"Gold: Bubble or boom?" is a big concern for the world's professional gold industry...

The BIG MONEY flows from the biggest trends, of course, writes Adrian Ash at BullionVault, just returned from the London Bullion Market Association's 2010 Conference in Berlin.

But even the brightest people, and with the best of intentions, can struggle to see today what hindsight will say you could have banked on.

By the summer of 1922, for instance, you needed 100 of Germany's paper Marks to buy one Gold Coin Mark, against which they were supposed to be equal. Yet the German Chancellor "would [still] accept no connection between the printing of money and its depreciation," notes Adam Ferguson in When Money Dies (London, 1975)...even  as the Weimar Republic's hyperinflation pushed Berlin food prices well over 50% higher inside one month.

Indeed, "the opinion that the flood of paper is the real origin of the depreciation [in its purchasing power] is not only wrong but dangerously wrong," said the Vossische Zeitung newspaper. So by the time the worthless currency was abandoned 14 months later, it took one trillion paper Marks to buy one golden equivalent, and German banks "turned the Marks over to junk dealers by the ton" for recycling as scrap paper.

Who could've guessed?

Now, fast forward almost a century. Today the value of money (like its price versus gold) is at issue once more, and missing the big trend – inflation or deflation, commodities boom or depression – is a big worry for anyone serious about defending their savings. Over the last decade, gold prices have scarcely looked back in their rise from $252 to $1313 per ounce today. US equities, in contrast, have gone precisely nowhere, while commodities have certainly rallied, but hard assets (outside gold and silver) remain off their pre-Lehman tops of 2008. Treasuries and cash-in-the-bank can barely keep up with inflation, meantime, despite the official "core" US measure slipping below 1% per year. Housing looks like the "double-dip recession" cast in concrete.

Edging above $1300 this week, therefore, it's little wonder that "Gold: Bubble or boom?" was the big theme (both on-stage and off) at this year's London Bullion Market Association conference, held in Berlin. Besides dealing silver and the platinum-group metals, the LBMA's membership is the world's wholesale gold market – the refiners, assayers, vault operators, dealers, financiers and analysts who help move the metal from mine-head to retail production, whether jewelry manufacturers, dental suppliers, chip fabricators or Gold Coin mints. Very much centered in London (where the Association's biggest bullion-bank members settle some $20 billion of gold trading between themselves each day), this odd little corner of the financial market well remembers the time before today's current rally...a miserable two-decade run of falling gold prices, falling demand, and falling returns for the market's suppliers. And no one wants to be late in seeing that the wind's changed direction.

"When I started in precious metals in the early '80s," said one head of metals trading to the 500+ delegates on Tuesday morning, "I understood that private clients would hold around 3% of their wealth in Gold Bars and coin...But over the next 20 years, those reserves were really liquidated, down to pretty much zero by 2000."

He's just added to his own personal gold holdings, he said, buying Gold Bars first cast in 1980 for bank-teller sales to clients in the north-east of England. Yet the vast bulk of attendees – whilst bullish in their average $1450 price forecast for Sept. 2011, and with 60% believing gold would "perform well" even if deflation hit – are a long way from fully invested. A question thrown to the floor showed 74% of the bullion-market professionals meeting in Berlin keep between 0% and 10% of their own private wealth in precious metals. So either they're shills who lack the courage of their convictions, or they prefer to separate where they keep their savings from where they earn their income, or gold has yet to capture the real investment dollar of even those people closest to it.

More broadly, current gold investment accounts for barely 0.5% of investable wealth worldwide, as Shayne McGuire of the Texas teachers' pension fund (and now author of two books urging Americans to Buy Gold Now) showed on Monday, down from 3% in 1980 and far below the 5% of 1968 or 20% allocation gold received prior to the mid 1930s.

Thanks to the massive growth of other investment choices, "Gold has never played a smaller part in the global financial system than today," McGuire concluded, and while further gains aren't guaranteed by the "weight of money argument" (as Philip Klapwijk of GFMS called it) the relative lack of investor hoarding hardly smacks of gold's being a bubble. And while the Western world's biggest central banks hold huge quantities of the stuff, the world's biggest foreign exchange holders are all "underweight gold by any measure" (Philip Klapwijk again), with a growing desire at least to address their "overweight Dollars" position.

