Mover Mike

This morning a press release was sent out to all business editors announcing that

A study published by Gulf Research Center a foundation in Dubai has endorsed the Gold Anti-Trust Action Committee's findings that Western central and commercial banks have rigged the gold market but have much less gold than they claim to have and so are vulnerable to rising demand for gold. The study recommends that the oil-producing countries of the Middle East diversify their ever-depreciating U.S. dollar holdings into gold.

The study titled The Role of Gold in the unified GCC Currency By Eckart Woertz is available from the Gulf Research Center for $10 USD. Here is their abstract:

GCC countries are dollar dependent. Their currencies are pegged to the dollar, their main source of income (oil) is factored in dollars and the majority of their investments abroad are held in dollars. While after World War II, the US dollar was still backed by gold and current account surpluses, it has turned into an empty paper promise since the 1970s. That spells potential disaster for GCC countries and calls for a stronger diversification of their currency reserves. The paper critically discusses a potential monetary role of gold by analyzing the failures of the historical Gold Standard and the topical attempt of Malaysia to introduce an Islamic Gold Dinar. Finally, it proposes that apart from “second worst” paper currencies like the Euro, GCC countries should take a closer look at gold, as it has an impeccable track record of asset protection over centuries

The press release says "The study quotes the work of GATA's consultants, including Frank Veneroso, and predicts that the gold price suppression scheme of the Western banks will fail just as their similar scheme of the 1960s, the so-called London Gold Pool, failed when the drain on Western gold reserves became too great. Once the scheme fails, the study says,"

"it will be highly difficult and expensive to accumulate a gold reserve. This is especially true for central banks that have low gold reserves like those in the Gulf Cooperation Council countries."

The study concludes:

"The paper dollar standard is a dead man walking. Its debt, accumulated over the recent decades, is too high to be effectively repaid.

"Gold will be a suitable means of asset protection and ultimate payment in such a scenario. It will preserve the wealth of individuals and central banks alike and will ensure important maneuverability for the latter."

I suspect you will not read about the study or its recommendations in the MSM. They have not been permitted to write about GATA and they certainly won't admit that the price of Gold has been suppressed or capped since Rubin was Secretary of the Treasury. Bottom line: The members of the Center, made up of Bahrain, Kuwait, Oman, Qatar, Saudi Arabia, and United Arab Emirates, have been advised to shift out of USD's and into Gold before it is too late.

Mover Mike

Larry Kudlow hasn't been concerned about inflation and economists like to exclude energy and food from the CPI and concentrate on the "core" rate of inflation. You and I, however, are aware that prices have been rising for some time and the government figures don't square with our life experiences. Today, in The Oregonian, is an article Mowing the bottom line . Carol Gross' Lawn & Garden Service operates "mowers, edgers, weed trimmers and blowers. All are gas-powered." Her company's gas bill last month came to $526, up from about $325 a year ago March.

Bernie Bravo, who with his wife owns Cascade Landscape & Irrigation Inc. said his gas costs have tripled, from $3,000 a month several years ago to $9,000 a month this year.

Carol and Bernie will try to pass along some or all of the increased cost to their landscaping customers, but are afraid of losing customers if they do. If Carol and Bernie and you and I can't pass along our rising costs, we will either have to borrow to maintain our consumption, dip into our savings savings, or cut back somewhere. Maybe we eat out less, stay at home for the vacation, switch from Meier & Frank to Burlington Coat Factory, or rent a movie instead of going to Regal Theaters or ask for a raise.

That's not what our governments do! They just spend more each year, year after year, and either tax us more or inflate, which is the hidden tax that Carol and Bernie and you and I are wrestling with.

Joel at No Pundit Intended and I had a conversation about oil. Was the price increase of Oil due to inflation as I contended in Larry and Carol and Bernie or as Joel contends to demand. Joel said

Our high gas prices are not due to inflation. They are due to the grossly higher demand for fuel in developing nations, as well as our continuing rise in the US. While the US demand for fuel has risen about 20% in the past several years, it has nearly quadrupalled (double check my numbers, but you will get the idea) in China, as they reap the technological benefits of capitalism.

Mover Mike said

GCC countries are dollar dependent. Their currencies are pegged to the dollar, their main source of income (oil) is factored in dollars and the majority of their investments abroad are held in dollars. While after World War II, the US dollar was still backed by gold and current account surpluses, it has turned into an empty paper promise since the 1970s. That spells potential disaster for GCC countries and calls for a stronger diversification of their currency reserves.

I just learned of the International Relations and Security Network (ISN). Based in Zurich, Switzerland,

the ISN is a free public service that provides a wide range of high-quality and comprehensive products and resources to encourage the exchange of information among international relations and security professionals worldwide. The ISN works to promote a better understanding of the strategic challenges we face in today’s changed security environment.

Here's their take on the reason for higher oil prices:

One of the most important reasons for higher oil prices is the US trade and budget deficit. The trade deficit, which stood at around US$500 billion in 2004, served to devalue the dollar, and as the price of oil is set in US dollars, the cost has gone up to maintain its value. As energy imports make up 30 per cent of the trade deficit, an increase in the price of oil is reflected in the trade deficit. February’s deficit stood at an all-time high of US$61 billion and is projected to amount to a staggering US$700 billion for 2005. David Rewcastle, an analyst on energy and the Middle East, sees three financial reasons behind the rise in oil prices. First, he says, “oil is being used as a hedge against the falling dollar; secondly, a lack of good investment opportunities makes oil a good alternative for hedge fund and institutional investment; and thirdly, with the subsequent price rise, and high futures curves, everybody in the market is buying in the expectation that some event will cause a catastrophic oil crunch, which would reap huge returns for those who bought oil futures.

