Despite prices rising 338%, global gold demand in 2010 was like the decade-long bull run hadn’t got started…

WESTERN SAVERS hoping to defend their standard of living as global incomes converge take note.

Ten, even five years ago, precious-metals analysts thought rising incomes in Asia would see gold substituted for financial services or consumer goods. But China’s private demand has more than doubled as a proportion of gross household savings. Based on the World Gold Council’s latest data – issued today in the market-development and research group’s new Gold Demand Trends report – India’s private consumption jumped in 2010 to a new all-time record of more than 963 tonnes.

That’s equal to 2.65% of GDP on the IMF estimate. On BullionVault‘s analysis, it equated to more than 11.5% of India’s gross household savings.

Yes, the data are subject to revision, of course. They can only ever be an estimate, too.

But for Western savers hoping to defend their standard of living, it’s plain commonsense to buy a little of what Asian households are using to store ever more of their fast-growing wealth.

Looking at today’s Gold Demand Trends report, you can forget about central banks (net gold buyers in 2010 though they were, as a group, for the first time in two decades). Don’t dwell on “safe-haven” Western demand either (other than to note how new ETF demand and “unallocated” trading in the wholesale, off-exchange market both slipped 45% from 2009′s record highs, while coin and bar demand surged worldwide). Indian and Chinese private households are the knock-out story from 2010′s data. The Indian figures in particular beggar belief.

The world’s two most populous nations, its fastest-growing major economies, and numbers one and two for physical gold buying, both India and China set new records for private gold demand by value and volume in full-year 2010. On our reading of the new World Gold Council data, per capita consumption also set fresh records in the top two demand countries.

Rising inflation and sub-zero real rates of interest are setting the pace, just as they did during gold’s developed-world bull market of the 1970s. Productivity and real wages are rising, however, in sharp contrast to the economic path the rich West took four decades ago. So Asia’s deep love of gold – and ever-deepening pockets – suggest a different path, perhaps, from the post-bubble slump which gold prices suffered amid the record-high interest rates paid to cash savers to defeat Western inflation at the start of the ’80s.

Developed-world gold investment rose amid the financial crisis starting 2007, even as world jewelry demand sank. Emerging Asia tempered and even reversed its buying as global GDP turned down, with private consumers in India – a net importer every year since the Great Depression (the world’s No.1 consumer has got virtually no domestic mine output) – actually becoming net exporters of gold in the first quarter of 2009.

The economic rebound, so much more pronounced in emerging Asia than the rich West, has seen those trends switch over. Because even with the Eurozone deficit crises driving a jump in physical demand for gold bars and coin (particularly in Germany), net demand for new units of gold ETF shares actually slipped 45% from 2009′s record. So too did “unallocated” trading in London’s wholesale market.

You’ve got to go a long way to over-state the strength of physical gold demand in 2010. The Dollar price rose 26%, but total global demand still grew 9% by volume, hitting its highest tonnage since the long bear market of the 1980s and ’90s hit rock-bottom in 2000.

Gold then averaged $279 per ounce, rather than 2010′s average of $1224. Yet in tonnage terms, global physical demand – led by emerging Asia’s big giants – was like the bull run hadn’t even got started.

Adrian Ash

For Money Morning Australia
Adrian Ash is head of research at www.BullionVault.com

The gold price kicked off this year with a fall.

It dropped from $1422 / oz, down to a low of $1318 / oz by late January.

This was a fall of just 7.3%, but still this gave all the gold bears something to rant about for a few weeks: ‘It’s the end of the gold bull market’, ‘I told you it was in a bubble’, and so on.

We’ve heard it all before, and we can be sure to hear it all again.

But the fall they were all getting so excited about was really just another tiny dip on the way up.  

Take a look at the top right hand side of the two-year gold chart below.

That little pull-back was what all the fuss was about…..

Gold price continues its steady march upwards

Source: Goldprice.com

More to the point, you can see that the gold price has already bounced since then! It is on its way up already, climbing 4% in the last few weeks. It didn’t take long.

Media reports also focused on the amount of gold being withdrawn from the gold ETF (GOLD). This is the world’s largest gold exchange traded fund (ETF), and apparently holds around 40 million ounces of gold for investors.

But when these investors cashed in on a few million ounces of gold last month, the media were citing it as evidence of the coming end of the gold market’s epic run.

But again, take a step back. This few million ounces was but a fraction of the amount of gold on their books. And moreover, this drop is no worse than ones we have seen in the last few years.

Recent withdrawals from the GOLD ETF barely even register in the big picture

Source: Credit Suisse

Most reporters would have you believe that the GOLD ETF is the only part of the gold market that you need to look at.

But it is just a small part of the puzzle.

CHINA is soon to be the world’s largest gold market.

With four gold recommendations in Diggers and Drillers (which are up 85% on average), it is what’s  been happening in China’s gold market that makes me sleep well at night.

This has always been the main reason I am bullish on gold: the potential demand from the hundreds of millions of newly wealthy, Chinese middle classes.

