From Negative 5Y/5Y To $2200 Gold?

Tuesday, June 5th, 2012

For the first time on record (based on Bloomberg’s data) 5-year / 5-year forward inflation expectations turned negative today. This kind of deflationary impulse has occurred twice in recent years and each time has been accompanied by dramatic Federal Reserve easing. The anticipation of the move by the Fed has caused Gold each time to surge higher on yet more expectations of the fiat-fiasco unwinding. Given the 5Y5Y inflation print currently, we would expect action from the Fed and one could argue that this would cause the price of Gold to rise to $2200 per ounce as the deleveraging continues.

The red arrows show the deflationary impulse (5Y5Y inflation is inverted) and the orange curve arrow shows the reaction function post Fed reaction to the blue arrow levels of the deflationary impulse.

Chart: Bloomberg

Tags: Anticipation, Blue Arrow, Federal Reserve, Fiasco, fiat, Gold, Impulse, Inflation Expectations, Nbsp, Orange Curve, Ounce, Price Of Gold, Red Arrows
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Bank Of Russia To Buy “Considerable Figure” Of Gold Tonnage In 2012

Friday, May 25th, 2012

From GoldCore

Bank Of Russia To Buy “Considerable Figure” Of Gold Tonnage In 2012

Gold’s London AM fix this morning was USD 1,560.50, EUR 1,240.66, and GBP 996.04 per ounce. Yesterday’s AM fix this morning was USD 1,558.50, EUR 1,239.27, and GBP 993.62 per ounce.

Silver is trading at $28.30/oz, €22.60/oz and £18.13/oz. Platinum is trading at $1,430.00/oz, palladium at $588.70/oz and rhodium at $1,275/oz.

Gold was off $1.70 or 0.11% in New York yesterday and closed at $1,559.50/oz. Gold fell in Asia prior to gains late in the session and these gains continued in early European trading as lower prices are leading to some safe haven demand.

Gold USD Chart – (Bloomberg)

Gold looks set to see a fourth consecutive monthly loss which will be bearish technically. Gold will need to rally nearly $100/oz between now and end of trading of next Thursday May 31st to not incur a monthly loss of some 6% in May.

It will be the first time it has had four consecutive monthly losses since the four months to January 2000 – prior to the current secular bull market.

Gold’s monthly decline is primarily in dollar terms and therefore a dollar phenomenon as it coincides with a very poor month for the euro which currently is down nearly 5% versus the dollar.

Thus, gold is only down 1% against the euro while most European equity indices are down by 5% plus.

Although gold is a safe haven, in recent days speculators and investors burnt by riskier assets like equities, oil and industrial metals have been forced to liquidate their gold paper positions to cover losses in other markets.

While speculative players in futures markets can exert considerable influence in the short term, as ever physical supply and demand will be the ultimate arbiter of price in the long term.

The debt crisis in Europe looks like it may spiral out of control and trigger a global economic slowdown and contagion which will again support gold in the long term.

Holdings in the SPDR Gold Trust, the biggest bullion-backed exchange-traded fund, rose for a second day to 1,270.30 metric tons yesterday. Demand in Asia outside of India was “good” yesterday and interest in Europe is “evident,” UBS said in a report this morning.

Premiums of gold bars in Tokyo rose to as much as $1.50 per ounce above London prices, the highest level since last March, as investors turned from sellers to buyers during this most recent price correction, dealers told Reuters.

The IMF central bank gold demand figures for April were very bullish and suggest that central bank demand in 2012 may be even higher than the 456.4 tons added last year – which was the most in almost five decades.

The World Gold Council estimates that central banks will buy as much as 400 tons this year.

The data yesterday suggests that demand may be even higher than these levels and there is also the near certainty that larger central banks, such as the People’s Bank of China, are quietly accumulating gold reserves and not reporting their purchases to the IMF – as was done previously.

XAU/EUR Currency Chart – (Bloomberg)

Today, the deputy chairman of Russia’s central bank, Sergey Shvetsov, said that the Bank of Russia plans to keep buying gold on the domestic market in order to diversify their foreign exchange reserves.

“Last year we bought about 100 tonnes. This year it will be less but still a considerable figure,” Shvetsov told Reuters on the sidelines of a financial conference in Milan.

Russia’s gold and foreign exchange reserves fell to $514.3 billion in the week ending May 18, from $518.8 billion a week earlier. However, they have risen from the $498.6 billion seen at the end of 2011.

Yesterday, Shvetsov said that Greece has plans for a parallel currency and that it is a “necessity” for Greece to leave the euro.

US exchanges are closed on Monday for Memorial Day.

XAU/GBP Currency Chart – (Bloomberg)

OTHER NEWS
(Bloomberg) — CME Group Cuts Margins for Gold, Hog, Lumber Futures 
CME Group Inc. cut margins for gold on the Comex in New York.

The amount that speculators must keep on deposit for an initial account in gold futures was reduced to $9,113 from $10,125, CME Group said today in a statement on its website.

CME also lowered margins for hog and lumber contracts.

For breaking news and commentary on financial markets and gold, follow us on Twitter.

Cross Currency Table – (Bloomberg)

NEWS
Gold weakens on euro, on track for 6 pct loss in May – Reuters

Italians recycle family gold – The Financial Times

Gold ends up but stronger dollar limits gains – Reuters

Greek Exit Could Trigger a Run on European Banks – Business Week

COMMENTARY
Gold is near a critical turning point – where will it go next? – MoneyWeek

James Rickards: Currency Wars – The Making Of The Next Global Crisis – GoldSeek

Police Urging Greeks To Stop Stuffing Mattresses – Zero Hedge

Bond exodus on a par with eurozone bank run – The Financial Times

Tags: Arbiter, Bank Of Russia, Contagion, Debt Crisis, Dollar Terms, Eur 1, European Equity, Four Months, Futures Markets, Gbp, Global Economic Slowdown, Gold Paper, Industrial Metals, Ounce, Palladium, Rhodium, Safe Haven, Secular Bull Market, Speculators, Tonnage
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Gold ‘Will Go To $3,000/oz’ – David Rosenberg

Friday, May 11th, 2012

Gold ‘Will Go To $3,000/oz’ – David Rosenberg

Highly respected economist and strategist David Rosenberg has told that Financial Times in a video interview (see below) that gold “will go to $3,000 per ounce before this cycle is over.”

Markets are repeating the downturns of 2010 and 2011 and it is time to search for safety, David Rosenberg of Gluskin Sheff tells James Mackintosh, the FT Investment Editor.

Rosenberg sees a “very good opportunity in gold” as it has corrected and seems to be “off the radar screen right now”.

He sees gold as a currency and says the best way to value gold is in terms of money supply and “currency in circulation.”

As the “volume of dollars is going up as we get more quantitative easing” he sees gold at $3,000 per ounce.

Mackintosh says that Rosenberg’s view is a “pretty bearish view”.

To which Rosenberg responds that it is “bullish view on gold and gold mining stocks.” Mackintosh says that it is “bearish on everything else”.

Rosenberg  says that it is not about being “bullish or bearish,” it is about “stating how you view the world” and he warns that the major central banks are all going to print more money and keep real interest rates negative “as far as the eye can see.”

This is “critical” as one of the key determinants of the gold price are real short term interest rates.

The longer they stay negative “the longer the bull market in gold is going to be.”

Rosenberg sums up that “this is not about being bullish or bearish, it is about how do we make money for our clients.”

The interesting interview can be watched here.

Tags: Central Banks, David Rosenberg, Determinants, Economist, Editor Rosenberg, Financial Times, Gold Mining Stocks, Gold Price, gold stocks, Mackintosh, Money Supply, Nbsp, Ounce, Quantitative Easing, Radar Screen, Sheff, Strategist, Sums, Term Interest, Video Interview
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What’s Next For Gold?

Wednesday, March 14th, 2012

by Dominic Frisby, Moneyweek.com

I’m not unduly worried about the gold price.

But when I saw it had dropped $40 yesterday from $1,700 an ounce to almost $1,660 in the space of just a few hours, I’ll admit a concerned eyebrow was raised.

So I suppose a bit of hand-holding is in order in today’s Money Morning – even if it’s only my own.

Gold may not see fresh highs for at least another year

Let me start by re-visiting my forecast of several months back. By my reckoning, we wouldn’t see new highs in gold for at least another year, ie not before autumn 2012, if not later.

I based this forecast on a simple, repeating pattern that gold makes when it gets ahead of itself. In the chart below, you can see gold’s action since 2001. It’s plotted on a logarithmic chart, as the pattern is clearer that way. (A logarithmic chart, by the way, measures percentage gain on the y-axis as opposed to an arithmetic chart which measures price. So on a logarithmic chart, a move from 200 to 400 looks the same as 400 to 800 and so on).

You can see what a lovely consistent ascent it’s been.

But even within this steady uptrend there are times when it’s got a little ahead of itself and then pulled back as I have indicated in yellow on the above chart. One example is in early 2003, another is in May 2006, another February 2008, and of course the same thing happened again in September 2011.

