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Extraordinary Bullish Outlook for Gold
By Eric Hommelberg
www.golddrivers.com

Gold proves itself as only true alternative for the dollar
Confidence in currencies shaken to the core
Gulf countries are keen to break away from the link with the US dollar
Chinese appetite for US debt in decline
Former Bank of England official expects dollar collapse
Investors fleeing into gold as US prints trillions
HSBC, Citigroup, Merril Lynch, Goldman Sachs all turning bullish on gold
Senior gold shares ready to move higher after impressive 100% bull run since October 2008
Junior gold shares waking up - bottomed out in December 2008


02/06/09

This piece is an update on "GoldDrivers 2009 - Extraordinary bullish outlook for gold" so I would urge readers to read that piece in case they haven't done so.
The year of 2009 started as how it ended in 2008. The inflation/deflation debate intensified and still there seems to be no agreement whether we're heading into a deflationary or hyperinflationary depression.

I've stated many times that hyper inflation will be the tune of the day coming years. The deflationists can argue what they want but the simple truth is that the US government will default sooner or later on its inability to service its ballooning debt which makes the US dollar worthless overnight. This happened to the Reichsmark, this happened to the Zimbabwe dollar and this could happen to the US dollar. Once confidence gets into a steep decline foreign investors will dump their worthless dollar holdings which will translate itself into the death of the dollar.

Deflationists may argue that governments can't keep up with printing money as fast as credit is being destroyed through means of weapons of financial mass destruction called derivatives so the net result would be deflation, yet they still miss the point that no government ever managed to create the strongest currency in the world by means of default. The US government is adding debt at the fastest pace ever but no one seems to be willing to take on that debt. The only alternative would be (and will be) to monetize that debt which will eventually lead to a confidence collapse for the dollar. Any currency facing a confidence collapse will eventually seek its intrinsic value which is zero. Needless to say what inflation figures would look like by then.

Maybe Iím too pessimistic so letís see who could come to the rescue here. The Japanese perhaps?

"The dollar may lose as much as 40 percent of its value to 50 yen or 60 yen from the current spot rate of 90.40 today in Tokyo"

Japan Should Scrap U.S. Debt as Dollar May Plummet, Mikuni Says

Bloomberg, Wednesday, December 24, 2008

TOKYO -- Japan should write off its holdings of Treasuries because the U.S. government will struggle to finance increasing debt levels needed to dig the economy out of recession, said Akio Mikuni, president of credit ratings agency Mikuni & Co.

The dollar may lose as much as 40 percent of its value to 50 yen or 60 yen from the current spot rate of 90.40 today in Tokyo unless Japan takes "drastic measures" to help bail out the U.S. economy, Mikuni said. Treasury yields, which are near record lows, may fall further without debt relief, making it difficult for the U.S. to borrow elsewhere, Mikuni said.

"It's difficult for the U.S. to borrow its way out of this problem," Mikuni, 69, said in an interview with Bloomberg Television broadcast today.

END.

No Japanese help to be expected here but what about the Arab states then? Will they be keen to keep their currencies pegged to the dollar? Will they come to the rescue and buy up US paper in ever increasing quantities? Well, don't count on it since the answer is NO! The Arabs have their doubts on the dollar as well, that's why they will issue a new currency themselves which might include gold as well:

"Gulf countries are keen to break away from the link with the US dollar because it ties them to inappropriate monetary policies that exaggerate the boom-to-bust cycle in their economies."

Will the New GCC Single Currency Include Gold?

Peter Cooper
January 3, 2009

Gulf Cooperation Council leaders yesterday concluded their 29th annual summit meeting in Muscat, Oman with a final approval for the creation of a single currency for the six-nation economic bloc, still targeted for 2010.

Saudi Arabia is the largest economy in the GCC and boasts substantial gold reserves. But whether gold will be included in the currency basket has not yet been decided.

The creation of the GCC single currency - likely to be known as the Khaleeji which means Gulf in Arabic - is a major gold event for two reasons.

First, the breaking of their dollar pegs by the Gulf Arab nations is clearly dollar negative. Secondly, any inclusion of gold either as a part of the monetary basket, or in the reserves of the new GCC Central Bank will create additional demand for the precious metal.

END.

So no Japanese and Arab help for the dying dollar, will the Chinese be coming to the rescue then? Unfortunately the answer is no again!

The declining Chinese appetite for United States debt, apparent in a series of hints from Chinese policy makers over the last two weeks comes at an inconvenient time."

China Losing Taste for Debt From the U.S.

By KEITH BRADSHER
January 7, 2009

HONG KONG ó China has bought more than $1 trillion of American debt, but as the global downturn has intensified, Beijing is starting to keep more of its money at home, a move that could have painful effects for American borrowers.

The declining Chinese appetite for United States debt, apparent in a series of hints from Chinese policy makers over the last two weeks, with official statistics due for release in the next few days, comes at an inconvenient time.