Not to mention the fact that the Chinese government are doing all they can to promote gold ownership. With a long cultural history of personal gold ownership, this is not a hard sell.

Gold demand in China has now gone ballistic.

It imported 6.7 million ounces in just the first ten months of last year! Compare that to 1.4 million ounces in the full twelve months of 2009.

It’s not just gold either.

Last year China imported 120 million ounces of silver. The year before that it was just 30 million ounces of silver. A 300% increase!

It’s good to know this as another two of the Diggers and Drillers tips are silver plays.  These are up 42% on average, with the most recent one just getting going now.  (You can get my latest research, and take a test drive of my service by clicking here )

Last week I managed to get my hands on some current data for Shanghai gold trading volumes. This is a market that has pretty much started from scratch just a few years ago, but is already now going at full tilt.

It’s hungrily vacuuming up any gold that US investors are silly enough to liberate.

Shanghai Gold Exchange volumes climbing last six years

Source: ANZ commodity research

There are many days where 30million ounces have changed hands, and the 12 month rolling average is now closing in on 20 million ounces daily. This is one busy market.

So with this kind of growing demand from China, it really is hard to see the gold price falling very far, for very long, in the foreseeable future!

The fact is that for all the media coverage of gold, only a fraction of global investment assets are tied up in gold and gold stocks. It’s just a fraction-of-a-fraction of the investible universe.

The thin bar on the bottom right of the chart below is what we are talking about.

Gold is still a small fish in a big pond, for now anyway…
Source: Barrick

Maybe this is the real reason why so few commentators understand the gold market. Because so few are genuinely involved with it!

There are many willing to venture an opinion, but few who really know the gold market. Check out Sprott Asset Management’s commentary to hear it from some of the best.

The good news is that until gold becomes main-stream, there is still a huge opportunity there. When the media start saying gold is good, that’s when I’ll be thinking about selling out!

For the foreseeable future though, in the words of another one of the world’s best gold commentators Marc Faber

‘The risk is really not to own any precious metals at all’.

Regards,

Dr.Alex Cowie
for Money Morning Australia

If you’re a subscriber to Australian Small-Cap Investigator you’ll know we’ve had a bit of a fetish for rare earths stocks.

It lasted for a while, but came to a conclusion late last year when we told readers to sell Lynas Corporation [ASX: LYC] for a 190% gain, and Alkane Resources [ASX: ALK] for a 130% gain.

We didn’t sell because we’d gone off the rare earths story.  We sold Lynas because we thought it was a good time to lock in a big profit.  And we sold Alkane because it hit our trailing stop. [Ed note: a trailing stop is where you move your selling price up as the share price rises.  If the share price falls, the stop order is triggered and you sell your shares.]

At the time – and even now to a lesser extent – rare earth stocks were going off like firecrackers.

Companies that had no prior involvement in rare earth exploration were suddenly announcing to the market a potential rare earth resource.  You can guess what happened next…

And while we still like the rare earth story, we’re also aware of the game China could be playing with the supply.

If you don’t know, China controls about 95% of the global rare earth market…

And it knows it.  In recent years the Chinese have made massive cuts to rare earth exports.  This has pushed the price of rare earths and rare earth stocks higher… and encouraged mining firms to search for these valuable minerals.

But what’s China got planned now?

One of our concerns has always been that China could tighten the market to drive up the price and then quick-as-a-flash flood the market with a massive supply… sending the price of rare earths crashing, and crushing the viability of prospective mines.

You can bet your bottom dollar if that happens, it would be some time before investors would be prepared to take a punt on rare earth stocks again.

In fact, almost exactly one year ago the Financial Times reported:

“China’s leading producer of rare earth metals has been given government approval to build a strategic reserve, exacerbating concerns that Beijing is tightening its grip on the valuable minerals…

“Baotou Rare Earth said in a statement to the Shanghai stock exchange that it had gained approval from the regional government of Inner Mongolia to build 10 reserve facilities capable of storing more than 200,000 tonnes of rare earth oxides…

“The move to create a strategic reserve at a cost of about $3bn could also boost the cost of rare earths.”

And today The Wall Street Journal reports:

“China is building strategic reserves of rare earth metals, an effort that could give Beijing increased power to influence global prices and supplies in a sector it already dominates.”

If China does build a 200,000 tonne stockpile, it would equal roughly five times the amount China exported last year.

Knowing this gives you as an investor two choices.  You either buy in now on the expectation that China will tighten exports further, causing rare earth prices and rare earth explorer prices to rise.  Or you give it a wide berth and look elsewhere.

It’s a tough one.  Because fundamentally rare earths is still a good story.  The only problem is the Chinese government manipulation could turn the market at any moment.

So, right now, I’m giving it a wide berth.  Of course, that could be a big mistake.  But after already locking away big gains last year I’m prepared to let other investors play the rare earths game for now.

But if rare earths are off the agenda, what else is there?  Well, our old pal at Diggers & Drillers, Dr. Alex Cowie has been all over tin for the past year… and it has paid dividends as the price of tin has soared to above USD$30,000 a tonne.

