RANDGOLD RESOURCES LIMITED
Incorporated in Jersey, Channel Islands
Reg. No. 62686
LSE Trading Symbol: RRS
Nasdaq Trading Symbol: GOLD
(“Randgold Resources” or the “company”)
RESTRICTED STOCK AWARD: NON EXECUTIVE DIRECTORS
London, United Kingdom, 23 February 2011 – Randgold Resources Limited
announces that in terms of the company’s remuneration for non-executive
directors approved by shareholders at the Annual General Meeting on 4
May 2010, an award [...]

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

How much gold is too much gold if you’re a fixed-income investor…?

GOLD DOESN’T pay any income, of course. Which is why retirees and pensioners should hate it.

But since gold cannot go bust – and because its tight supply typically finds strong demand when cash loses value to inflation in the cost-of-living – gold in fact makes the perfect insurance for fixed-income investments like corporate or government bonds. At least, that’s what €39 million gold investor Stichting Pensioenfonds Vereenigde Glasfabrieken says.

Crazy name, crazy Dutch fund managers! SPVG holds a massive 13% of its assets in gold, running a total €300m ($400m) to try and ensure a pension for workers past and present at the Schiedam, Netherlands glass manufacturer.

That compares with the typical 5% or 10% allocation which even the friendliest gold-friendly advisors might suggest. And seeing how the average European pension fund holds 2.7% in ALL commodities, never mind just gold, Holland’s central bank, De Nederlandsche Bank (DNB), thinks SPVG is nuts. And so – as its regulator – it’s given the fund two months to slash its gold position to below 3% of assets.

Good call? Not if you’re holding a full 85% of your savings in fixed-income bonds, all denominated in the Euro, and primarily issued by the Dutch or German governments, says SPVG in a statement. Speaking to Investment & Pensions Europe, board member Rob Daamen picks up the story…

“[The gold purchase] was a way to secure the pension fund’s assets value. If we win our appeal against the instruction of the DNB [to sell] we can claim compensation for any loss we might incur.”

Did you get that? A pension fund obliged by law to defend its members’ savings – and doing a very good job of it by all accounts – bought gold to secure its asset value. It’s seeking a legal decision that means it can then sue the central bank if selling down those gold holdings means the fund loses value overall.

“The decision to raise the gold allocation [doubling it in October 2009, while selling off the fund's 17% position in equities] was made in the expectation that the stock market’s rise would not be sustainable and a considerable downward correction was likely to follow.” Which has paid off handsomely regardless of the broader stock-market’s continued gains, especially in terms of the faltering Euro which denominates pretty much all of SPVG’s other investments.

Zero-yielding gold might look worthless to retirees and pension savers, in short. But if you’re entirely reliant on fixed-income debt – as the SPVG has become, matching its liabilities to its assets to make sure it can pay its members their pensions – then it’s all-the-more important to insure your savings against inflation, currency loss and default.

At least, that ‘s what a glass-company’s pension fund in Holland believes, holding pretty much only AAA-rated government debt and stateless, debt-free gold bullion as a warranty on its members savings.

Regards,

Adrian Ash

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

How much gold is too much gold if you’re a fixed-income investor…?

GOLD DOESN’T pay any income, of course. Which is why retirees and pensioners should hate it.

But since gold cannot go bust – and because its tight supply typically finds strong demand when cash loses value to inflation in the cost-of-living – gold in fact makes the perfect insurance for fixed-income investments like corporate or government bonds. At least, that’s what €39 million gold investor Stichting Pensioenfonds Vereenigde Glasfabrieken says.

Crazy name, crazy Dutch fund managers! SPVG holds a massive 13% of its assets in gold, running a total €300m ($400m) to try and ensure a pension for workers past and present at the Schiedam, Netherlands glass manufacturer.

That compares with the typical 5% or 10% allocation which even the friendliest gold-friendly advisors might suggest. And seeing how the average European pension fund holds 2.7% in ALL commodities, never mind just gold, Holland’s central bank, De Nederlandsche Bank (DNB), thinks SPVG is nuts. And so – as its regulator – it’s given the fund two months to slash its gold position to below 3% of assets.