Indeed, "off-market" sales of Gold Bullion by European and even perhaps – one day in the far future – the US governments "may [in time] facilitate a transfer of bullion from West to East" the GFMS chairman said, reminding delegates of the gold transferred from the US to Europe to settle America's balance of payments debts in the late 1950s and early '60s. Meantime emerging economies continue to Buying Gold both "to diversify" their large US-Dollar holdings, and also as "catastrophe insurance", and private investors have similarly seen "the world's markets flooded with cheap money," said Germany refinery Heraeus's head of sales, Wolfgang Wrzesniok-Rossbach. His detailed (and best-in-show) presentation on Gold Bars, coins and other retail-investment products Monday afternoon noted the surge in European physical demand during the Greek deficit crisis of early 2010.

One driver is psychological, Wrzesniok-Rossbach said. Because "here in Germany, there is a great desire for security. We are the most over-insured people in the world." More historically, however, German households are asking "Haven't we seen this before, in 1923...?"

Already scared by two stock-market crashes and a global property crash in the last decade alone, "There's an entire generation of [Western] investors who may not want to trust governments or mainstream financial products," agreed Natixis bank's head of precious metals (and LBMA vice-chairman) David Gornall on Tuesday morning. At several points during the global financial crisis, "The US Mint has been right at the limit of immediate physical supply," he noted, but that frenzy has since died down – even as the gold price has continued to rise. Together, that's created a very un-bubblicious atmosphere on the trading floor.

"When the Gold Price broke new all-time highs [in early Sept.]," reported Steve Branton-Speak of Goldman Sachs, "volatility [in daily prices, measured on a rolling one-month basis] was at a 5-year low. When it then went through $1300, traders just shrugged and said 'So, did you watch the game last night?'

"Compare that to the frenzy of gold trading we got when Bear Stearns and then Lehman Brothers failed," Branton-Speak continued, a point confirmed by both Gerry Schubert of ABN Amro (who restated the "lack of frantic activity or volume") and several of the traders I spoke to between presentations (and also in the bar of course).

"What looks like a massive boom in demand is actually very small...relatively insignificant," confirmed Jeremy East of Standard Chartered Bank, but gold keeps making headlines because it "punches above its weight in terms of significance."

Asked whether gold is now a bubble, East opted instead for "new paradigm – which is in fact a return to the old paradigm." Concurring with Shayne McGuire's presentation on pension-fund holdings, Standard Chartered's head of metals sees gold investment holdings only now starting to recover from the wipe-out caused by two decades of strong interest rates and economic growth between 1980 and 2000. This view, of gold not so much soaring to untold heights as simply returning to its former position as a key asset class ("Back to the future" as one oddly aggressive guy put it to me in the smoking lounge) might seem to downplay its gains. But consider why gold's not always valued, said Graham Birch, former head of natural resources at Blackrock:

"You don't need gold when...

• Inflation is dead
• Governments are benign
• Taxes are low
• Currencies are solid
• Markets are booming..."

In other words, said Birch, "Nobody wants gold if market returns are high and don't seem risky." Whereas today?

Part II to follow...

What part will Gold Bullion play for investors as the "race to debase" speeds up...?

In the LAST TWO WEEKS we have seen the US Dollar move from $1.2751 to $1.3450 against the Euro, notes Julian Phillips of the Gold Forecaster.

The Dollar has also fallen against the Pound, the Yen and the Swiss Franc. In response, the Japanese government via the Bank of Japan is weakening the Yen as we write this. The trade-weighted Dollar Index of its value against a basket of competitors has fallen to 0.79 (a 4% drop), and points to a further major drop still. The breakdown through support is critical and will incite arguments that the US itself going to weaken the Dollar via coming Quantitative Easing.

And meanwhile, the Gold Price is nudging the record price of $1300 and promising much more.

The argument from the US Treasury that China should let the Yuan rise is now losing weight in line with the weakening of the US Dollar. All eyes are on the Fed after the issue of its statement this week. These pointed downward to deflation for the economy, despite the general belief that the US still has a recovery underway.

