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Escape to Gold

The next 3 foreign lenders to abandon the Dollar keep barely 1% of their reserves in gold...

It's ONE OF THOSE numbers that's so unbelievable you have to actually think about it for a while, writes Porter Stansberry in his S&A Digest.

Within the next 12 months, the US Treasury will have to refinance $2 trillion in short-term debt. And that's not counting any additional deficit spending, which is estimated to be around $1.5 trillion. Put the two numbers together...then ask yourself:

How in the world can the Treasury borrow $3.5 trillion in only one year?

That's an amount equal to nearly 30% of our entire GDP. And we're the world's biggest economy. Where will the money come from?

How did we end up with so much short-term debt? Like most entities that have far too much debt – whether subprime borrowers, GM, Fannie, or GE – the United States Treasury has tried to minimize its interest burden by borrowing for short durations and then "rolling over" the loans when they come due.

Because, as they say on Wall Street, "a rolling debt collects no moss." And what they mean is that, for as long as you can extend the debt, you have no problem.

Unfortunately, that leads folks to take on ever greater amounts of debt...at ever shorter durations...at ever lower interest rates. Sooner or later, the creditors wake up and ask themselves: What are the chances I will ever actually be repaid? And that's when the trouble starts. Interest rates go up dramatically. Funding costs soar. The party is over. Bankruptcy is next.

When governments go bankrupt it's called "a default". Currency speculators figured out how to accurately predict when a country would default. Two well-known economists – Alan Greenspan and Pablo Guidotti – published the secret formula in a 1999 academic paper. That's why the formula is called the Greenspan-Guidotti rule.

The rule states:

To avoid a default, countries should maintain hard currency reserves equal to at least 100% of their short-term foreign debt maturities.

The world's largest money management firm, PIMCO, explains the rule this way:

"The minimum benchmark of reserves equal to at least 100% of short-term external debt is known as the Greenspan-Guidotti rule. Greenspan-Guidotti is perhaps the single concept of reserve adequacy that has the most adherents and empirical support."

The principle behind the rule is simple. If you can't pay off all of your foreign debts in the next 12 months, you're a terrible credit risk. Speculators are going to target your bonds and your currency, making it impossible to refinance your debts. A default is assured.

So how does America rank on the Greenspan-Guidotti scale? It's a guaranteed default.

The United States currently holds gold, oil, and foreign currency in reserve. The US has 8,133.5 metric tonnes of gold (it is the world's largest holder). At current Dollar values, the gold's worth around $300 billion. The US strategic petroleum reserve shows a current total position of 725 million barrels. At current dollar prices, that's roughly $58 billion worth of oil. And according to the IMF, the US has $136 billion in foreign currency reserves. So altogether...that's around $500 billion of reserves.

Our short-term foreign debts are far bigger.

According to the US Treasury, $2 trillion worth of debt will mature in the next 12 months. So looking only at short-term debt, we know the Treasury will have to finance at least $2 trillion worth of maturing debt in the next 12 months. That might not cause a crisis if we were still funding our national debt internally. But since 1985, we've been a net debtor to the world. Today, foreigners own 44% of all our debts, which means we owe foreign creditors at least $880 billion in the next 12 months –
an amount far larger than our reserves.

Keep in mind, this only covers our existing debts. The Office of Management and Budget is predicting a $1.5 trillion budget deficit over the next year. That puts our total funding requirements on the order of $3.5 trillion over the next 12 months.

So, where will the money come from? Total domestic savings in the US are only around $600 billion annually. Even if we all put every penny of our savings into US Treasury debt, we're still going to come up nearly $3 trillion short. That's an annual funding requirement equal to roughly 40% of GDP.

Where is the money going to come from? From our foreign creditors? Not according to Greenspan-Guidotti. And not according to the Indian or the Russian central banks, which have stopped buying Treasury bills and begun to buy enormous amounts of Gold Bullion. The Indians bought 200 metric tonnes last month from the International Monetary Fund. Sources in Russia say the central bank there is looking to double its gold reserves.

So where will the money come from? The printing press perhaps? The Federal Reserve has already monetized nearly $2 trillion worth of Treasury debt and mortgage debt, creating bank reserves to purchase T-bonds and other government-backed debt. This weakens the value of the Dollar and devalues our existing Treasury bonds. Sooner or later, our creditors will face a stark choice: Hold our bonds and continue to see the value diminish slowly, or try to escape to gold and see the value of their US bonds plummet.

One thing they're not going to do is buy more of our debt.

And which central banks will abandon the dollar next? Brazil, Korea, and Chile. These are the three largest central banks that own the least amount of gold. None own even 1% of their total reserves in gold.

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Dubai Times 1,000

Why the Dubai "debt freeze" gives early warning to investors everywhere...

The DUBAI DEBT STORY is more like Bear Stearns than Lehman Brothers, writes Dan Denning in Melbourne for the Daily Reckoning Australia.

