Oct 30

Brazil Minerals: Pursuing Profitable Diamond and Gold Mining

Gold Price Comments Off on Brazil Minerals: Pursuing Profitable Diamond and Gold Mining

With an impressive management team and focus on profitability, Brazil Minerals is steadily making progress at its diamond- and gold-producing project in Brazil.

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Oct 16

Goldman Small Cap Research Releases New Report on Brazil Minerals

Gold Price Comments Off on Goldman Small Cap Research Releases New Report on Brazil Minerals

Goldman Small Cap Research has released a new research report on Brazil Minerals (OTCQB:BMIX). Analyst Rob Goldman stated, “[t]his pure play on the natural resources market in Brazil has made major strides since the release of our initiation of coverage report last month, which bode well for shareholders going forward.”

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Oct 07

Brazil Minerals Makes Final Payment for Duas Barras Diamond and Gold Mine

Gold Price Comments Off on Brazil Minerals Makes Final Payment for Duas Barras Diamond and Gold Mine

The Duas Barras Diamond and Gold Mine in Brazil is now 100% owned by Brazil Minerals, Inc. (OTCQB: BMIX), after making the final payment of $200,000 in cash and issued 2,142,857 shares of its restricted common stock to a private individual.

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Sep 16

The Most Important Chart Right Now

Gold Price Comments Off on The Most Important Chart Right Now
Dollar up, everything down. And the end of QE means it probably isn’t done yet…
 

I WANT to show you the most important chart in the investing world right now. It’s affecting the price of just about everything else, writes Greg Canavan in The Daily Reckoning Australia.
 
If the United States’ superpower status is on the decline, you wouldn’t know it by looking at the chart below – the US Dollar index. As you can see, it’s moved sharply higher over the past few months.
 
The momentum indicators at the top and bottom of the chart are severely ‘overbought’, and the index itself is well above the moving averages. This suggests a correction is imminent, but for now, everything denominated in US Dollars is weak.
 
 
The Aussie Dollar, gold, copper, oil and most other commodities have all been under pressure lately. And it’s why share markets around the world are struggling to push mindlessly higher…as they’ve been doing ever since late 2012 when Ben Bernanke and Co. got jiggy with it on the QE front.
 
But next month, it all changes. For a short time at least, global share markets will experience life without Federal Reserve QE for the first time since 2011.
 
In short, the market is having another ‘taper tantrum’ as the end of QE draws closer. The last such episode was back in June 2013. As you can see in the chart above, that was when the US Dollar last spiked to its current level.
 
Being the world’s reserve currency, US monetary policy is essentially global monetary policy. As the US Federal Reservewinds down QE, you can see the knock on effects starting to emerge.
 
US Dollar strength is just the most notable. Its strength since bottoming in May this year indicates tightening global liquidity. But until recently, the effects of this haven’t been all that obvious.
 
Emerging markets are usually most vulnerable to a strengthening Dollar. But that vulnerability only began to show in the past week or so, as you can see in the emerging markets index chart below…
 
 
Emerging markets rallied to new highs this year despite the strengthening Dollar. Until recently that is – when sharp falls took place, especially in markets like Turkey and Brazil. The Bank for International Settlements warned in its just-released quarterly report that these markets are particularly vulnerable because of increased US Dollar borrowing over the past few years.
 
As you know, borrowing in a strong currency while revenues and earnings are in a weaker currency doesn’t usually work out well. It places greater pressure on a company to service its debts, leaving less left over for shareholders.
 
You’ll have to wait and see whether emerging market resilience can continue, or whether the end of QE will finally have a more definitive impact on these peripheral economies.
 
I don’t know what the outcome will be. But I can say that markets often ignore issues for months on end and then all of a sudden worry about them acutely. Maybe this is just the start of an intense worry phase.
 
Whatever it is, Australia is a part of it. Our stock market and currency are under the pump, thanks to weaker commodities and a weaker iron ore price in particular. That, in turn, is because of a slowing Chinese economy, which, as it turns out, imports US monetary policy through a partially pegged exchange rate.
 
The US Dollar’s tentacles have a wide reach. And it touched China on the weekend with the Middle Kingdom announcing weaker than expected industrial production, fixed asset investment and retail sales growth.
 
The slowdown comes amid a deteriorating property market in China, which for years was the engine of growth for the country. But that engine is sputtering as China’s leaders grapple with trying to rebalance the economy without crashing it. It’s a tough task.
 
Which is why you can expect to hear calls for ‘more stimulus’ from China grow louder this week, because ‘more stimulus’ always works. If only we had done ‘more stimulus’ sooner rather than later, we’d not be in the position of needing ‘more stimulus’ now.
 
Economics really is that simple. Money may not grow on trees but it does lay dormant and abundant inside the computers of our heroic central bankers. (In case you need me to say it, yes…I’m being sarcastic.)
 
For that reason, all eyes will be on the Federal Reserve this week. They gather for a two-day meeting on the 16th and 17th, and boss Janet Yellen gets a chance to move markets with an accompanying press conference at the conclusion of the meeting.
 
Usually, the Federal Reserve provides soothing words about how interest rates won’t go up for ages and everyone can keep punting without any need to worry. That’s worked well for the past few years.
 
But the time is approaching where the Fed will actually start having to do something on the interest rate front. Or at least they’ll have to stop pretending they’ll keep interest rates low forever.
 
In other words, there are fewer rabbits in the hat. Or maybe there are no rabbits left at all?
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Jul 28

Orinoco Targeting Q4 Production at Cascavel Gold Project

Gold Price Comments Off on Orinoco Targeting Q4 Production at Cascavel Gold Project

Orinoco Gold Ltd. (ASX:OGX) announced that it has entered into a strategic alliance with Brazil’s Cleveland Mining Company Ltd. (ASX:CDG). The aim of the alliance is to fast track development of Orinoco’s high-grade Cascavel gold project.

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Jul 24

Brazil Minerals Expands Management Team in Brazil

Gold Price Comments Off on Brazil Minerals Expands Management Team in Brazil

Brazil Minerals Inc. (OTCQB:BMIX) has expanded its management team in Brazil in order to accomodate for the company’s operational growth. The additions bring a wealth of experience including management skills, experience in operations and experience in finance and administration.

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Jul 24

100 Years to the Day Since the Gold Standard Died

Gold Price Comments Off on 100 Years to the Day Since the Gold Standard Died
Gold Standard payments through London look awfully like US Dollar clearing a century later…
 

GOLD loves nothing if not irony, writes Adrian Ash at BullionVault.
 
And here, 100 years to the day after the approach of World War I killed the Gold Standard stone dead, the world’s monetary system risks breakdown again.
 