This is a major step forward for us in the gold and silver world. The Fed has indicated that deflation may have to be fought. If this is correct then the Quantitative Easing we have seen to date is more than inadequate. More than that, the Fed is aware it may have to inflate, to give the right financial environment for a 'real' recovery to take place. This means that the value of the Dollar both inside and outside the US will be lowered, in future. Markets are discounting deflation expectations right now. Once inflation appears, only then do we expect equity markets to rise, as the Dollar cheapens.

The boom-bust history of the last three decades is now over and we are moving to and into new territory for global economies. The new ground is dangerous, requiring and facing extreme economic and currency conditions. We doubt whether the tools in the Fed's hands are sufficient to cope with future situations. This is when government should step in, as President Roosevelt did in the 1930's with huge quantitative easing and heavy, ground-level, employment stimuli.

Unfortunately we are approaching a time when the US government will be emasculated with the Administration unable to appoint people to high places, let alone pass critical legislation to really boost the economy. Global foreign exchanges have been the first to reflect the true picture on the Dollar by sending it down through critical support levels.

As inflation (which may not be visible for another couple of months) debauches debt itself, repayment of debt will make it easier to repay. This could well propel the consumer from saving into spending.

Consumers will then turn to durables and other hard assets to protect their savings boosting the economy, but not in a good way (unless employment takes off to cope with the demand). It worked in the 1930s, but industrial production was boosted by a supportive Second World War effort.

No such future exists for us though. Manufacturing will only revive if protectionism is employed. In fact, the future appears fraught with potential changes on such a scale that a complete re-vamp of the global monetary system is needed. That can only happen once the global pecking order of nations has been re-worked. That won't happen without economic strife. We are really watching the rise of China and the decline of the US

In such an environment gold is the only common denominator of value, accepted globally.

As we saw in the huge gold/foreign currency swaps which the Bank of International Settlements conducted earlier this year gold can be harnessed to 'guarantee' international currency transactions. Having said this, the problem is, "How do you slot it into a fragmented global economy in such a way as to back currencies 'officially'...?" Not for one moment do we think Gold Bullion will be used in isolation as international money. It can only work with paper currencies, with international governmental approval, for it to be part of the global monetary system again.

As you can see from the above, the entire future global monetary game plan is changing. In the current issue of the Gold Forecaster you will see how we outline potential financial and currency crises that lie ahead.

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What's in a word from the Fed...?

IT IS TOO BAD that the media fails to make use of an accessible resource, writes private investor and author Fred Sheehan from North Weymouth, Massachusetts, in Bill Bonner's Daily Reckoning.

Itself.

Newspapers and financial TV are generally content to report what is being said today with no reference to the past. There seems to be no memory. A recent instance is Federal Reserve chairman Ben Bernanke's opinion that inflation is not a concern. In a sane world, his opinion would not matter much. But we live in a more nonsensical atmosphere in which abstractions substitute for reality.

The Fed chairman's inflation prediction is thought to reflect whether the Federal Reserve's Open Market Committee (FOMC) will raise the fed funds rate from zero. It is not, then, Bernanke's opinion about inflation that stirs imaginations (very limited imaginations, to be sure), but the train-of-thought that the global yield curve is a consequence of his purported wisdom. If the Fed Chairman's public view changes, the residence of several trillion Dollars will also change: carry trades, institutional asset mixes, and potential reallocations from stocks into money markets are examples of financial securities that are shipped from asset class to asset class according to the Fed chairman's price-change gazetteer.

The real world today is repeating a pattern of a couple of years back. Prices are rising everywhere. This was also true when Bernanke became chairman of the Fed, in February 2006. Shortages, bottlenecks, black markets and prices were increasing when Bernanke became chairman. They continued to do so into late 2008. These conditions then retreated but are charging upward again.

To cut to the finale, a search through the files shows that Ben Bernanke was neither concerned nor understood the 2006 to 2008 inflation. It is certain, reading the evidence, that once again he will ignore (or remain malignantly ignorant, as the case may be) inflation until long after rice riots outside California supermarkets are a feature on the evening news.

To those unaccustomed to Fed-foolery, there is a motive for the chairman to day-dream through an inflationary swindle. The Federal Reserve wants to print money at will. An admitted problem with inflation would make it difficult to keep pumping money into the market.

Two conclusions can be drawn with near-certainty: the FOMC will not raise its zero-percent fed funds rate as long as Ben Bernanke remains Federal Reserve chairman. (A trivial 0.25% or 0.50% increase is possible.) Prices of things, particularly of commodities, will keep rising. This is an area to make money.