Good call? Not if you’re holding a full 85% of your savings in fixed-income bonds, all denominated in the Euro, and primarily issued by the Dutch or German governments, says SPVG in a statement. Speaking to Investment & Pensions Europe, board member Rob Daamen picks up the story…

“[The gold purchase] was a way to secure the pension fund’s assets value. If we win our appeal against the instruction of the DNB [to sell] we can claim compensation for any loss we might incur.”

Did you get that? A pension fund obliged by law to defend its members’ savings – and doing a very good job of it by all accounts – bought gold to secure its asset value. It’s seeking a legal decision that means it can then sue the central bank if selling down those gold holdings means the fund loses value overall.

“The decision to raise the gold allocation [doubling it in October 2009, while selling off the fund's 17% position in equities] was made in the expectation that the stock market’s rise would not be sustainable and a considerable downward correction was likely to follow.” Which has paid off handsomely regardless of the broader stock-market’s continued gains, especially in terms of the faltering Euro which denominates pretty much all of SPVG’s other investments.

Zero-yielding gold might look worthless to retirees and pension savers, in short. But if you’re entirely reliant on fixed-income debt – as the SPVG has become, matching its liabilities to its assets to make sure it can pay its members their pensions – then it’s all-the-more important to insure your savings against inflation, currency loss and default.

At least, that ‘s what a glass-company’s pension fund in Holland believes, holding pretty much only AAA-rated government debt and stateless, debt-free gold bullion as a warranty on its members savings.

Adrian Ash
for Money Morning Australia

Adrian Ash is head of research at www.BullionVault.com

Equities, housing, commodities and bonds viewed through the prism of what money once was…

WHAT WOULD the world look like if, as a handful of economists, investors and politicians hope, gold really was money again?

In a word, cheap…ish. Cheaper, at least, than much of it was a decade ago.

Long used (together with silver) as a means of exchange and unit of account, gold had already lost those functions by the time it ceased backing the world’s currency system in 1971. But gold retains the third function of money – as a store of value – now beating, now lagging the unbacked fiat money (i.e. created at will) which replaced it.

Since then, gold’s value has also varied more widely against other, competing stores of wealth as well as cash, amplifying the swings in its relative worth against equities, real estate, commodities and government bonds.

Perhaps you’ve seen the above chart before, for instance. Simply dividing the Dow Jones Industrial Average by the Dollar-price of gold per ounce, the Dow/Gold Ratio might sound an arbitrary yard stick. But it tracks the relative worth of US equities against an increasingly popular, if still minority store of wealth, gold bullion. Dividends are excluded, leaving just the market-price – rather than income or earnings potential – of business assets in the world’s largest economy, measured by a lump of dumb metal.

Why? Because unlike corporate equity, gold doesn’t do much. It can’t even rust, much less grow (or shrink) its return-on-capital-employed. And from the recent low (7.2 ounces per Dow unit, hit in Feb.2009), US stocks have gained 20% vs. gold. (Priced in nominal dollars, they’ve risen 73% in the last two years.) The historic low stands beneath two ounces of gold, the all-time high above forty. Today, the Dow/Gold Ratio sits just shy of nine – a little beneath its 12-decade average of ten.

Note those two lows (or rather, peaks for gold ), hit in the mid-1930s and early ’80s. Because they show up elsewhere, as well.

The average US home – a term so broad, it’s quite possibly worthless beyond the very broadest historical sweep – has averaged 202 ounces of gold over the last 120 years, at least on the data we’ve constructed from a collection of sources to cover more than a century’s worth of different housing, styles, sizes, locations and amenities.

Let’s put the methodological doubts to one side, though. Currently priced around 112 ounces, US housing hasn’t been this cheap in three decades, dropping over 75% from the 2001 high (478 ounces; the 1971 peak was 485 ounces). Returning to the very lowest prices on BullionVault’s series would see residential property lose another third. It hit 77 ounces in 1980, just above the 1934 low of 71 ounces. Whatever the national US housing stock gained in utility or comfort over that time, in short, unrusting gold priced it just as lowly amid first a deflationary and then an inflationary depression.