Again you could blame war in a poor corner of Europe. Again, that war could be cast as a big power demanding a small neighbor says “sorry” – then Serbia for the murder of a fat-necked Austrian prince, now Ukraine for ousting its fat-headed Moscow-backed president.
 
If irony suits, it only tastes richer when you think this week also marks 70 years since the Gold Standard’s replacement was put together as the war that followed the war to end all wars finally slaughtered itself to a close. But that shadow system…of invisible gold and all-too visible paper…didn’t quite die when the Dollar-Exchange system lost its link to bullion. US president Richard Nixon “closed the gold window” at the New York Fed in August 1971, yet the Dollar still rules today. So like world trade needed access to the City of London a century ago, clearing funds through a US bank is vital for world trade today.
 
Say US clearing becomes unavailable – or untrusted for credit-default or political reasons. Either trade will shut down (see the post-Lehmans’ crisis of 2008), or it will find other systems to use. Comic little pops like bitcoin might suggest that’s where apolitical free trade is headed, onto Silk Road and elsewhere.
 
Back to 1914, and “It may be,” one merchant banker noted before the July Crisis hit London, “that hides and rabbit skins are being sold from Australia to New York, or coffee from Brazil to Hamburg.” Either way, and whatever was being shipped to wherever, in every such cross-border deal “the buyers and sellers settle up their transaction in London.”
 
That remains true of wholesale gold and silver today. Lacking any mine production, and with no consumer demand or refinery output to speak of, the UK still hosts the world’s physical bullion market, settled in London’s specialist vaults and ready for “digging out” onto a forklift truck before being shipped to the new owner should they ever want it. From Arizona to Beijing, Perth to Qatar, the world trades market-warranted London Good Delivery bars. Those same standards apply in most local non-London markets as well. Great Britain still rules in gold, an echo of the high classical Gold Standard shot dead a century ago.
 
Europe’s second 30-year war destroyed Britain’s empire, but London’s role as the centre of money was already ruined. US banks moved into the rubble to settle the world’s business, and the US Dollar took over from Sterling as Washington hoarded central-bank gold to win the peace as well as the war at that Bretton Woods conference of July 1944.
 
What had stopped the world’s financial heart pumping in London? Scalded in late June 1914 by unknown Serb teenager Gavrilo Princip shooting dead the unlikable Archduke Franz Ferdinand, Austria handed its “belligerent ultimatum” to Belgrade on the evening of Thursday 23 July. Vienna’s 10 outrageous demands made rejection look certain. (Serbia agreed to four, only to find Vienna dismiss its reply and start shelling regardless). Financial markets finally panicked the next morning, at last. They had been slow to take fright, as Niall Ferguson notes of the bond market, distracted by more trouble in Ireland and the coming summer vacation. But now London’s bankers…creditors to half the world’s cross-border transactions, according to Jamie Martin in the London Review of Books…awoke to find their debtors unable to pay. Because “it suddenly became difficult for foreign borrowers to remit payments” anywhere, London would not extend fresh credit. So the world couldn’t raise the loans it needed to settle its debts, and the Sterling bill of exchange – “the world’s premier financial instrument” – went entirely offline.
 
Sterling bills had been crucial. These bits of paper turned the Classical Gold Standard into that “period of unprecedented economic growth, with relatively free trade in goods, labor and capital” which misty-eyed gold bugs might think came thanks, between about 1880 and the rude end of July 1914, to physical metal alone. Promissory and transferable notes, typically with a 3-month maturity as Martin explains in the LRB, Sterling bills were accepted by traders on one side of the world in payment for goods sent to the other, and then sold to a local bank for cash. Merchant bankers in London then accepted and sold the bills on again, with the original debtor perhaps buying and sending another Sterling bill – rather than shipping physical gold – to settle the deal. Around it all went again. Until Austria’s ultimatum to Serbia stopped it.
 
Yes, the Sterling standard limped on, and yes, so did something like the Classical Gold Standard after the guns of August finally fell silent in 1918. But private gold had underpinned the whole system before. You could convert cash into gold at your bank, giving them every reason to offer good rates of interest instead. A universal equivalent for all major world currencies, it was vital that the gold was mostly privately owned, rather than trapped in government or central-bank hands (although that was already changing, with fast-growing national hoards announcing the rise of the warfare- and welfare state in the decade before Princip shot the Archduke, much like the political earthquake of WWI had already struck Britain with the People’s Budget five years before). But shipping bullion bars or coin remained clumsy, slow, risky, and thus expensive. So it was paper bills which released the value of the 19th century’s torrent of gold, first Californian, then Australian and finally South African, to grease the first era of globalization.
 
By the eve of Austria’s ultimatum to Serbia, the bill on London offered to some “a better currency than gold itself,” as a Canadian banker put it, “more economical, more readily transmissible, more efficient.” The City of London, capital of the world, stood ready to buy and sell whatever was wanted.
 
Nevermind. As Professor Richard Roberts explains in his excellent new Saving the City (free sample here), come 27 July – the Monday after the Serbs got Vienna’s demands – London’s money market was effectively shut. On Tuesday, with major shares like copper-mining giant Rio Tinto dumping 25% in a week, the London Stock Exchange suspended trade for the first time since it opened in 1801. From Wednesday 29 July, commercial banks in Britain stopped paying gold to the long queues of savers pulling out their deposits. But the banking run simply moved to the Bank of England itself, as people lined up on Threadneedle Street to swap the paper £5 notes they’d been given for Sovereign gold coins instead, sucking out £6 million of bullion in three days.
 
To stall the outflow, the annual Summer Bank Holiday was extended to nearly a week, from Saturday 1 to Friday 7 August. Ahead of the banks reopening, politicians desperate to lock down more gold for the national hoard “vociferously denounced the [private] hoarding of gold in speeches in the House of Commons,” says Professor Roberts. But by then, Great Britain had already declared war on Germany on Tuesday the 4th. The Gold Standard would never recover, built as it was on free trade, Britain’s imperial Navy and those Sterling bills of exchange on London’s credit.
 
Yes, London’s role as gold clearing house continues today (for now). But total war needed endless state spending. So the free-trade basics – and bullion limits – of the global Gold Standard could no longer apply. Private gold shipments were replaced by government-to-government transfers inside the Bank of England, the Bank for International Settlements, and the New York Fed…before French warships hauled metal to Paris, and Russian Aeroflot jets swapped Kremlin gold for Canadian wheat. London’s Sterling bills have meantime long rotted as the world’s key means of exchange. Which brings us to the US Dollar here in 2014.
 
French bank BNP Paribas now faces a $9 billion penalty “and a one-year suspension in 2015 of direct US Dollar clearing on its and gas, energy and commodity finance businesses,” explains Pensions & Investments Online, after pleading guilty to $30 billion of transactions “with countries that are under US government sanction.”
 