On Tuesday, President-elect Barack Obama predicted the possibility of trillion-dollar deficits ďfor years to come,Ē even after an $800 billion stimulus package. Normally, China would be the most avid taker of the debt required to pay for those deficits, mainly short-term Treasuries, which are government i.o.u.ís.

END.

China settling its trade with Yuan instead of the dollar wouldn't be a big help for the dollar either:

"Chinese exporters might face losses if they continue to be paid in US dollars"

China tries settling trade with yuan instead of dollar

Yuan-Settlement Test to Start

From Shanghai Daily
Wednesday, January 7, 2009

China's central bank said yesterday that it plans to implement a pilot program that would settle overseas trade with the Chinese currency instead of the US dollar.
Those moves are expected to facilitate overseas trade, as Chinese exporters might face losses if they continue to be paid in US dollars, analysts said.

END.

So what we see here is the US government facing years of trillion-dollar deficits but no foreigners willing to take on that debt. The only option left is to monetize that debt and ask the FED to buy US Treasuries.

Surprise surprise:

Fed Keeps Rate Near Zero, Is Ready to Buy Treasuries

Jan. 28 (Bloomberg) -- The Federal Reserve left the benchmark interest rate as low as zero, said itís prepared to purchase Treasury securities to resuscitate lending.

The purchase of Treasuries would extend the Fed strategy of using its balance sheet to reduce borrowing costs. The new program may benefit several types of borrowers, because long-term government bond yields influence interest rates on mortgages, corporate bonds and municipal debt

END.

Sounds good right? The FED purchasing Treasuries which will bring rates down. I don't believe however that the FED is bigger and more powerful than the world markets. The FED can buy all it wants but the bottom line remains when confidence is gone, the dollar is gone. When confidence is gone investors will start selling their long-term Treasuries which will drive up long term rates. It seems we find ourselves at this critical juncture where investors start losing confidence in US paper:

"The gap between two- and 10-year rates widened at the fastest pace in a year last month as traders demanded more compensation for longer-term debt"

Treasury Real Yields at 16-Month High as Deflation Bets Die

By Dakin Campbell

Feb. 2 (Bloomberg) ó For the first time since 2007, Treasury investors are betting that inflation will accelerate.

The yield on 10-year notes exceeds the consumer price index by 2.74 percentage points, the most since December 2006. The gap between two- and 10-year rates widened at the fastest pace in a year last month as traders demanded more compensation for longer-term debt. Treasury Inflation Protected Securities that signaled falling prices as recently as Nov. 20 show they will increase in the U.S. this year.

Deflation was the growing concern for investors in 2008 as government bond yields fell to historic lows in December, the Reuters/Jefferies CRB Index of commodities tumbled 53 percent since July and home prices plunged 18 percent amid a deepening recession. Now, the bond market is saying Federal Reserve interest rates at zero percent, President Barack Obamaís $819 billion planned stimulus package and $8.5 trillion of U.S. initiatives to revive credit markets will reignite inflation.

"When the Fed gets finished here they will have an inflation nightmare on their hands,"said Mark MacQueen, who helps oversee $7 billion as co-founder of Sage Advisor Services Ltd. in Austin, Texas. "There is a lot of downside in conservative government bonds."

MacQueen is selling 30-year Treasuries, which are more sensitive to inflation expectations than shorter-maturity debt.

END.

The message is crystal clear, investors and foreign countries are losing their appetite for US debt which could result in a dollar collapse, former Bank of England official Willem Buiter seems to admit:

"Americans must prepare themselves for a massive collapse in the dollar as investors around the world dump their US assets, a former Bank of England policymaker has warned. "

Former Bank of England official expects dollar collapse

By Edmund Conway
The Telegraph, London. Monday, January 5, 2009

Americans must prepare themselves for a massive collapse in the dollar as investors around the world dump their US assets, a former Bank of England policymaker has warned.

The long-held assumption that US assets -- particularly government bonds -- are a safe haven will soon be overturned as investors lose their patience with the world's biggest economy, according to Willem Buiter.

Professor Buiter, a former Monetary Policy Committee member who is now at the London School of Economics, said this increasing disenchantment would result in an exodus of foreign cash from the US.

END.

So investors world wide are losing their appetite for the dollar but what's the alternative then?

The answer is simple, the one and only true safe haven remains gold. It seems that more and more investors are picking upon it:

"Investors are largely shunning everything from U.S. Treasuries to stocks, which are down 10 percent and 7.5 percent so far this year, respectively, while pouring cash into gold"

Gold gaining investors as U.S. prints trillions

By Frank Tang and Jennifer Ablan
Reuters, Wednesday, January 28, 2009

NEW YORK -- Gold, the traditional safe haven in times of economic turmoil, proved to be more a commodity that everyone loved to hate last year even amid the turbulence that engulfed world markets.