Commodities are a separate matter. Because they have never been cheaper in terms of gold, slumping by more than 70% since 2001, even as the much-touted “commodity super-cycle” took energy, base metal and now food prices to record highs in terms of the Dollar.

Buying commodities in the hope of growing your capital means you’re “selling human ingenuity” reckons SocGen strategist Dylan Grice, and (over the last 300-odd years) he’s got a point. Because raw materials are “generally cheaper to produce over time [as] human innovation has lowered the cost of production.” Yet ironically, Grice’s point is best made in gold, that least ingenious, least human of all pricing yard sticks. Indeed, the difference between gold-priced commodities and gold-priced stocks or housing is that raw materials failed to surge and recover their previous highs after the 1970s’ bear market. For the last six decades and more, gold has grown consistently more valuable in terms of the world economy’s natural-resource inputs.

Our chart takes the Reuters-Jefferies CRB index – a weighted basket of the 19 most heavily traded raw materials, including aluminum, crude oil, live cattle, orange juice, and gold itself – and divides it by the Dollar-price of gold. As with housing and stocks, gold’s most dramatic gains and highest valuations came during economic turmoil, outpacing the price of industrially useful natural resources even amid the severe cost-inflation of the 1970s as well as during the last four years of global financial crisis. Further back, once again, the Great Depression also saw gold’s relative worth rise sharply against raw materials, as commodity prices sank but gold was revalued higher by governments, who – then tied to its physical limits as money – were desperate to devalue currency and so reduce debt burdens in a bid to reflate the economy.

Last in our little survey of gold’s relative worth, therefore, come government bonds. There’s a problem here, because governments are constantly paying old and raising new debt, issuing bonds with a vast range of maturity dates which (unless they default) all revert in the end to par value, redeeming $100 (or £100, €100 and so forth) for every $100 originally lent by investors.

A broad price basket is hard to construct, in other words, with the various indices – such as those offered by S&P and Dow Jones – also including annual yields to give “total returns”, and only running back a few years at best.

One solution is to weigh gold’s total value against the sum total of debt outstanding – the par value of government bonds in issue. Data from the International Monetary Fund, running from 1980, at least enables us to cover the world’s “advanced” economies. And here, based on what we may as well call the “market capitalization” of gold – and in contrast to stocks, housing and industrially useful resources – government debt looks very highly priced, albeit on a mere three-decade horizon.

All the gold above-ground – swelling to some 165,000 tonnes or more today, and including central-bank reserves and that mass of jewelry used to store wealth in Asia, as well as the coins and gold bars more typically favored by Western investors – has been swamped, in terms of relative value, by advanced-economy government debt. Back in 1980, their nominal cash values were pretty much identical. Yet the doubling of gold’s Dollar-price from that year’s (then) record high, plus the two-thirds increase in above-ground gold stockpiles over the last 30 years, has still left the metal worth less than one quarter of what it was at the start of the ’80s in terms of rich-world government debt.

That debt, now 18 times larger in Dollar terms at $36 trillion, has swollen from 25% of those rich-world economies’ GDP to more than 87% of their annual output. There’s very much more of it around in 2011 than in 1980. On a relative basis – and given that the par value of debt outstanding cannot fall without default or “restructuring” – gold’s steady appreciation against equities, US housing and raw materials has barely begun to play out against government bonds.

Adrian Ash

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

–Boy, it sure isn’t a good look for the land of the free and the home of the brave that American-made F-16s and M1 Abrams battle tanks are out in force across Egypt now. But cosmetics and theatrics aside, there’s a bigger story here: the entire geopolitical arrangement that has grown up around the U.S. dollar standard is unravelling. The modest task of today’s Daily Reckoning is to figure out what that means for your investments.

–First we should probably back-pedal on our statement above about Middle East tyrannies being supported by American policy and American weapons. Or wait, should we? Hmm. The fact the Egyptian Army is now in the streets of Cairo and NOT firing on people is an argument that the Army itself may force out Egyptian President Hosni Mubarak and end his 30-year U.S.-backed rule.