That’s some slapdown. “Temporarily restricting its ability to handle transactions in Dollars,” says Bloomberg, “would present BNP with administrative costs and could test the willingness of clients to remain with the bank.”
 
Where else might those clients go? Forget the Yuan for the foreseeable future. The Dollar accounts for 41% of global payments by value, with the Euro at 32% and the British Pound in third place with 8%. The Chinese currency is way off the pace with just 1.5%. The Yuan accounts for only 23% of China’s own direct trade with the rest of Asia!
 
Financing crooks or clearing their deals is a bad thing, of course. But the list of countries wearing “US goverrnment sanction” only gets longer. Parking or trading your money only gets tougher if your home-state doesn’t suit what Washington thinks. Yes, a London government spokesman when asked Wednesday said there is a link – “a correlation” indeed – between the UK’s new sanctions against Moscow and outflows from London of Russian oligarchs’ cash. “That is certainly the case,” as money scared of being frozen or seized gets out while there’s still time. But London or Frankfurt today is nothing next to the United States’ place in clearing global finance.
 
“No international bank,” as the Financial Times noted last week, “can operate without access to the US money markets.” And with access now restricted, claims FTfm columnist John Dizard, thanks to “dangerously stupid punitive actions and fines levied on banks using the international Dollar clearing system [means] the world is finding ways to get along without the Dollar.”
 
Chief amongst them, according to Dizard’s shadowy “sources”, is gold – “the most expensive and least convenient of all monetary alternatives to the Dollar.” Is he kidding? Perhaps not.
 
“Gold is very heavy to carry and often has to be re-assayed by the person accepting it as payment,” Dizard goes on, “since there is often a lack of trust among participants in the off-the-books transactions that use it.” No London Good Delivery and its chain of integrity here, in short. But where the rules roll over the trade, as India’s surging gold smuggling proves, the trade will find a way if it must.
 
“Not many transactions or investments are actually invoiced in gold as such,” says Dizard. “Instead gold is used as the settlement medium rather than for the price quotation.”
 
So welcome to our neo-Classical Gold Standard. “Gold’s popularity as a medium of international exchange,” Dizard says, “has been soaring.” The US might yet adapt, and accept that everyone pays who uses the Dollar, rather than inviting the world to find a replacement instead. Legal drug dealers in the United States, after all, need somewhere to bank their profits too.
 
Happy 100th birthday meantime to the death of gold money.
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Jul 23

6 Stupid Claims About China’s Gold Demand

Gold Price Comments Off on 6 Stupid Claims About China’s Gold Demand
Don’t worry about the gold price, says this Western analyst. China’s got your back…
 

I DON’T want to say that mainstream analysts are stupid when it comes to China’s gold habits, writes Jeff Clark, senior precious metals analyst and editor of Big Gold at Casey Research.
 
But I did look up how to say that word in Chinese…
 
One report claims, for example, that gold demand in China is down because the Yuan has fallen and made the metal more expensive in the country. Sounds reasonable, and it has a grain of truth to it.
 
But as you’ll see below, it completely misses the bigger picture, because it overlooks a major development with how the country now imports precious metals.
 
I’ve seen so many misleading headlines over the last couple months that I thought it time to correct some of the misconceptions. I’ll let you decide if mainstream North American analysts are stupid or not.
 
The basis for the misunderstanding starts with the fact that the Chinese think differently about gold. They view gold in the context of its role throughout history and dismiss the Western economist who arrogantly declares it an outdated relic. They buy in preparation for a new monetary order – not as a trade they hope earns them a profit.
 
Combine gold’s historical role with current events, and we would all do well to view our holdings in a slightly more “Chinese” light, one that will give us a more accurate indication of whether we have enough, of what purpose it will actually serve in our portfolio, and maybe even when we should sell (or not).
 
The horizon is full of flashing indicators that signal the Chinese view of gold is more prudent for what lies ahead. Gold will be less about “making money” and more about preparing for a new international monetary system that will come with historic consequences to our way of life.
 
With that context in mind, let’s contrast some recent Western headlines with what’s really happening on the ground in China. Consider the big picture message behind these developments and see how well your portfolio is geared for a “Chinese” future…
 
#1. “Gold Demand in China Is Falling”
This headline comes from mainstream claims that China is buying less gold this year than last. The International Business Times cites a 30% drop in demand during the “Golden Week” holiday period in May. Many articles point to lower net imports through Hong Kong in the second quarter of the year. “The buying frenzy, triggered by a price slump last April, has not been repeated this year,” reports Kitco.
 
However, these articles overlook the fact that the Chinese government now accepts gold imports directly into Beijing.
 
In other words, some of the gold that normally went through Hong Kong is instead shipped to the capital. Bypassing the normal trade routes means these shipments are essentially done in secret. This makes the Western headline misleading at best, and at worst could lead investors to make incorrect decisions about gold’s future.
 
China may have made this move specifically so its import figures can’t be tracked. It allows Beijing to continue accumulating physical gold without the rest of us knowing the amounts. This move doesn’t imply demand is falling – just the opposite.
 
And don’t forget that China is already the largest gold producer in the world. It is now reported to have the second largest in-ground gold resource in the world. China does not export gold in any meaningful amount. So even if it were true that recorded imports are falling, it would not necessarily mean that Chinese demand has fallen, nor that China has stopped accumulating gold.
 
#2. “China Didn’t Announce an Increase in Reserves as Expected”
A number of analysts (and gold bugs) expected China to announce an update on their gold reserves in April. That’s because it’s widely believed China reports every five years, and the last report was in April 2009. This is not only inaccurate, it misses a crucial point.
 
First, Beijing publicly reported their gold reserve amounts in the following years:
  • 500 tonnes at the end of 2001;
  • 600 tonnes at the end of 2002;
  • 1,054 tonnes in April 2009.
Prior to this, China didn’t report any change for over 20 years; it reported 395 tonnes from 1980 to 2001. There is no five-year schedule. There is no schedule at all. They’ll report whenever they want, and – this is the crucial point – probably not until it is politically expedient to do so.
 
Depending on the amount, the news could be a major catalyst for the gold market. Why would the Chinese want to say anything that might drive gold prices upwards, if they are still buying?
 
#3. “Even with All Their Buying, China’s Gold Reserve Ratio Is Still Low”
Almost every report you’ll read about gold reserves measures them in relation to their total reserves. The US, for example, has 73% of its reserves in gold, while China officially has just 1.3%. Even the World Gold Council reports it this way.
 
But this calculation is misleading. The US has minimal foreign currency reserves – and China has over $4 trillion. The denominators are vastly different.
 
A more practical measure is to compare gold reserves to GDP. This would tell us how much gold would be available to support the economy in the event of a global currency crisis, a major reason for having foreign reserves in the first place and something Chinese leaders are clearly preparing for.
 