But we’re not about to tread on his toes.  He picked that market inside out and found the two best stocks on the market that he feels can profit from the resources boom.

Meanwhile, our good mate and publisher, Dan Denning at Australian Wealth Gameplan has recently jumped on an oil stock.

Which makes a lot of sense given the political unrest in North Africa.  And it could get a whole lot worse if the unrest spreads to the Suez Canal.  Bloomberg reports:

“Shipping on Egypt’s Suez Canal, used to carry about 8 percent of global seaborne trade, is transitting on schedule after service workers linked to the waterway began striking, the Suez Canal Authority said.”

Why does this matter for oil prices?  The report tells you:

“The canal has the capacity to handle 2.2 million barrels of oil a day while that of the adjacent Suez-Mediterranean Pipeline is 2.3 million barrels… Actual volumes in 2009 were a combined 2.1 million barrels…”

Either way, cutting the Suez would have a big impact on oil prices.  In fact, it has already.  And it’s shown up in the price spike of Brent Crude Oil and the increased spread between Brent Crude (European benchmark) and West Texas Intermediate Crude (North American benchmark).

Normally the spread is minimal, and as a casual observer it doesn’t make much difference whether you’re looking at Brent or West Texas crude.

But right now there’s a big difference.  The guys at ETF Daily News have printed the following chart showing the spike in Brent/West Texas spread:

Source: ETF Daily News

As you can see, normally – aside from 2008 and in recent months – the spread is quite small.  And for the most part, the West Texas price trades at a premium to the Brent price.

But since late last year when things started kicking off in North Africa, the spread has blown out, and Brent is trading at a premium.

To the extent that right now it’s at a record high.

As ETF Daily News comments:

“WTI [West Texas Intermediate crude] is a sweeter, lighter crude, and all things being equal, gasoline refiners prefer to work with WTI over Brent.  Thus… WTI should trade at a premium to Brent.”

You can see this clearly on the following table from Bloomberg:

Source: Bloomberg

The difference in prices is over USD$12, compared with just a couple of bucks for most of last year.

Clearly it means that any Middle East supply disruption to Europe equals an increased demand for European oil – hence the higher price for Brent Crude.

But it also shows you how sensitive crude oil still is to geopolitical tensions.

For the most part oil and oil stocks haven’t really taken part in the global inflationary commodity trade.  Could that be about to change?  Certainly Dan hopes so with his oil tip.

Personally, I’m looking elsewhere.  The global inflationary commodity trade is still working and if I’m right it could have further to run…

That’s where I’m looking with my next stock tip for Australian Small-Cap Investigator, taking advantage of the “Money Torrent” flowing from central banks and pushing commodity prices higher.

It’s not a risk-free trade, but in my view it’s a risk worth taking.

Regards,

Kris Sayce
for Money Morning Australia

While we kicked back on Australia Day with tongs in one hand and a stubbie in the other, it also marked the first day of the annual World Economic Forum in Davos, Switzerland.

This junket brings together a couple of thousand politicians, business leaders, intellectuals and journalists to jawbone the financial problems of the world (it’s a total coincidence of course that it happens to be held in a world-class ski resort in mid-winter).

The state of the world’s economy has been top of the agenda for the last few years. And this dominated the opening day’s discussions.

Apparently the mood in the room is the most confident it’s been in four years (though your guess is as good as mine as to how they measure that…)

Maybe they haven’t noticed the crippling debt levels, stubbornly high unemployment levels, and poor growth in the US. Or… the escalating debt crises in Europe… the revolutions starting in the Arab world… or the rampant inflation Central banks worldwide are playing down with dodgy statistics.

Maybe the fine Swiss mountain air, pristine ski-fields, Schnapps and Toblerone have gone to their heads.

Thankfully Professor Nouriel Roubini is there, keeping it real, telling everyone the world’s economy is still like a ‘glass half-full’. Roubini was one of the few economists to predict the crisis, and has been soberingly negative ever since.

Yet, ‘glass half-full’ is probably the most positive thing I’ve heard him say in four years.

What I found most interesting was the four hundred business folk from the ‘emerging economies’ that turned up. This is a big jump on previous years. Considering that the IMF reckons emerging economies are set to grow at about 6.5% this year, maybe it’s not surprising. The part of the glass that’s half-full has to be these emerging economies.

Maybe it’s time we found a new name – after all, they seem to have ‘emerged’ already, and left the ‘developed’ nations in the dust.

As editor of resource sector newsletter, Diggers and Drillers, I like to keep a close watch on these countries. For one thing, China, India and other emerging economies are huge buyers of Aussie commodities. India’s increasing presence in the market is particularly exciting. It is starting to give China a run for its money.

A population of 1.2 billion people hell bent on industrialising is adding a rising tide of demand for commodities in an already tight market.

The other important thing here is that companies in countries such as China, India, Russia and Brazil have come through the crisis incredibly cashed-up. On average they are sitting on $240 million of cash. This is 70% higher than at the market peak back in 2007.

They’re looking to go shopping for more assets: mines, deposits, or whole companies. This is how they guarantee supply of resources for the future.

