The Best Case Yet for Gold
by Rob Kirby, Kirby Analytics. December 3, 2007
Despite continuing assertions from officialdom to the contrary, inflation is alive, well and unfortunately - flourishing.
Continued claims that we live in a 2 - 3% inflationary environment fly in the face of broad money growth rates [M3] of 14% in the U.S. and annualized growth rates in excess of 27% in countries like Russia:
Money Supply 2 (National Definition) in 2007
|Date||M2 Money Supply1 |
end of period
|Money Supply Growth Rates, %|
|Total||Including:||against previous month||against 01.01.2007|
1 M2 is defined as total cash in circulation (outside banks) and balances in the domestic currency on accounts of resident non-financial organizations and individuals.
The methodology for calculating M2 and its structural components is detailed in the Summary Methodology (Section 1) of the "Bulletin of Banking Statistics".
And Here's Why We All Should Care
When record keepers insist that official inflation rates are lower than reality, these distorted numbers are typically used as "benchmarks" – not only for indexing purposes [relating to cost of living increases in such things as labor contracts and Social Security], but these same faulty numbers are also used as inputs to assess the economic viability of capital intensive projects going forward:
Teck Cominco, NovaGold step back from Galore Creek plan
Globe and Mail Update
November 26, 2007 at 3:23 PM EST
"The two companies said Monday that an evaluation of the Galore Creek project by an independent engineering firm, along with their own review, concluded that the capital cost of the project 'could approach as much as $5-billion,' while adding 18 to 12 months to the construction schedule.
This is fully $3-billion higher than estimates in the initial feasibility study just over a year ago, an increase that clearly shook some analysts who took part in a conference call held by the mining companies"
What this is saying folks; the bean counters [accountants] are basing the future viability of a mega project on the assumption[s] that prices are rising at 2 – 3%. Meanwhile, real costs in the field are uncontrollably spiraling up [in this case, cost estimates more than doubling in just over a year].
This dichotomy has led to the shelving of billions of dollars worth of economic activity and directly to the loss of a great many future jobs.
Isn't inflation fun?
Beggar Thy Neighbor: Exporting Inflation
The deleterious inflationary effects outlined above are amplified [double whammy effect] when the players involved incur their costs of production in local currencies and their revenues in the offending currency - in this case, the U.S. Dollar.
This often leads to international disunity on the trade front.
Tensions like these, stemming from the debasement of currency, can and often do lead to fears or "a crisis of confidence" on the part of large [dollar] stake holders.
These fears are now being empirically, measurably evidenced by movements on the part of large Dollar holders in the Middle East [OPEC] to de-hinge their local currencies from the $U.S. Dollar:
December 3, 2007
Dollar faces new sell-off if Gulf states end greenback pegs
Gary Duncan, Economics Editor
"Rulers of the six nations of the Gulf Cooperation Council (GCC) meet today and tomorrow In the Qatari capital of Doha amid significant pressures to sever their currency ties to the falling dollar, which is fuelling record inflation in their countries".
For those of you who think or might even be saying to yourselves, "They wouldn't dare", I offer you this:
Hotels hedge bets as revaluation fever grips UAE
Sun Dec 2, 20071:23pm EST
"DUBAI (Reuters) - Hotels in the United Arab Emirates, including those owned by Dubai's ruler, have started changing dollars into dirhams at as much as 17 percent below the official rate in anticipation of a revaluation.
Money changers, used by expatriates in the UAE to send savings home, have also jacked up rates, in many cases overnight, on expectations that the central bank would allow the dollar-pegged dirham to appreciate".
I suspect they already have. We simply haven't been told – yet.
You won't read much about this in the main steam financial press folks, but it’s happening all the same. Ownership of precious metals has historically served as a very good hedge allowing holders to preserve their wealth through such periods of monetary upheaval.
Are you adequately protected?
Overseas equity markets began the week on a sour note with Japan's Nikkei Index falling 51 points to close at 15,628. North American markets didn't fare much better with the DOW losing 57.20 to 13,314.60, the NASDAQ taking it on the chin for 23.83 to 2,637.13 and the S & P losing 8.75 to 1,472.40. NYMEX crude oil futures gained 1.02 to end the day at 89.73 per barrel.
On foreign exchange markets the U.S. Dollar Index fell .07 to 75.96.
Interest rates were sharply lower across the curve with the benchmark 5 yr. bond ending the day at 3.27% and the 10 yr. bond finishing at 3.88%.
Precious metals were broadly higher with COMEX gold futures up 5.10 to 789.00 per ounce while COMEX silver futures added .09 to end the day at 14.12 per ounce. The XAU Index gained .83 to 171.90 while the HUI added 3.76 to close at 409.97.
Wishing you all the very best and a pleasant evening!
© 2007 Rob Kirby