The U.S. news media has convinced many investors that oil consumption is falling because of the global recession. While that may be true, it’s a disservice to millions of investors because production is declining at a pace that’s actually three times faster.

And that suggests higher oil and gasoline prices in coming months - perhaps as much as 50% - 70% higher, or more - particularly if a U.S. economic recovery is truly in the offing.

To really see what I’m talking about, let’s start with a close look at consumption. I’m asked about this frequently in my global wanderings, most recently at the Las Vegas Money Show last week.

For months we’ve been hearing about a drop in global demand. It’s a popular story and one that sounds credible: After all, it seems logical to assume that during economic chaos, consumers and businesses alike will rethink their budgets and ratchet back their spending.

For consumers, the continued economic malaise will mean fewer trips to the store, less-ambitious vacations, and car-pooling to school or work . For businesses, the cutbacks by consumers will clearly translate into canceling trips where conference calls will suffice and using lower-cost shipping alternatives for the decreased sales volumes most U.S. companies will experience.

According to the U.S. Energy Information Administration, oil consumption fell by nearly 50,000 barrels a day throughout 2008. According to the latest figures, the EIA suggests that global oil demand may slump to 83.4 million barrels a day in 2009 - nearly 2.4 million barrels below 2008 consumption levels. On a percentage basis, that’s almost a 3% drop. I have my doubts that we’ll actually see a decline of this magnitude, but if it does occur, it will be the first time ever that consumption has declined for two straight years. That alone is pretty noteworthy in this era of cohesive and powerful global growth.

The reason I have my doubts about such a steep decline in demand is this: While overall consumption is dropping in such developed economies as the United States, Europe and Australia, it’s being at least partially offset by continued growth in China, the Middle East and Latin America. Because the data produced there is less than transparent, I can’t help but think that analysts are underestimating the growth we’ll be seeing in those markets, where consumption is accelerating strongly. And it’s entirely possible that growth in those markets will outstrip any fall here in the developed world.

Even if the growth in the emerging markets doesn’t quite offset the decline in their developed brethren, analysts seem to be forgetting that oil prices are a function of two variables - consumption and production. And it’s the change in production that’s going to catch a lot of people by surprise.

After a run of record high oil prices punctuated by frantic resources development, we’re now seeing the opposite scenario. The long period of lower than anticipated oil prices following oil’s meteoric rise last year means that the entire industry is no longer making the investments needed to sustain production capacity or actual production.

And not many folks recognize this fact.

For instance, direct project investment in drilling may be down as much as 20%, while the number of drill rigs in operation in America alone has dropped by more than 40%. Various estimates from the EIA and private sources suggest that actual U.S. production may fall by as much as 320,000 barrels a day. While the amount is a matter of debate, the fact that production is declining is not.

More than 20% of total U.S. oil production comes from tiny wells located in remote areas that were marginally profitable producers when crude oil was trading at $100 a barrel. With oil currently at about $61 a barrel, those producers are practically worthless now.  So the “mom-and-pop” shops that own them are actually abandoning entire fields and equipment without a moment’s thought.

To be fair, at least part of the drop in demand can be attributed to increased reliance on methanol, ethanol and other types of biofuel, but that’s hard to quantify at the moment because the long period of low oil prices has eroded the economic viability of alternative fuels - at least for now.

The story is much the same with new exploration projects being cancelled left, right and center. The trend is particularly apparent in the Canadian oil sands that were everybody’s fancy only 24 months ago. Now we’re seeing Royal Dutch Shell PLC (NYSE ADR: RDS.A, RDS.B), StatoilHydro ASA (NYSE ADR: STO) and Petro-Canada USA (NYSE: PCZ) each backing away from multi-million dollar investments that were to bring online an estimated 500,000 barrels a day.

Russian, Saudi and Mexican producers are reporting the biggest production drops seen in 50 years. Even Venezuelan leader President Hugo Chavez - the perennial motor mouth and longtime U.S. critic - is eating crow. He’s begrudgingly invited (read that to mean “is begging”) the oil companies whose assets he nationalized only a year ago to “come back” into the market.

He has no choice. Venezuela’s oil production is already below its 1997 levels, and many analysts say that output could fall even more since Chavez has done such a thorough job of alienating the big foreign oil companies that actually possess the technology needed to extract crude oil from that country’s hard-to-reach reserves.

Chavez’s Chavez’s government seized the assets of 60 foreign and domestic oil service companies after conflict erupted over nearly $14 billion in debt owed by the country’s state-owned energy company, Petroleos de Venezuela (PDVSA). PDVSA accumulated the debt as oil prices took a dramatic slide from over $147 a barrel last July to less than $35 a barrel in February.