The following table shows the top six holders of gold in GDP terms. (Eurozone countries are combined into one.) Notice what happens to China’s gold-to-GDP ratio when their holdings move from the last-reported 1,054-tonne figure to an estimated 4,500 tonnes (a reasonable figure based on import data).
 
 
At 4,500 tonnes, the ratio shows China would be on par with the top gold holders in the world. In fact, they would hold more gold than every country except the US (assuming the US and EU have all the gold they say they have). This is probably a more realistic gauge of how they determine if they’re closing in on their goals.
 
This line of thinking assumes China’s leaders have a set goal for how much gold they want to accumulate, which may or may not be the case. My estimate of 4,500 tonnes of current gold reserves might be high, but it may also be much less than whatever may ultimately satisfy China’s ambitions. Sooner or later, though, they’ll tell us what they have, but as above, that will be when it works to China’s benefit.
 
#4. “The Gold Price Is Weak Because Chinese GDP Growth Is Slowing”
Most mainstream analysts point to the slowing pace of China’s economic growth as one big reason the gold price hasn’t broken out of its trading range. China is the world’s largest gold consumer, so on the surface this would seem to make sense. But is there a direct connection between China’s GDP and the gold price?
 
Over the last six years, there has been a very slight inverse correlation (-0.07) between Chinese GDP and the gold price, meaning they act differently slightly more often than they act the same. Thus, the Western belief characterized above is inaccurate. The data signal that, if China’s economy were to slow, gold demand won’t necessarily decline.
 
The fact is that demand is projected to grow for reasons largely unrelated to whether their GDP ticks up or down. The World Gold Council estimates that China’s middle class is expected to grow by 200 million people, to 500 million, within six years. (The entire population of the US is only 316 million.) They thus project that private sector demand for gold will increase 25% by 2017, due to rising incomes, bigger savings accounts, and continued rapid urbanization. (170 cities now have over one million inhabitants.) Throw in China’s deep-seated cultural affinity for gold and a supportive government, and the overall trend for gold demand in China is up.
 
#5. “The Gold Price Is Determined at the Comex, Not in China”
One lament from gold bugs is that the price of gold – regardless of how much people pay for physical metal around the world – is largely a function of what happens at the Comex in New York.
 
One reason this is true is that the West trades in gold derivatives, while the Shanghai Gold Exchange (SGE) primarily trades in physical metal. The Comex can thus have an outsized impact on the price, compared to the amount of metal physically changing hands. Further, volume at the SGE is thin, compared to the Comex.
 
But a shift is underway. In May, China approached foreign bullion banks and gold producers to participate in a global gold exchange in Shanghai, because as one analyst put it, “The world’s top producer and importer of the metal seeks greater influence over pricing.” The invited bullion banks include HSBC, Standard Bank, Standard Chartered, Bank of Nova Scotia, and the Australia and New Zealand Banking Group (ANZ). They’ve also asked producing companies, foreign institutions, and private investors to participate.
 
The global trading platform was launched in the city’s “pilot free-trade zone,” which could eventually challenge the dominance of New York and London.
 
This is not a proposal; it is already underway. Further, the enormous amount of bullion China continues to buy reduces trading volume in North America. The Chinese don’t sell, so that metal won’t come back into the market anytime soon, if ever. This concern has already been publicly voiced by some on Wall Street, which gives you an idea of how real this trend is.
 
There are other related events, but the point is that going forward, China will have increasing sway over the gold price (as will other countries: the Dubai Gold and Commodities Exchange is to begin a spot gold contract within three months).
 
And that’s a good thing, in our view.
 
#6. “Don’t Be Ridiculous; the US Dollar Isn’t Going to Collapse”
In spite of all the warning signs, the US Dollar is still the backbone of global trading. “It’s the go-to currency everywhere in the world,” say government economists. When a gold bug (or anyone else) claims the Dollar is doomed, they laugh.
 
But who will get the last laugh?
 
You may have read about the historic energy deal recently made between Chinese President Xi Jinping and Russian President Vladimir Putin. Over the next 30 years, about $400 billion of natural gas from Siberia will be exported to China. Roughly 25% of China’s energy needs will be met by 2018 from this one deal. The construction project will be one of the largest in the world. The contract allows for further increases, and it opens Russian access to other Asian countries as well. This is big.
 
The twist is that transactions will not be in US Dollars, but in Yuan and rubles. This is a serious blow to the petroDollar.
 
While this is a major geopolitical shift, it is part of a larger trend already in motion:
President Jinping proposed a brand-new security system at the recent Asian Cooperation Conference that is to include all of Asia, along with Russia and Iran, and exclude the US and EU.
 
Gazprom has signed agreements with consumers to switch from Dollars to Euros for payments. The head of the company said that nine of ten consumers have agreed to switch to Euros.
 
Putin told foreign journalists at the St. Petersburg International Economic Forum that “China and Russia will consider further steps to shift to the use of national currencies in bilateral transactions.” In fact, a Yuan-ruble swap facility that excludes the greenback has already been set up.
 
Beijing and Moscow have created a joint ratings agency and are now “ready for transactions…in Rubles and Yuan,” said the Russian Finance Minister Anton Siluanov. Many Russian companies have already switched contracts to Yuan, partly to escape Western sanctions.
 
Beijing already has in place numerous agreements with major trading partners, such as Brazil and the Eurozone, that bypass the Dollar.
 
Brazil, Russia, India, China, and South Africa (the BRICS countries) announced last week that they are “seeking alternatives to the existing world order.” The five countries unveiled a $100 billion fund to fight financial crises, their version of the IMF. They will also launch a World Bank alternative, a new bank that will make loans for infrastructure projects across the developing world.
 
You don’t need a crystal ball to see the future for the US Dollar; the trend is clearly moving against it. An increasing amount of global trade will be done in other currencies, including the Yuan, which will steadily weaken the demand for Dollars.
 
The shift will be chaotic at times. Transitions this big come with complications, and not one of them will be good for the Dollar. And there will be consequences for every Dollar-based investment. US-Dollar holders can only hope this process will be gradual. If it happens suddenly, all US-Dollar based assets will suffer catastrophic consequences.
 
In his new book, The Death of Money, Jim Rickards says he believes this is exactly what will happen. The clearest result for all US citizens will be high inflation, perhaps at runaway levels – and much higher gold prices.
 
Only a deflationary bust could keep the gold price from going higher at some point. That is still entirely possible, yet even in that scenario, gold could “win” as most other assets crash. Otherwise, I’m convinced a mid-four-figure price of gold is in the cards.
 
But remember: It’s not about the price. It’s about the role gold will serve protecting wealth during a major currency upheaval that will severely impact everyone’s finances, investments, and standard of living.
 
