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It was Alan Greenspan who said that, “gold is money in extremis”.   By this all understood that when times got tough, gold became money that people could trust.   But what constitutes “in extremis”? 


 11 December 2009 By: Julian D. W. Phillips, Gold/Silver Forecaster - Global Watch

 Gold Is Money In Extreme Times, Have They Arrived? 

History, with hindsight, usually finds it easy to answer such a question.   Event with hindsight such a precise tool, it is of no use to investors who don’t have the privilege of using it.   For instance it is clear that a year before the last war, n o, almost 5 years before the last World War, it was clear that the world was on the path to the war.   One year before the war started the Prime Minister of Britain came back from Germany with the cry, “Peace in our time” heralding his belief that there would be no war.   On the ground, opinions were divided right up until Germany marched into Poland.  


This illustrates clearly that such clarification that we are in extreme times is never easy when we only have today and tomorrow to base our decisions on.   That’s where we are today.  

The tool that we are left with is extrapolation, defined as “calculate approximately from known values, data, etc” according to the Concise Oxford Dictionary.   Put simply, it means taking the facts, attitudes and intentions and taking them forward to assess the future likelihoods.   It does not include hopes and dreams, but only present realities, those that will decide the future.

So what do we see now?


The Global Economic picture

-               U.S.

Growth resumption is still being argued in the States with joblessness at frightening levels, but is edging closer.   Consumer debt is still not under control nor are U.S. citizens of a mind to become savers and not borrowers.   So consumer recovery is still not certain.   The economy is in relative decay and has shown far less resilience than that of China.   Interest rates are at such low levels that there is every incentive for the $ to fall as money is borrowed in the States, then sold to be invested in foreign countries.   No matter how loud or long the Administration cries, ‘we want a strong $’it just ain’t going to happen. 

In the Monetary System, we see a U.S. with the net external debt of the U.S. nearly tripled in the last year to $3,500 billion and it is projected to increase by nearly $1,000 billion every year for the next decade.   Now add to that the role of the $ as the Global Reserve Currency and you have such a $ overhang that if the borrowed dollars came home as intere st rates rose and pushed the $ stronger, surplus holders would be tempted to sell their $ surpluses into $ strength.   Then where would the U.S. money supply stand?   Overall the $ is in trouble!  With the $ being the tree trunk of the global money system, all the braches of that system will suffer its pain too, in a structural way.  

Overall we see a massive shift of wealth and power to the East.   In time it will subject the Western style money system to its power.   As long as this is not recognized the world will be threatened by a potential collapse of the monetary system [just recall how even the Treasury department in the U.S. recognized that if they hadn’t stemmed the credit crunch as they did, they knew a collapse would have come].   Washington has no other choice but to print more dollars, let the world devalue the currency and service debt in ever cheaper greenbacks.    This is a managed devaluation in the hope of avoiding a massive loss of confidence in the $. 

-               China

We see in the East, China a country with a population twice the size in population of the Eurozone and U.S.A. put together.   It’s growing at a double digit rate, compared to a developed West which is barely growing and facing many unknowns and fears because of the fragmentation of their economies.   We see in China a synthesized approach to growth that is allowing them to build 50 cities each to hold 10 million people, sucking up world resources at an amazing rate.  

It is achieving a self-sufficiency that had proved most economists very wrong.   Supporting this are two factors; first the fact that the Chinese are savers not borrowers and second, they are starting from so low a disposable income level that they are considerably more resilient to economic downturns, should they come.   It is building an economic empire that will overshadow the West just as Japanese goods grew from cheap transistor radios to goods that have overtaken those produced in the West [Auto industry].  

Now add to that, the fact that they are controlling capital flows into China and they are refusing to let the Yuan rise.   This ensures that Chinese goods will remain competitive and suck the manufacturing power out of the West.   Whether you call it economic war or not, the effects are the same.   After all, ‘a rose by any other name smells just as sweet’.   Western economies and currencies are already carrying the wounds of this war.

-               India 

In India we see rapid growth in urbanization and GDP but without the strong grip of China’s central government dictating growth.   Nevertheless, such growth in a nation of 1.2 billion people who are providing cheap goods and personnel, is overwhelming Western competition to the roots of any economy.

Capital Controls

Cheap and easily borrowed money in the United States, alongside a falling $ have and are leading to flows of funds seeking better returns in emerging markets.   These have and are bringing new rounds of capital controls in emerging markets to slow inflows of Capital.   As each day passes the likelihood of more stringent controls spreading further comes closer.   They are expected to follow any reversal of capital inflows and become Capital outflow controls.  Failure to impose such controls and allowing currencies to appreciate on foreign exchanges destroys vital, difficult to establish, businesses.  

So where “carry-trade” [or ‘hot’] money serves no good purpose in the economy of a country, it is slowly being made unwelcome by Capital Controls.   Such capital flows have the power now, to destabilize an economy.   The worst effect of it will come when such traders want to disinvest and the outward flow drains liquidity from the system and leaves the country economical ly littered with industries in economic distress and banks loathe to lend to them by way of rescue.    Believe you me such damage is far worse than any inflationary dangers.   But so many countries remain riveted to inflationary concerns that they are leaving themselves open to economic shocks that lower interest rates and adequate liquidity just will not cure.

-               Russia

Russia on Wednesday joined the list of countries eyeing new measures to stem currency speculation and appreciation. Moscow was c areful to say it would not impose actual capital controls, which seek to regulate flows of funds into or out of an economy, but the measures they are considering would have exactly that effect, making it tougher or more expensive for money borrowed abroad to be brought into Russia.

-               Kazakhstan

Kazakhstan has introduced legislation allowing capital controls, but so far has not used them.