With this amount of cash on balance sheets, it’s no surprise that the amount of acquisitions by companies from these BRIC countries is rising fast.

It has gone from

• $100 billion in 2006, to
• $230 billion in 2009, to
• $400 billion in 2010.

It has quadrupled in just five years!

I don’t know if there is a clearer indicator of the power shift from West to East.

So what does this mean for the resource sector, and for you?

I read this as double good news.

First of all this is another clear sign of strong and sustained economic growth in countries that make up a big chunk of Australia’s customer base. The group of seven biggest emerging economies is now expected to grow bigger than the group of seven developed economies within the next twenty years.

But as well as creating demand for Aussie resources, we are sure to be seeing more acquisitions of Australian resource companies this year and beyond.

For example, right now Indian and Chinese companies are trawling the world for good coal deposits to buy up. Africa is a favourite location, and there are a few Australian companies, including a few Diggers and Drillers tips, operating over there that are prime targets. China and Russia are competing with each other to snap up good uranium assets. Base metal projects are getting attention as well.

This gives investors a great chance to profit if you get in early.

For example Botswana based Coal company, CIC Energy (TSE:CLC) quadrupled in price within a few months when an Indian group made a takeover bid.

One of the D&D coal tips in the same area is up 63% since I tipped it just a month ago. And I reckon it’s just a matter of time before an emerging economy company has a crack at it.

The recommendation I am writing up now will have ‘take-over target’ written all over it before long as well. It is another African-based stock, and has built up a massive deposit of an unusual commodity that is in huge demand. It’s an interesting one for sure.

So, it will be interesting to see what else comes out of the Davos talks this week. However, I think the increasing dominance of the so called developing economies will be a major theme.

Of course, there will be all the usual hot air that happens when you put too many politicians under one roof.

(But not too much hot air, of course, as that might spoil their skiing).

Cheers,

Dr.Alex Cowie
For Money Morning Australia

Soft gold prices without hard-money rates? Not for long, says the world’s 40-year unbacked money so far…

JUST HOW MUCH ABUSE can soft money take? Two-thousand-and-eleven sees a big, but so far little-noted ruby anniversary. Expect to hear lots more about it as August 15th draws near.

Because that day will mark 40 years since the United States’ government finally stopped redeeming its dollars for gold. That ended over 250 years of formal “gold backing” for the West’s dominant currencies. It also took the entire world off precious-metal money for the first time in 5,000 years of civilization.

Gold wasn’t being used as money in Aug. ’71, of course. Long banished to central-bank vaults, the ageless metal was represented instead by paper notes – the medium of exchange – in purses, wallets and tills. Nor did gold bullion bars back more than $1 in every four in circulation, gradually slipping from the 40% cover-ratio set during the Great Depression. And unbacked money had also been tried many times in the past as well. Persian kings, Mongol emperors, Scottish chancers in the French court, desperate men at the Reichstag…they all thought they’d found “the secret of the alchemists”, as Marco Polo called China’s paper-note chao in his Travels of the late 13th century – and they all found it disastrous.

But irredeemable money had never been applied worldwide before, and never without some element of “hard money” (meaning gold or silver-backed notes) running alongside. Since US citizens were pretty much barred from owning physical gold, however, removing the metal from inter-government settlement looked a small, inconsequential step to most, especially next to the wage and price controls Richard Nixon also announced in his “Sunday special”. (Tricky was apparently worried about upsetting voters by delaying the latest episode of Bonanza on TV, but he was more anxious still to break the news before markets opened on Monday 16th August.)

Indeed, refusing to redeem foreign governments’ Dollars for US gold bars should have played well to the crowd. Because Nixon was defending the States’ ultimate hoard against those overseas partners who dared to doubt Uncle Sam’s promise to…ummm…redeem his paper dollars for gold. France alone had swapped $250 million for gold in “recent months”, the Financial Times reported on 5th August, helping draw the US gold reserve down to “just over $10,000m, the lowest point since the early 1930s,” as the paper said four days later.

“There has naturually been a revival of the traditional theory that when the gold stock hit $10,000m, the US would simply close the gold window,” the FT explained on 9th August, adding that “There is no evidence that the Nixon Administration plans such action,” even as the Dollar crisis continued to make its front page each day.

Slamming the window shut, just as the “theory” suggested, “We must protect the position of the US Dollar as a pillar of monetary stability around the world,” Nixon told the nation (and the world) on 15 August, 1971. But as his central-bank chairman, Arthur Burns of the Federal Reserve, had feared (“What a tragedy for mankind!” wrote Burns in his diary) the early results soon proved as awful as they were entirely predictable.

Freed from gold’s seemingly arbitrary limits, money bred so fast – everywhere – that wholesale and consumer-price inflation reached untold peace-time levels, crushing savers in both the equity and bond markets pretty much worldwide. Freed from its official peg, in contrast, gold prices rose 20-fold. The public grew so discouraged that, within a decade of Nixon’s decision, his Republican successor, Ronald Reagan, ordered a commission to consider reversing it.