Then there’s simple shrinkage. This is an oil industry term for declining output. The EIA recently released data suggesting that production at more than 800 oil fields around the world is going to decline by about 9.1%. It doesn’t matter whether the decline is prompted by depletion, war, or simple neglect. The fact is that this shrinkage will take an estimated 7.6 million barrels per day out of the system.

I could go on but I think you get the picture.

Now imagine what could happen to oil-and-gasoline prices when normalized demand resumes. Not only will there be less oil in storage, but virtually the entire industry - exploration, production, refining and sales - is going to be caught sitting on its heels when the world needs it to be zooming along in high gear. And that means the companies that make up this industry will have to ramp up again to meet the newly increased consumption demands.

This whole process could take two years - or even longer - to play out.

As for prices, history is replete with examples of what happens when there are major shortages of key commodities.

In the Energy Crisis of 1973-74, for example, I can still remember the numbingly long gas lines and waiting in the car for hours to get a fill-up. My father and grandfather vividly remember that prices quadrupled in a matter of months. I’m sure you do, too.

Only a few years later, in 1979, we got another oil shock when prices quadrupled again. Because it was coupled with stagnant economic growth and virulent inflation (stagflation), this period was an economic disaster for the United States.

For those who had learned from the earlier crisis, however, it was a mondo- profit opportunity.

The same can be said for 2007-2008, when the huge spike in oil prices that I predicted contributed to the bear market in stocks, tight credit and recessionary conditions that led to the current malaise that continues to grip the U.S. economy. As much as anything else, high oil prices contributed to the carnage we’ve seen in the auto-making and airline industries, and to the financial crisis that started here before spanning the globe.
Which brings us full circle.

Many investors will refuse to believe we’ve arrived at this new energy nexus, especially given all the hype we’ve seen surrounding alternative fuels, hybrid vehicles and the new “green” mentality that’s taken hold here in this country. If you listen to some of the real believers, they’ll tell you that we could be living in a petroleum-free Nirvana - as early as tomorrow.

While I personally would like that, too, it’s a misleading argument if for no other reason than there are millions of consumer items we use - from plastic bags to makeup - still created using petroleum. And there are still more than 60,000 manufacturing processes that depend on petroleum, and even the most aggressive estimates suggest that it will take the world decades to shift away from them.

We’re in much the same situation when it comes to hybrid vehicles. There isn’t a mass-produced electric vehicle available today that could offset the coming rise in recovery-driven demand for oil and gasoline. There’s a strong effort underway, but I’m not aware of a single company ready to field the solution in cost-affordable quantities by 2010 - which is when most analysts say a recovering economy will stoke demand for oil.

Of course, U.S. President Barack Obama’s much-lauded efficiency and greenhouse-gas-standards mandate will help significantly, but that’s like bolting the barn door after the horses have run for the fields. The irony of watching auto executives “applaud” his press conference was almost too much to watch with a straight face. But that’s a story for another time.

The bottom line is this: Our society will be highly dependent on oil for many years to come and investors should plan accordingly.

If governments around the world really want to get serious, they could collectively work to eliminate the fuel subsidies that are part of the price paid for gasoline in Asia or sugarcane ethanol in Brazil. We could also stop our own energy pork barreling. But given the complete lack of transparency that surrounds this issue - not to mention the influence wielded by vested industry interests, and the scores of well-paid lobbyists that patrol the halls of power in our nation’s capital - I don’t think we’ll see any big changes anytime soon.

So I’m left with one inescapable conclusion, at least in the intermediate term. Every investor needs to have at least some sort of energy strategy - preferably one that includes a range of drillers, producers and suppliers to cover the spectrum from wellhead to consumer.

That way, we can profit from an increase in energy prices that we can only hope rise fast enough to jump-start the oil industry’s production arm but not so fast that it snuffs out the badly needed economic recovery.

______________________

Original Article Here: http://www.moneymorning.com/2009/05/21/oil-prices-10/

The aggressive monetary policy of central banks around the world is playing havoc with the structure of the bullion market, creating a chronic shortage of gold that may soon push the metal to fresh records above $1,500 an ounce.

Charles Gibson, a gold expert at Edison Investment Research, argues in a new report that negative real interest rates (below inflation) in the US and beyond has upset the “leasing” machinery in the gold industry and led to a sustained market squeeze.

This is what occurred in the late 1970s, driving gold prices to $850 and ounce — roughly $1,560 in today’s terms. Gold finished last week at $870.

Mr Gibson said the powerful dynamic could lead to a second leg of this gold bull market, even though the metal has already enjoyed a torrid run over the last eight years.

In normal times, gold mining companies sell — or “hedge” — a chunk of their output in advance through bullion banks. These banks cover their positions by leasing gold from central banks. This bread-and-butter trade created excess supply of 500 tonnes each year until the start of this decade.

Low real interest rates have caused the process to reverse, creating a shortfall of about 500 tonnes. The process accelerates as rates turn negative, leading to a scramble by market players to find physical gold.

