Dear reader, we have said in the past that before China would be agreeable to a new version of the SDR, they would probably want a more important seat at the IMF table.

It looks like this may be indeed happening. The newly appointed head of the IMF has recently announced that a new position of Deputy Managing Director of the IMF is being created, and will be held by a former Peoples Republic of China Deputy Governor.

While not conclusive, these moves signal a changing of the guard so to speak, that may make China more agreeable to participate in a future SDR to add liquidity and perhaps provide an alternative to the USD as reserve currency.

http://www.reuters.com/video/2011/07/07/china-to-get-senior-imf-job-sources?videoId=216827266

Modern economics is run by men who have learned from John Maynard Keynes.

A famous quote of Keynes follows:

Lenin is said to have declared that the best way to destroy the capitalist system was to debauch the currency. By a continuing process of inflation, governments can confiscate, secretly and unobserved, an important part of the wealth of their citizens. By this method they not only confiscate, but they confiscate arbitrarily; and, while the process impoverishes many, it actually enriches some. The sight of this arbitrary rearrangement of riches strikes not only at security, but at confidence in the equity of the existing distribution of wealth. Those to whom the system brings windfalls, beyond their deserts and even beyond their expectations or desires, become ‘profiteers,’ who are the object of the hatred of the bourgeoisie, whom the inflationism has impoverished, not less than of the proletariat. As the inflation proceeds and the real value of the currency fluctuates wildly from month to month, all permanent relations between debtors and creditors, which form the ultimate foundation of capitalism, become so utterly disordered as to be almost meaningless; and the process of wealth-getting degenerates into a gamble and a lottery. Lenin was certainly right. There is no subtler, no surer means of overturning the existing basis of society than to debauch the currency. The process engages all the hidden forces of economic law on the side of destruction, and does it in a manner which not one man in a million is able to diagnose.

I note that there is no mention whatsoever of monetary inflation in the entire article below. History does repeat.

As with other societies going through similar circumstances, the call of the people is to the government to “do something” about the prices continually rising. There is no mention of that something including stop printing money, but rather regulate prices, somehow. Enter price controls, which lead to nothing more than long lines and bare shelves.

Government faces call for action on food prices
Johann Tasker
Tuesday 05 July 2011 09:19
The government is facing increasing calls to curb spiraling food prices.

Farm minister Jim Paice is being urged to put in place a coherent set of policies that address food inflation and food security.

Laura Sandys, Conservative MP for South Thanet and Sandwich, will make the call in an adjournment debate on Tuesday (5 July).

“We need to take the 4.9% food inflation rate seriously as it is impacting all of our household budgets,” she said.

“If left unaddressed, it will also have a detrimental effect on the UK’s growth targets and will hamper consumer spending.

“I am urging government to look at food with the same intensity it has afforded to energy security.”

Food security and food price inflation had hardly ever been debated in the House of Commons, said Ms Sandys.

“It is high time we grappled with the complexities of this issue, as there is nothing that impacts our constituents more than the prices on our local shop’s shelves.

“Food inflation lies at the heart of political and economic instability internationally – we must not let it destabilise our ambition for growth.”

The call comes amid new findings that consumers want government action to curb food price inflation.

Rising food prices are driving a major shift in the way UK shoppers buy and think about food, according to research.

Consumers are changing their weekly shopping habits in response to inflation-busting increases in food prices, it found.

Shoppers are also more concerned about the global factors affecting food prices and the security of food supply for future generations.

More than half of shoppers were worried about the impact of climate change, population growth, water and energy supplies on food availability and affordability.

The independent survey was carried out by Network Research on behalf of the Crop Protection Association.

Most shoppers agreed that the era of cheap food has come to an end, and want the UK to become more self-sufficient in food production. Three-quarters of respondents said the government should do more to prevent further increases in the cost of food.

“For many people, increases in the cost of food are hitting other areas of household expenditure,” said CPA chief executive Dominic Dyer.

“There is an overwhelming view among respondents that the government should be doing more to keep food prices down.”

The survey findings were a wake-up call to policy-makers and regulators that a global food security crisis was urgent and immediate, said Mr Dyer.

Advances in plant science and crop protection would be critical to meeting future food needs, Mr Dyer added.