Each time it’s done so, it’s had a nasty fall, followed by a period of consolidation and digestion. And the more it’s got ahead of itself, the bigger the fall and the longer the subsequent consolidation phase. I’m thinking in particular about the 18 months or so that followed the highs of May 2006 and February 2008.

On both occasions it was well over a year before gold made new highs. I believe we’re in just such a period now. The high gold made last September at $1,920 was a typical example of gold going too far too fast. Now we have the consequent period of digestion.

So that’s how I’m interpreting the big picture.

Gold measured in sterling is far less smooth

Out of interest, I present to you now the same chart, but of gold measured in pounds. The graceful ascendency is gone. This chart is hiccuping its way higher in steady, annual burps.

The inverse of this chart – which shows just how much the pound has fallen against gold – has the look of a geriatric stumbling blindly to his coffin.

The short-term outlook for gold

Now let’s zoom in and take a look at the nearer term. Here is a one-year chart of gold.

My famed 144-day moving average (blue line) has now become resistance, unfortunately. I see good support in the $1,550 zone, where I have drawn the light blue band. And I see resistance at $1,800 where I have drawn the red band.

These will be, I suspect, the two lines in the sand for the time being, probably until the autumn. Of course, these are just guesses – I know no more than you.

But again, staring at the chart and guessing, I suggest a retest of at least $1,600 looks to be on the cards before gold’s normal, upwardly-mobile business can resume. But such a re-test, should it occur, would give a nice symmetry to the chart and add to that decent-looking base at $1,550.

Could the miners finally start to outperform?

As for silver, I see a similar picture with strong support at $26, but resistance at $38. Silver does seem to be displaying some relative strength, which is positive.

Also on the positive side of things, I am seeing some buying coming in to the junior resource sector. This is probably because of broader stock market strength, but I’m hoping we’re in the early stages of one of those periods when the stocks outperform the metals. Not before time, that’s all I can say.

I’ve just come back from the PDAC in Toronto, which is the world’s biggest mining conference. I must have spoken to over a hundred different companies while I was there. I’ll be publishing my notes from the conference, as well as my pick of the PDAC in a new report, so watch this space.

And, finally, I’ve banished my inner Luddite and signed up for Twitter. I have 136 subscribers so far, so plenty of room for upside. If you’re on Twitter, please follow me @dominicfrisby.

Tags: Arithmetic, Ascent, Autumn, Axis, Consolidation Phase, Digestion, Dominic, Eyebrow, Frisby, Gold Price, Last September, Measures, Money, Nasty Fall, Nbsp, New Highs, Occasions, Ounce, Percentage Gain, Typical Example, Uptrend
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Silver Surges 4.5% To Over $37/Oz On “Massive Fund Buying”

Wednesday, February 29th, 2012

From GoldCore

Silver Surges 4.5% To Over $37/Oz On “Massive Fund Buying”

Gold’s London AM fix this morning was USD 1,788.00, EUR 1,329.96, and GBP 1,120.79 per ounce..

Yesterday’s AM fix was USD 1,774.75, EUR 1,321.48, and GBP 1,120.42 per ounce.

Cross Currency Table – (Bloomberg)

Gold rose 1% in New York yesterday and closed at $1,783.90/oz. Gold rose in Asia to a high of $1,790.16 it’s highest since mid November then edged down.  Europe this morning saw sideways trading until unusually volatile trading around the London AM fix saw gold rise from $1785.oz to over $1790/oz at 1030 GMT and then fall quickly to $1783/oz.

Spot silver has gained another 0.5% to $37.05 an ounce, after surging 4.5% yesterday once it rose above resistance at $35.50/oz. Silver reached a 5 month high of $37.21 but remains more than 30% below its nominal high in of April last year of $48.44.

Silver Spot $/oz – (Bloomberg)

Over 800 European banks have taken €529.5 billion from the ECB today after taking €489 billion euros at the first tender in December. The ECB’s 3 year lending is now near 1 trillion euros ($1.35 trillion) and the ECB’s balance sheet looks increasingly precarious.

Although the flood of paper has been credited with fuelling a rally on Europe’s distraught bond markets and safeguarding the region’s banks, it is another exercise in kicking the beer keg down the road as it fails to address the fundamental issue which is the insolvency of many European banks and many European nations and the obvious risk of contagion from that.

The continuation of ultra loose monetary policies increases the risk of inflation which will benefit gold which is an excellent inflation hedge. Extremely low yields on deposits and “risk free” sovereign debt means the opportunity cost of carrying non yielding bullion remains very low.

Spot silver gained 0.4% to $37.05 an ounce, after surging 4% and hitting a 5 month high of $37.21 in the previous session.

Silver as ever outperformed gold yesterday and traders attributed the surge to “massive fund buying” and to “panic” short covering. Some of the bullion banks with large concentrated short positions covered short positions after the technical level of $35.50/oz was breached easily.

Massive liquidity injections and ultra loose monetary policies make silver increasingly attractive for hedge funds, institutions and investors.

This time last year (February 28th 2011) silver was at $36.67/oz. Two months later on April 28th it had risen to $48.44/oz for a gain of 32% in 2 months.

There then came a very sharp correction and a period of consolidation in recent months. Silver’s fundamentals remain as bullish as ever and the technicals look increasingly bullish with strong gains seen in January and February.

Very bullish is the fact that silver also remains more than 30% below its record nominal high 32 years ago in 1980 and more than 75% below its inflation adjusted high of $140/oz in 1980.

The gold-silver ratio dropped to its lowest level in 5 months, after silver rose more than 12% so far this month and an enormous 34% this year, outperforming other precious metals.

Rising holdings of silver-backed ETF’s also indicated growing investor interest in the metal. The overall silver Exchange Traded Funds holdings rose to 491.079 million ounces, the highest since last May.

Spot platinum gained nearly 0.5% to $1,722.24, as investors await the latest in Impala Platinum’s dealing with an illegal strike that has disrupted production at Rustenburg, the world’s largest platinum mine.

For breaking news and commentary on financial markets and gold, follow us on Twitter.

OTHER NEWS
(AP) — Silver Prices Jump, Playing Catch-up to Gold
Silver prices shot up 4.5 percent Tuesday, playing catch-up to gold.

Silver is both a precious and an industrial metal. Traders can buy it to hedge against a volatile stock market, as they do with gold. But it can also be used to make products like computer chips, meaning prices can rise when traders expect demand from manufacturers to go up.

In March contracts, silver rose $1.616 to $37.14 per ounce. It’s up roughly 10 percent from where it was a year ago. Sterling Smith, senior market analyst at Country Hedging in St. Paul, Minn., said part of the reason silver is surging is that traders believe it’s undervalued compared to gold. Gold closed at $1,788.40 an ounce, up $13.50 for the day. It’s up about 26 percent compared to a year ago.

Copper rose 3.15 cents to $3.912 per pound, and platinum rose $9.20 to $1,723.50.

Energy contracts fell, partly because investors were pulling back after price gains last week. Oil prices remain close to nine-month highs because of concerns that Iran could cut shipments of crude to Europe and interfere with supplies elsewhere. The European Union and the U.S. are using sanctions against Iran because they fear the country is developing a nuclear weapon.

Benchmark oil fell $2.01 to finish at $106.55 per barrel on the New York Mercantile Exchange. Natural gas prices fell 8.5 cents to end at $2.627 per 1,000 cubic feet. Heating oil fell 6.28 cents to $3.2201 per gallon.

Smith said grains and other agricultural products have been enjoying a “winning streak” for the past week. Those movements are especially important now as farmers decide what to plant this year.

Soybean prices on Monday topped $13 a bushel for the first time in five months. That’s because traders think there will be greater demand for U.S. exports of the protein-rich beans because smaller harvests from South America are expected.

On Tuesday, soybeans for March delivery rose less than 1 percent, to $13.125 per bushel from $13.025. March wheat rose 15.5 cents to finish at $6.6825 per bushel. Corn ended up 8.75 cents to $6.5725 per bushel.

The price of orange juice also rose. Cocoa and sugar fell.

(Bloomberg) – Gold-Oil Correlation Rises to Eight-Month High
Gold’s strengthening correlation with oil means more gains for the metal as Brent near a nine- month high spurs demand for an inflation hedge, UBS AG said.

The CHART OF THE DAY shows Brent prices reached $125.55 a barrel in London on Feb. 24, the highest since early May, and are up 15 percent this year. Bullion has gained 14 percent in the period and reached $1,787.55 an ounce last week, the highest since Nov. 14. The 30-week correlation coefficient between the commodities rose to 0.61 today, the most since June. A figure of 1 means the two always move in the same direction.

Gold’s “rolling correlation with oil is slowly inching higher and we think this signals that some catching up lies ahead,” Edel Tully, an analyst at UBS in London, wrote today in a report. “To the extent that rising oil prices feed into higher inflation expectations, gold is bound to reap benefits.”

