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-- Posted Friday, 18 January 2008 | Digg This Article | Source: GoldSeek.com

Global Macro - World of 1970s Versus 2008 and Beyond
It is interesting to note that the world of South Africa in 1970 is very different to the world of today. The global population has increased massively, globalisation has resulted in a hugely enlarged global economy, the U.S. dollar and all fiat currencies are no longer on the Gold Standard, money supply internationally has surged hugely in 38 years and there is some $45 trillion in derivatives many of them exotic, opaque and untested in nature (Warren Buffett, the world’s most respected investor calls them “Financial Weapons of Mass Destruction”).

There is some $50 trillion worth of bonds and $40 trillion worth of paper money in the world. Money supply is increasing at extremely high levels globally. The annualised growth of some national broad money supplies are United States M3 up 10%, Eurozone M3 up 9.0%, UK M4 up 13%, China M2 up 15.9%, South Korea up 10.6%, Australia M3 up 13%, Russia M2 up a staggering 48%.

There has been an unprecedented increase in wealth amongst a segment of the population in recent years. The number of millionaires in the world is multiplying very rapidly and there are now approximately 9 million millionaires in the world. There are approximately 70,000 ultra-HNWIs who have a net worth of more than $30 million. Forbes recently estimated that there are now a record 946 billionaires in the world. In 2006, there were only 178 new billionaires.

All the billionaires' combined net worth is estimated at some $3.5 trillion. There are a total of 8.7 million millionaires around the world, representing a total wealth of a mind boggling $33.3 trillion. A trillion is an extremely large number and difficult for most to comprehend. It is one million million or 10 to the power of 12. It is an absolutely huge number and it is important to remain conscious of the sheer size of this number.

Annual worldwide production of gold is only some 50 million troy ounces per year or some $44 billion (50,000,000 X $880).

With global gold supply decreasing and a potential demand that is hundreds if not thousands of times higher than in the 1970s, gold looks set to embark on a bull market that will make that of the 1970s look minor in comparison.

Potential for Massive Short Squeeze to Propel Gold to over $2,000 in Coming Weeks
There is much talk of a record long position in gold being bearish for the price in the short term. This traditionally is the case in any market - when everyone is long, the buying move is generally exhausted and the market is likely to sell off and correct. However, it is not as simple as that in gold. As along with the record long position there is a record short position. Therefore there is a titanic struggle taking place between the gold longs and the gold shorts. This battle has in recent years been won by the gold shorts leading to short sharp corrections in the price. However, given the extremely strong fundamentals, significant and growing global systemic risk (see below) and some extremely determined buyers this may not be the case this time.

Of huge significance and unacknowledged by many analysts is the increasing likelihood that central bank gold reserves cannot be mobilised in order to cap the gold price. This was recently outlined by two Citigroup analysts, John Hill and Graham Wark, who wrote that central banks faced a choice between a global recession and their continuing “control” of gold. They said that the avalanche of central bank bullion sales earlier this year was “clearly timed to cap the gold price”, which is the Gold Anti-Trust Action Committee's (GATA) long held contention. But central banks have chosen to focus on staving off global recession. “We believe that the policy resolution to the credit crunch will take the form of a massive, extended ‘reflationary rescue’ in a new cycle of global credit creation and competitive currency devaluation which could take gold to $1,000/oz or higher.”

Thus, the record long position is bearish in and of itself however in conjunction with the near record and massive commercial short position it can be construed as bullish as if the shorts are forced to cover their positions we could see a commercial signal failure when faced with massive losses on their short positions, the commercial shorts are forced to panic cover en masse creating a massive surge in the gold price. This eventuality is looking increasingly likely, especially in the light of the very significant macroeconomic and systemic risks facing the U.S. and many western economies.

Systemic Risk in Global Financial System Increasing – Denial Remains Order of Day
The global financial system continues to deteriorate and unravel and yet there still pervades a curious mix of denial, complacency and idiocy. Deluded wishful thinking remains the order of the day among the naïve, ill informed and wilfully ignorant. Advertising and commission driven investment ‘experts’ continue to claim that the financial markets “are beginning to return to normal” thereby increasing moral hazard and risk by leading the mass of investors up the garden path in the belief that the worst is over or soon to be over.

More informed and responsible observers realize the importance of acknowledging reality and continue to point out and warn of that reality - that the global financial and monetary system is in a critical state. The Federal Reserve certainly realises it and this is why drastic emergency measures are being considered. Bernanke was unusually bearish in his analysis yesterday and warned that the baseline outlook for economic growth has ‘worsened’.