They should be matched by science-based EU policies that supported, rather than stifled, investment and innovation in agricultural science.

A Defra spokesperson said:

“The impact of food price inflation, and especially spikes in commodity prices, are a real cause for concern.

“We’re leading internationally and at home to feed a rapidly expanding global population in a sustainable way.

“That means we need to increase food production in a way that reduces the impact on the environment, as well as opening up global markets, boosting trade and making reforms that help the poorest.

“Important steps were taken at the recent G20 meeting, but there’s much more work to be done.”

Article Source

A gold exchange center has been established in Kunming on March 31st, which means the city has moved one step forward towards target: becoming an important financial center in Pan-Asia Free Trade Area.

Cultural collections, gold, silver and mines are traded in the center. Precious metals are main products, such as gold. Information consultation and other services will also be provided for traders in the center.

Mayor of Kunming, Zhang Zulin (张祖林) attended the unveiling ceremony of the center.

Pilots for RMB cross-border trade settlement and related financial service centers have been established in Yunnan. Yunnan’s finance has increasingly promoted.

“Currency Wars” is the term widely used to explain the fact that global currencies, floating versus the US Dollar, are forced to devalue over time to retain the ability for its host country to compete in foreign trade. If a country’s currency becomes to valuable versus others, then the export sector suffers as goods become to expensive for other countries in their own currencies. One way to visualize it is that if the worlds currencies were an atom, the USD would be the nucleus and the other various currencies are electrons orbiting it. As the US goes down in value, the other currencies follow it.

Gold is not really rising on speculation, what its doing is signaling a problem in the global system of exchange, which demands a stable currency for use in international trade.

Brazil is preparing a range of additional measures to stem the damaging rise of the real as the global currency war shows no signs of ending, according to Guido Mantega, the country’s finance minister.

Speaking to the Financial Times in London, Mr Mantega said the Group of 20 leading economies was still a long way from achieving its goal of agreeing new guidelines for managing currencies, there were “struggles between countries” such as the US and China, and the global currency war was “absolutely not over”.

Slow growth and low interest rates in advanced economies continued to put upward pressure on Brazil’s currency, Mr Mantega said, forcing the authorities to consider further intervention in currency and derivatives markets to limit overshooting.

“We always have new measures to take,” he told the FT, indicating on the sidelines of an investor conference that these would not be pre-announced, but would include market intervention. On Tuesday, the Brazilian central bank also announced a spot auction to buy US dollars in another move to boost foreign exchange reserves and stem the upward pressure on the real.

The Brazilian currency has been close to 12-year highs against the dollar in recent weeks, but fell by 0.7 per cent on Tuesday.
Brazil’s actions to limit currency appreciation highlight the dilemma faced by many fast-growing economies – including Turkey, Chile, Colombia, and Russia – since allowing currency appreciation limits domestic overheating, but also undermines the competitiveness of domestic industry.

“I gave a speech to investors and I hope they did not receive it too enthusiastically,” Mr Mantega joked, “ because there is a tendency for too much capital to enter”.

Brazil had to take other actions, he added, because domestic interest rates were already high, so as to curb inflation, and further rate rises alone tended to encourage further capital inflows. Brazil has already instituted a number of measures, including taxing bond portfolio inflows, to try and curb the real’s appreciation.

“Monetary policy is very tight in Brazil and the level [of interest rates] in real terms is higher than in other [emerging] countries,” Mr Mantega insisted.

With the main policy rate at 12.25 per cent, he rejected the notion that Brazil was overheating, saying the economic growth rates were sustainable, inflation was falling and the fiscal deficit was coming down. The economy is forecast to grow by 4 per cent this year after expanding 7.5 per cent in 2010.

Credit growth – at 15 per cent this year – was lower than the 22 per cent rate in 2010, he added, partly as a result of government restrictions on banks borrowing cheaply at low interest rates from the US, but he looked forward to the day when lower inflation allowed “monetary policy more flexibility”.

Mr Mantega’s comments highlight the low-level currency war between emerging and advanced economies that has unsettled global financial markets. This will be one of the issues facing Christine Lagarde, who started work as managing director of the International Monetary Fund on Tuesday.

