Gold is the final refuge against universal currency debasement

Ambrose Evans-Pritchard
“We live in an amazing world. Everybody has big budget deficits and big easy money but somehow the world as a whole cannot fully employ itself,” said former Fed chair Paul Volcker in Chris Whalen’s new book Inflated: How Money and Debt Built the American Dream.

“It is a serious question. We are no longer talking about a single country having a big depression but the entire world.”

The US and Britain are debasing coinage to alleviate the pain of debt-busts, and to revive their export industries: China is debasing to off-load its manufacturing overcapacity on to the rest of the world, though it has a trade surplus with the US of $20bn (£12.6bn) a month.

Premier Wen Jiabao confesses that China’s ability to maintain social order depends on a suppressed currency. A 20pc revaluation would be unbearable. “I can’t imagine how many Chinese factories will go bankrupt, how many Chinese workers will lose their jobs,” he said.

Plead he might, but tempers in Washington are rising. Congress will vote next week on the Currency Reform for Fair Trade Act, intended to make it much harder for the Commerce Department to avoid imposing “remedial tariffs” on Chinese goods deemed to be receiving “benefit” from an unduly weak currency.

Japan has intervened to stop the strong yen tipping the country into a deflation death spiral, though it too has a trade surplus. There is suspicion in Tokyo that Beijing’s record purchase of Japanese debt in June, July, and August was not entirely friendly, intended to secure yuan-yen advantage and perhaps to damage Japan’s industry at a time of escalating strategic tensions in the Pacific region. More...

China's 2010 Gold Rush

Adrian Ash, Editor, Bullion Vault

Owning gold is more often an end-in-itself than as an investment vehicle...the aim of accumulation, not the means...

THE COLLAPSE in India's gold demand during 2007-09 might seem good reason to question the fundamental strength of gold buying worldwide.

After all, if the world's No.1 gold buyers can't keep up with record-high gold prices, who can...?

But the plain fact, as BullionVault first forecast in spring 2009, is that China has overtaken India as the number one private gold buyer this year. The typical Chinese New Year gold rush has already begun (thanks in part to 3% discounts at major retailers), and robust demand looks likely to continue through 2010 if not beyond.

Full-year 2009 private demand in mainland China could outstrip India, the former No.1 buyer, by one quarter if not one third. Short of a (very unlikely) collapse in Q4 demand, full-year private gold buying – including jewelry and retail investment – is set to have grown 10% from 2008's record in volume terms, rising 26% by value to equal $13.5 billion or more.

On recent trends, that would equate to more than 2.0% of China's famously massive household savings (up from 1.0% ten years ago) and account for almost one ounce in every eight sold worldwide.




Basis the GFMS consultancy's data (published by the World Gold Council), physical gold purchases by mainland Chinese households in 2009 was already running 19% ahead of India's private demand for Q1-Q3.

Given China's continued economic growth (certain to hit Beijing's 8% target according to the Chinese Academy of Social Sciences) – let alone the surge in money-supply and credit growth over and above GDP (put at 23 and 27 percentage points respectively by Deutsche Bank) – private gold consumption in Q4 most likely remained very robust. Whereas India's private gold off-take during Oct-Dec. continued to shrink in the face of record-high prices. Indian bank and wholesale dealers have reported below-market bids from their clients throughout the autumn. Comments from the Bombay Bullion Association put Q4 imports 54% lower from 2008's already disastrous finish.

Fourth-quarter Chinese consumption should be in the range of 116 tonnes (if it adds 37% to Q1-Q3 volume, as per the 5-year average) to 128 tonnes or more (if Q4 tops Q3 by volume, as it has each year since 2004). Running total to end-Sept. was 315 tonnes. Likely to finish full-year at 431-443 tonnes.