–Whatever happens in the next few days, it’s getting clearer by the day that as global food and fuel prices rise (Bernanke exports), so does political instability. Of course if you’re in Egypt and have been living under the heel of the State for 30 years, a little instability might be welcome. In fact, the desire for stability—to freeze things as they are so we can control them and manage them just the way we like—is often the motivator for more State control in private and public life.

–Viva instability!

–Financial markets continue to operate when geopolitical tensions rise. But they shift to risk aversion. For example, spot gold was up $23.50 in Friday trading. Short-sellers must have taken one look at the pictures coming from Cairo and decided to cover their bet on falling gold prices. Over in America the Dow fell 1.39%.

–It’s obvious that in the short-term, a crisis in Egypt is bearish for stocks and bullish for oil and precious metals. But you are not paying for the Money Morning to read what is obvious to everyone. So what is the un-obvious point to take away from the last few days? Well we actually count four separate points.

–Watch out Europe.  Energy is capital. A U.S. dollar rally cannot be ruled out. Seek out public companies with many years of energy reserves.

–Why should Europe watch out? Popular protests can spread like a bad cold. Egypt may not be experiencing a revolution so much as a changing of the institutional guard. And it’s unlikely, in our view, that the wave of anger/resentment/optimism spreading through North Africa will reach, say, Saudi Arabia and its 263 billion barrels of light sweet crude oil. But like a psychic tsunami, that wave could travel across the Mediterranean and into Europe.

–There are large populations of North African immigrants in Europe’s major cities. Many of them arrived at the end of World War Two. They provided cheap labour for Europe’s rebuilding economies. Are those large immigrant populations now a potential source of even more unrest in Europe?

–Well, the art of organising protests to take down the authorities is refined each time one of these “revolutions” takes place. Facebook, Twitter, YouTube, flash mobs, it’s all getting pretty sophisticated…and very difficult to shut down (even when the State does the ham-fisted thing and turns out the lights on the Internet.)

– Popular uprisings happen at the margin. A small, well-organised cadre of individuals can set a whole process in motion that reaches a tipping point. And after that, all bets are off. You never quite know where your revolution/uprising will take you.

–What’s happening in Egypt is not just something to watch on Sky News over dinner. It’s a preview of what may happen in the developed world too in coming years. The reasons will be different. In the developed world it will happen because of the corrupt and debt-laden financial system continues to reward the elites at the top at the expense of the Middle Class.  But the results (a deposed or decapitated leadership) may be the same.

–So good luck Europe and good luck the Euro!

–The second point is energy itself (especially crude oil) is a kind of capital in a world where there’s a bear market in paper money. Energy is normally just a commodity. It’s an economic input that, along with labour, land, and capital combines to bring you goods and services.

– But the urbanisation and population of the modern world would not be possible without cheap energy. These days, access to cheap and abundant energy is as important as anything else if you want to ensure your economic competitiveness. If you don’t have energy,  or at least a boatload of money to bid for it, you have nothing.

–You could further argue that the U.S. dollar is the world’s reserve currency because of its relationship with energy. The Saudis agreed to price oil in U.S. dollars in exchange for a U.S. security umbrella. But as the dollar is sabotaged from within by Ben Bernanke and Tim Geithner, all the geopolitical arrangements that evolved around the dollar standard—including the pricing of oil in dollars and the security of oil producing regimes—is slowly crumbling like the crust of a three-day old homemade apple pie.

–The unravelling of this strategic arrangement for energy puts a geopolitical premium on the actual ownership of oil, gas, coal, and uranium. Australia scores pretty well in three out of those four categories. But you still have to be careful. If you own a company that has large energy reserves, are those reserves located in politically risky areas?

–Point three: watch out for a U.S. dollar rally. You may disagree with your editor that the Euro could be a surprising next victim of the events in North Africa. But when S&P downgraded Japan last week, it was definitely dollar bullish. Betting on a dollar rally to contain inflation while U.S. deficits show no sign of getting smaller is admittedly pretty contrarian. But you shouldn’t rule it out.