Brazil supported the new French managing director over her Mexican rival, Agustín Carstens, but Mr Mantega insisted there was no “regional rivalry” between Latin America’s two biggest economies. Mr Mantega said he felt Ms Lagarde would be more effective at advancing the cause of developing nations.

Article Source

It is interesting to note the timing here – QE2 is scheduled to end and just as Libya oil is off market for at least all of 2011, and the combined force of less oil and more paper money in the economy has caused the price of food to skyrocket, causing addition social unrest. These oil stocks are being sold off and are hard assets belonging to US Citizens, at prices that will never be seen again and the reserves will likely never be replenished.

The International Energy Agency announced it would inject 60 million barrels of government-held stocks in the global market, immediately increasing world supply by some 2.5 percent for the next month and sending prices spiraling, with U.S. crude prices erasing all of the year’s gains.

“This supply disruption has been underway for some time and its effect has become more pronounced as it has continued,” said the IEA. It said expectations were that Libyan production would remain off the market for the rest of 2011.

“Greater tightness in the oil market threatens to undermine the fragile global economic recovery,” it said.

The IEA release, at 2 million barrels per day (bpd) over the next 30 days, is more than the daily loss of Libya’s 1.2 million bpd exports and comes despite a broad view that the world is not now short of crude — although many analysts and agencies also agree that markets will tighten later this year.

The release includes 30 million barrels of light, sweet crude from the U.S. Strategic Petroleum Reserve — the same quality that markets have lost due to the Libya disruption.

Article Source

JOHN C. HATHAWAY, CFA – Senior Managing Director & Portfolio Manager, Tocqueville Funds

John Hathaway, Senior Managing Director, is a Portfolio Manager and a member of the Investment Committee at Tocqueville Asset Management L.P. He is also a Director of Tocqueville Management Corp., the General Partner of Tocqueville Asset Management.

Mr. Hathaway, who has 39 years of investment experience, manages the Tocqueville Gold Fund, Tocqueville Gold Partners and separate accounts for individual and institutional clients following a gold strategy.
Prior to joining Tocqueville in 1998, Mr. Hathaway began his career in 1970 as an Equity Analyst with Spencer Trask & Co. In 1976 he joined the investment advisory firm David J. Greene and Company, where he became a Partner. In 1986 he founded and managed Hudson Capital Advisors followed by seven years with Oak Hall Advisors as the Chief Investment Officer.
Mr. Hathaway has a B.A. degree from Harvard College, an M.B.A. from the University of Virginia and is a CFA charter holder.

The Toqueville Gold Fund is a $2.7 billion USD fund.

From King World News:
With a continuation of gold and silver volatility, today King World News interviewed one of the great ones, 40 year veteran John Hathaway of the Tocqueville Gold Fund.  When asked about the volatility in both gold and silver Hathaway had this to say, “We’re in a shakeout now and frankly it isn’t as scary as the one in 2008, but I think there’s no foundation whatsoever for solid, robust economic growth and that’s the realization the markets are coming to.  I think we’re past the point of no return.”

Hathaway continues:

“I’m sure the vast majority of investors think that somehow we can restore fiscal sanity to the federal budgeting process, that it can be done democratically, but I kind of doubt that.  When you go to somebody and say we’re going to have to go on an austerity regime…that’s socially contentious…they don’t want to hear that.  That’s why you’re seeing rioting in Greece and that’s why you’re going to see the same sort of thing here (in the US) if we go the austerity route.”

Hathaway presented a Dow/Gold ratio in his latest piece and believes we are headed ultimately to a one to one ratio which would put gold today at over $12,000.  When asked if $12,000 gold was achievable Hathaway replied, “Sure, because that would reflect more damage to the integrity of the currency.  The number that they (Dow & Gold) cross at is going to probably be in the high 4 digits or low 5 digits, if it happens in the next couple of years.

…You know here’s the problem, we have negative interest rates today, negative real rates of around two percent, two and a half percent…If we did have a Volcker moment when you had somebody at the head of the Fed who said, ‘We are going to restore integrity to the currency’, you would have to raise real rates to something like three percent to make it easy.  So negative three (percent) to positive three means six percent nominal times $14 trillion in debt which is $700 or $800 billion, on top of the federal deficit that is already $1.6 trillion.  I mean those are the numbers that tell you that we’re basically bankrupt.  That’s why I say…that we’re past the point of no return.”