Meaning the news from Dubai could be the catalyst for fund managers and traders to take profits on all of their 2009 winners. This could lead to steep falls in emerging market stocks, including Australia.

But first things first. Dubai World is not nearly as large, leveraged, or systemically important as either Bear Stearns or Lehman Brothers were when those firms failed. For those reasons, it's unlikely that the failure of Dubai World (and we're not saying it will fail) would, by itself, cause a global deleveraging.

Dubai World has $59 billion in debt. That makes up the majority of the $80 billion in debt of Dubai itself. According to Reuters, international banks are exposed to $12 billion in debt. Incidentally, the Commonwealth Bank of Australia said it has exposure to Dubai but doesn't expect to make a loss.

There is some risk to CBA, no doubt, just as there is risk Dubai's other lenders. But it's nothing like the risk posed to the entire financial industry by Bear Stearns and Lehman Brothers.

For starters, the Bear Stearns High-Grade Structured Credit, and High-Grade Structured Credit Strategies Enhanced Leverage Fund were both massively leveraged. The first fund began with $600 million in assets but quickly borrowed on that to increase its asset portfolio to over $6 billion.

The trouble with that is Bear geared up to buy collateralized debt obligations (CDOs). It may not have known it at the time, but the CDO quality sucked. The CDOs were chock-full of subprime mortgages. In 2006 alone, $503 billion worth of CDOs were issued. It was a $2 trillion market by 2008. A fall in the value of Bear's assets – a big chunk of which were CDOs – was enough to wipe it out.

Dubai World is likely to be backstopped – at some point – by Abu Dhabi. And although we're sure it has its fair sure of property assets falling in value, Dubai World owns assets all over the world which it can sell. And, importantly, Dubai world is probably not a counterparty to many other financial arrangements in the same way Lehman Brothers was, at least as far as we know.

But still, you wouldn't be alone if you had an odd sense of déjà vu this morning. We'd say the Dubai affair is more like Bear and less like Lehman because it's a warning. Dubai may not be as systemically important as Lehman, but it is a reminder to all the world's investors that global financial markets remain highly leveraged. And we know what can happen next.

There are other, much bigger, and much more leveraged markets that pose far bigger risks to the global economy. For example, in the US, there is over $3.4 trillion in debt backed by commercial real estate owned by US banks. A presentation by a Federal Reserve analyst in late September suggests that the US banks have failed to set aside adequate capital to cover losses in commercial real estate. It's safe to say the US banking system – and by extension Australia's – would not survive another real estate collapse without major casualties.

And that is just one debt bubble. The other large debt bubbles are in China – which hedge fund manager Jim Chanos calls "Dubai times 1,000" – and in government debt worldwide. The China bubble and the US Treasury bond bubble are systemically important. And that's what we should be worried about now. But what's happening in the short-term is not quite what you'd expect.

Emerging market stocks are selling off. In fact, don't be surprised if Dubai is just the excuse fund managers use to take profits on a lot of 2009 positions. It will make this year's performance statistics look great by crystallizing a profit now. And who can blame a manager for being cautious?

Already the cost of insuring sovereign debt from default – as measured by credit default swap rates – is rising. Yes, it does seem a bit absurd that debt crisis in emerging markets is driving investors into US Treasury debt. But that's what's happening in the short-term. You may get a Dollar rally and lower short-term US rates.

How will Australian share markets fair, then? Good question. It depends on how the rest of the world views Australia. If it's viewed as essentially an emerging-market, commodity-related, high-yield risk asset play, stocks are going to get sold off. The Aussie Dollar will give some ground against the greenback. And the market will wait to see how exposed Aussie banks are to any of the bourgeoning debt bubbles.

The bigger issue is the exposure of the Australian economy to the Chinese economy. According to the government and the media, that is the difference maker for the Aussie economy. It's what guarantees future surpluses, growth, and prosperity. But if the Aussie economy is hitched to China on the upside, surely it's hitched to China on the downside too.

Not that any of this potentially catastrophic news should stop Aussie houses from getting bigger or more expensive! CommSec released a report yesterday showing Aussie houses are now the biggest in the world. The floor area of the average Aussie home is now 215 square meters. That's a 10% increase in the last ten years. Maybe Australians just need more living room!

The world's growth is built on a debt bubble. The bubble is popping. Dubai is a tiny bubble by comparison. The bigger pops are coming.

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Strong Hands Buying Gold

Trading above $1000 an ounce, how high will gold go from here...?

MONEY THAT HAS been sat on the sidelines is driving the market, says TraderTracks editor Roger Wiegand in this exclusive interview with The Gold Report.

Devoted intensive research time to the precious metals, currency, energy and financial markets for more than 17 years, "TraderRog" is a regular essay contributor to popular websites addressing the commodities markets, and he is frequently interviewed on radio in the United States and Canada.