–And keep in mind that dollar strength against the Yen and the Euro is only relative.  You don’t have to be a dollar bull to see that it could go up against other paper currencies in the next few weeks. The important price to watch is gold. If gold goes up against all paper currencies even as the dollar clobbers the Euro and the Yen, you’ll know the primary trend of the last ten years is still firmly in place.

–Finally, alluding to the point we made above, the big takeaway for investors is to look at your portfolio and find out if you have enough exposure to energy stocks. The oil price climbed over the weekend. It wasn’t because Egypt is a major exporter of oil (it’s not) or that the Suez Canal is critical to the flow of oil to Europe (it’s not, the canal was built in the 19th century and is not big enough to handle modern super tankers).

–But it’s the speculation that U.S.-backed authoritarian regimes in the Middle East may now be living on borrowed time…THAT’s what has oil speculators worried. As well they should be.

Regards,

Dan Denning
for Money Morning Australia

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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

It’s no surprise your editor copped some flak for yesterday’s Money Morning – The Cost of Meddling.

But that’s OK.  We’re a big lad.  We can take it [sniffle].

The gist of the comments was that we don’t know what we’re talking about.  And, besides, cloud seeding doesn’t work anyway.  So it couldn’t have made the floods worse, right?

What’s that?  Scientists get something wrong… surely not.

So, let’s see if we’ve got this right.  Scientists are 100% right when they warn you about climate change.  But they’re 100% wrong when they spruik the benefits of cloud seeding.  OK.  Got it.

But where does that leave the scientists who believe in climate change and cloud seeding?  Such as the one mentioned in this article from Physicsworld.com:

“It should be possible to counteract the global warming associated with a doubling of carbon dioxide levels by enhancing the reflectivity of low-lying clouds above the oceans, according to researchers in the US and UK.  John Latham of the National Center for Atmospheric Research in Boulder, US, and colleagues say that this can be done using a worldwide fleet of autonomous ships spraying salt water into the air.”

As we’ve said many times, we’ve no idea whether climate change is real or not.  By the way, we usually cop it from the anti-climate changers too whenever we write that.  But we do know not to take every statement from a supposed climate change expert at face value.

Just like any other scientist, they’ve got vested interests.  A scientist working for tobacco companies will play down the risks of smoking.  Just as a scientist who works for a government agency will play up the risks of climate change.

And a scientist who works for a food company will claim their foods are safe.  And a scientist who works for a beverage company will say their drinks aren’t unhealthy.

You shouldn’t think that just because someone has a Dr. of Prof. in front of their name that they can’t be influenced.  So to think that climate change scientists are unique individuals, somehow immune to the kind of influence experienced by other scientists is very, very naïve.

Make no mistake.  There’s a lot of money to be made from the climate change industry.  And if you can make money from it you’d be mad not to.

Those are the facts, like it or not.

And as for the Queensland government’s $7.6 million punt on cloud seeding technology…

What we should have shown you yesterday is proof of the inefficient government.  Even before it finished a four-year and $7.6 million study of cloud seeding, the rains arrive and the technology – even if it works, which we’re told it doesn’t – isn’t needed.

Anyway, we could go on.  But we won’t.  Because it’s too boring.  We’ve more important things to write about today…

“Winston Churchill’s gold dentures auctioned for $25,590”, reports News Ltd.

A strange way of buying gold… But nonetheless, it’s still gold.

Overnight the US dollar gold price got smashed, down USD$22.53 to USD$1,345.57:

Source: Goldprice.com.au

The Aussie dollar gold price has done better.  It’s only down two bucks to $1,362.52:

Source: Goldprice.com.au

The drop in the Aussie dollar against the US dollar explains the difference.  This morning the Aussie is trading at USD$0.9867 – nearly two cents lower than earlier this week.

You can bet your bottom dollar that newcomers to the gold market will flee in panic.  That’s why we suggest if you are new to gold you buy small chunks at a time.  That way you’ll be less likely to panic on pullbacks like this.

Frankly, a move down in the gold price is a red herring to the big picture.

The big picture is what’s happening in other markets.  And what’s happening with inflation… it’s going bonkers.

Yet most in the mainstream still refuse to accept it exists.

They see inflation as something to worry about in the future… in a year or two… even though they said the same thing two years ago!