But thanks to those falling bond prices, however – which came thanks to bond buyers everywhere demanding ever-higher interest rates if they were lend money for any period of time to government – Washington got to ignore the Gold Commission’s minority report, and extend the world’s experiment with unbacked money for another 31 years (and counting…).

Because by 1980, and thanks to those soaring bond yields, central bankers had already stumbled upon the solution to unbacked money’s first global crisis…

Hike interest rates so high that cash-on-deposit actually starts paying a positive real return, post-inflation. The effect on gold – and so on any thought of returning to gold-backed money – was signal, as you can see.

Over the first-half of the 1980s, real interest rates – paid over and above inflation – averaged nearly 5% per year. Major-currency savers hadn’t seen anything like it since Great Britain fought to defend (and lost) its own Sterling Gold Standard half-a-century before. And together with those desperate Gold Standard-style interest rates, the Dollar recovered something like a Gold Standard poise.

Peaking at almost 15% in 1980, the pace of US inflation then fell by more than two-thirds in the following half-decade. The Dollar gold price did the same, sliding from its (then) record peak of $850 per ounce to less than $285 five years later.

Why? Mining supplies rose, and the peak prices of 1979 and 1980 unleashed a torrent of scrap-metal supply back to market, too. But negative real rates had forced a growing number of otherwise cautious savers to abandon money for gold throughout the 1970s, just as they have again since 2001. Whereas strongly positive rates, in contrast – and positive like nothing since the scramble for gold of five decades earlier…when global bullion flows determined (and were thus targeted to maintain) international currency values – worked the opposite way. Because no one needs an inflation hedge, a defense against devaluation, when cash-in-the-bank pays 5% more. And that victory was so hard-won, the stability it brought to unbacked money continued even as real rates eased back…pretty much until they neared zero a decade ago.

Here in early 2011, cash savers and central bankers alike stand so far removed from gold-backed currency, let alone from gold-as-money itself, the idea of returning to redeemable notes seems ridiculous. But those killer rates of 1980-85 remain the only sure lesson of how confidence in unbacked money can be won back once it’s begun to dissolve. This month’s gold-price jitters, therefore, are both understandable and absurd. Most sensitive of all assets to a switch in interest-rate sentiment –and so clearly buoyed by the Fed’s repeated promise of “exceptionally low levels…for an extended period” – gold has turned 6% lower on inflation data that points higher, even as Western central banks make plain they’ve no plan of responding, and China holds its real rates some 1.5% below zero for cash savers.

Soft gold prices without hard-money rates? Not for long, we’d guess…not after faith in unbacked money has begun to dissolve. But the feint of 1975-76, however, might say otherwise.

Check the chart above. Gold prices halved even as real US rates stayed sub-zero but pushed upwards. Gold then rose 8-fold as rates fell again, finally forcing those very same hard-money rates which confidence in unbacked money demanded.

Adrian Ash

For Money Morning Australia
Adrian Ash is head of research at www.BullionVault.com

“I think not owning gold is a form of insanity, it may even show unhealthy masochistic tendencies, which might need medical attention.”­ – Robin Griffiths, Cazenove Capital

How we wish we’d said that.

You can watch the video clip here.

Sometimes we have a tendency not to say what we really think.

I know that seems odd considering some of the things we write. So let’s just come out and say it. To avoid confusion… for the love of God, buy gold.

If you insure your car against a crash, and you insure your house against fire, why wouldn’t you insure your money against devaluation?

It’s a no-brainer to me.

How much “insurance” you take out is up to you – 5%, 10%, 20% or more. Make up your own mind. It depends how much insurance you want.

And how you do it is again up to you. Physical gold, gold certificates from the Perth Mint, or even buying the Gold exchange traded fund on the ASX. These are all viable options.

It’s just a matter of whether you think the global economy is about to go elbow-up tomorrow – in that case buy physical gold now – or whether you think it won’t happen for another couple of years. In that case you could just buy the gold certificates or ETF to quickly get an exposure. And then buy the physical stuff later on.

Whatever you do, you want to do something about it.

Commodity prices are on the up. And the Aussie dollar – at least in the short term – is on the way down.

Gold, rare earths and veggies higher

Today’s Australian Financial Review (AFR) tells readers:

Ginger is up 145% since September.

Broccoli is up 222%.

Pumpkins are up 93%.

And cauliflowers are up 192%.

Not forgetting a 198% increase in tomato prices in two weeks.

We’re sure some of these changes are seasonal price adjustments. But if the price changes from September to December 2010 are anything to go by, they’ll be nothing compared to the price increases you can expect this year.

Although we’re surprised the mainstream press is even reporting this. They’ve always told you fuel and food are volatile items and should be ignored when looking at price inflation.

You and I know better.

Add in a surging oil price and the picture for the consumer looks even worse. Brent Crude is trading at USD$97.51 a barrel, and West Texas Intermediate at USD$91.11 a barrel.