Some investors buy gold to hedge against accelerating consumer prices and as a protection from slowing growth and geopolitical risk. The metal, which generally earns holders returns only through price gains, rallied for an 11th year in 2011 as central banks in Europe and the U.S. kept interest rates near record lows. Oil advanced this year on concern the west’s dispute with Iran over the Islamic republic’s nuclear program may lead to a disruption in exports from the Middle East.

Investors are holding a record 2,398.2 metric tons of gold in exchange-traded products backed by the metal, valued at about $137.1 billion, according to data compiled by Bloomberg. The tonnage exceeds the holdings of all but four central banks, which are expanding reserves for the first time in a generation.

The Islamic republic has threatened to close the Strait of Hormuz, a transit point for about 20 percent of globally traded crude oil, if its exports are banned in sanctions. While UBS forecasts Brent at $110 a barrel in the second quarter, “any Iran-related headlines, military threats or small incidents in the Persian Gulf are likely to push oil prices sharply higher and potentially boost gold in turn,” Tully said.

(Bloomberg) – Oil Set for Best Month Since October on Recovery Signs, Iran
Oil rose, heading for its best month since October in New York, amid signs of economic recovery and concern that tension with Iran threatens global crude supplies.

West Texas Intermediate futures climbed as much as 0.6 percent after sliding yesterday the most in five weeks. Industrial output in Japan and South Korea beat estimates and U.S. consumer confidence rose to the highest level in a year. Oil has advanced 8.8 percent in February, its first monthly gain in three, as sanctions tighten against Iran, OPEC’s second- biggest producer.

(Bloomberg) – Impala Says Strike Halts 2 Billion Rand of Platinum Output
Impala Platinum Holdings Ltd. said 100,000 ounces of output, equivalent to sales of 2 billion rand ($265 million), was halted by a strike at its Rustenburg mine.

The company, based in Johannesburg, is working to resume output at the world’s biggest platinum mine after bringing back 9,800 of 17,200 staff fired during the illegal strike, Impala said today in a statement. About 15,800 didn’t join the strike.

“It is dependent on operational turnout of staff,” Impala said. Fired workers have until tomorrow to return on their prior terms after the walkout, which has entered a sixth week.

SILVER
Silver is trading at $37.14/oz, €27.64/oz and £23.30/oz.

PLATINUM GROUP METALS
Platinum is trading at $1,723.00/oz, palladium at $710.00/oz and rhodium at $1,475/oz.

NEWS

(Reuters)
Gold edges up ahead of ECB loan offer‎

(Reuters)
Silver up 4 percent, gold races toward $1800 on ECB

(Reuters)
Iran to accept payment in gold from trading partners

(The Financial Times)
Tehran considers trade payments in gold

COMMENTARY

(The Globe and Mail)
Don Coxe on Why Buffett Has Gold All Wrong

(MarketWatch)
Buffett rebuffs gold, but inflation says ‘buy’‎

(Chatham House)
Gold and the International Monetary System

(The Washington Post)
UBS’s Hickson Expects Gold Will Rise to $2025 in 2012‎

(Zero Hedge)
Silver Explodes As DJIA Closes Above 13,000

Tags: agricultural, Balance Sheet, Beer Keg, Bloomberg, Bond Markets, Bullion, Contagion, Currency Table, ECB, Eur 1, European Banks, Fundamental Issue, Gbp, Insolvency, Monetary Policies, Opportunity Cost, Ounce, Silver Spot, Sovereign Debt, Spot Silver, Trillion
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Invest Like a Champion Today

Friday, February 10th, 2012

by Scott Ronalds,

Warren Buffett’s perspectives on investing are worth their weight in gold (or better yet, stocks). Invest in things you understand. Wait for the right pitch. Don’t follow the herd. Buy things you’d be comfortable holding forever.

In a recent article in Fortune magazine, Buffett lays out his views on what he considers the three major categories of investment possibilities: fixed income (currency-based investments), assets that will never produce anything (gold), and productive assets (businesses, farms, real estate).

Not surprisingly, Warren thinks that the third category is the place to be: “I believe that over any extended period of time this category of investing [ownership of businesses] will prove to be the runaway winner among the three we’ve examined. More important, it will be by far the safest.”

He notes, “The riskiness of an investment is not measured by beta (a Wall Street term encompassing volatility and often used in measuring risk) but rather by the probability – the reasoned probability – of that investment causing its owner a loss of purchasing power over his contemplated holding period. Assets can fluctuate greatly in price and not be risky as long as they are reasonably certain to deliver increased purchasing power over their holding period.”

Consider Buffett’s views on gold. “Today the world’s gold stock is about 170,000 metric tons. If all of this gold were melded together, it would form a cube of about 68 feet per side. (Picture it fitting comfortably within a baseball infield.) At $1,750 per ounce – gold’s price as I write this – its value would be about $9.6 trillion. Call this cube pile A. Let’s now create a pile B costing an equal amount. For that, we could buy all U.S. cropland (400 million acres with output of about $200 billion annually), plus 16 Exxon Mobils (the world’s most profitable company, one earning more than $40 billion annually). After these purchases, we would have about $1 trillion left over for walking-around money (no sense feeling strapped after this buying binge). Can you imagine an investor with $9.6 trillion selecting pile A over pile B?”

There are lots of other unique perspectives in the article, which is an adaptation of his upcoming shareholder letter. Buffett fans may also be interested in watching a 12 minute segment that aired on CBS’s ‘Person to Person’ last night, in which he takes Charlie Rose and Lara Logan through his private office in Omaha.

Tags: Baseball Infield, Cropland, Exxon, Exxon Mobils, Fixed Income, Fortune Magazine, Gold Stock, Herd, Holding Period, Investment Possibilities, Metric Tons, Million Acres, Ounce, productive assets, Profitable Company, Purchasing Power, Recent Article, Runaway Winner, Trillion, Volatility, Warren Buffett
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You Can’t Print More Gold

Sunday, December 11th, 2011

You Can’t Print More Gold

By Frank Holmes, CEO and Chief Investment Officer, U.S. Global Investors

What do you get when you mix negative real interest rates with stimulative money supply efforts by global central banks?
An exceptionally potent formula for higher gold prices that could send gold to the unimaginable level of $10,000 an ounce. Negative real interest rates and strong money supply growth are two key factors of what I refer to as the Fear Trade.

Negative real interest rates occur when the inflationary rate, or CPI, is greater than the current interest rate. A quick account of the G-7 and E-7 countries shows that the majority have negative real interest rates.

Across the developed G-7 countries, British citizens are the worst off with real interest rates in the U.K. sitting at negative 4.5 percent. U.S investors aren’t doing much better with rates at negative 3.25 percent and the Fed has all but guaranteed rates will remain there. Only Japan has a positive real interest rate among the G-7 and that rate is barely above zero.

Conversely, the most populous nations making up the E-7 have mostly positive real interest rates. However, the grouping’s grandest economic powerhouses, China and India, have negative real interest rates sitting around negative 2 percent.

Simply put, investors in those countries who have parked their savings in cash and low-yielding investments, such as Treasury bills and money market accounts in the U.S., are actually losing money due to inflation.

That can be tough for any investor, but when you’re the central bank of a country with millions of dollars in reserves, it can be catastrophic. This is why central banks around the globe have sought protection by diversifying their foreign-exchange reserves into gold bullion this year.

VTB Capital’s Andrey Kryuchenkov told The Wall Street Journal this week that, “Central banks are diversifying, and it has intensified to a rate that nobody had expected.” Latest estimates predict global central banks will purchase between 475-500 tons of gold in 2011.

This amount of capital flowing into gold has the potential to push prices up a level in 2012. John Mendelson from ISI Group sees gold prices reaching $2,200 an ounce during the first six months of 2012.

While real interest rates look to remain in the red for the foreseeable future, many of these same countries are printing record amounts of “green” with accommodative monetary policies.

U.S. Global’s director of research John Derrick says central banks around the world have focused their attention on stimulating growth. Beginning with Brazil’s interest rate cut in late August through the European Central Banks (ECB) cut this week, there have been 40 easing moves by global central banks, according to ISI Group.

John says this also means we will likely see more quantitative easing in 2012. The Bank of England has already started its quantitative easing, and many experts believe the ECB and the Federal Reserve will follow in its footsteps.

Bloomberg reports that global money supply (M2) is “set to increase the most on record in 2011.” The chart below shows the year-over-year change of global money supply has been gradually moving higher and higher since mid-2010.

The reason global central banks have shifted the printing presses into overdrive is simple: they need the money. My long-time friend Frank Giustra reminded us of this new reality in an op-ed piece for the Vancouver Sun last week. Frank writes:

“The bottom line is that the money needed to bail out Europe and to fund America’s spiraling debt and future unfunded obligations is in the ten of trillions. IT DOES NOT EXIST. It has to be created by printing money in massive quantities, and despite all the rhetoric you will hear against such policies, in the end it’s the path of least resistance. Printing money is an invisible tax on savings, much easier to initiate, than, say, raising taxes or cutting back on services and entitlements.”