When asked what the price of gold would have to be to get back on a gold standard Hathaway stated, “It would have to be much higher.  I mean basically you have to make paper preferable to gold, and in this climate that means in a way you have to sort of bid for all of the gold, get people to trade in their gold for paper.

The market says you can’t get it at $1,500.  Maybe they’ll try $2,000 or $3,000, but the reality is unless that bid for gold is backed by credible measures to restore integrity to government finances, the real number is going to be what we talked about earlier, something in the five digits.”

Jim Sinclair stated the price of gold would have to clear $12,500 to balance the foreign debt of the United States.  When asked about Sinclair’s $12,500 number Hathaway said, “Yeah, that ($12,500 for gold) is really what it would have to be.”

Just like the Jim Sinclair interview, here you have one of the great ones, John Hathaway, talking about the end game, essentially the end of the currency system as we know it.  This is probably Hathaway’s most compelling interview on King World News for that reason.  There is so much more information in John’s segment than the small portions above, so be sure to return to hear the complete interview.

As western nation debt continues to escalate, this trend of Central Bank buying will likely continue, because gold is indeed money.

Gold is not in a bubble, fiat currencies and sovereign debt is in a bubble. The comment parroted so often by those who have not taken the time to study history or the underlying factors is that gold is overpriced, the problem is what they are comparing it to. This view most often stems from the common western idea that gold is a speculative commodity, and not money.

This view is changing fast, evidenced by massive Central Bank buying. If you compare the price of gold relative to the explosion in money supply gold is incredibly cheap. Smart investors are starting to make this switch, and are comparing gold now to currencies instead of stock market performance. The inability for many people to even as an experiment consider gold as money, is the reason so many are incapable of understanding golds recent and likely future performance. Only those who are able to think outside of what our current generations have accepted are the ones who are able to grasp it.

“Gold is a possession and not a promise. A government that owns an ounce of gold does not have to ask the United States or anyone for permission to cash it. The gold supply is finite; that is its monetary significance.” – Sir Rees-Mogg, The Times, Dec. 12,1979

The above quote is the exact opposite of what those incapable of grasping that gold is money has to say about gold. The common claim is that gold cannot be money because there is not enough of it. If a person exercises their common sense they will see this is a ridiculous statement. The reason any money has value at all is due to its scarcity. If dollar bills were as common as rocks on the ground, how valuable would they be? Yet those who have a hatred of gold as money bordering on paranoia would suggest that creating infinite amounts of paper notes is a better idea?

It took almost 100 years for the Dow to hit 1000, yet  it took only 16 years to hit 10,000 from 1983 to 1999. It is important to note that the money supply of the US was about $1.5 trillion for the majority of the US’ prosperous years – all of the hospitals, bridges, etc were built with that limited stock of money – all the way up to about 1971 when gold was severed from the USD – since then the money supply has exploded by over ten fold, arguably carrying the equity markets with it.

This same effect can be seen by comparing the recent QE to the SPX as this excellent chart from Zeal LLC shows:

So the question must be asked, are the equity markets really rising or is that just a symptom of an explosion in paper money printing?

If the (Continuous Commodity Index) CCI has risen an average of 14.4% each year for the last decade, is that really the value of food and other commodities increasing or the value of the paper money decreasing? If your portfolio increases by 10% in nominal USD terms, but you lost 14.4% in buying power, did you really move forward or backward?

If you expand the money supply 10 fold, can gold not go from $350 to $3500, a ten fold increase? It seems it is easy for financial commentators to accept that the money supply measured in M3 is well beyond $14.5 trillion, yet cannot fathom dividing those dollars by the number of ounces of gold in the US treasury to arrive at a price north of $50,000 per ounce.

The biggest subject that must be decided upon by financial professionals is to realize that gold is actually money and stop comparing it with the stock markets and other speculations. Gold is not rising on speculation, gold is rising on the fact that it is  now and always has been the measurement by which all value is compared to.

(Bloomberg) Mexico, Russia and Thailand added gold now valued at about $6 billion to their reserves in February and March as prices advanced to a record, the dollar weakened and Treasuries lost investors money.