The Prosecutor's Brief

In 2006, Bernanke had the excuse of being new to the job, without his predecessor's experience at judging how every comment would be interpreted and analyzed. In the end, his inexperience with the media was not a disadvantage. (Discussed in the past tense, all of this is just as true today.) He talked in circles, made little sense, but criticism of the Federal Reserve Chairman's remarks was confined to vocabulary. He could have bellowed his discontinuities of thought, of logic, of basic economics through the public address system before a full house at Yankee Stadium and the financial media would have remained deferential. An instance was his inflation commentary. An abbreviated sequence of Bernankeism follows.

Chairman Bernanke discussed inflation before the Joint Economic Committee on April 27, 2006. He sent written responses to the committee following his testimony. In this take-home exam, the new Fed chairman pronounced "inflation is overstated" and expectations are "well contained." His contentions were controversial, not for the obvious reason that crude oil prices had risen 50% since the beginning of 2005. Such comparisons between what is real and what Bernanke recites do not interest the media. Again, his economics are illogical. This was the real story, but was not discussed.

Instead, the press and financial TV grew aggressively neurotic when the Federal Reserve issued a statement, on May 10, that inflationary expectations are "contained". The media was consumed with the distinction from "well contained" in Bernanke's April 27, 2006, statement.

On June 5, Bernanke, speaking at the IMF, admitted inflation, not inflationary expectations, was a problem. Again this distinction in vocabulary was front page news. Barely discussed were announcements in the same week that mergers and acquisitions for the year had already passed the record level of 2000 ($1.4 trillion), private equity in Europe was "loading companies with a record amount of debt," and home mortgage debt in the US was increasing at a 12.2% pace (when the national income was rising at a 3% rate).

On June 15, 2006, Bernanke spoke about expectations (not inflation, as he had on June 5). He believed expectations remained within historic ranges, which seemed to be consistent with his May 10 statement, but he was chastised for "giving mixed signals," maybe because he discussed expectations rather than inflation, though this was not clear, and who cared other than the panting, breaking-news media and the trading desks that might unwind billion-Dollar arbitrage positions in reaction to the media's portrayal of the Fed chairman's word choice?

On November 28, 2006, he told the National Italian American Foundation that inflation expectations were "contained." He repeated this assessment on many other occasions. The chairman may have thought his personal contentment would sooth the masses. Whatever the case, Simple Ben applied the formula to any topic that popped into his head. On March 28th, 2007: "At this juncture ... the impact on the broader economy and financial markets of the problems in the subprime markets seems likely to be contained."

In his November 2006, address to the National Italian American Foundation, Bernanke talked in clichés that had lost all meaning. He would "continue to monitor the incoming data closely." The FOMC is "prepared to take action to address inflation if developments warrant." The chairman, at best, made glancing references to what he was monitoring, when the FOMC would take action, and what form the action might take.

Seven months later, in July 2007, Bernanke finally gave a speech devoted to the Federal Reserve's measurement of inflation: "First, how should the central bank best monitor the public's inflation expectations?" Bernanke's description of the Fed's methods could not be refuted, since there was nothing to refute: "The Board staff employs a variety of formal models, both structural and purely statistical, in its forecasting efforts. However, the forecasts of inflation (and of other key macroeconomic variables) that are provided to the Federal Open Market Committee are developed through an eclectic process that combines model-based projections, anecdotal and other 'extra-model' information, and professional judgment. In short, for all the advances that have been made in modeling and statistical analysis, practical forecasting continues to involve art as well as science." This means nothing. Dan Quayle was ransacked for misspelling "potato," yet the media adored Bernanke for sounding like an idiot savant.

He went on to ask critical questions (e.g.: "Do we need new measures of expectations or new surveys?"). There were no answers. Bernanke described some of the inputs to the Fed's models, but then crushed hopes of those who were trying to understand how the Fed measures expectations: "[T]he model specifications employed differ considerably in their details, including how lagged inflation enters the equation, how resource utilization is measured, and whether a survey-based measure of inflation expectations is included. In principle, formal econometric tests could determine how much weight should be put on the forecast of each model, but in practice the data do not permit sharp inferences...." In the end, he confirmed what Fed skeptics already believed – the Federal Reserve is a Works Project Administration for failed statisticians: "Because of these considerations, as I have already noted, the staff's inflation forecasts inevitably reflect a substantial degree of expert judgment and the use of information not captured by the models."