As central banks print money and increase supply, currencies become devalued. Whereas in the recent past, one currency may be reduced in value compared with other currencies, this time there is global competitive devaluation as excess liquidity is put into the system. Historically, this excess liquidity has made its way to riskier assets, i.e. stocks and commodities.

Gold is generally a benefactor of this flight to riskier assets as many investors see it as a store of value. This chart illustrates the interconnectivity of gold and global money supply growth.

However, this image doesn’t tell the whole story. While the price of gold has followed the same upward path as money supply over the past 14 years, it hasn’t been able to keep pace with M2 growth, says the Bloomberg Precious Metal Mining Team.

In fact, if the global money supply were backed by gold, gold prices would be much higher, according to Bloomberg. The yellow line below shows how gold would be greater than $5,000 per troy ounce if just half of global money supply were backed by gold. If all of the money supply in the world were to be backed by gold, the price of one troy ounce would need to rise above $10,000.

It’s unlikely, of course, that this will happen, but it serves as a useful illustration for the disappearing value of the world’s fiat currencies.

Frank reminded readers that we have been down this path before. Frank says, “When great nations mature and over-extend themselves, they revert to the paths of least resistance: borrow and/or print money. They all did it and they all failed; this time will be no different.”

The beneficiary of this type of event has historically been gold.

Tags: Andrey, British Citizens, Central Banks, Chief Investment Officer, CPI, Current Interest Rate, Economic Powerhouses, Foreign Exchange Reserves, Frank Holmes, Gold Bullion, Gold Prices, Money Market Accounts, Money Supply Growth, Ounce, Populous Nations, Potent Formula, Real Interest Rate, Treasury Bills, U S Global Investors, Wall Street Journal
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Dalio: “There Are No More Tools In The Tool Kit” – Charlie Rose Interviews The World’s Biggest Hedge Fund Manager

Monday, October 24th, 2011

When it comes to reading the world’s “tea leaves”, few are as capable as Ray Dalio, head of the world’s biggest (macro) hedge fund, Bridgewater Associates. So when none other than Ray tells PBS’ Charlie Rose that “there are no more tools in the tool kit” of fiscal and monetary policy to help America kick the can down the road, perhaps it would behoove the respective authorities to sit down and listen. Or not… and just to buy S&P futures in hopes that record career risk is big enough to force every other asset manager in the market to do the dumb thing and follow the crowd of lemmings right over the edge. Luckily, there are those who have the luxury of having both the capital and the time to not be drawn into the latest sucker’s rally. More importantly, Dalio shares some unique perspectives on what it means to run the world’s largest hedge fund, his perspective on social anxiety, and Occupy Wall Street and thus the demonization of wealth and success (in a way that does not imply crony capitalism: see Omaha), his views on taxation, on China, on the markets, on Europe and its insolvent banks, and most imporantly on the economy and why the much pained 2% growth (if that) will not be nowhere near enough to alleviate social tensions, such as those that have appeared over the past two months. Dalio’s conclusion, in responding to whether he is optimsitic or pessimistic, to the current environment of broad delevaraging of the private sector, coupled with record releveraging of the public, is that he is “concerned.” And that’s why, unlike the recently unemployed David Biancos of the world, who never exhibit an ounce of skepticism, Dalio is among the wealthiest men in the world (and hence a prime target of the #OWS movement). Well, that and also being smarter than most.

Full video interview after the jump

And complete transcript:

CHARLIE ROSE: Ray Dalio is here. He is the founder of Bridgewater Associates. He created the investment firm in 1975 out of a two-bedroom apartment in New York City. Today the company managed roughly $125 billion in global investments. Its clients include foreign governments, sovereign banks, central banks and institutional pension funds.

Over the last two years, Bridgewater ranked as the largest and best- performing hedge fund in the world. In 2010, his returns were greater than the profits of Google, Amazon and eBay combined.

I`m very pleased to have Ray Dalio at this table for the first time to talk about a perspective on the global economic scene and a whole range of issues having to do with where we see ourselves and also a look at his own philosophy and what has informed his own opinions and the way he looks at the world. Having said that — welcome.

RAY DALIO: Thank you.

CHARLIE ROSE: It`s great to have you here.

RAY DALIO: It`s great to be here.

CHARLIE ROSE: What is Bridgewater Associates?

RAY DALIO: It`s a global macro firm. We assess what the world economy is like and what — how asset classes will change and we are managing money for pension funds and endowments like you described; the Pennsylvania teachers, those types of pension funds. We`re trying to keep them safe.

CHARLIE ROSE: When you look at the world today, the global economic picture, I read today Goldman Sachs had a disappointing performance. JP Morgan did not do as well as some had hoped it might be. What`s happening with financial firms?

RAY DALIO: I think it`s important to understand that we`re going through a deleveraging. So we have to understand the big picture is — there`s a deleveraging. Three big themes: first there`s a deleveraging; secondly we have a problem with monetary and fiscal policies are running out of ammunition; and thirdly we have an issue in terms of people most importantly who are at each other`s throats politically and globally in terms of having a problem resolving those.

Imagine you earned $100,000 a year and you didn`t have any debt. You can go to a bank and borrow $10,000 a year. You can spend, therefore, $110 a year. When you spend $110,000 a year, somebody else earns $110,000 and they can go to a bank and there`s a self-reinforcing process in which your debt rises in relationship to your income.

And that goes on for a long time and that goes on for 50 or 75 years through history. We`ve had 50, 75-year cycles and then you reach a point where you can`t anymore get more debt and the process starts to change. And you can`t leverage up. Traditionally the private sector leverages up, we leveraged up then we got to a point in 2007 where we had a bubble and that same sort of bubble that happened in Japan, same sort of bubble that happened in the Great Depression, meaning we reached our debt limits. Europe`s reached its debt limits.

So then we begin the process in reverse as you can`t spend as much you — somebody else`s income falls. And that process works in reverse. So we`re in a deleveraging. So I think that this is important globally. That`s what Europe`s in.

So when we deal with Goldman Sachs or when we deal with banks and when we deal with Europe I think you can break the world into two parts, there`s the debtor-developed world which has reached its debt limits and is going through a deleveraging. Then there`s the creditor-emerging world, the countries like China which are competitive and are beginning to have those big surpluses and they`re lending us money. So we have this big imbalance in the world.

You can break the world into two parts. Debtor-developed countries and emerging-creditor countries and they have a big imbalance which is a debt problem. That`s the nature of the beast of what`s going on.

CHARLIE ROSE: And how long would the deleveraging take place? Ten years?

RAY DALIO: These take place over ten years. The key is to spread it out as much as you can. Make sure that it`s not disorderly.

CHARLIE ROSE: let me talk about the dysfunction issue. We can`t solve our problems domestically in the United States, our economic problems, unless there`s some sense of respect for other people`s views and some sense of it being able to come together and find solutions that are in the interest of the country, not necessarily always in the interest of the ideology or the party.

RAY DALIO: Yes. And I think that`s the problem so pervasively when we`re talking about culture. It is — when people disagree and you can take thoughtful people disagree, you have then the potential of learning a lot. If people who were disagreeing can say why do we disagree and work through that conversation in an intelligent way to try to find out what`s true, you can learn, you can make progress, it can be a fabulous thing.

When you instead have people who were talking behind each other`s backs and all criticizing and all looking for blame, this is a problem. I think the real question is how we approach those — can we approach that in a thoughtful way in which we work that through?

Let`s say for example the government budget balance.

CHARLIE ROSE: Right.

RAY DALIO: The government budget balance if you raise taxes — if everybody just sucked it in a little bit, you raise taxes by three percent, you cut spending by three percent — I`m using three percent as an example to say not much. Everybody should be able to pay three percent more or you should be able to cut your expenditures by three percent.

CHARLIE ROSE: If the government did that –

RAY DALIO: If the government did that, they would eliminate half the budget deficit — it`s estimated about $8.5 trillion over the next ten years is what we`re going to have as a deficit, they will eliminate half of that. Now –

CHARLIE ROSE: Over how long a period?

RAY DALIO: The next ten years.

CHARLIE ROSE: The next ten years, all right.

RAY DALIO: Now, I`m asking you if we could have every American — can everybody pay three percent more? Can everybody just spend three percent less? You can make a heck of a contribution to that.

Instead we have a division that`s going on in which we — the basic division is Republicans will say that we shouldn`t raise taxes.

CHARLIE ROSE: Or even reduce deductions.

RAY DALIO: Yes — in that way of raising taxes. So we — and Democrats say that we must raise taxes because we can`t cut the spending. So the delineation that as we came into that was the debt limit issue, that remains the debt limit issue.

And there`s vested interests involved; 70 percent of the taxes are paid by the top 10 percent of income earners, income taxes. And so — so what we have is a division here in which there`s not a coming together, I believe, and that means that in a deleveraging at a difficult time we`re not dealing with it in the best possible way. But it`s human nature.