Most advisors who look out to the horizon and see the same future China sees believe you should hold 20% of your investable assets in physical gold bullion. I agree. Anything less will probably not provide the kind of asset and lifestyle protection you’ll need. In the meantime, don’t worry about the gold price. China’s got your back.
 
We think you don’t have to worry about silver either, because we think it holds even greater potential for investors. In the July Big Gold, we show why we’re so bullish on gold’s little cousin, provide two silver bullion discounts exclusively for subscribers, and name our top silver pick of the year. Get it all with a risk-free trial to our inexpensive Big Gold newsletter.
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Jul 22

No Gold Lessons from the Great Depression

Gold Price Comments Off on No Gold Lessons from the Great Depression
Gold Standard opponents point to its 1930s collapse. But why…?
 

WITHOUT question, the Great Depression was a time when the political consensus moved from a Classical “hard money” approach towards a Mercantilist “soft money” approach, writes Nathan Lewis at New World Economics.
 
That led, ultimately, to today’s “print until the pain goes away” reaction. But actually, this trend had started in the later 19th century, and was not fully expressed until the 1970s – an evolution stretching over a hundred years or more.
 
However, the experience of the Great Depression period of the 1930s still serves as justification, today, of all kinds of currency-jiggering nonsense.
 
Beginning with Britain in September 1931, currencies around the world were devalued. The British Pound was the world’s premier international currency at the time, and also the premier “reserve currency” in the sense that other central banks held British government bonds as reserve assets.
 
By some measures, this was a success: industrial production indeed improved in many countries, after they devalued their currency.
 
 
For some reason, this one statistic has taken on totemic significance. As an emerging markets macro analyst for several years, I saw the effects of several devaluations upfront, and I have to say it is not some kind of Economic Christmas where goodies fall from the heavens, and there are never any consequences.
 
Remember the Mexican devaluation of 1995, the so-called “Tequila Crisis”? How about the Argentina devaluation of 2001, or the Ukraine devaluation of 2008? The fact of the matter is, we have done this many, many times and the results are usually not too pretty.
 
They weren’t too pretty in the 1930s either, which is why these governments soon abandoned the strategy, and agreed not to engage in any more “currency wars.” This was formalized in the Bretton Woods agreement of 1944, in which 44 countries agreed to behave themselves, and return (mostly) to the Classical principles of pre-1930.
 
Governments have been devaluing currencies for literally thousands of years. Can there be short-term benefit? Of course. They wouldn’t do it otherwise.
 
There is a lot one could say about this one topic. Here are a few things to think about:
 
#1. This was not a floating currency policy. These were one-time step-devaluations. The US did not leave the gold standard system, but rather devalued the Dollar from 1/20.67th of a troy ounce of gold to 1/35th, the value it maintained until 1971. Other countries actually did introduce floating currencies, to their detriment. The US’s decision to remain on a gold standard system after 1934 is one reason the US Dollar usurped the British Pound to become the world’s primary international currency.
 
 
#2. This provides no justification for today’s floating currencies, interest rate management, and all the other funny-money games. That plainly did not happen here.
 
#3. This was a time of extreme crisis. During 1931-1932, there was a wave of sovereign defaults, on top of waves of bank and corporate defaults. It was a time of emergency measures. Might a currency devaluation be a tolerable emergency measure in a once-a-century catastrophe? Maybe. But it would be better to avoid such catastrophes to begin with. What does this have to do with the FOMC getting together to jigger interest rates every six weeks?
 
#4. You don’t see the bad stuff. When the value of the US Dollar fell by 41%, from 1/20.67th of an ounce of gold to 1/35th of an ounce, the value of all wages was also devalued by the same amount. In other words, people were effectively paid 41% less. This is one reason employment and activity improved: corporations were given a gift of radically slashed labor costs. The unemployed were helped, but at the expense of the employed. While such measures might be tolerable in a crisis situation of soaring unemployment, a nation does not become wealthy by chronically making workers poorer. The world is full of cheap labor; the miracle of the developed economies is their high incomes, not low ones.
 
#5. It was effectively a type of government default. When the British Pound was devalued (by roughly the same 40%) in 1931, all holders of supposedly “risk free” British government bonds, worldwide, took a giant loss. Imagine that you were, for example, a foreign central bank holding British government bonds as reserve assets, or a commercial bank with British-pound-denominated debt as assets. The central bank would immediately have insufficient reserve coverage for its monetary liabilities, potentially inviting an echo devaluation. The commercial bank would be insolvent. Thus, these devaluations, particularly for international currencies like the British Pound or the US Dollar, led to waves of financial failures worldwide. That’s why they called it “beggar thy neighbor” devaluation.
 
 
#6. All savings in the devalued currency were also devalued. All bonds and bank deposits, denominated in the devalued currency, were also devalued. On the other hand, debtors such as corporations were given an artificial windfall, effectively lightening their debt burden. This is one reason why commercial activity improved – because creditors got screwed.
 
#7. It produced an artificial trade advantage – and an artificial trade disadvantage. The devaluing countries – by way of cheaper labor costs and devalued debt burdens, essentially – then had an artificial trade advantage versus countries that had not devalued. British and Japanese companies could use their now-cheap labor to either compete in the export market, or replace imports with low-cost domestic alternatives.
 
But what if you hadn’t devalued, like France? Now, exporters’ business was collapsing, due to no fault of their own. Domestic businesses found that they were uncompetitive with a wave of cheap imports, and closed down. Whatever advantage one country enjoyed in the “currency wars” was matched by hardship elsewhere. That is why countries tended to suffer until they too devalued, to bring exchange rates back in line.
 
When one country devalues today – such as Mexico – it doesn’t upset the overall situation that much. But, when major international currencies devalue, the resulting trade effects are such that governments around the world tend to get pulled into the devaluation vortex. This happened in the 1970s, when the US Dollar was devalued. Other countries ended up doing the same, so that exchange rates wouldn’t get too out of line.
 
 
After Britain devalued in 1931, other countries, including the US, devalued to normalize exchange rates. The “currency wars” of the 1930s added a new element of chaos and uncertainty in what was already a very difficult time.
 
#8. It is not just a question of devaluing or “doing nothing”. For some reason, people become fixated on the notion that the alternative to currency devaluation is to sit around and do nothing. Eh? The best thing would have been to avoid the catastrophic errors (mostly tariff wars and tax hikes, leading to sovereign default and systemic collapse) that created the crisis situation in the first place. Otherwise, you could do something to remedy the underlying cause of crisis. Why did Japan seem to do so much better than Britain or the US? One reason was that finance minister Takahashi Korekiyo avoided all the “austerity” tax hikes and tariff wars that had become fashionable in the Western world. As the Japanese economy was militarized in the 1930s this was accomplished in part by offering corporations various tax breaks if they participated – in effect, a series of tax cuts.
 