They argue the last thing central bankers should worry about now is inflation.  Especially with the economy still at risk of going backwards.

Of course what they fail to understand is the economy needs to go backwards.  The artificially low interest rates have created more problems than they solve.

To use a tasteless analogy, the low interest rates are damming the flow of water.  The central bankers think they can gradually open the gates to release some of the flow.  Unfortunately, they haven’t accounted for the damage they’ve caused by holding back so much.

Eventually there’s so much of it that when the sluice gates open, they lose control and the flood wreaks havoc.

Low interest rates in the US and Europe are causing monetary and inflationary floods in other countries – Brazil is a classic example.

Thanks to inflationary policies by Western central bankers, cash is heading for emerging markets such as Brazil.

Since late last year, just before Federal Reserve chairman Ben Bernanke went on his money printing spree, the Brazilian Real has gained nearly 10% versus the US dollar:

Source: x-rates.com

It’s a similar trend to the Aussie dollar.

The effect has been an increase in inflation and in inflation expectations.  And for a country with recent experience of double-digit inflation, that’s sure to create concern amongst the public:

Source: Banco Central Do Brasil

The result of higher inflation?  Higher interest rates:

Source: Banco Central Do Brasil

Again, the central bank interest rate is a long way below previous highs.  But still, you’re looking at a country that’s recently had high interest rates.

And as the charts show, inflation and interest rates can take off quickly, before you know it.

If you compare the two charts you can see the central bank had to lift interest rates from 15% in 2000 to above 25% in 2003 in an attempt to control price inflation.

I’m sure you can see why Brazilians wouldn’t want that repeated.

But, that’s the impact of inflationary policies in the US and Europe.  Cheap money (low interest rates) in the US is causing investors to seek higher yields.  That’s luring them to higher yielding countries such as Brazil.  And that pushes the value of the local currency higher.

While an appreciating currency may sound good, that’s not always the case.

Because while one currency appreciates, the other (the US dollar) depreciates.  The depreciating US dollar is pushing up the price of commodities such as wheat and soy beans.

As you can see from the wheat price chart below, a 10% increase in the value of the Brazilian Real isn’t much comfort when wheat futures prices have increased by 76.8% in the last six months:

Source: tradingcharts.com

In other words, sure the Real has gained in value, but commodity prices have gained further.

That’s because inflation doesn’t impact goods and services evenly.  Price inflation takes time to filter through an economy.  It affects different industries and commodities at different times.

And it’s not just in Brazil where there are inflation fears.  According to the Sydney Morning Herald:

“Inflation fears soared to their highest level in two and a half years this month as food prices rose due to the flood crisis in eastern Australia.

“The Melbourne Institute consumer inflationary expectations survey, released on Thursday, showed the median expected inflation rate jumped to 4.6 per cent in January, following a decrease of 2.8 per cent in December.”

By the way, while we agree the floods will have an impact on consumer prices, it’s wrong to blame the floods for all rising prices.  Although we’re sure the central bankers will be quite happy to pin the blame there – it’s in their interests to.

The fact is the real cause of consumer price inflation is the monetary inflation from central bankers.  The weather and flooding is a minor detail compared to the damage caused by central bankers.

A quick look at the wheat price chart above shows you that… as will the price chart of most other commodities –

…Soybeans up 50%:

Source: tradingcharts.com

…Corn up 85%:

Source: tradingcharts.com

…Live Cattle up 37%:

Source: tradingcharts.com

…Cotton up 76%:

Source: tradingcharts.com

These are the results of central bank meddling… printing money to bail out banks in the West is causing price inflation in hard and soft commodities across the globe.  And where is it being felt most?

By the consumer.  Especially by the consumer who can least afford the price rises… hence civil unrest in developing nations.

But don’t think Australia or any other developed nation is immune from this.  Interest rates in Australia have already moved higher – just as in Brazil – and odds are, having neglected inflation for too long, the Reserve Bank of Australia will be forced to raise rates again before the year is out.

And that means the benefits of a higher Aussie dollar will be wiped out by the increased costs of living for the average Australian.

Cheers,

Kris Sayce
For Money Morning Australia