CHARLIE ROSE: We are doing as they say, kicking the can down the road and not dealing with it. Suppose the super committee does not reach an agreement in terms of its requirement and therefore the mechanism — the trigger mechanism kicks in? What does your team think about that and what impact will that be?

RAY DALIO: Charlie, I`m meant to be a realistic person and sometimes when there`s concerns it`s difficult to talk about difficult situation. So I want to try and answer your question as honestly as I possibly can but I want to say that I`m very concerned not just of that. I do not believe that we will find a political solution. I think that that would not be — I`m pessimistic about that.

CHARLIE ROSE: So you have the same opinion that Standard & Poor`s had when they reduced –

RAY DALIO: Essentially.

CHARLIE ROSE: — America`s credit rating.

RAY DALIO: Essentially. So I think — and by the way I think it`s very important to understand that the government debt is the terrible challenging issue that we should talk about maybe but also more important is the private sector debt. So that resolving the public sector debt does not resolve the problem.

That individuals face the same problem meaning that they`re overly indebted and because they`re overly indebted and spend a lot of their consumption through borrowing and they had a — it was like if you borrow you have a party and everything`s good and you have a prosperity and you — you have your party, you hire the caterers, they`re employed and everybody`s happy.

So that there`s a private sector debt issue at the same time as the public sector debt. They`re both. So if you resolve the budget deficit, you do not resolve the private sector debt issue. Both of those things mean we`re both overly indebted. We cannot — the amount that we owe and have promised in its various forms can`t be paid.

Now we can accept is that right or wrong but let`s — and I think we need to talk about it forthrightly whether that`s right or wrong. And if it`s right — and I believe it`s right — then we have to talk calmly and logically about how we can approach that and deal with it in the best possible way without having this battle of one side or another.

Like the issue of is it better to have austerity or stimulus? The basic problem there is that there`s not a quality conversation on the subject. So if people who disagree could sit down and work on a television show or something, work through, how does the machine work, how does the economic machine work? What does it mean to each of those? How has it worked in the past so that they can understand what exists. Get past the ideology part of it and get on with trying to say we have is very difficult situation and how do we deal with it in our best possible way together?

We can`t solve the problem easily because we still have too much debt. But we can move forward in being able to make the best of it. We can spread it out, we can keep orderly we have a situation now in which we have a very severe situation, not only because we have a deleveraging going on, but we have a situation in which monetary policy cannot work the way it worked in the past, that fiscal policy will not be stimulative.

CHARLIE ROSE: Some people say that they describe that as there are no more tools in the tool kit.

RAY DALIO: There are no more tools in the tool kit.

CHARLIE ROSE: In terms of fiscal and monitory policy.

RAY DALIO: Yes, so number one is we have a deleveraging. Now that deleveraging means we`re going to have more debt problems. You`re going to see — no matter what is solved in Europe you will have a deleveraging. Banks will lend less and lending less will mean a contraction. That`s — that is what I believe is the case, we should talk about whether or not that is the case. Thoughtful people should discuss that.

If it is the case, we should then approach how do we deal with that? Now – - so I`m saying there`s a — I believe there`s a deleveraging going on. There are no tools in the tool kit and everybody`s at each other`s throats.

So that there is not a quality conversation of what is true; how do we best handle it?

CHARLIE ROSE: We have had that debate about the need for growth — which would be a stimulative impact on the economy and at the same time the need to reduce spending because of the debt and the deficit as well as the long- term debt. You need also to make investments for the future in terms of science and research and a whole range of issues so that that the country – - this country can be competitive around the world. Make sure it trained scientists and doctors and people who make a positive long-term contribution to the economy.

What is your own analysis as to how we find the right balance between austerity and growth? Or austerity and stimulus?

RAY DALIO: I think — I think it just comes back to the fundamentals same for us. Individually, the economics for government work the same as the economics pretty much for the individual that whatever we expend money on, we have to make sure — there`re certain things that are critical.

First you have to make sure that it will — it produces an income to pay it back. Investment, in other words, in some fashion or another. What we have to do is make sure that we put that money out and we — let`s say we build infrastructure, I believe that you can build infrastructure. I believe that you can hire people who unproductive people — people now who are idle, I think the worst thing now is not only the economics of it but I think the social impact of individuals who are not working or are living beneath their potential is a — is a dangerous thing.

It`s a social tragedy. It`s not good for them; it`s not good for the society. It`s a cancer that exists. They have to be made productive. But you can`t waste money doing it.

So those jobs — whatever they may end up being — or those investments have got to have a payback. And then –

(CROSSTALK)

CHARLIE ROSE: Did the stimulus program that was enacted by the Congress after the President — this President — assumed office, did it make a contribution to growth at all?

RAY DALIO: Oh, it made — it certainly made a big contribution –

(CROSSTALK)

CHARLIE ROSE: It did create jobs? Because some people would like to believe that that stimulus program didn`t create jobs and you`re here to say with your own analysis it did create some jobs.

RAY DALIO: Oh, a lot.

CHARLIE ROSE: Yes.

RAY DALIO: Ok but we — at the same time — and it created growth and it created some jobs. At the same time we have this overriding factor that is depressing jobs. So it created jobs in an environment — and let`s — so let`s turn to what is depressing jobs.

CHARLIE ROSE: Right. What is?

RAY DALIO: Ok. What`s depressing — what`s depressing jobs is that the world supply and demand for labor has changed. In other words, there`s a lot more people working as China came on and India came on and they are competitive. There`s a world supply of labor has change — has increased and technology has had an effect.

So we`re in an interesting era because I think almost and if you think of a person as — in a machine, an economic machine as being tool, a part of that economic machine the demand for labor has changed in a very profound way. It`s an interesting question. We might enter into a period in which we don`t need people as tools. So what does that mean?

CHARLIE ROSE: The two reasons that people are enormously curious about you: number one, is simply the objective success of what Bridgewater has done and become. And secondly there are interesting questions as to how you think about the world and how you think about investments.

You have mentioned a couple times the economic machine. Give us a sense of what that means to you. Because my understanding is that`s central to a philosophy you have about the way the economy works.

RAY DALIO: Reality works in a certain way. You have to understand how reality works. If interest rates go to zero and you can`t ease monetary policy, how does the economic machine work? Ok, a central bank can make a purchase and get money in the hands of somebody else or blah, blah, blah, blah, blah.

There is a certain machine. It is operated this — you can raise your debt relative to your income to so far but you can`t raise it more than that. And then when you reach that, that changes.

So the private sector cannot — there are such laws of economics, such realities of if — let`s say Europe. I`ll give you another one. We have a debt problem in Europe. You can either transfer the money from one rich country to a poor country –

CHARLIE ROSE: Right, Germany to Greece.

RAY DALIO: You can print the money.

CHARLIE ROSE: You can`t do it.

RAY DALIO: Or ECB could say I`ll find a way to do it, whatever.

CHARLIE ROSE: Right.

RAY DALIO: Or you can write them down. Those are the choices.

CHARLIE ROSE: So-called hair cut?

RAY DALIO: Hair cut.

CHARLIE ROSE: Machine for you is a theory of the way things work?

RAY DALIO: And so — yes, that`s right. It`s a description of reality. If I ski and I`m putting my weight on my downhill ski I will make a better turn than if I don`t.

CHARLIE ROSE: And you always make a point that you know what you don`t know and that`s equally valuable.

RAY DALIO: More valuable. I want to say that — so this is the whole philosophy. I — I so, know that I can be wrong; and look, we all should recognize that we can be wrong. And if we recognize that we`re wrong and we worry about being wrong than what we should do is have a thoughtful dialogue.

(CROSSTALK)

CHARLIE ROSE: Ok, but that –

(CROSSTALK)

RAY DALIO: So the way I get to success. The way — it`s not what I know. I`ve acquired some things that I know along the way and they`re helpful.

(CROSSTALK)

CHARLIE ROSE: It is — it is — it`s not what you know but it is –

(CROSSTALK)

RAY DALIO: It`s knowing what I don`t know or worrying that I won`t — that I`ll be wrong that makes me find –

CHARLIE ROSE: Yes.

RAY DALIO: Well, I want people to criticize my point of view — I want to hold down.

CHARLIE ROSE: Right.

RAY DALIO: Say I have a — I think this but I may be wrong. And if you can attack what I`m saying — in other words stress test what I`m saying — I`ll learn.

CHARLIE ROSE: So that everybody knows so therefore people will be free to tell you what they think.

RAY DALIO: Of course.

CHARLIE ROSE: Because you know that it will not be held against you and you can benefit from it.

RAY DALIO: That`s right.

CHARLIE ROSE: So anybody in a meeting at your company can stand up and say Ray –

(CROSSTALK)

RAY DALIO: Absolutely.

CHARLIE ROSE: — you`re absolutely wrong.

RAY DALIO: Of course.

CHARLIE ROSE: And you have not been precise, and your assumptions are flawed.

RAY DALIO: Oh it`s so essential, right. There`s — the — the number one principle at our place is that if something doesn`t make sense to you, you have the right to explore it, to see if it makes sense.