There are already reports that gold bars are becoming scarce, partly due to fears that futures contracts and other forms of paper gold may not prove reliable if there is a serious breakdown in the global financial system. Pure metal — whether Krugerrands, Maple Leaf coins, or the “five tael biscuit” favoured by the Chinese — entail no counterparty risk.
Mr Gibson says the Fed’s monetary blitz will end in another burst of inflation akin to the late 1970s. That is a disputed claim as deflationary forces tighten on the global economy. Some of the big global banks are already calling the start of a bear market. Rarely has the gold fraternity been so schizophrenic.

Original Article here: http://www.telegraph.co.uk/finance/news…

Leaders from the Group of 20 nations Thursday endorsed the International Monetary Fund’s plan to sell 403 tons of gold to raise funds to support the world’s poorest countries.

The announcement from G20 leaders helped add pressures to Thursday’s gold trading. Gold futures fell $20.30, or 2.2%, to $905.80 an ounce in recent trading on the Comex division of the New York Mercantile Exchange.

The G20 vowed in its statement to “use the additional resources from agreed IMF gold sales for concessional finance for the poorest countries.” The endorsement suggests that the IMF’s gold sales plan is likely to be approved by its member countries later this year.

The IMF has been planning to sell gold since as early as 2007 to diversify its revenues and strengthen its balance sheet. But the plan needs to be approved by an 85% majority vote from its 185 members.

The U.S., which has 17% voting power in the fund, essentially holds veto power. The U.S. government has informed the IMF that Congressional authorization by law is required before it is able to support the plan.

The U.S. Treasury announced last year that it will seek authority from Congress. The U.S. administration has seemed supportive, both for expanding the IMF’s role as well as helping its long-term funding challenges. This makes the proposed IMF gold sales much more likely.
Hussein Allidina, an analyst at Morgan Stanley, said in a note Thursday that he expects the IMF to implement the sales over the next few years, “but do not believe that this presents a strong negative risk to gold prices - as it will be ‘orderly’ and maybe even off market.”

Minimize market impact

The IMF, which holds more than 3,200 tons of gold, is the third-largest holder in the world after the U.S. and Germany.

Most of the IMF’s gold holdings come from the fund’s member countries, which are required to commit 25% of their quota in gold. The fund can’t sell those holdings into the markets.
But an additional 403.3 tons of gold the fund acquired through off-market transactions in 1999 and 2000 - such as interest payment from countries that received IMF loans - are not subject to the restriction.

If member countries approved the gold sales, the IMF can find ready buyers in countries with low gold reserves, especially Russia and some Asian countries such as China, Taiwan, and India.

China, with less than 1% of its $2 trillion reserves held in gold, has expressed interest in buying more gold, crude oil, and other strategic commodities.
According to the IMF’s plan, the gold selling will be implemented in coordination with major central banks to minimize the impact on the market.

The European Central Bank said Wednesday it had completed the sale of 35.5 tons of gold.
The gold sales were in full conformity with the second Central Banks Gold Agreement, which was signed in 2004 by the ECB and other European major official gold holders.

The second CBGA, which caps total gold sales of the signatories at 500 tons a year, expires in September. Some analysts expect a third CBGA to be signed before September.

Original Article here:
http://www.marketwatch.com/news/story/g20-supports-imf-plan-raise/story.aspx?guid={5ABAE8F2-060D-44BC-9905-EB79665AEACE}&dist=msr_1

“Buying US government bonds amid an economic downturn, [a purchase] that is not based on the sound performance of the US economy itself, indicates a huge bubble,” said Zuo Xiaolei, chief economist of China Galaxy Securities. [italics added]

Chinese officials express mounting alarm at the likely negative near-to-medium term effects upon the dollar, and upon their huge reserves, of the spend-spend-spend policy emanating from Washington:

The huge deficit would not immediately lead to inflation, since banks were likely to curb lending as the financial system remained weak, Zuo said. “It might be two or three years before the huge deficit leads to serious inflation.” Analysts noted that if the stimulus plan didn’t accomplish its goal of restarting growth, the US government would have to ease its large fiscal burden by borrowing more and issuing more dollars, instead of relying on economic growth.

Huge Treasury bond issues would exacerbate the depreciation of the US dollar and world wealth. Such developments would be more catastrophic than the global financial crisis, according to Zhang Yansheng, head of the International Economic Research Institute under the National Development and Reform Commission, the chief economic planning body in China.

A weaker US dollar would hurt that currency’s international status, he said, which would “not be in the interests of the United States and other countries and would exacerbate the crisis.” Said Zuo: “US dollar depreciation is inevitable in the long run. China should prepare and reduce its holdings of US Treasuries to a proper size.”