But don’t think the oil price rise will stop there. According to a recent article in the Wall Street Journal:

“Rare Earths Shortage Becoming Problem For Refiners”

If you don’t know the story, rare earths are a bunch of crazy little elements usually found squatting beneath the main part of the Periodic Table:

Source: Corrosionsource.com

The funny thing is, despite their name, rare earths aren’t that rare at all. In fact, they are quite abundant in the earth’s crust.

As an example, rare earth Cerium has a presence of 60 parts per million (ppm) in the earth’s crust. That’s compared to 55ppm for Copper and 75ppm for Nickel.

The difference is that rare earths aren’t usually found in large enough quantities in one place. That means it’s just not economical to mine most deposits of rare earths… not at the current price anyway.

So, what do rare earths have to do with crude oil?

Fuel crisis back on

Simply this, as the WSJ article points out:

“Rare earths, elements that go into high-tech batteries, television sets and military technology, are also used in the catalyst component of refiners’ gasoline-making fluid catalytic cracking units, or FCCU’s. Although rare earths account for only up to 4% of catalysts used in these units, their recent price increase has added as much as an extra 25% to catalyst costs, according to the National Petrochemical and Refiners Association.”

And the problem could get worse.

China controls about 95% of the world supply of rare earths. And it’s doing its darnedest to restrict it.

This has seen the price of rare earths take off over the past year.

To show you what I mean, take a look at the rare earths prices according to Lynas Corp [ASX: LYC] - a former Australian Small-Cap Investigator stock pick until we sold out for a 200% gain last October:

Source: Lynas Corp

Note the price increase in the dark blue row across the bottom.

In the last four months, the price of rare earths has doubled.

Since 2007 the price has increased by 510%. You can see why the Lynas share price and other rare earth stocks piled on big gains late last year.

But for now we’re out of the stock… and all other rare earth stocks.

Sure, there’s a chance these things could go higher – much higher – but at the current price and after such a huge rally, I’m happy to have locked in the gains for my readers. Right now I’m assessing the market from the sidelines.

Besides, given China’s dominance of these elements there’s the risk China will relax its export quotas and flood the market with more rare earth’s than manufacturers can eat.

The point is, everywhere you look price pressures are high. Consumers are being force-fed higher costs. Whether it’s higher interest rates from banks, higher prices from retailers, or higher commodity prices due to natural disasters, the story is the same.

And on top of that you’ve got government and central bank manipulation.

Kids creating money from nothing

This last cause is the most evil of the lot.

All the others you can say, well, that’s markets and nature folks. You can call it supply and demand. You even can say its businesses making profits… good luck to them.

But with the central bankers it’s different. That’s purely about saving their bacon and trying to postpone the inevitable – the Great Depression MkII… perhaps we can start calling it GD2.

And if you want to see the culprits in action, just pick up a copy of today’s Australian Financial Review and turn to pages 18 and 19. There you’ll see a syndicated article from the New York Times. Or better still, just click here and read the original article for free.

It’s the sorry tale of the “inflationistas” in action.

The article dramatically states:

“On one recent Tuesday morning, what Mr. Frost and his five young colleagues did over a 45-minute period might have unsettled even a seasoned Wall Street hand: they bought $7.8 billion of Treasuries.”

Just like that. Easy isn’t it?

Here’s how it works:

“On one recent morning, trade one was Tiffany Wilding, 26. While she reviewed the stream of offers and then the prices finally accepted by the algorithm, trader two, Blake Gwinn, 29, double-checked her decisions and trader three, James White, 29, made a duplicate of everything in case the computers crashed.

“All the while, Mr. Frost stood behind his colleagues, ready to intervene – and even cancel the Fed’s purchases – at any sign of trouble.”

It almost sounds childlike. Young kids playing with their computers while the teacher looks on.

Good old Tiffany, Blake and James. Creating billions of dollars and then spending it. Pushing more dollars into the economy to boost prices and cripple the wealth of individuals… most individuals anyway… except the bankers. They get their greasy hands on the cash first and can spend it before prices move higher.

This handy graphic from the New York Times helps explain everything. We especially like the following quote:

“The Federal Reserve creates money and credits it to its own account.”

Source: New York Times

And so the inflationary spiral continues.

Australian food riots?

It’s why you’re seeing soft commodity prices reaching multi-year highs. And it’s why you’re seeing headlines in the mainstream press such as:

“Food crisis fears as global prices hit record high”

Unfortunately, most in the mainstream are too dumb to put one and one together. They see the Fed creating billions of dollars’ worth of new money, and they see food shortages in the third world.

But they fail to connect the dots. As far as they’re concerned they’re unrelated events. I assure you, they aren’t.

And if the floods in Queensland continue to impact not only agriculture, but the mining sector too, then it’s possible – just possible – that food shortages and even higher prices will reach these shores too.

We’ll have more to say on this. If you’re content to sit on your hands and let government, central bankers and bankers grind your wealth into the ground then do nothing.

But if you prefer the idea of living a comfortable lifestyle. And if you think it makes sense – as I do – to insure your wealth against the inflationary actions of Ben Bernanke, Tiffany, Blake and James, then I suggest you do something about it.

One of those things is to buy gold.

If you’re sane you’ll do it.