Mexico bought 93.3 metric tons since January, adding to holdings of about 6.9 tons, according to International Monetary Fund data. Russia increased its reserves by 18.8 tons to 811.1 tons in March and Thailand expanded assets by 9.3 tons to 108.9 tons in the same month, the data show.

Central banks are expanding their gold reserves for the first time in a generation as purchases by billionaire investors including John Paulson contributed to bullion extending its longest winning streak since at least 1920. Countries were also boosting their holdings in 1980 when gold rose to a then-record $850 an ounce, only to fall for most of the next 20 years.

“Central banks have good reason to buy gold,” said Peter Morici, a professor of business at the University of Maryland in College Park and a former economic adviser to the U.S. government. “The dollar is no longer a safe asset for backing currencies. Treasuries are not a sound investment” and budget and debt issues mean central banks should buy gold, he said.

Gold for immediate delivery climbed to a record $1,577.57 an ounce on May 2 and traded at $1,539.29 by 3:04 p.m. in London today. Prices are up 8.3 percent this year and have gained the past 10 years. Global holdings of gold by governments and official institutions such as the IMF stood at 30,523 tons by April, according to the World Gold Council.
Lowest Level

The dollar today slid to the lowest level since July 2008 against six major currencies. Treasuries lost investors 0.14 percent in February and March, according to Bank of America Merrill Lynch indexes.

Bullion earlier today dropped after the Wall Street Journal reported Soros Fund Management LLC sold precious metal holdings because of a reduced risk of deflation, citing unidentified people close to the matter. The Soros fund held shares in the SPDR Gold Trust and the iShares Gold Trust equal to about 508,800 ounces as of Dec. 31, a U.S. Securities and Exchange Commission filing on Feb. 14 showed.

Soros described gold at the World Economic Forum’s meeting in Davos, Switzerland, in January last year as “the ultimate asset bubble.” In a Nov. 15 speech in Toronto the 80-year-old said conditions for the metal to keep rising were “pretty ideal” and at this year’s Davos forum he said the boom in commodities may last “a couple of years” longer. Michael Vachon, a spokesman for Soros, declined to comment today.
Thailand’s Reserves

Since the end of 2009 countries including India, Sri Lanka, Mauritius and Bangladesh have bought gold. Before this year’s purchases, gold accounted for about 0.2 percent of Mexico’s total reserves, and 2.6 percent of Thailand’s reserves. The metal accounts for more than 70 percent of reserves of the U.S. and Germany, the biggest holders, World Gold Council data show.

“Mexico’s gold accumulation confirms the demand of emerging market central banks to diversify their reserves,” said Bayram Dincer, an analyst at LGT Capital Management in Pfaeffikon, Switzerland. “They will be the big buyers for years to come.”

A call and text message seeking comment from Thailand Central Bank spokeswoman Sirithida Panomwan Na Ayudhya was not returned after business hours.

Kazakhstan reduced its bullion holdings by 1.55 tons to 67.3 tons in March, the IMF data show.

This kind of public pressure on Central Bankers with weaker economies only makes sense if other Central Banks want the gold. Regardless of the common misconception among financial commentators that Central Banks sell their gold to the market at large, all such transactions in recent years have instantly been gobbled up by massive demand from Central Banks of developing economies in direct Central Bank to Central Bank type sales.

Any such sale would never see the marketplace.

I do however predict that we will see more of this as the debt burdens of western nations causes re-structuring of sovereign finance and gold is again admitted to be money.

Watch what they do, not what they say. Gold is indeed money. You don’t see Central Banks holding coffee or copper. They hold Gold.

Should the Golden Goose Be Plucked?

By DAVID COTTLE (Wall St. Journal)

Why shouldn’t cash-strapped European countries be forced to liquidate their gold holdings, German politicians have been asking.

Prices, after all, are close to historic highs. Moreover, bullion is the ultimate hedge against an economic rainy day, and it’s certainly pouring down in Greece, Portugal and Ireland.

The first two are sitting on substantial gold reserves. Portugal has nearly 383 tons and Greece around 112, according to the World Gold Council. Indeed, Portugal’s hoard comes to about 9% of its GDP, which is the highest proportion in Europe. Greece’s is a much lower 1.7%.