I don`t want people around who do things that they don`t — they don`t think makes sense because I`m going to have not-thinking people.

(CROSSTALK)

CHARLIE ROSE: Right.

RAY DALIO: So that they have not only the right, they have obligation. Don`t walk away thinking something`s wrong.

CHARLIE ROSE: Failure teaches you more than success?

RAY DALIO: Of course. One of my favorite books is “Einstein`s Mistakes.”

CHARLIE ROSE: Right. And because it showed you that even Einstein, the most brilliant person of the century in common judgment made mistakes?

RAY DALIO: The great fallacy of all — I think of all of mankind practically — I mean that`s a big statement — but the great fallacy is that people know more than what they do and there`s a discovery process and so when you look at — that`s the process for learning.

The process for learning is to say “I don`t know.” Like, I`m — I`m totally comfortable being incompetent. If I — if I — I like being incompetent. I don`t mind being an incompetent. If I don`t — how — how much can you be competent about?

And so that whole notion of do you like learning? Do you like finding out what`s true and building on it without an ego? And that becomes the problem. How many statements do you listen to people that begin “I think this, I think that,” where they should be asking “I wonder.”

CHARLIE ROSE: What`s in here? And why did you write it; because you wanted people who come to work with you to understand what your own philosophy was about openness, about management about dialogue, about the machine.

RAY DALIO: Yes. So what — I think every place has to have a culture.

CHARLIE ROSE: Right.

RAY DALIO: And culture is the values. What — when values are leaving (ph) out and so for example the number one value is it has to make sense to you, we have to talk about it, we have to work it through in a none egotistical kind of way. And so it`s an unusual place and it`s an unusual culture.

CHARLIE ROSE: Are you offended when people sometimes label it a cult?

RAY DALIO: I think that — I think a cult — when I think of a cult it means believe this. And where — it`s the opposite.

CHARLIE ROSE: Yes, you`re taken from on high.

RAY DALIO: In other words a cult mean — yes. Somebody`s telling you believe this –

(CROSSTALK)

CHARLIE ROSE: Because I said so.

RAY DALIO: And follow it.

CHARLIE ROSE: Because I have a superior wisdom.

RAY DALIO: Ok, it`s exactly the opposite of that, right? The number one principle is “Don`t believe anything; think for yourself.” And now let`s go through a process of what is true together. But we can`t stop that with ego. We can`t let that barriers stand in our way. So we`re going to live in a culture in which we can do that.

Ok, now that`s opposite of a — ok, it`s a belief system, in other words I`ll ask you do you believe that we should operate this way with each other. Ok, if you want to call that a cult, I think it`s the opposite of a cult, it means “think,” right? Speak up. Don`t hide it; don`t talk behind people`s backs. Its talking behind people`s –

(CROSSTALK)

CHARLIE ROSE: Did you have these ideas for a long time or these ideas that you came to through, came to through your own experience and your own living and your own sense of what you read and what you question and you came to this?

RAY DALIO: Of course, of course through my whole life. Now as I say when I started at the markets, the knowing I don`t know and the liking to have people challenge me. So when I was young I did like that — to know. I did know that I`m — I`m an independent thinker and I know that for an independent thinker and I like to innovate. We like to innovate.

And if you`re going to have an innovative thinker, they made –there`s a high chance they`ll be wrong and if you have to have an independent thinker they`re going to have a different point of view than the next person.

So if you`re going to have innovation and independent thinking you`re going to have to have the ability to disagree, to find out what`s wrong and I learned through my whole experience day after day that the cost of being wrong is a terrible thing.

So I worry about being wrong and because I worry about being wrong I want to know what`s true.

CHARLIE ROSE: Yes.

RAY DALIO: And we have a community here, I want to know what`s true including my strengths and weaknesses so that I know how to deal with them and I want to be in a community of other people who want to do that.

CHARLIE ROSE: Do you believe as –

(CROSSTALK)

RAY DALIO: And by the way that`s connected to our performance.

CHARLIE ROSE: You have this dialogue with members of the Tea Party on the Republican side and the members of the President`s administration on the other side. What would you tell them about the necessity for revenue in the next ten years?

RAY DALIO: Well, here`s what I would be telling them.

CHARLIE ROSE: You`ve got to tell them more than just talk.

(CROSSTALK)

RAY DALIO: Ok, no but here`s what I would say. Can I, Mr. President — Mr. Alternative Republican –

(CROSSTALK)

CHARLIE ROSE: Mr. Cantor, let`s say.

RAY DALIO: Ok, can we first just together sit down in a room, together with whoever you want to bring in, and go through an exercise of finding — now forget what we should do at the moment — just find out a discussion of how does the economic machine work? How does the machine work? We`re not going to get to what we`re doing at the moment. And can we agree on how the machine works?

CHARLIE ROSE: Do you think they`ve done that or not?

RAY DALIO: I — they don`t do that. They don`t — this is the big thing. Everybody`s looking at what to do and there`s a debate –

(CROSSTALK)

CHARLIE ROSE: Well but no this is about can they do — when I said do you think they have done that or not? Meaning have they set –

(CROSSTALK)

RAY DALIO: No, no, no.

CHARLIE ROSE: Let`s just test all of our assumptions about what`s necessary in the way the system works and the machine works?

(CROSSTALK)

RAY DALIO: No. No, so that`s the interesting thing. Everybody`s looking about what to do and each approaches it with a bias and we`ve not in a conversation that`s a quality conversation –

(CROSSTALK)

CHARLIE ROSE: And part of the argument comes — has to do with how you read history too. Those people who were saying –

RAY DALIO: Well, we could do it together.

CHARLIE ROSE: Right, we read history together?

RAY DALIO: And you can at a very nuts and bolts level I can take any period of history and put it through my template. There`s a template I wrote that describes how I think machine works.

(CROSSTALK)

CHARLIE ROSE: Right, right. When you have signed “The Giving Pledge” with Warren Buffett and Bill Gates, have you not?

RAY DALIO: Yes.

CHARLIE ROSE: When you look at the Buffett rule about 00 as a man who has a huge income, how do you feel about the Buffett rule vis-a-vis the way you look at it in terms of whether there needs to be more sacrifice on the part of people who are at the highest level of the economic –

RAY DALIO: So I — so — I think the answer to that is probably true.

CHARLIE ROSE: Yes.

RAY DALIO: Ok. I think that — but I want to be clear what — I want to say more than this on the subject. I think that there`s not enough discussion on people being — how do we get people to be self-sustaining?

So I want — so the number one thing I want for my kids, the number one gift I can give my kids or the number one gift that I can give anybody is that you`re self-sufficient.

I don`t — it`s not a matter of even living standards. It`s the notion of if you`re self-sufficient you have the freedom to make your own choices –

(CROSSTALK)

CHARLIE ROSE: It`s like a difficult parable about giving fish and teaching how to fish.

RAY DALIO: Yes and you can make whatever choices in life you want to make but you`re self-sufficient. And on an ethical standard it means that what I`m giving is equivalent to what I`m taking — self-sufficiency, right?

So what I want to do, what I think that we need to do is say this large percentage of the population, how do we make them useful? How do we make them self-sufficient? Let`s all agree on a goal of how to achieve that. So like my kids I don`t want to just give money. Let`s — I give — I`m going to give away a lot more than half of my money.

CHARLIE ROSE: Right.

RAY DALIO: I`d be happy to give that to the government –

CHARLIE ROSE: If?

RAY DALIO: If the government put together programs that were like I`m giving away to charity to certain programs in which I believe the money is sufficiently used to help people.

Let`s say for example if the government created a series of programs that said there`s this education, teach for America. If I can read these things off, ok, of these types of things –

CHARLIE ROSE: All those you support.

RAY DALIO: Yes or it doesn`t have to be those.

CHARLIE ROSE: Yes.

RAY DALIO: It just has to be good.

CHARLIE ROSE: Right.

RAY DALIO: Ok? If the government –

(CROSSTALK)

CHARLIE ROSE: The result has to be self-sufficient?

RAY DALIO: Yes. So for example Arne Duncan –

CHARLIE ROSE: The Secretary of Education.

RAY DALIO: Secretary of Education is a fantastic person for dealing with improving the quality of education in the United States and he — “Race for the Top” and such.

(CROSSTALK)

CHARLIE ROSE: So you say I`d be happy for my taxes to be raised if I knew that the money would go to be administered by someone like Arne Duncan.

RAY DALIO: Oh, man. Or even create a series of quality — I will — I will fund that opportunity. Give — don`t waste it. Ok, don`t waste it. Put it to good use for education, for opportunity.

So I`m — I think that what the country`s most important thing to give anybody is opportunity.

CHARLIE ROSE: Let me take this downtown to where there`s an economic protest on Wall Street.

RAY DALIO: Yes.

CHARLIE ROSE: In your sense — you clearly have read about that and looked at it — what do you think is at stake there and what do you think they`re saying to us?