Roger Wiegand now see the makings of some "pretty exciting" action in precious metals, forecasting that the Gold Price could go beyond $2,960 with the next big drop in the stock market...

The Gold Report: Roger, when we last spoke, at the end of August, you expected the stock market to have a pretty good fall after Labor Day. So, the market didn't collapse. What's your view on why it keeps appreciating?

Roger Wiegand: Well, part of it has to do with manipulation and part of it has to do with an awful lot of money that has been on the sidelines. A couple of months ago I heard there was around $8.5 trillion in cash that was not invested. I couldn't believe it. A lot of the money is starting to come back because investors are persuaded things are going to really pick up.

Typically, what happens in the cycles is November 1st is the time to buy, after the September-October event sell-off is over. And, if you buy on November 1st forward, you usually do pretty well. This year it was delayed a little bit, and some of those charts look a little bit sloppy and choppy, and that's what got everybody confused, including me. As of November 24, 2009, the news is reporting smaller investors are running to the bear funds for security. If the correction is now imminent, it is off-cycle and late by at least three to four weeks.

TGR: Are you saying that you're expecting the markets to go up now that it's late November?

Roger Wiegand: We could go either way. I really believe that. We've got some interesting charts. There's the S&P chart, which has a double top on it right now, indicative of a selling point, obviously. I don't think there's going to be that much of a selling event. I think it's going to stay propped-up. Last week we saw a gravitational pull from the smaller cap stocks into the larger ones. Usually, when they go into the S&P 100 and they get out of the trading 500, it's because they're looking for security and safety, and they're looking to buy those consumer cyclical stocks, like household goods and toothpaste. There's a heavy load in that regard right now in the market, but I think they're going to get out – the people in the funds are going to get their bonuses, and they're going to get out of town with some pretty big money. But I don't think there's going to be very much selling right now. I really don't. The selling is coming but it is delayed until the funds exit and close the books for bonuses at year end next week.

A big part of this has to do with inflation, too. I know a lot of people say, "Well, there's no inflation now; it's all deflation." We disagree; we say that the inflation is now 7% and rising more quickly.

Unemployment is a lot higher than people are discussing, and others are saying, "Well, this is a jobless recovery." Well, it may be a jobless situation, but it's certainly no recovery. What's happened here is a lot of corporations have laid-off so many people and run down their inventory so much that their overhead was cut back tremendously and they're showing profits, at least where we are right now. And those profits are going to be a one-off deal, I think. They're going to last for maybe a few months but come spring again, we're back to the same old problems. We're overloaded on debt. The bond market in Japan is looking absolutely horrifying right now; it's really scary. The government is selling bonds to pay pensioners and I don't think they've ever been in that position before. The amount of paper that is out there in Japan relative to GDP and the currency is way beyond where it is in the US. And I thought ours was bad!

So, in all likelihood, something is going to snap here pretty soon; it's got to. But it's confusing a lot of people because several good reports continue to be reported.

TGR: If you go back a year ago, everyone was looking at the balance sheets of the gold juniors, looking for those who weren't overloaded with debt who could survive the downturn in the capital markets. And so we've had a shake-out, and we're back to having free markets determine and who's going to make it...

Roger Wiegand: Absolutely. I think your example with the Gold Mining juniors is perfect. A lot of the ones who shouldn't have been in the business anyway are shaken out and gone because they didn't have capital; they didn't have the proper reserves; they didn't have any good partnerships. A lot of those projected mines were located in spots where they shouldn't have been politically. So, what have we got now? I don't know how many there were – I heard numbers like there were 5,000 of them (I don't think there were that many), and I hear now that there's something like 1,500. I have watched the charts and trading activity of these juniors that we like and those we dislike. We've thrown out the dislikes.

The experience we've been through is going to helps us with what's coming next. The thing that's really interesting is that a lot of these stock buyers who focus on the juniors are not really educated in the industry – they don't understand, especially in America; as they do in Canada – how much further we've got to go on this thing. I just wrote in my letter this morning that some of the people that are involved in silver are thinking that because we are up to $22 and fell back to $9 that that's the end of the game. I think if you look at where we are in gold and silver right now we're basically on page two of a ten-page story. I believe that's how much longer we've got to go.

TGR: You've previously mentioned all currencies are devaluing almost simultaneously. Other than currency devaluation, what's driving the price of gold and silver?

Roger Wiegand: Well, a lot of it is fear; gold is now basically considered to be money in many of the foreign countries, partially in the US, more overseas. I think a perfect example is Vietnam. It looked like they were going to have some things that would work out in their economy, and unfortunately for them, a lot of it's coming apart. And they know from experience that if they can get into gold and hang on, they're going to be a lot better off.