Portugal’s holding would be worth $18 billion at current market rates, which would be a handy offset to the €78 billion ($108 billion) bailout it has just accepted from the European Union. On the face of it, there is an absurdity here. How many of us would toss a dime to a beggar if we knew he had an ingot or two stashed under his sleeping dog?

Not Norbert Barthle, Germany’s governing coalition budget speaker, it seems, nor his counterpart Carsten Schneider from the Social Democrats. They have urged Portugal to consider selling some of its gold pile to ease debt woes and therefore reduce the cost to German taxpayers of bailing it out.

Unfortunately for the pair, market economics are never quite as simple as they look, even when considering arguably the simplest asset of all.

Both Greece and Portugal have signed central-bank agreements not to destabilize the gold market, and announcing an imminent dump of their reserves would certainly do that.

Moreover, as one gold dealer said: “Selling reserves has a finality about it; you never get them back. Governments can tell their people that there is some benefit at the end of austerity and reform, but not at the end of selling gold to plug a debt hole.”

Even so, central banks in cash-rich exporting countries are accumulating gold despite the high prices. The Bank of Mexico snapped up a hundred tons between February and March, so there’s clearly an appetite for large amounts.

Monument Securities strategist Marc Ostwald is one analyst who doubts a straight gold sale is likely from either nation, as it would be too destabilizing for a market already looking nervous at such lofty peaks.

But there is no reason, he said, why the gold of debtor states shouldn’t be used as collateral in repurchase agreements, lent out and bought back later at a small premium, which would represent the interest on the cash paid.

“I think some sort of repo deal using gold might make sense,” he said, “although of course this would really be no more a long-term solution to these countries debt problems than the bailouts are.”

In the end, Europe’s debtor states, perhaps, are haunted by the memory of the last high-profile national gold seller, the U.K. Deeming the metal too volatile to its Treasury, under then Chancellor of the Exchequer Gordon Brown, it sold off nearly 400 tons between 1999 and 2002.

Prices were at their lowest in 20 years, and advance notice of the U.K.’s intent drove them lower by 10%, to $252 an ounce, by the time of the first sale in July 1999.

Twelve years on, and with gold trading in the vicinity of $1,500 an ounce, that nadir is still remembered as “Brown’s Bottom.”

Article Source

This weeks correction in silver has been a huge move. Looking back a few years, this weeks decline was even steeper in slope that the globally fear induced crash of 2008.

The unique set of circumstances leading to this acute correction do not occur very often.

1. Margin requirements with CME for silver have occurred 5 times in 8 days. This has resulted in smaller traders being forced out of their positions and provided easy and cheap momentum for institutional players to pile on the short action. This was extremely convenient for the elephants to stomp out the little guys and gobble up some profits. Bear in mind, silver margins could be raised to cash before this is all over.

See this excellent chart from Zero-Hedge:

2. With silver in overbought territory since roughly $36, this has been due for a pull back for some time now

3. With a massive dollar rally, all commodities were getting sell signals across the board creating further downward pressure

Finally, silver does tend to follow what gold is doing, and gold has had a powerful bounce and is up $20.10 as I write this.

For those waiting for an entry point in precious metals this is smelling like a good one. Note: silver could still drop down ultimately a bit below the 200dma which is currently 28.29 before going back into an upward leg but this doesnt happen very often

Ultimately, our long term view on gold and silver has not changed. Gold fundamentals are actually getting stronger as we progress, not weaker, and gold over the next 3 to 5 years has a long way to run. Western nation debt and alarmingly large federal budget deficits appear to be normal policy now – there is no doubt this must eventually have its consequences in the marketplace. We look to history to tell us what those consequences are – and thus far the answer has always been the same. Whether the modern alchemists of our Central Banks globally today with Bernanke as the head alchemist can truly transform paper into gold is yet to be seen. Our money is with history.

Silver fundamentals are also getting stronger with GFMS estimating all annual silver production will be consumed by industrial demand by the year 2015, leaving existing investment supply as the sole place to buy for new investors – having strong positions in PHYSICAL silver before this timeframe may be a smart idea.