But as 2009 gets under way the yellow metal has found huge traction with money managers.

The furious rally in the bullion stems from expectations that the U.S. government will need to borrow about $2 trillion of debt this year to finance its rescue packages for the battered banking sector. Already, outstanding Treasury debt stood at $5.5 trillion at the end of September.

Against this backdrop, investors are largely shunning everything from U.S. Treasuries to stocks, which are down 10 percent and 7.5 percent so far this year, respectively, while pouring cash into gold.

END.

So gold is gaining investors, yes, one of them is Greenlight founder David Einhorn:

"The $5.1 billion hedge fund is buying gold for the first time amid the threat of inflation from increased government spending"

Greenlight Founder Takes Grandfatherís Advice on Gold

By Stewart Bailey and Saijel Kishan

Jan. 28 (Bloomberg) -- Greenlight Capital Inc. founder David Einhorn is finally taking his grandfather's advice. The $5.1 billion hedge fund is buying gold for the first time amid the threat of inflation from increased government spending.

Since Einhorn was 10 years old, his grandfather has warned him that investing in bullion and gold-mining stocks was the only "sensible" thing to do given the threat of inflation and the risks of so-called fiat currencies, New York-based Greenlight said in a Jan. 20 letter to clients. The firm had never before considered buying bullion or mining-company shares.

"To everyone's dismay, we believe some of Grandpa Ben's predictions are playing out," Greenlight said in the letter, a copy of which was obtained by Bloomberg News.

"The size of the Fedís balance sheet is exploding, and the currency is being debased." Greenlight is turning to the centuries-old currency to mitigate the effects of the economic collapse and government efforts to end it. Bullion gained for the eighth straight year in 2008 as governments in Europe and the U.S. rescued banks from collapse.

END.

So investors are turning en mass to gold but what about foreign countries like eg China? China isn't quite happy about the dollar's prospects so what are they going to do with their excessive dollar holdings? What could happen to the gold price if some of these holdings were to be converted into gold?

According to Barrick CEO gold could treble or more from here in case China would switch from dollar holdings to gold:

"central banks, including China's, might start to switch from dollar holdings to gold, which could cause the metal's price to treble or more."

Gold likely to hit new highs on dlr fear-Barrick

DAVOS, Switzerland, Jan 29 (Reuters) - Gold is likely to hit new record highs, spurred by serious concern about the U.S. currency and doubt about the state of the world economy, the chairman of Barrick Gold Corp. said on Thursday.

There was even a possibility, although not a probability, central banks, including China's, might start to switch from dollar holdings to gold, which could cause the metal's price to treble or more.

END.

In part I we noted that HSBC and Citigroup became bullish on gold exactly for reasons well outlined above:

HSBC Fund Returns to Buying Gold to Hedge Against Inflation

Dec. 3 (Bloomberg) -- HSBC Investment Management's $2.6 billion Absolute Return Service started buying gold again on expectations that inflation will accelerate and may start adding coffee, sugar and grains next year.

END.

Citigroup says gold could rise above $2,000 next year as world unravels

Gold is poised for a dramatic surge and could blast through $2,000 an ounce by the end of next year as central banks flood the world's monetary system with liquidity, according to an internal client note from the US bank Citigroup

END.

It seems that Merril Lynch has jumped on the gold wagon as well, Merril's CIO expects gold prices to hit $1500 in the next 12 to 15 months:

"With confidence in currencies shaken to the core, the yellow metal is increasingly assuming the role of "the most trusted currency"

Gold prices could hit $1,500, fears Merrill Lynch CIO

Gold prices may hit $1,500 (Dh5,509) an ounce in the next 12 to 15 months, Gary Dugan, the Chief Investment Officer (CIO) of Merrill Lynch, said yesterday.

Dugan termed his apprehensions of gold striking such a high as a "fear" that may come true. He reasoned that such a price would mean the other commodities and streams of investments have been shunned by investors.

With confidence in currencies shaken to the core, the yellow metal is increasingly assuming the role of "the most trusted currency", Dugan said. "We have never seen such a rush to buy gold. It's bringing in security and it's still affordable.

END.

Goldman Sachs joining the gold bulls, well, at least they finally get it after being on the short (wrong) side of the trade for more than a decade:

Goldman Sachs Lifts Gold Price Forecast to $1,000

By Lewa Pardomuan
Reuters, Thursday, February 5, 2009

SINGAPORE -- Investment bank Goldman Sachs raised its forecast for the price of gold to reach $1,000 an ounce in the next three months from its previous forecast of $700 due to rising investor demand for safe haven assets.

"The gold price rally has been driven by surging demand for gold in all forms: physical gold, exchange-traded funds, and futures contracts as investors seek 'a safe store of value' amid the financial distress and inflation risks," it said in a report.

 



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