RAY DALIO: I think the number one problem is that we`re not having a quality dialogue. So I wish that I could sit down –

(CROSSTALK)

CHARLIE ROSE: So somebody should be listening and –

RAY DALIO: No, no yes we get together, sit here in a room like you with those thoughts and understand how — how — what`s going on and what`s true. So for example on that particular case I don`t know that I adequately know the various points of views that are behind it.

CHARLIE ROSE: Right.

RAY DALIO: I certainly understand the frustration. I understand the dilemma. I understand that there`s discontent. Ok –

(CROSSTALK)

CHARLIE ROSE: Yes, discontent about there`s somehow a feeling that –

(CROSSTALK)

RAY DALIO: Right so it seems to me –

CHARLIE ROSE: — that some people did better because of the way the rules were or some people did better because –

(CROSSTALK)

RAY DALIO: Right.

CHARLIE ROSE: — they had power to influence Washington and they didn`t.

RAY DALIO: So I think we need to work ourselves through that. I — I`m sorry –

CHARLIE ROSE: No, no go ahead.

RAY DALIO: Ok, so I think that not only do we have to work ourselves through that, I would say like the question really is also a question that should be dealt — designated for our legislators, our government. Because if the government makes the rules, people will behind either — did they break laws or did they not break laws? This is a — this is a question of how should behavior be managed?

Like I think I — I think I did everything right, you know I — I did well for my customers. My customers are pension funds, teachers. I did well when others didn`t and I`m going to say that they are very grateful.

We have a wonderful relationship, 15-year wonderful relationship. That — what happens is I happen to earn one-fifth of the profits.

CHARLIE ROSE: Right.

RAY DALIO: So then –

CHARLIE ROSE: You make 20 percent.

RAY DALIO: Ok, I earn 20 percent of the profits.

(CROSSTALK)

CHARLIE ROSE: And you take a two percent fee for doing it.

RAY DALIO: What — yes that covers my overhead and a bit more.

CHARLIE ROSE: Right.

RAY DALIO: But anyway, I earn this money as a result. Very similar to I would say, any of those companies you mentioned, the eBay and so on and so forth.

CHARLIE ROSE: Right.

RAY DALIO: I pay about one-third in taxes. I pay about one — I give away about one-third. And I`m — and that`s what I do and I follow the law. And if I`m doing something that is incorrect, that they think is incorrect I`d like to know that and I would also like to say should those laws — is that right or wrong.

CHARLIE ROSE: You want the people who work for you to tell you exactly what they believe and to be able to document the fact that it`s not just what they believe but it`s what they have discovered.

And you have to test those ideas in the marketplace of your own firm before you go off and act on those assumptions, correct?

RAY DALIO: Yes.

CHARLIE ROSE: So what is it telling you now if Greece defaults? And that has a contagion ability to leap across the Atlantic and have some influence on the U.S. economy. What is it telling you, you know, about whether China, for example can maintain the level of economic growth it`s had and avoid the kind of social conflicts that might exist in that society.

What does it tell you about emerging nations and what it is that — what impact they will have on commodity prices and what does it tell you about the future of the dollar as a currency? All of those kinds of issues?

RAY DALIO: You`ve got a bunch of questions.

CHARLIE ROSE: No. I know I did.

(CROSSTALK)

RAY DALIO: And also I`ll do the best I can.

CHARLIE ROSE: In my remaining minute. Go ahead.

RAY DALIO: Ok, I would want to say that there is — there are two worlds. There`s debtor-developed countries and there`s emerging creditor countries, classically the United States and China.

CHARLIE ROSE: Right.

RAY DALIO: One is a creditor, one a debtor. They are getting we`re still borrowing, we`re still in debt, we`re still — they`re still earning. Then those two worlds can be broken into two — those that can print money and those that can`t print money.

So now when I`m giving you the total answer in my remaining minutes, Europe is — can`t, a lot of it, can`t print money. Therefore it will have to deal with whether there`s a transfer of wealth, there`s a limit to that transfer of wealth.

And so we are going to deal with the question of whether they would print money or get the haircuts. I think they`ll do both.

CHARLIE ROSE: Right.

RAY DALIO: When looking at China, China because they can`t raise interest rates because of their existing monetary policy, is that they can`t control credit growth in the normal ways that we control credit growth. So there`s a credit bubble emerging there and as — in other words there`s a quality of lending and it`s bypassing the credit system.

And that`s something that the Chinese will need to get a control of because it`s a dangerous thing. And so that creates their risk. If I take then the United States we`re in a position in which there is this deleveraging. Deleveraging is risky so for example banks are leveraged about 12 to 15, 17 times.

CHARLIE ROSE: Right.

RAY DALIO: 15 times is a round number it depends on the bank. They`re leveraged 15-1 and if they go down by one-fifteenth, we have a capital problem and we`re in a deleveraging. Those problems — bank crisis that have existed every ten years normally we are — we can have a problem.

We don`t have the ability to have the same effect of monetary policy as we did before because a central bank — it can buy a bond. It can — therefore buy the bond. It gives that money to somebody who sold the bond and they were going to buy something like a bond. They`re — the — the getting it in the hands of somebody who spends it on cars and houses who really owes probably too much in debt is not an easy thing to do for monetary policy. So monetary policy is not as effective and then we have this social tension.

So we should be able to — there`s this downward pressure of the deleveraging. We should be able to grow at a rate that`s comparable to our income growth if we are — if we keep orderly and we — and we work this through and everything is orderly. That means something between like 1.5 percent or 2 percent we should be growing at maybe about the 2 percent vicinity.

The problem with the 2 percent vicinity is that the employment rate remains the same or can trend higher. That produces social pressures, that produces tension which itself means that you can have a situation analogous to that which is existing in Greece and more social pressure you create the more tension that is existing and emerging in various ways, not just a Wall Street piece. But it`s existing in Spain.

CHARLIE ROSE: Right.

RAY DALIO: So if we can keep orderly and not argue with each other and not do disruptive things and we don`t go down ok and grow at that two percent you know maybe then it will be ok.

If we have disruption and we are not able to have a monetary policy and we can`t have fiscal stimulation and you have a problem of what do you do — you can`t recapitalize the banks. I mean if you should happen to need to recapitalize the banks you can`t have a TARP program again.

CHARLIE ROSE: Politically not feasible.

RAY DALIO: Politically not feasible.

So you have to have a plan. You need to be thoughtful, I think, how do you create that plan and not only it`s a theoretical thing when I say how do you make a plan because you have to be able to have agreement to implement the plan. You can`t have people at odds.

As I say sometimes to policymakers my job is very — is much easier than their job. My job is that I just have to pretty much anticipate what`s going to happen and be one step ahead. That`s not an easy job but it`s an easier job than policymakers who have to do that. They have to then find a solution for the bad stuff not happening. That`s not easy to find solutions and then even if they had solutions they have to get that solution through the political system. In which there`s — there`s — everybody`s saying that you can`t do that, whatever that is and everybody blaming each other.

CHARLIE ROSE: Are you optimistic or pessimistic?

RAY DALIO: I suppose I`m — if I was – I`m concerned. I think it`s a test of us. It`s a test of us in our society. It`s a test of us.

CHARLIE ROSE: On that note thank you for coming.

RAY DALIO: My pleasure, thank you for having me.

Tags: Asset Manager, Biancos, Bridgewater Associates, capitalism, Charlie Rose, Demonization, Dumb Thing, Fiscal And Monetary Policy, Gold, Hedge Fund Manager, India, Infrastructure, Insolvent Banks, Lemmings, Ounce, Prime Target, Ray Dalio, Skepticism, Social Anxiety, Social Tensions, Tool Kit, Video Interview, Wealthiest Men In The World
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Gold Falls 2% in Minutes in Asian Trade – Global Currency Wars Resume and Markets Digest German Decision

Wednesday, September 7th, 2011

From GoldCore

Gold Falls 2% in Minutes in Asian Trade – Global Currency Wars Resume and Markets Digest German Decision

Gold is trading at USD 1,843.60, EUR 1,314.10 , GBP 1,155.30, CHF 1,584.10 and JPY 142,390 per ounce.  Gold closed marginally lower in all currencies yesterday except for the Swiss franc which fell nearly 7% against gold and other fiat currencies.

Gold’s London AM fix this morning was USD 1,844.00, EUR 1,311.99, GBP 1153.44 per ounce. Gold fixed lower in all currencies (USD 1,891.00, EUR 1,330.75, GBP 1172.86 per ounce).

Cross Currency Table

The German constitutional court rejected the challenge against the Eurozone ‘bail outs’ but said that the ruling shouldn’t be seen as “blanket” approval for future bail outs. Going forward Angela Merkel and the German government must seek approval from the Parliament’s budget committee for new guarantees it assumes under the European Financial Stability Facility.

Gold closed in New York at $1,870.70/oz yesterday and then traded sideways prior to sharp selling in Asian trading saw gold fall 2.3% or nearly $50 in minutes ($1,871/oz at 0514 GMT to a low of $1,827/oz at 0523 GMT). The price fall was odd as there was no breaking news or ostensible reasons for the sell off and other markets were unchanged at the time.