-               Indonesia

Indonesia is considering curbs on foreign holdings of short-term official debt but considers currency moves based on such flows were so far manageable.

-               Taiwan

Other Asian central banks have been intervening to cap gains in the value of their currencies, with Taiwan going so far as to ban foreign funds from investing in local time deposits.

-               Brazil

Brazil last month announced a 2% tax on foreign investment in stocks and fixed-income securities to limit the strengthening of the Real.

-              Summary 

If the trends we are now seeing are not drastically changed when we extrapolate the situation, we cannot see the monetary system surviving in its present state.   Willingly or unwillingly we will see a huge change in economic and monetary power.   There is not the political will to recognize this situation, so the likelihood of the bitter consequences of these changes rising into economic conflict on a much larger scale is growing by the day.   So can one trust currencies?   They are after all national obligations not real value ‘in extremis’?  The future looks bleak, sad to say.

So we are in extreme times and they are getting worse by the day.   Looking ahead we can see nothing among the nations large or small that is capable of stopping this.

 Is Gold a Thermometer of this?



 20 December 2009 Gold Forecaster Weekly E-Mail Snippet


By: Julian D. W. Phillips, Gold/Silver Forecaster - Global Watch 


Volatility In Markets, Including Gold, Is This A Bad Sign For The Gold Price?



Gold, is it inherently Volatile?

A 5% correction in one day, is this reasonable?   That happened to gold and many would say was consistent with its reputation as a volatile market.   But at the same time most markets reflected the same volatility and have recently been doing so regularly.   Actually, gold’s reputation as a volatile market [when others are stable] is misplaced.


When gold rises in price it is because uncertainty and instability lie ahead or lie all around.   Then all markets are volatile.   It would be better for investors to accept this and to accept that gold under these conditions rises in price, as we have seen in the over 300% [nearly 400%] rise in the gold price this decade.   Volatility in other markets has usually led to a fall in their value and even now most markets are struggling to regain pre-instability levels.   So it is a great thing for gold to go volatile, because it means that economic and financial conditions favor the metal.


Where does the volatility come from?

Volatility in basic terms comes when a seller or buyer is large enough to move a market by overwhelming buyers or sellers with their transaction.   It may be that most buyers or sellers are acting emotionally and all facing one way so that all are sellers or all are buyers at that moment.   Then volatility comes from markets being uncertain and both buyers and sellers rushing to follow others no matter.   So when the gold price rises through resistance and soars, all become buyers, then the next logical step is for a cautious trader to take profits, triggering stops and sell orders that make the market go one way.   When big buyers enter the market, they do not trade those amounts but hold and go quiet.   So once they have bought and the gold price rockets, traders often come into take the price down to where new or old buyers re-enter the market again.   This is what we are seeing on the $, on gold and on many equity markets.   It makes for volatile markets full of uncertainty.


On one day the market is positive and one way, then a piece of news comes to fan the market, making buyers hesitate and sellers act, just as it did when the unemployment figures came out last week.   Then a positive piece of news turns the market completely, such as an I.M.F. sale of gold to India and the market goes one way again.  


What is most pernicious is when the future is so uncertain that news both positive and negative has a disproportionate impact, as in the times of panic and fear, where reason flies out of the window and people just run in the direction of others.   We are seeing this more and more frequently as we get used to bad news and surprises.


For gold there could be a dramatic piece of news from the short sellers in the gold market, a place occupied by just a few major banks.   If the price were to continue to rise, their position would become untenable and they be forced to close their positions by buying gold.   You can be sure that if this happens, there won’t be enough gold to cover their short positions, so the price must rise to bring scrap to the market.   In a market like gold at the moment this would send the gold price up a hundred dollars or more.   But then again as we have seen, big buyers standing back leaves the market to traders, who fixated with the exchange rate of the $: € are taking the gold price down in line with the fall of the €, despite an remarkable fundamental scene.


Volatility here to stay?

Once the future of money and the global economy clouds and fear rises, volatility rises as a symptom of that fear.  Instead of these fears being containable, they are structural and have the potential of moving markets substantially.   Spreads [the price between buying and selling] widen as dealers become fearful of large price moves and it becomes more difficult to deal.   This exacerbates volatility.   As dealers face the dangers that lie ahead, they promote volatility so as to minimize their losses and maximize profits.   So volatility becomes symptomatic of the likelihood of more bad news or good news.   As volatility is a two-way street any news that calms or reassures the market acts disproportionately and sends prices soaring.


When we look ahead to the dark future for the global currency and monetary systems, reflecting the shift in economic power from West to East, we are certain that we will experience disturbing shocks on the way.   In turn these favor gold as investors rush to it.   The arrival of an O.P.E.C. currency that could be used as a petro-currency is a structural change, yet to be absorbed by the markets.   Just that alone takes this world down to a new lower plateau of uncertainty.


We see many parallels between now and 1933.   Just as the future from 1933 was often lightened by hopeful forecasters, we expect many to work from a base that normality will return and growth and faith will repair all the damage.   This may comfort many, but is not pragmatic or realistic.   Unt il global monetary authorities work in concert and repair the fundamental problems of the system, worse must come.   But denial will kick in and nothing will be done until a crisis is on us again.   Politicians reap more kudos and have more power in a crisis than in just simply a problem.   So volatility must remain.


Present purpose of volatility

In the gold market at present there are buyers who would like to buy large tonnages of gold, but the ‘open market’ may not be supplying such quantities.   So there is a need to flush out holders who will under some circumstances sell gold.   A volatile price helps, as does a price that is high, too high for traditional demand to enter the market as buyers.   Such conditions can be made to persist and are being made so now.   To get large amounts from this market, such conditions must stay for a long time.   This is a large part of what is happening now, we believe.   Don’t be fooled by the $ rally!

ABird © 2004

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