Unfortunately, the proposed ‘solution’ is further cheap money, liquidity and ‘stimulus’ - this time in the form of showering tax rebate cheques of some $150 billion on the citizenry. No solution rather another short term panacea which fails to tackle the root cause – irresponsible overspending and consumption and record debt levels at all levels of western society. At least the new measure is slightly more equitable – favouring the less well off as it does rather than Bush’s usual constituency of the super rich and corporations (preferably ones who will finance him and the Republican party.

This is further evidence of a growing sense of panic among the U.S. financial authorities. Evans-Pritchard of the Telegraph wrote that Bernanke is just the dull tip of a long U.S.-policy spear - a spear in the hands of the President's Working Group on Financial Markets (http://en.wikipedia.org/wiki/Working_Group_on_Financial_Markets), the so-called “Plunge Protection Team”. The Plunge Protection Team - long kept secret - was last mobilized to calm the markets after 9/11. It then went into hibernation during the long boom. He writes “on Friday [Jan. 4], Mr. Bush convened the so-called Plunge Protection Team for its first known meeting in the Oval Office … the New Deal of 2008 is in the works. The U.S. Treasury is about to shower households with rebate cheques to head off a full-blown slump, and save the Bush presidency.”

This is the same Bush presidency that has increased the U.S. national debt by more than $5 trillion in less than 8 years. The U.S. national debt is currently $9.13 trillion, expanding at a rate of 1.4 billion dollars a day (one million dollars a minute). Five trillion dollars have been added to the national debt since G. W. Bush took office, sharply cutting the tax rates for the wealthy and launching wars in Iraq and Afghanistan. Together, these wars will cost (if not stopped sooner) $42.4 trillion over the next decade.

Total U.S. consumer debt, excluding mortgages, reached $2.46 trillion in June 2007. Eight percent of the households owe $9,000 or more on their credit cards, with the average consumer having a total of 13 credit obligations on record at the credit bureau. These include credit cards, department store charge cards, gas cards, bankcards, instalment loans for cars, student loans etc. Fifty one percent of the U.S. population has at the minimum two credit cards.

An article by Stephen Roach, chairman of Morgan Stanley Asia in the Jan. 7, 2008 Financial Times reported “household debt in the U.S. hit a record 133 percent of disposable income.” Noting that this trend is unsustainable, he foresees a sharp drop in the price of housing with obvious serious ramifications for the U.S. economy and for the U.S. dollar.

Jim Rogers on the U.S. Economy, the Dollar and the Federal Reserve
Jim Rogers, former partner of George Soros in Quantum Fund sums it up well: “The Federal Reserve is totally out of it. They're destroying the currency and driving up inflation, which will result in higher interest rates and a worse economy. We now know the Fed doesn't understand markets or economics, but is just trying to bail out its friends on Wall Street at the expense of 300 million Americans; nay, of the whole world”.

Rogers has warned of a depression in the U.S. and a collapse in the U.S. dollar. He is selling all his assets in the U.S. and all assets denominated in U.S. dollars, moving to Hong Kong and investing in China and commodities which he says are in a long term secular 15 to 25 year bull market cycle. Of all the commodities he particularly likes sugar, cotton and silver.

FX
The euro remained range bound in an session of sideways trading for the single currency against the Greenback. Currently the currency pair is sitting on the Fibonacci 50% retracement of the move from 1.4315 to 1.4925, this should prove to be supportive in the short term. Meanwhile against sterling the euro found support, as we suspected yesterday around the 0.7415/20 level. Sterling has since weakened on negative Retail Sales data released from the UK this morning and could pave the way for the next leg higher for the euro against the British pound.

The U.S. dollar weakened further against the Japanese yen after closing below 107.40 yesterday, it continued to sell off to a low of 106.40 in the Asian trading session. Having rallied this morning, back over 107.00 the overnight low will prove to be short term support ahead of this month's low of 105.95 August 07 low at 149.25.

Support and Resistance
Support at $875 was breached and thus support is now at the recent lows at $870 and then there should be strong support in the $840 to $850 range which was previous resistance.
Gold is likely to remain above $840 and given the macroeconomic climate gold is likely to reach $1000 will be reached sooner than many market participants expect.

Silver
Silver is trading at $15.96/$16.02 at 1200 GMT.

PGMs
Platinum was trading at $1546/1556 as per above (1200 GMT).
Palladium was trading at $369/374 an ounce (1200 GMT).

-- Posted Friday, 18 January 2008 | Digg This Article

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