If you’re insane or a masochist then you won’t – just make sure you know where to get some good medication, because boy will you need it.

Regards,

Kris Sayce
For Money Morning Australia

Why China won’t re-evaluate the Yuan to please America.

As 2010 comes to an end we’ve had two themes banging on in the background…

Sovereign Debt and China’s undervalued Yuan.

And as 2011 rolls in it doesn’t look like either problem will be resolved anytime soon.
As central banks continue to lend and governments overspend, you can expect the sovereign debt saga to drag on well past 2011.

And the undervalued Yuan?

China may force its economic might on the world. But you can bet the Christmas Ham that America will continue to push for a Yuan level that suits them rather than the Chinese.

But the U.S. is kidding itself thinking that a higher valued Yuan will solve all of its economic problems.

So why are government officials still calling on China to let the Yuan appreciate 30%, or even 40%?

Chinese officials have let the Yuan gain 2.4% against the U.S. dollar this year. Yet, that’s still not enough for some American politicians.

There aren’t a whole lot of outspoken Chinese officials. But, there is one or two suggesting that a stronger Yuan will benefit the Chinese economy. The CEO of Lenovo – a computer manufacturer – has said a ‘…stronger Yuan will boost the purchasing power of the Chinese.’

And he’s right. But most importantly it’ll benefit the Chinese middle class too. This just happens to be the target demographic for American corporations. Those that want to sell their iPods and other lifestyle gadgets.

Letting the Yuan appreciate in a free market system could assist China to move demand from the manufacturing sector to the service sector. It may even achieve balanced economic growth.

Heck, a higher valued Yuan would mean lower import costs to China. This would help reduce its trade surplus. And it could lead to slower growth and much lower inflation.

If these are just a few of the benefits to the Chinese economy, why are officials refusing America’s request to surrender?

It could just be that China was paying attention all those years ago when Japan signed the Plaza Accord in the 1985.

What’s that?

Back in the mid eighties, America was in the middle of a recession. And there seemed to be no end in sight. You could argue it’s pretty similar to the situation they’re in now. That was when the country had a massive trade deficit with Japan. Sounds familiar doesn’t it?

The United States, requested that the other countries in the ‘G5′ nations – France, Germany, Japan and United Kingdom – sign an agreement that would weaken the U.S. dollar against those currencies.

So, why would the U.S. want to weaken its currency?

Funnily enough, the whole idea of the Plaza Accord was to pull the country out of a recession and reduce the massive trade deficit with Japan, and the other G5 nations.

China must have been paying attention. Because this is the very reason for not weakening the Yuan.

For the other three countries that took part, it worked well. The U.S. was pulled out of the recession and its trade deficit with the remaining G5 members was reduced.

You see, at the time the Plaza Accord was signed, America’s trade deficit with Japan was about USD$43 billion. And you guessed it, not only was the deficit not reduced, but it ballooned out to USD$59 billion by 1993.

But for Japan, the outcome wasn’t what everyone had hoped for. Just after the agreement was signed the Yen began to climb against the U.S. dollar.

One of the biggest problems was that of the trade deficit reduction. And the structural implications around what imports Japan could accept. Let’s just say not a whole lot of American goods met the requirements.

In a frantic attempt to weaken the Yen, the Japanese central bank lowered interest rates to offset the rising currency. Of course, these moves by the central bank weren’t the only cause. But it can be argued that these decisions added to the property bubble and what later became known as Japan’s ‘lost decade’.

There’s a chance China could be using the Plaza Accord and the outcome for Japan as an excuse to not let the Yuan appreciate. Senior economists in China have said that the ‘lost decade’ occurred because of the Bank of Japan’s own bad decisions.

Either way, it doesn’t matter.

China has seen that America will do only what it is in the best interests of America.

The good news for China is that its economy should pass America’s in about 15 years.

China can afford to take its time ensuring its own economy is looked after before any other.

And right now letting the Yuan appreciate beyond the central bank’s control is not in the best interest of Chinese officials.
Shae Smith

Assistant Editor
Money Morning

Most important story of the week…

Murray Dawes, editor of Slipstream Trader joined us this week, taking a look at what ‘Benny Boy’ Ben Bernanke, chairman of the Federal Reserve Bank has done to the bond market. Click here for more…

Monday: As we’ve pointed out several times, these funds are on the way to becoming the next plaything for financial institutions and government bureaucrats – need a new rail line built? Get the super industry to pay for it. Click here for more…

Tuesday: The fact is no bank is as robust as they could be. But that’s simply the way things are with fractional reserve banking. Fiddling around with it won’t help. Increasing reserve requirements from say, 7% to 7.5% or 8.5% won’t make a blind bit of difference. Click here for more…

Wednesday: Short-sellers could have made a killing if NAB and Westpac had fully disclosed the secret loans. In fact, non-disclosure of the loans could have resulted in many short-sellers losing a lot of money as bank share prices rallied. As investors were led to believe Australia’s banks were strong and secure. Click here for more…

Thursday: He’s basically using the virtual economy to prod the real economy back to life. But the patient is still only wiggling his toes and a spike in interest rates won’t do him any favours. Click here for more…

Friday: Click here for more…

The S&P/ASX200 ended the day higher by 11 points to 4,757.10.

