Friday, October 15, 2010

China Takes Off It's Boxing Gloves And Why Gold Is Still WAY Undervalued

"The first panacea for a mismanaged nation is inflation of the currency; the second is war. Both bring a temporary prosperity; both bring a permanent ruin. But both are the refuge of political and economic opportunists." … Ernest Hemingway

Many of you have already seen this Reuters news report, but it's significant enough to warrant highlighting and some commentary. In fact, it can be argued that this is an over statement of direct confrontation between China and the Obama Administration:  U.S. is currency war's "tomb maker" -China economist

"The dollar's depreciation may appear to be market-driven. In reality, it is a depreciation coloured by very strong, deliberate actions," Li said in the paper, which serves as the chief mouthpiece of China's ruling Communist Party.
Here's the link to the news report in case you have not seen it:  China's Warning Shot

Up to this point acknowledgement of the nascent global currency war, led by the United States, has been largely relegated to commentary and debate in the various internet forums, blogs and truth-seeking media outlets (King Word News, etc).

With this publicly overt, front-page statement issued to the world by the Chinese Government, China has elevated this global financial conflict into the dangerous realm of visible sovereign rhetoric and conflict.  Not only has China thrust the issue of competitive currency debasement into full public view, but it has pointed out the obvious attempt by the United States to make - via aggressive, motivated dollar devaluation - its uncontrolled borrowing and spending problems the problem of the world:
"If the global financial crisis was about nationalising private debt, then in the post-crisis period the urgent need of the United States is to internationalise its national debt," he said.
Make no mistake about this.  With this front-page statement by the Chinese Government via this Chinese economist, China is directly engaging in a war of rhetoric that could well polarize the global community into the emerging market "wants" and the Western developed countries who "had it and are losing it."  See the above quote from Hemingway if you are curious about how this could eventually play out...

Helicopter Ben Starts The Engines - On A Whole Fleet Of Money-Dropping Helos

Bernanke Sees Case for `Further Action' With Too-Low Inflation Here's the article:  LINK

Yesterday the primary dealers were the primary buyers of the long-bond auction.  Wall Street took down a stunning 59% of the entire auction.  This is not bidders going thru Wall Street. This is direct monetization of the Treasury auction.  This is so-called Quantitative Easing - "sterilized" money printing - because the Fed, indirectly through the banks - has taken in an asset against the electronic issuance of currency.  I also believe that the Fed - although I don't have time to run through the "forensic" work to prove it outright - is also outright increasing the money supply without taking "assets" onto its balance sheet (I use "assets" because most of the toxic garbage the Fed has assumed is worth 10 cents on the dollar at best). 

You guys can read the news release, but please understand that this statement implies that Bernanke is getting ready to monetize the mortgage crisis:
He said the central bank could expand asset purchases or change the language in its statement, while saying “nonconventional policies have costs and limitations that must be taken into account in judging whether and how aggressively they should be used.”
So there it is.  The Fed will print money electronically, buy the fraudulent mortgage paper from Bank of  America et, al.  AND thanks to the deal Wheelin' Dealin Tax Cheatin' Tim Geithner cut with the Fed on behalf of the Taxpayer, ultimately the middle class taxpayers who still work and do not feed off the Government breast of food stamps and the interminable unemployment benefits will end up paying for this mess.  My bet is we collapse before this all actually unfolds.


Most of you have likely seen this chart, which was posted ad nauseum around the internet yesterday.  But this is one of those pictures that has a 1000 words.  I added just 22 of my own to emphasize the point of the chart (thanks to Sprott Asset for sharing that with the world):

(click on chart to enlarge)

One of the original intellectual arguments that got me intensely interested in the precious metals sector was Jim Dines' proposition back in 2000/2001 that it would just take pension funds in this country alone moving 1-2% of their asset base into the mining stock sector to ignite a move that would dwarf the move we experienced in the tech/internet stocks during that bubble.  Now imagine if they end up moving 5% of their assets into the sector AND globally big investment funds to the same.  As you think about this, keep in mind - and this is a verifiable fact - the market cap of every mining stock in the world combined is less than the individual market cap of each of the top 10 stocks in the S&P 500.

Have a great weekend (will be out of town so I might be a bit slow in posting comments but will be checking periodically).



  1. Great post Dave as always...Gold Bubble indeed haha.

    Loading up on the dip. Enjoy your weekend.


  2. Dave--great reading for us, thanks.

    On the pension plans--how will they be able to invest in PM when they are running out of cash themselves, and their mark to BS assets including mortgages are uh, suspect.

    I think the post on Midas today from Solari Group pinpoints the issue--the govt takes 401k and IRA assets, redistributes wealth from those who had foresight to structure and invest properly and gives to the already overpromissed lower income class.

    And the govt guarantees 3%?

    Thankfully inflation is not a problem. Except of course for the necessities of life.

    And China--they really do not need to be aggressive in handling the US--we are shooting ourselves as we all know.

  3. And should holding mining shares prove to be the bonanza squared that you suggest, be prepared to see a lot of it taxed away. One is going to need physical gold above all other gold related investments IMHO.

  4. The main reason for devaluation is not the stated goal of saving American jobs. Few manufacturing will return with the dollar devaluation.

    The goal is to partial default on the dollar debts owed to the Asian countries, via devaluation, similar to the effects of the Plaza Accord of 1985.

    It will become more clear, after the G20 summit of Nov 11, how much devaluation and QE the power elites can achieve.

    JJ from WSB

  5. Dear Dave in Denver,
    I have some gold eagles I bought over concern of the falling dollar. However, I can't quite figure out whether it's a practical investment or not. Yes, on paper, my gold goes up in value as the dollar declines, thereby making me wealthier. But, how does that translate to more money in my pocket if the gov't refuses to institute a gold standard, other than the fact that I could sell my gold to buy inflated dollars? Won't he majority of the population be reticent about conducting business in gold?

    Are gold propenents saying that once the dollar becomes so worthless, the common man and businesses will start doing business in gold rather than the dollar? It seems to me that unless the gov't gets on board with this, the "gold as money" concept would have to be a black market one and instead the gov't might, in fact, make doing business in gold illegal.

    Your thoughts on this would be greatly appreciated.


  6. Your ability to use that gold in commerce is not at all dependent on the Govt reinstating a gold standard. At some point some enity(ies) will roll out a gold-backed currency that will be accompanied by a major upward reval of the price in order to create a true gold backing. At that point you will be exchanging your bullion for that currency.

    Remember, it's not your gold that is going up in value, it's the U.S. dollar that is being devalued.

    If the U.S. tries to do anything w/respect to gold, it would be to forbid the use of gold for commerce and that would be accompanied by forcing the use of the U.S. confetti paper. But the black market will be flourishing. Read up on Zimbabwe to see how that works. And if the U.S. does become totalitarian like that, it's time to get the hell out of here anyway...

  7. If the global financial crisis was about nationalising private debt, then in the post-crisis period.

  8. it seems a nice,,,,,,,,,..........thanks!