#9. There was more going on than just currency stuff. One major reason for the recovery of the US economy after 1933 was the stabilization of the financial sector, with the “bank holiday” which helped resolve insolvency concerns, and also the introduction of deposit insurance.
 
#10. Devaluation has different effects depending on the situation. For example, in most countries, corporate (and even government) financing is done in international currencies like the Dollar or euro, because nobody trusts the local fiat junk. What happens when the currency is devalued? Instead of debt burdens becoming lighter (as was the case in Britain in the 1930s), debt burdens become heavier! This can be quite catastrophic, as was especially the case in Thailand, South Korea, Indonesia, Brazil and Russia in 1997-1998. Unemployment didn’t go down and production didn’t go up – exactly the opposite.
 
You could add quite a few more points. My conclusions?
  • Avoid Great Depression-like situations in the first place. “Austerity” leads to disaster – in the 1930s, in 1980s Latin America, and in Europe today.
  • Take nonmonetary steps first. If preceding administrations have been blowing up the economy with “austerity,” maybe you should reverse these policies. Or, maybe deposit insurance is the immediate fix.
  • If you find yourself in a once-a-century crisis of 1932-1933 proportions, and you think that devaluation might help, then go ahead and do it. But stay on a Gold Standard system.
This is what the US did, and the result was plainly better than the alternative of transitioning to a floating currency. By “once-a-century” I mean once-a-century, or less. This is not a justification for devaluations every four or five years (France in the 1950s and 1960s), or for a policy of floating fiat currencies and continuous interest-rate jiggering (today), or printing money because someone thinks it will help get them re-elected (1971).
 
After the one-time devaluation in 1933, the US stayed with a gold-standard framework for 38 more highly successful years, until the transition to floating fiat currencies in 1971.
 
The fact of the matter is, once Britain and a host of other countries devalued, the situation tended to impel others to follow, to normalize trade relations.
 
What does a step-devaluation in the midst of crisis in 1933 have to do with floating fiat currencies in 1971, or today?
 
Nothing.
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Jul 20

What’s the True Rate of Inflation?

Gold Price Comments Off on What’s the True Rate of Inflation?
Watch commodities, and wages, for unmassaged price-level reports…
 

In AN AGE when governments of every political leaning and ideological stripe distort economic data to promote their parties’ interests, it is hardly surprising that the nation’s inflation rate is reported in a manner that best suits their political needs, writes Gary Dorsch, editor of the Global Money Trends newsletter.
 
By the same token, in an age of near universal cynicism on the part of citizens towards their corrupt politicians, it is entirely natural for official inflation data to be wildly at odds with the reality faced by consumers and businesses, and in turn, to be regarded with utter disbelief.
 
Since the days of the Clinton administration, the US government has tinkered with the methodology of computing the inflation rate, and therefore, the CPI is no longer considered to be an objective gauge of the prices of a fixed basket of goods, that consumers normally buy. Instead, the US government has a vested interest in understating the true rate of inflation, because it enables Washington to lower cost of living allowances for Social Security checks, helps the Fed to keep interest rates artificially low, weakens wage demands, buoys confidence in the US Dollar, and artificially increases the “real” rate of US economic output.
 
The tens of thousands of government apparatchiks who work for the Bureau of Labor Statistics, Bureau of Economic Analysis, US Treasury, Office of Management and Budget, Economics and Statistics Administration, and countless other agencies, massage their spreadsheets day in and day out, and fudge the numbers. It’s hard not to notice that the inflation rate is reported with distortions caused by seasonal adjustments, hedonic deflators, chain-weighted substitutions, skewed sampling, delayed reporting, and with a twist of political bias. Yet perhaps the simplest advice on how to resolve contradictions between the costs that households face everyday, and the phony CPI, is to watch the Dollars and cents flowing through the global commodity markets, and to map their longer term price trends. Who are you going to believe, the commodity price charts or the skewed data from government apparatchiks? 
 
 
According to the Bureau of Labor Statistics, in 2012, US households spent 40% of their total expenditures on commodities, and the remaining 60% was spent on services. Thus, the commodities markets have become less of a leading indicator of future trends of inflation than in the past, when commodities made up 58% of expenditures in 1980 and 64% in 1970.
 
Still, the alternative to relying on the commodities markets for clues on inflation, is to blindly adopt the Fed’s favorite gauge of inflation, the “personal-consumption-expenditures” price index, (the PCE), which strips out the cost of the basic essentials of life, and is conjured-up by apparatchiks. The PCE was reported to be 1.8% higher in May from a year earlier, or -0.3% less than the CPI. 
 
On 17 June 2014, the US government reported that consumer prices increased 0.4% in May – the biggest monthly increase in more than a year – saying the cost of food and gasoline showed big gains. Airline fares jumped 5.8%, their largest monthly increase in 15 years. The cost of clothing, prescription drugs and new cars all showed increases. Overall, the consumer price index was 2.1% higher compared with a year earlier. That left prices rising at slightly above the Fed’s so-called 2% inflation target, and traders questioned if the uptick would sound the alarm bells at the Yellen Fed.
 
The increase in the consumer inflation rate was preceded by a sharp upturn in the market value of the Continuous Commodity Index (CCI), a basket of 17-equally weighted commodities – that started in January ’14. Six months later, the CCI was trading 9% higher than a year earlier. For the first time in 2-½ years, the CCI has emerged from deflation territory (or negative year-over-year returns). However, commodity prices are notoriously volatile, and so, the outlook for inflation can often turn on a dime.
 
 
Commodity markets are notoriously volatile from month to month, and from year to year, quite often due to unforeseen acts of nature or military conflict. However, in order to filter out the “noise” of the markets, a simple approach is to take a much longer-term view of price trends. And for a wide array of commodities, their prices have trended significantly higher.
 
For some of the basic staples of life, the market price of rough rice is up 83% higher, Butter is up 69%, and unleaded gasoline is up 67%, compared with 8.5 years ago. Milk and cattle prices are up 63%, and the cost of wheat is up 61%. So when Americans are driving to the grocery store, they are feeling the pinch of accumulated rates of inflation.
 
But what about the wages of the US worker, have they kept pace with the increasing cost of living? According to the Labor Dept apparatchiks, the average wage is up 19% compared with 8.5 years ago, for an increase of 2.2% per year, on average. However, for many Americans, their incomes are actually declining and that could put a squeeze on discretionary spending.
 
For example, in the month of June ’14, the BLS reported that the number of higher paying, full-time jobs plunged by 523,000 to 118.2 million while lesser paying, part-time jobs increased 799,000 to over 28 million. That suggests that many US workers’ are being forced into part-time work, and their income is decreasing. Thus, the hallowing out of the US middle class and the impoverishment of the lower income groups is worsening.
 