India's private demand, in contrast, ran 45% below 2008 levels during the first 9 months of the year, most notably depressed during Q1 (down 83% from Q1 08, with Indian investors becoming physical dis-hoarders on GFMS's data; overall, India was a net exporter of gold for the first time since the Depression according to market historian Timothy Green). Applying the 5-year average ratio of Q4 demand to Q1-Q3 figures (27% added to 264 tonnes), full-year private off-take would come in at 336 tonnes, the lowest total since at least 1991 on GFMS's data.

India's full-year imports (it has virtually no domestic mining output) are forecast at 370-380 tonnes says the Bombay Bullion Association. They have not been below 400 tonnes per year since at least 1997 according to the Indian Bullion Market Association.

It is impossible to predict the outlook for gold-buying in mainland China next year, but this decade's drivers for Western gold investment – credit excess and miserable returns to cash – also apply in China, with bells on.

The People's Bank cut its benchmark rate from 7.5% to 5.3% in Dec. 2008, and has left it there since. Inflation in the cost of living was officially reported at minus 1.1% across the first 3 quarters, but real rates were negative in H2 2004 and again in at the turn of 2007-8. Some analysts are forecasting 4.0% inflation for 2010, and either way, commercial rates have been so attractive this year that new credit growth was CNY295 billion in Nov., equal to $43 billion. That was down from 2009's monthly average of $130bn, but took full-year credit growth to the equivalent of $1.35 trillion, equal to 27% of GDP.

Pitched against this rampant credit excess, gold's quasi-religious and auspicious appeal in Chinese culture – as a solid, tangible, intrinsically valuable store of wealth – will only have grown. Most significantly, and in sharp contrast to Indian demand, private Chinese buying has grown as the price has risen (gold has than tripled against the Yuan since retail price controls were lifted in 2001).

That might suggest gold is just another bull-market asset for China's increasingly wealthy and capital-rich middle classes. But owning the metal is most often viewed more as an end-in-itself than as an investment vehicle; it's the aim of accumulation, not the means.

Given this last decade's average 15% annual gains for US-Dollar investors – plus the outlook for sub-zero real interest rates, struggling equity dividends, and the danger of sharply higher bond yields (i.e. falling bond prices) as the Treasury attempts to finance a new record deficit – might the Chinese approach to gold investment start to take hold in the West...?

Social Unrest Explodes in China

Shirong Chen
BBC News China analyst

Social unrest is on the rise in China, according to an analysis by a Chinese think-tank.

The country is grappling with more acute social problems than ever before, according to a report from the Chinese Academy of Social Sciences. Crime is also up, despite a nationwide campaign to shore up social stability. Although continued economic growth has provided a greater number of jobs, China has seen more social conflict in 2009 than before.

The report on China's social trends sounds a stark warning to policy makers. The authors believe deep resentment has been accumulating over the past few decades against unfairness and power abuses by government officials at various levels. They quote six large-scale popular protests - from taxi strikes to unrest in central China in June - involving tens of thousands of people.

This does not include the rioting in the north-western region of Xinjiang, where nearly 200 people were killed in early July.

Urban-rural gap

There has been more crime too - official figures for January to October 2009 show more than four million recorded criminal cases, an increase of about 15% above last year. The report admits some of China's policies have prevented more people from sharing the benefits of the economic development.

The urban-rural income gap, for example, has become even bigger and the country's phenomenal GDP growth has been achieved at the expense of the rural population, the environment and overall social cohesion.

The report is a damning indictment on the authorities' slogan of building a harmonious society. But there is one ray of hope in the report - while the Chinese authorities are taking tighter control over the media, people are turning more and more to the internet to expose official failings and abuses. In the past 12 months, nearly a third of the top stories originated from the internet, pushing the boundaries of press freedom.

D225G Ukraine Norway Link and China Spread

Recombinomics Commentary 14:15
November 25, 2009
The same mutation has been found in both fatal and mild cases elsewhere, including in Brazil, Japan, Mexico, Ukraine, and the United States, said the WHO.

WHO's spokeswoman in Beijing, Vivian Tan, said the agency is aware of three such cases in China that occurred in June and July that were similar to the cases being investigated in Norway. Tan said WHO had no information on the cases mentioned in the Xinhua report Wednesday.