And, China is the number-two gold producer now, we've been told. They're not selling any and not only that, they're buying it. Further, they're encouraging gold sales to consumers. And Japan has been doing the same thing. The supply of gold is not going to be able to meet what people are after here, and that's the reason for this breakout we're looking at right now. We felt gold shares would separate from the regular stock market. I saw early glimmers of that this fall, a little bit of that in late summer. And now I am more convinced than ever that with the next big drop in the stock market, the gold and silver shares could really depart from the rest of the mainstream market, especially with the Dollar being so weak.

TGR: You've said that you see a lot of money moving from the smaller cap stocks to the larger cap stocks. Is the smart money moving to the seniors in the Gold Mining equity plays?

Roger Wiegand: Well, two things happen when you get into a market where the gold really starts to take off. Before, the Gold Price was in a long, slow climb from $200 up to $850 – that was one marker. And then we got up to a $1000 and hung around there for quite awhile, and it looked like it was going to sell-off, and did, and then came right back. But we are now in the next price range, which is beyond $1000, and Mark Faber of the Gloom, Boom & Doom Report says if gold will stay above $1000, it's never going under $1000 again. I agree with him; I really don't think it's going to.
 
Again, getting back to the senior versus junior, keep in mind when these markets get so crazy and convoluted like they are there's so much money looking for a place to go, that when a sector like gold takes off, where does the money go? It's going to go to NYSE gold companies.

TGR: So, as an investor, are you through shifting your funds to the seniors or are you still investing in the juniors?

Roger Wiegand: I don't trade shares personally; I trade the futures because they're faster and that's the business I started in. That's my preference – futures and commodity trading. I can't buy a stock and then go promote it. That's not fair. So, it's easier for me if I don't buy the stocks for me, but there's a lot of people who read our newsletter and that's all they do. They prefer shares, and they've made a lot of money on it.

TGR: Roger, can we wrap up with your thoughts on where you think the price of gold is headed? Or investing in precious metals?

Roger Wiegand: I forecast that gold is going to go beyond $2,960, which is my highest number right now. You're getting to the point in the gold market where some of the really strong, big players – by that, I'm saying commodity funds with hundreds of millions of Dollars – are saying gold is should easily be rising to $2,000.

And as far as investing, I think people are going to have to take more of a trading stance, rather than buy and hold. After what happened at Lehman; and what happened this year with prices mushing around, I suspect people understand they're going to have goals; they're going to have to trade a minimum of two times a year with these shares, and use other available trading vehicles, too. Volatility is increasing and is demanding more trade management than ever before. Opportunities are wider and larger than ever.

TGR: Thanks, Roger. Enlightening as always.

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Treasure expert searches for gold artefacts

A treasure expert is currently searching for gold artefacts among items that have been recovered off the coast of Florida. Bill Moore, director of operations at Mel Fisher's Treasure Museum in Sebastian, Florida, is searching through the treasure from a fleet of Spanish ships that sank off the coast of the state in 1715, according to Florida Today.
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Anglo-Saxon gold showcased at Oxford University museum

A £60 million makeover has allowed a piece of Anglo-Saxon gold to be showcased as a prize specimen at the Oxford University Museum. According to the Los Angeles Times, the university's Ashmolean museum - which is reported to be the oldest in Britian - used to store the gold treasure in heavy wooden display cases.
The news feeds on this site are independently provided by Adfero Limited © and do not represent the views or opinions of the World Gold Council.

Gold discovery in Ethiopia granted exploration licence

A gold discovery described as "significant" has been made in the Afar region of northern Ethiopia. Following this discovery, exploration and development company Stratex International has been granted a three-year exclusive exploration licence (EEL) to cover the 1,579 square km area that surrounds the gold find.
The news feeds on this site are independently provided by Adfero Limited © and do not represent the views or opinions of the World Gold Council.

Speedy Staffordshire gold valuation praised by minister

The prompt manner in which the Staffordshire hoard of gold was valued has been praised by an MP, according to reports. Pits n Pots notes that the West Midlands regional minster, Ian Austin said: "This is excellent news. I am delighted that everyone has come to such a speedy agreement."
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Trolley car adorned with gold leaf proves a hit for museum

A trolley car decorated with gold leaf and described as the "corporate jet of its day" has proved a hit with visitors to a US museum. The 103-year-old Toledo private car was built in 1906 to transport executives and VIPs to events such as the 1908 World Series in Detroit, Michigan. It also carried sightseers along the shores of Lake Eerie in north-west Ohio, the Tribune-Review reports.
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Gold leaf icons set to go on display

A collection of religious icons made using gold leaf to ancient techniques are set to go on display in the United States. Artist Gloria Gaffney creates the icons, which range from "life-size" angels to smaller images of religious figures and scenes, using medieval processes developed in the Byzantine Empire, which lasted from the fourth century AD until the fall of Constantinople in 1453, the Citizen-Times reports.
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