As such, the Fed is already talking about moving the goal posts again, from targeting inflation to targeting wage increases. “Signs of labor-market slack include slow wage growth and low labor-force participation,” Fed chief Yellen said on 15 July. Earlier, on 11 July, Chicago Fed chief Charles Evans said on Bloomberg TV that it would not be a “catastrophe” to allow the inflation rate to overshoot the Fed’s 2% target.
 
“Even a 2.4% inflation rate, I think that could work out,” he said.
 
So the message is; the Fed would be tolerant of above target inflation, since lower paying part-time wages are supposed to keep inflationary pressures in check. For the Fed, with the passage of time, many of its sins of the past, in the form of a higher cost of living, are seemingly washed away into obscurity.
 
When asked about the recent uptick in the consumer inflation rate to 2.1% in the month of May, Fed chief Janet Yellen downplayed the threat saying; “So I think recent readings on, for example, the CPI index, have been a bit on the high side, but I think it’s – the data we are seeing is noisy. It’s important to remember that, broadly speaking, inflation is evolving in line with the Committee’s [ie, politburo’s] expectations. The Fed [ie, a politically appointed Politburo] has expected a gradual return in inflation towards its 2% objective, and I think the recent evidence we have seen…suggests that we are moving back gradually over time to our 2% objective, and I see things roughly in line with where we expected inflation to be,” she said.
 
 
However, the reality for the 48 million Americans that are receiving food stamps is their monthly stipend is buying a lot less butter, cheddar cheese, chocolate, and milk, these days. At the Chicago Mercantile Exchange, the nearby futures contract for Milk futures is 23% higher, compared with a year ago, and up 75% compared with 8.5 years ago. However, in the Fed’s view, the soaring cost of dairy products is only transitory. After all, according to the Law of Gravity, what goes up must eventually come down, right? 
 
From Asia to South America, the demand for US dairy products processed foods containing milk, such as cheddar cheese, is up 19% compared with a year ago, according to the US Dairy Export Council. Exports of cheese jumped 46% in the past year, led by a 38% increase to Mexico, the biggest buyer of US dairy products, and a doubling of sales to China.Exports of dry milk now account for 16% of all dairy sales, compared with 5% a decade ago. As such, dairy farmers’ revenue soared 35% last year to $584 million.
 
So far this year, rising dairy and meat costs are the biggest sources of inflation. Safeway, the second-largest US supermarket operatorwith a network of more than 2,400-stores and 250,000 employees, said on April 23rd, that it plans to pass along the higher costs for meat, produce and other staples on to shoppers at its US grocery stores in the second quarter.
 
Hershey (NYSE:HSY) – the No.1 candy maker in the United States – said it would increase prices of its instant consumable, multi-pack, packaged candy and grocery lines by about 8% to tackle rising commodity costs, with Cocoa futures trading at a 3-year high.
 
However, higher prices for dairy products have widened profits margins for farmers, and in turn, they are already decreasing their dairy cow culling rates, in order to boost the supply of milk. New Zealand, the world’s top dairy exporter, is expanding its output of milk to an all-time high, in order to meet growing demand in China, and is setting the stage for a surplus of milk, in the months ahead.
 
Increased output in New Zealand has already rattled the milk futures market on the Chicago Mercantile Exchange. The nearby contract has slumped 12% from a record high of $24.32 per hundred pounds in April. Class III milk, used to make cheese, closed at $21.42 per hundred pounds this week. The price of nearby Cheddar Cheese futures have dropped from an all-time of $2.35 per pound to $2.04 today.
 
 
In a year when American dairy farmers are enjoying windfall profits, other US farmers can expect to see lower earnings than in 2013. US farmers will suffer a 21% drop in net-cash income, on average, due to sharply lower prices for their biggest cash crops, corn, wheat and soybeans. At the same time, dairy farmers will earn 28% more or roughly $334,100 on average, this year, the USDA predicts.
 
Two years ago, on the Chicago Board of Trade, Corn futures sold for as high as $8.43 per bushel shortly after the US Dept of Agriculture gave its assessment of the effects of the historic drought plaguing the Farm Belt. The USDA lowered its estimate of the US’s corn production at 10.8 billion bushels, or 13% below 2011, and the lowest since 2006.
 
However, US farmers figured that drought like conditions would last for a long time, and many decided to profit from record high prices by boosting output. In turn, the collective actions of the farmers created a huge glut of supply in today’s grains markets.
 
Two years removed from a devastating drought that sent US grain prices soaring, the price of Corn has dropped in half, tumbling to $3.75 per bushel today, and its lowest level in four years. It’s estimated that the average cost of production is around $3.50 for a bushel of corn, which could act as a floor for corn prices. Soybean prices have plunged from a record high of $18 per bushel two years ago, to $11.80 per bushel today, its longest slump in 41 years. The farther dated Nov ’14 contract is priced below $11 per bushel. The USDA says US farmers will harvest 3.8 billion bushels of soybeans this year, compared with last year’s crop of 3.3 billion. Amid a bumper crop that is expected to boost global stockpiles to the highest level in 14 years, corn futures are down 44%, wheat is 24% lower, soybeans 20% lower, and rice is down 18%
 
 
Of more than 50,000 edible plant species in the world, only a few hundred contribute significantly to food supplies. Just 15 crop plants provide 90% of the world’s food energy intake, with three rice, maize (corn) and wheat – making up two-thirds of this. 
 
Whether birthed from Indian soil, or in China or Japan, rice is a staple food for nearly one-half of the world’s population. Today, rice and wheat share equal importance as leading food sources for humankind.rice provides fully 60% of the food intake in Southeast Asia and about 35% in East Asia and South Asia. The highest level of per capita rice consumption is in Bangladesh, Cambodia, Indonesia, Laos, Thailand, and Vietnam.
 
Yet only 5% of the global rice crop is available for export. Thus, rice commands a higher price than wheat on the international market, because a higher percentage of the wheat crop (16%) is available for export. That leaves small rice-producing countries such as Thailand, Vietnam, and the US as the top exporters of rice. On the basis of yield, rice crops produce more food energy and protein supply per hectare than wheat and maize. Hence, rice can support more people per unit of land than the two other staples.
 
With its invaluable status as a staple food source in two of the most populous nations on earth and the domination of its export share by relatively small producers, rough rice futures have attracted both hedgers and speculators. In July ’12, China, the world’s top rice producer and consumer, launched the early Indica rice futures contract on the Zhengzhou Commodity Exchange – a world bellwether.
 
Since the inception of the contract, early Indica rice futures have been gripped by a grizzly bear market, losing 28% to 2,050 Yuan per ton this week. Yet Rough Rice futures traded on the CBoT were remarkably stable over the past few years, gyrating within a narrow range between $14 and $16 per hundred weight (cwt). However, starting in late May ’14, Chicago rice began to tumble, plunging 10% over a two-week period to as low as $14/cwt, before crashing to $12.85/cwt this week. This is certainly good news for citizens residing in the Emerging countries, where households spend as much as 30% of their income on purchases of food.
 