Speculation was that the falls were technical in nature after stop losses were triggered.

Gold in US Dollars Spot – 1 Day (Tick)

However, Asian traders spoke of some 4,000 lots of gold being ‘dumped’ on the COMEX and of a “large sell order”.

This would suggest that the sellers may not have been profit motivated and official selling may have been involved.

After the Swiss franc intervention and currency debasement yesterday, market participants are wary of further official government and central bank intervention. With further gains for the Swiss franc artificially capped (at least in the short term), it would be naïve to exclude the possibility of intervention in the gold market and a continuing strategic capping of the price.

“The start of full-on currency wars has started in earnest,” said Maurice Pomery, chief executive at Strategic Alpha, quoted in the front page of the Financial Times today. “After currency wars come trade wars and as we see the exporting world pressured as the developed world contracts, tensions will rise.”

Central banks, from the SNB to the Bank of Japan, are openly intervening in the currency markets and devaluing their currencies and therefore may be surreptitiously intervening in the gold market.

The safe haven Swiss franc is now pegged to the not so safe haven euro and Japanese money printing is leading to question marks over the safe haven status of the yen. Therefore, risk averse money is likely to flow into gold.

Gold is an internationally traded currency that is not controlled by any one government and therefore cannot be debased, unlike fiat currencies. A way to control gold (at least in the short term) is by market manipulation and capping or lowering the price at key strategic and psychological moments in order to prevent enthusiasm and the public from seeking out the safe haven.

Reuters reports this morning that analysts believe that “expectations that other central banks may step in to intervene in the currency market” may have contributed to the “restraint” in the gold market overnight.

Given the fact that global currency wars have intensified and will likely escalate in the coming weeks, we should be mindful of peculiar and volatile short term movements that give false signals.

All interventions and market manipulation can be successful in the short term but as ever the real fundamentals of supply and demand will dictate the price of all goods, services, assets and currencies in the long term.

Investors and store of wealth buyers should continue to buy the dip.

For the latest news and commentary on financial markets and gold please follow us on Twitter

NEWS

(Reuters) — PRECIOUS-Gold drops as stocks rally; debt crisis lends support
http://www.reuters.com/article/2011/09/07/markets-precious-idUSL5E7K712S20110907

(Reuters) — PRECIOUS-Spot gold tumbles 2 pct, tracks US gold in technical selling
http://af.reuters.com/article/metalsNews/idAFL3E7K703G20110907

(Bloomberg) — Gold Drops for Second Day as Equity Rebound Trims Haven Investment Demand
http://www.bloomberg.com/news/2011-09-06/gold-may-decline-for-a-second-day-after-rally-to-record-encourages-sales.html

(Reuters) — Libyan convoy with gold, cash crossed to Niger-NTC spox
http://af.reuters.com/article/energyOilNews/idAFLDE78509020110906

(SouthAfrica.info) — South African gold production declines
http://www.southafrica.info/news/business/1038896.htm

COMMENTARY

(The Telegraph) – Evans-Pritchard: German austerity drive risks Euro-slump
http://www.telegraph.co.uk/finance/financialcrisis/8745695/German-austerity-drive-risks-Euro-slump.html

(The Telegraph) — Switzerland abandons floating exchange rate in dramatic ‘currency war’ twist
http://www.telegraph.co.uk/finance/currency/8745686/Switzerland-abandons-floating-exchange-rate-in-dramatic-currency-war-twist.html

(King World News) — Marc Faber – This Will End in Disaster & You Must Own Gold
http://kingworldnews.com/kingworldnews/KWN_DailyWeb/Entries/2011/9/7_Marc_Faber_-_This_Will_End_in_Disaster_%26_You_Must_Own_Gold.html

(The Telegraph) — Libya: Mystery of Gaddafi and the gold-laden convoy crossing the desert to Niger
http://www.telegraph.co.uk/news/worldnews/africaandindianocean/libya/8745665/Libya-Mystery-of-Gaddafi-and-the-gold-laden-convoy-crossing-the-desert-to-Niger.html

(King World News) — Andrew Maguire – LBMA Shorts Will be Forced to Take Losses
http://kingworldnews.com/kingworldnews/KWN_DailyWeb/Entries/2011/9/6_Andrew_Maguire_-_LBMA_Shorts_Will_be_Forced_to_Take_Losses.html

(Zero Hedge) — “The European Financial System Is Finished” In Quotes
http://www.zerohedge.com/news/european-financial-system-finished-quotes

(CNBC) — Another Reason to Buy Gold: Franc Losing Safety Status
http://www.cnbc.com/id/44410858

(MarketWatch) — Euro crisis helps gold shine
http://www.marketwatch.com/story/euro-crisis-helps-gold-shine-2011-09-07

(MarketWatch) — Gold’s rally will continue
http://www.marketwatch.com/story/golds-rally-will-continue-2011-09-07?reflink=MW_news_stmp

Tags: Angela Merkel, Asian Trade, Blanket Approval, Budget Committee, Central Bank Intervention, Comex, Currency Table, Debasement, Eur 1, Fiat Currencies, Financial Stability, German Constitutional Court, German Government, Global Currency, Gold, Gold Fall, India, Jpy, Market Participants, Ounce, Swiss Franc, Ter
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The 2011 Gold Season is Just around the Corner

Monday, August 1st, 2011

By Frank Holmes, CEO and Chief Investment Officer, U.S. Global Investors

The ongoing debate in Washington prompted increased Fear Trade activity in gold this week. The issue over raising the federal borrowing limit caused the yellow metal to remain around its all-time high of $1,600 per ounce this week.

Gold has now increased for 124 months straight, says Deutsche Bank. The rally is in its 11th year, lasting nearly three times as long as other historical rallies going back to 1971. If the metal rose to $2,100 an ounce, it would represent the most powerful percentage increase in history, according to Deutsche Bank.

I believe what’s happening in the market today is a short-term driver of gold prices spurred by ETF investments. While Deutsche Bank believes a “market friendly resolution to the U.S. debt ceiling may trigger a short-term correction in the gold price,” fundamentals seem to be place to keep gold prices elevated over the long run. Even in many economic scenarios today, Deutsche Bank believes gold prices “appear irreversible.”

A more important driver that will keep gold prices elevated over a longer time period is the Love Trade. Marcus Grubb, managing director of investment at the World Gold Council (WGC), highlighted the significant aspects of this trend in his interview with Andrew Bell on the Business News Network (BNN). He says investors need to consider the issues outside of the euro zone, the debt-ridden countries and fiscal deficits.

More important to him is what he calls the “transfer of wealth from west to east” and the accumulation of wealth, particularly in China and India. This is what is driving the longer term strength in the gold price.

He states that the demand for gold is particularly strong in China: The country has a $3 trillion surplus, with some of it in gold, and he estimates that household wealth will most likely rise by five times. China and India also share a strong cultural affinity for gold as an investment and jewelry. For these reasons, Grubb believes this will drive gold demand.

To see the interview in its entirety, click here.

Merrill Lynch has found that there is a positive correlation between gold jewelry demand and rising with increasing wealth. The chart below shows that as the GDP per capital rises so does demand for gold.

September has traditionally been the beginning of the gift-giving season for gold. This is the time of year when gold jewelers are the busiest. The Muslim holy month of Ramadan begins in August and concludes with generous gift-giving in early September. Then it’s Diwali, known as “the festival of lights” in India, Christmas in the U.S., and Chinese New Year. The key to this seasonal strength over the past few years has been demand from China and India.

The spending spree has already begun in East Asia. In the WGC’s second quarter report, physical gold delivered at the Shanghai Gold Exchange was 14.65 percent higher than the previous year. Gold purchases also remained strong across East Asia, with tourists from mainland China buying gold in Hong Kong. In India, coin stocks, symbols of good fortune, were running low during the Akshaya Tritiya annual holiday in May.

Immediately following Marcus Grubb’s interview, I spoke with BNN’s Andrew Bell and expanded on the Love Trade season. We also discussed how today’s financial worries in the market place have caused a selloff in many equities and gold stocks. I talked about how many of these gold stocks are becoming extremely undervalued relative to the price of gold.

Click here to go to BNN’s website to see which stocks we discussed.

With approximately fifty percent of the world’s population controlling the Love Trade, we’re in for an exciting period. To kick off gold’s season, we invite you to join us on our upcoming gold webcast where we’ll discuss the themes above, as well as the opportunity in gold equities which we highlighted a few weeks ago.

Stay tuned for more details.

Tags: Andrew Bell, Chief Investment Officer, Debt Ceiling, Deutsche Bank, Economic Scenarios, Etf Investments, Euro Zone, Fiscal Deficits, Frank Holmes, Gold Price, Gold Prices, Gold Season, Grubb, Household Wealth, India, Ounce, Percentage Increase, Trillion, U S Global Investors, Wgc, World Gold Council
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