In one sense Joel is right, demand is the culprit, demand based on economic growth. However, demand is also based on the "fraud" I posted about.

Bootstrap the system with leverage to inflate asset valuations, to inject easy money into the economy, to convince everyone that we are prosperous.

So investors and speculators are buying oil to hedge against a falling dollar and some disaster they think may happen. A government that cheapens its currency, like we do and most of the world governments do, is inflating and that inflation causes mixed signals. Ultimately, down through history, NO fiat currency has ever survived. Which would you rather do, buy something that is going to be worthless over time or an asset that is in demand.

In a piece I wrote on April 22, Higher Oil Prices, Inflation or Demand?, I wrote that the high price of oil was a signal that this government was inflating. Others, disagreed, saying the high price was due to demand caused by the growth in China and India. I acknowledged there was some of that, but said

A government that cheapens its currency, like we do and most of the world governments do, is inflating and that inflation causes mixed signals.

I came across this chart today at Investech, that proves my point. Oil in USD's has gone to new highs, but in Euros is still just equal to old highs. Really, meaning that oil is more expensive to the US than to Europe.

Investech, also, publishes a chart of the week. The following is interesting, because it allows us to peer into the future. According to this chart we are likely to start a Bear Market a year from now, and be in a recession in 2007, the year of the next presidential campaign.

The so-called “jobless recovery” notwithstanding, employable labor is becoming an ever-scarcer commodity. The weekly Initial Claims for Unemployment has dropped to a level that – in the past – led to higher wage inflation... higher interest rates... and eventually to recession within 18 to 24 months. The more important fact to remember is that a bear market usually leads the start of a recession by as much as 12 months. Stay tuned to the Hotline (at Investech) for updates at this critical time...

From Richard Russell's Dow Theory Letters (by subscription only)

Zimbabwe, formerly Rhodesia, is literally falling apart. When a nation is unraveling, you can see it in the path of that nation's currency. Zimbabwe's currency, which traded on the black market at 120 to the dollar in April 2002, went for 6,200 to the dollar last December, 12,000 on April 1, and 17,000 in early May. By mid-May a single US dollar bought at much as 25,000 Zimbabwe dollars, although the rate has now leveled off to 20,000. All the while the government insisted that the "official rate" was 6,100 Zimbabwe dollars to one US dollar. But last Thursday the government announced a devaluation to the new "official rate" of 9,000 Zimbabwe dollars to one US dollar. The new official rate is not expected to last very long. Of course, one problem is that the Zimbabwe dollar is not a reserve currency, which means that the government can't pay off its debts in trash Zimbabwe dollars. In that, sadly, the Zimbabwe government lacks the US government's ability to pay off its debts in trash US dollars.

From Ron Paul in Texas Straight Talk, his weekly column, Congress and the Federal Reserve Erode Your Dollars

May 23, 2005

Last week the US Treasury department issued a warning to the Chinese government with regard to its policy of pegging the value of the Chinese yuan to the US dollar. In essence, the Treasury department accuses China of artificially suppressing the value of its currency by tying it to the dollar, thus making Chinese imports very cheap and worsening our trade imbalance.

This kind of bluster may serve political interests, but in reality we have nobody to blame but ourselves for the sharp decline in the US dollar. Congress and the Federal Reserve, not China, are the real culprits in the erosion of your personal savings and buying power. Congress relentlessly spends more than the Treasury collects in taxes each year, which means the US government must either borrow or print money to operate- both of which cause the value of the dollar to drop. When we borrow a billion dollars every day simply to run the government, and when the Federal Reserve increases the money supply by trillions of dollars in just 15 years, we hardly can expect our dollars to increase in value.

If anything, the US government should be embarrassed that another nation has depressed its currency by tying it to the US dollar. An economically sound nation would take pride in its currency, one that maintains a stable value and provides incentive for savers. Yet here we are, mad at China for our own sin of flooding the world with cheap dollars.

The root of the problem is the Federal Reserve and our fiat monetary system itself. Since US dollars and other major currencies are not backed by gold, they have no inherent value. Their relative values are subject to political events, and fluctuate constantly in highly volatile currency markets. A fiat system means every dollar you have can be eroded into nothing by the actions of politicians and central bankers. In essence, paper currencies like the US dollar operate as articles of faith-- faith in the policies of the governments and central banks that issue them. When it comes to a government as deeply indebted as our own, that faith is sorely lacking among investors worldwide. Politicians often manage to fool voters and the media, but they rarely fool financial markets over time. The precipitous drop in the US dollar over the past few years is proof that investors around the globe are very concerned about American deficits and debt. When investors lack faith in the U.S. dollar, they really lack faith in the economic policies of the U.S. government. Unlike wealthy currency traders, most Americans are stuck with their U.S. dollars. Average people, particularly those who depend on savings or fixed incomes to fund their retirement years, cannot abide the continued devaluation of our currency. A true strong-dollar policy would not depend on the actions of China or any other nation. It would, however, require a constriction of the money supply and higher interest rates, both of which would cause some short-term pain for the American economy. In the long run, however, such a correction is the only alternative to the continued erosion of our dollars.

Lord, we need more men and women like Congressman Ron Paul!