There is no evidence the mutated swine flu virus is circulating widely in the world, Tan said, but since it has been linked to deaths in Norway and elsewhere, investigators are focusing on whether this mutation could be a marker for more severe disease.

The above comments are associated with a report of eight D225G isolates with in China. Genbank has three of the sequences, as noted earlier. The increase in examples to eight is not surprising since D225G was in four of four fatal cases in Ukraine and reports from Norway cited detection in three isolates, 2 fatal and 1 severe case who had recovered.

However, 25 HA sequences deposited at Genbank had an HA sequence that contained D225G, A/Norway/2924/2009, but also had the wild type sequence, raising concerns that D225G was circulating as a mixture that was most easily detected in lung samples, because the D225G was more than a "marker". It is a polymorphisms that was found in 1918 and 1919 samples which were well characterized for receptor binding properties, which indicated the change conferred increased binding to gal 2,3 receptors which are present in lung.

Concerns that this receptor binding domain change was widely circulating were increased because an HA marker on the Norway isolate with D225G was found on additional isolates in Norway, and worldwide (see list here). This marker was also in the HA sequences from the fatal cases in Ukraine. Full sequences from one of the Norway isolates, A/Norway/3364-2/2009, were deposited, and a marker on the NA sequence matched isolates with the HA marker, linking this broader set of isolate from Norway with the Ukraine sequences, which also had the NA marker, as did multiple other isolates (see list here).

These associations link Ukraine to Norway, but the D225G polymorphism has jumped onto multiple genetic backgrounds, which are widespread, increasing concerns the D225G is circulating undetected because it is concentrated in lung tissues and is poorly represented in nasopharyngeal swabs. Release of full sequences from China, as well as Norway, would be useful.

Ukraine Dead Approach 400 - D225G Spreads
Recombinomics Commentary 23:30
November 24, 2009
1,679,237 Influenza/ARI

99,661 Hospitalized

397 Dead

The above figures from the latest daily update from the Ukraine Ministry of Health support a decline in the rate of increases of cases and deaths, but the total is now almost 400 fatalities (see map). The spread was likely slowed by the country-wide closing of schools along with warmer weather. However, it is likely that the virus will return as temperatures drop and the traditional flu season begins, although it is unclear if seasonal flu will be in circulation in 2010.

The receptor binding domain change, D225G, was in four of four sequence from fatal cases, raising concerns that the 2,3 alpha specificity of D225G drove the H1N1 to the lungs and the total destruction. Three patients in Norway were said to also have D225G, and two of the three died while the third had been in serious condition. 25 HA sequences from Norway were deposited at Genbank, but only one had D225G, and it was a mixture. In Brazil both patients with D225G in lung samples had died, and the case in China had been in serious condition.

However, the severity of the infection may be related to the ratio of sequences with and without D255G, as well as viral load, because milder cases involving D225G have also been reported in the United States and Hong Kong.

More detail on additional cases, including sequences from upper and lower respiratory tract from the same patient would be useful.

The Dollar Is Finished

Economic historian Niall Ferguson warns that China's love affair with the dollar is fading faster than anyone realizes.

TechTicker: "The idea they don't have anywhere else to go or would shoot themselves in the foot if there were a steep decline in the dollar or appreciation of their currency
reassures many people in Washington ‘we can relax'," he says. "An appreciation of the renminbi may reduce value of their international reserves but increases the value of every other asset the Chinese own," most notably the commodity assets they have been buying all over the world.

China's "current strategy is to diversify out of dollars and into commodities," Ferguson says. Furthermore, China's recent pact with Brazil to conduct trade in their local currencies is a "sign of the times."

Perhaps most importantly, China's massive stimulus program is helping to generate internal consumption in the People's Republic, meaning local manufacturers are less dependent on exports. Because of the "rapid growth" of Chinese domestic consumption, Ferguson predicts China's international trade surplus could be gone by next year.