Others disagreed. In April 2007, Harry Landis, 107 years old, a World War I veteran, was interviewed by the St. Petersburg (Florida) Times: Landis had "lived through the invention of airplanes, televisions, interstate highways and cell phones. But the biggest change? 'Money has decreased in value,' he said. 'There is so much more of it.'"

Not according to Simple Ben. On July 10, 2007, Bernanke addressed current inflation, then dismissed it: "The steep run-up in oil prices in recent years has not triggered either high inflation or recession, in large part because consumers and businesses expect price increases to remain tame." Three days before Bernanke spoke, Lehman Brothers (R.I.P.) released its food ingredients cost index for the first 6 months of 2007. It had risen 14.9%.
 
The value of stuff was rising against Dollars and against paper assets in general. Detachment of prices from previous levels leads to poverty, desperation, and crime.

California suffered a copper crime wave. Irrigation systems were stripped from farms; their replacement had cost $2 billion in 2006, a 400% increase from 2005. Value investors "pulled plaques off cemetery plots, raided air-conditioning systems in schools, yanked catalytic converters from cars." The copper in a penny was worth more than one cent; the Treasury Department decided melting pennies for the copper was a crime with a sentence of up to five years in jail. In Britain, Monopoly, the board game, cut costs by replacing paper money with a calculator. In the United States, those who lacked formal education knew best: Twenty-two percent with a high school education or less named the economy as the country's worst problem, compared to eight percent with college degrees. Through history, inflation first attacked the lower classes and not stopped until it consumed the upper classes. This time looks no different.

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Ending its closest link with the Dollar in 19 years, gold is gaining from the global "race to debase"...

SO GOLD is suddenly all about the Dollar again. Or so you might think, says Adrian Ash at BullionVault.

After its longest run of moving in tandem with the trade-weighted Dollar Index since midsummer 1991 (45 trading days; average correlation +0.58), the gold price in Dollars resumed its commonly-assumed relationship with the greenback last Friday, moving opposite to the currency's forex fluctuations.

Tuesday then brought the first of this week's three new record highs. Only the Indian Rupee, to date, has suffered a similar fate.

What next? History says to expect further Dollar-led gold action ahead, at least in the headlines. Because any approach of the strong, positive correlation achieved this summer is typically followed by a stretch of strong negative correlation, with the Dollar and gold moving in opposite directions.

But that doesn't mean non-Dollar investors won't also see fresh gains or highs in gold, however – not with gold continuing what remains a powerful long-term uptrend against all major currencies, and not with central banks everywhere desperate to devalue their own money against the greenback.

"There's certainly investor nervousness about monetary policy around the world since the Yen intervention," as Mitsubishi's new precious metals strategist Matthew Turner (formerly at the VM Group) tells Reuters.

"A lot of people are sensing a race to the bottom by central banks to print more of their currency, to reflate their economies, and gold is getting support from that."

The Bank of Japan is now actively selling Yen to buoy the Dollar, while the Bank of England has held real Sterling interest rates below zero for 24 months running. Whatever the political rhetoric during May's Greek deficit crisis, France and Germany would rather see a weak than strong Euro, while Beijing's new "flexibility" – a prelude, perhaps, to its new Yen buying strategy – has so far delivered only a 1.4% rise in the Yuan's Dollar value since June.

That's barely a ripple compared with the Yuan's 4.8% rise of Q1 2008, and nothing against the 5.5% rise in the Kiwi, 8.7% rise in the Aussie, or 15% rise in the Swissie of the last 3 months.

Longer-term, as you can see, gold's bull market to date hasn't really been about any particular currency. It really is about all of them.

Gold has quadrupled and more against all the world's money since the start of 2000, as our Global Gold Index shows. (It maps the daily gold price in the world's top 10 currencies, weighted by size of economy and starting at 100 on New Year's Day 2000). And most critically for traders trying to second-guess the Dollar gold price, throughout 2010 to date – and also across the last four decades as well – gold's correlation with the Dollar Index is statistically insignificant (+0.02 and minus 0.15 respectively).

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