The People’s Bank of China (PBOC) decided not to raise interest rates last night, instead sticking with raising the reserve requirements for banks.

Volume traded was lighter than normal volume, but the Dow Jones Industrial Average still gained 18 points to close at 11,428.36.

China not raising rates was a good sign for U.S. investors. Even though China isn’t the main driver behind the U.S. recovery, any slowdown in Chinese growth could lead to an even weaker recovery in America.

In other news, Moody’s ratings agency has said that any tax cuts extended by President Obama could result in a downgrade to the country’s Aaa rating credit rating.

The FTSE closed at 5,860.75, up by 47 points.

The Nikkei added 81 points to finish at 10,293.89. Foreign funds have been the main buyers of certain stocks over the past six weeks, pushing the index higher by over 12%.

After losing over 2% last week, gold was higher on inflation data coming out of China.

The price of spot gold in Australian dollars is $1,399.18, while in US dollars it’s $1,393.74. The price of silver in Australian dollars is $29.64 and in US dollars it’s $29.52.

Copper hit a record higher as the latest Chinese data filtered through the markets. Goldman Sachs has reportedly forecast copper prices to reach USD$11,000 (AUD$11,051) per tonne over 2011. Currently, copper is USD$9,220 (AUD$9,263).

Copper is currently USD$4.13 a pound (AUD$4.14) Nickel is USD$11.08/lb (AUD$11.13) and Tin is USD$11.91/lb (AUD$11.96).

The Aussie dollar was up 1 cent overnight, reaching as high 99.84 at point during the night trade. Higher commodity prices helped the dollar get closer to parity again last night, but it’s unlikely that we will push past the November high of 1.015 before Christmas.

The Aussie dollar versus US dollar is AUDUSD 0.9961 and against the Japanese Yen it’s AUDJPY 83.09

Crude Oil closed at USD$88.19

For the biggest movers on the market yesterday click here…

That’s all I have for you today, see you tomorrow.

Shae.

[Please note: neither the authors nor any of the employees of Port Phillip Publishing own shares in any of the stocks discussed in Money Morning unless specifically stated. The articles do not give trading or personal investment advice, but are intended to provide a useful, independent news and analysis service to supplement your own investing and trading. Consult your financial advisor before making any investment decisions.]

52-Week Highs and Lows

Number of companies reaching a 52 week high previous day: 63
Number of companies reaching a 52 week low previous day: 20

On Friday the S&P/ASX 200 ended only 4 points higher to 4,745.90. The market was fairly subdued ahead of China releasing inflation figures and a possible interest rate move.

Data that will heat up the currency debate again between China and the U.S. was released early Friday afternoon. China’s trade surplus dropped slightly to AUD$23.92 billion, but some economists believe that China can afford to let the Yuan increase without hurting its industry. Officials in China have let the Yuan gain less than 3% against the U.S. dollar so far this year.

Chinese consumer price index (CPI) data rose 5.1% for November, up from 4.4% in October. Food prices in China are still the main driver behind the higher CPI figure, contributing 11.7% to the November CPI data.

In other Chinese news, the People’s Bank of China (PBOC) has raised lender’s reserve requirements by 50 basis points for the sixth time this year.

The Dow Jones Industrial Average closed at 11,410.32, higher by 40 points. Good news came in the form consumer sentiment index, which added 2.6 points to 74.2 for December. And the weaker greenback helped narrow the U.S. trade deficit for October to $38.7 billion (AUD$39.32 billion), which is the smallest the gap has been all year.

The FTSE added a modest 5 points, ending at 5,812.95.

The Nikkei was down on Friday. After reaching an intraday high of 10,373.70 most investors took profits where possible. The index closed 73 points lower to 10,211.95.

The price of spot gold in Australian dollars is $1,406.89, while in US dollars it’s $1,386.24. The price of silver in Australian dollars is $29.04 and in US dollars it’s $28.61.

Copper is currently USD$4.13 a pound (AUD$4.19) Nickel is USD$10.81/lb (AUD$10.98) and Tin is USD$11.91/lb (AUD$12.10).

The Aussie dollar versus US dollar is AUDUSD 0.9837 and against the Japanese Yen it’s AUDJPY 82.63

Oil dropped lower as China tries to cool inflation, which punters feared would slow the demand for energy related products. Crude Oil closed at USD$87.79

For the biggest movers on the market yesterday click here…

That’s all I have for you today, see you tomorrow.

Shae.

[Please note: neither the authors nor any of the employees of Port Phillip Publishing own shares in any of the stocks discussed in Money Morning unless specifically stated. The articles do not give trading or personal investment advice, but are intended to provide a useful, independent news and analysis service to supplement your own investing and trading. Consult your financial advisor before making any investment decisions.]

52-Week Highs and Lows

Number of companies reaching a 52 week high previous day: 44
Number of companies reaching a 52 week low previous day: 19