A pickup in the US’s official consumer inflation rate towards the central bank’s 2% objective has some Fed officials warning about the danger of risking faster inflation in the future by waiting too long to start raising interest rates.
 
The Fed hawks argue that the central bank must move to tighten its monetary policy sooner, rather than later. The way Philly Fed chief Charles Plosser sees it, the Fed is sitting on a ticking time bomb.
“One thing I worry about is that if we are late, in this environment, with $2.7 trillion of excess reserves, the consequences might be more dramatic than in previous times. If lending begins to surge and those reserves start to pour out of the banking system, that’s going to put pressure on inflation.”
However, Janet Yellen – the money printer in chief – is not swayed by the hawkish view.
“Inflation has moved up in recent months” she acknowledged, “but decisions about the path of the federal funds rate remain dependent on our assessment of incoming information and the implications for the economic outlook,” Yellen told Congress on 15 July.
 
“The Fed does need to be quite cautious with respect to monetary policy. We have seen false dawns in the past.
 
“With wages growing slowly and raw material prices generally flat or moving downward, firms are not facing much in the way of cost pressures that they might otherwise try to pass on,” the Fed said in a report accompanying Yellen’s testimony.
 
It’s true that the most economically sensitive commodities, traded in Shanghai, such as steel, iron ore and rubber, are trading at sharply lower levels than compared with a year ago, and thus, helping to keep a lid on factory-gate inflation. 
 
Free-falling cotton futures hit fresh two-year-plus lows to close around 68 US cents, amid expectations for a buildup in US stockpiles and growing world inventories outside China. In June, the World Bank cut its projection for global growth to 2.8% this year, from its earlier estimate of 3.2%.
 
That’s half the growth rate of the pre-financial crisis economy.
 
The World Bank also downgraded its outlook for the US economy to 2.1% for 2014, down from 2.8% earlier. Commodities such as copper, rubber and iron-ore have meanwhile been commonly used in China for collateral, where traders or investorsborrow against the commodity with the aim of investing Yuan in real estate or sub-prime loans in the shadow banking sector. Some estimates put the portion of inventories of iron-ore that is used as collateral at 40%. Now that Beijing’ is cracking down on shadow lending and weakened the yuan – a deliberate move by authorities – Beijing is trying to push these deals under water. As such, some of these commodities held in storage can find their way back onto the market and weigh on prices. 
 
China produces as much steel as the rest of the world combined and it’s most actively traded steel futures contract – Shanghai rebar – dropped to a record low of 2,800 Yuan per ton on June 30. That’s down nearly 50% from a record high of 5,450 hit 3 years ago.
 
Chinese steelmakers suffer from chronic lack of profitability and overcapacity of close to 200 million tons. Despite weak end demand and Beijing’s attempts at consolidation and its crackdown on polluting industries, steel production continues apace because regional authorities are fearful of closing down plants that provide tax revenue and employment. 
 
 
In Shanghai, the spot market for iron ore briefly fell below $90 per ton on 16 June, for the first time since September 2012. If sustained below $90 per ton, about one fifth of China’s iron ore miners would be forced to shut down around 80 million tons of output per year.
 
In contrast, Rio Tinto breaks even at $43 per ton, and BHP stays in the black at $45. Brazil’s Vale’s break even is $75 per ton, due to the greater distance to ship ore from Brazil to China. Iron ore has since rebounded to $97 per ton, but is still trading -23% lower than a year ago. 
 
The cartel that controls the majority of the world’s rubber production, Thailand, Indonesia and Malaysia has urged its exporters not to sell the commodity below $1.90 or 62.70 Thai Baht per kilo, as the average output cost for growers in Southeast Asia is about 60 Baht. The price of natural rubber is 16% less than a year ago, and at 13,750 Yuan per ton in Shanghai, has lost about two thirds of its value. Stockpiles of rubber at the Shanghai Futures Exchange are at the highest in 10 years, and a global surplus of 241,000 tons is expected in 2014.
 
Prices for thermal coal are expected to remain weak, with oversupply continuing to plague the market until producers curb output further. Coal prices in Europe and Asia have lost more than half their value since spring 2011, with European physical coal for September delivery was trading at $72.65 per ton, near five-year lows. New-Castle coal prices mined in Australia have also fallen below $70 per ton, bumping along five-year lows, as record output in Q’1 coincided with slowing import needs from China, the world’s biggest coal buyer.
 
 
Gold meanwhile is building a base, and eyeing these volatile commodities. History shows that rapid growth of the money supply usually fuels higher rates of inflation. Yet while the Fed increased the size of the MZM Money supply $700 billion in 2013, and $350 billion in the first half of 2014, what has surprised traders is the lethargic behavior of the US’s rate of inflation.
 
The CPI increased 1.5%, on average, in 2013, and bumped up to 2.1% in May ’14. However, given the -6% slide in the Continuous Commodity Index since the start of July, led by a drop of 20-cents in the price of unleaded gasoline on the Nymex, it’s a good bet that the consumer price index will start to edge lower again, with a lag time of 2-3-months.
 
Former Fed deputy Alan Blinder explained why the Fed’s QE-scheme didn’t spark an upward spiral in inflation. “The monies the Fed pumped into the banking system didn’t circulate in the US economy. Instead, it all got bottled up in the banks, and essentially, none of it got lent out,” he explained. Because the Fed began to pay 0.25% interest on excess reserves, the banks agreed to park the QE-monies at the Fed itself, instead of lending and creating deposits and increasing the money supply. Therefore, QE didn’t contribute to inflation. And if banks aren’t lending, there’s no boost to the economy. However, there is reason to believe that the $.35 trillion of QE-injections were funneled into the US bond and stock markets.
 
The meltdown in the yellow metal in 2013 left many gold bugs licking their wounds. However, in hindsight, the collapse in the Continuous Commodity Index (CCI), in the first half of 2013, was probably the biggest contributing factor behind gold’s slide to the $1200 level. And it’s the narrative about low inflation and/or deflation, and weak gold prices that enables the endless printing of money by central banks.
 
Bubbles in the European and US bond and stock markets can be sustained in the stratosphere, as long as inflation is said to be running near-zero. In fact, the Bank of Japan, the ECB and the Fed all say they must print money to counter the threat of deflation. As for the price of gold, the average break-even point for gold miners worldwide is estimated to be around $1200 per ounce, and it’s this figure, that gold investors believe is the “rock bottom” price for the yellow metal.
 
Gold bugs have been building a big base of support for the past 12-months, but a sustained rally to $1400/oz and beyond, might require the revival of the “Commodity Super Cycle.”
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