In a strong hint that China’s central bank won’t be adding to its holdings of Treasuries at anywhere near the rate it did in 2008, that it may already have clandestinely achieved more diversification out of the dollar than is widely known, and may well find ways to further decrease its holdings without explicitly telegraphing its moves, note this statement:

Fang Shangpu, deputy director of the State Administration of Foreign Exchange, noted Wednesday that the report released by the US Treasury of the amount of government bonds held by China included not only the investment from the reserves, but also from other financial institutions. It might be a hint that Chinese government is not holding as much US government bonds. [Italics added.]

China is managing its foreign exchange reserves with a long-term and strategic view, Fang told a press briefing. “Whether China is to purchase, and to buy how much of the US government bonds, will be decided according to China’s need,” Fang said. “We will make judgment based on the principle of ensuring safety and the value of the reserves,” Fang said.

The foregoing quotes beg the following questions:

· What about the widely held view, which is even at times recited by Chinese central bank officials themselves, that says China has no choice but to maintain its holdings of Treasuries and to keep buying more, lest any significant slowdown in its rate of purchases risk triggering a global dollar panic?

· Is that view correct, or does China’s central bank actually have other viable options, as Luo Ping and other officials insist that it does?

· What might those other options be, are they really viable, and what might happen to the dollar if China’s central bank began to exercise its professed “other options”?

· What kind of scenario might prompt China’s central bank to attempt to do so?

· Could its enactment of “other options” be carried out in a way that would be difficult to trace, so that China would avoid triggering a dollar panic while it steadily reduced its exposure to the dollar over the coming months?

Continues– Complete Article here: http://www.atimes.com/atimes/China_Business/KC17Cb03.html

China will grow in 2009 much more than any other country of any size.

However let us be realistic, China’s growth alone or when combined with slower growth from India will not be enough to create any semblance of growth in Europe and North America.

The global depression in Europe and the US will continue and accelerate in coming months.

THE US DOLLAR AND THE REPATRIATION OF US ASSETS TO THE US….. THE CURRENT VIEW VERSUS THE RATIONAL INVESTOR

According to several currency strategists, the US dollar will continue to rally for months or even a year. They say that global fear and panic in the investment and banking environment are causing the repatriation of massive amounts of US dollar assets held overseas to be repatriated into the US and placed back into dollars. They argue that as US holders of foreign stocks, bonds and direct investments made by US companies and individuals for the last 20 years are being repatriated. It is argued that the massive amount of foreign investment by US organizations dwarfs the amount of currency held by central banks, and willy-nilly repatriation based upon fear will cause the US dollar to continue to rise.

This is clearly the current psychology and the reason that so many speculators are buying dollars and selling other currencies… but we doubt the staying power of this thesis.

WHY WE DISPUTE THIS THESIS

We are asking the question “Why would those who want their assets to grow, repatriate them to the US? Why would they not move them from Europe, or other parts of the world where they are not providing good returns to China and India where the economic growth rate is positive, and the opportunities for profit are good?”

The answer is that fear and not rationality is dominating the investment process currently. So some investors are indeed repatriating assets to the US willy-nilly. However, we doubt that most investors are so short term oriented or so panicky. If investors were acting in a rational manner they would seek positive returns in China, India or some other country with good growth prospects, not minute returns in US Treasury Bills.

Further under new US tax proposals, profits will be taxed at higher rates in the US [should profits develop], and there is no doubt that the environment has become decisively less pro business in the past 2 months..

As time passes and rationality returns to the investment process, global investors will for many reasons, send money to those parts of the world where growth continues to be strong.  At that point in time, the dollar will once again begin to decline.

Some say it will take a long time for people to become rational and that they will remain panicky for quite a while. I dispute that argument. Those who panic easily never make money in the first place, those who have made money and thus hold it abroad, are not the panicky types and thus we see the dollar rally lasting for a much shorter time than some other observers.

Respectfully yours,
Monty Guild
www.GuildInvestment.com

Feb. 27 (Bloomberg) — Gold fell, capping the first weekly loss in three, as the dollar strengthened to the highest level since April 2006, eroding the appeal of the precious metal as an alternative investment. Silver advanced.

The U.S. Dollar Index rose against the currencies of six major trading partners on demand for a haven after the U.S. bailed out Citigroup Inc. for a third time, stoking concerns that the credit crisis and the recession may deepen. U.S. stocks fell for a third straight day and the Reuters/Jefferies CRB Index of 19 commodities dropped as much as 1.9 percent.

“The demand for dollars has outweighed the demand for gold in terms of safe-haven flows,” said Ralph Preston, a commodity analyst at Heritage West Futures Inc. in San Diego. “Gold is turning into a currency and competing with the dollar. It’s the battle of the safe havens.”

Gold futures for April delivery fell 10 cents to $942.50 an ounce on the Comex division of the New York Mercantile Exchange. That left the metal down 6 percent for the week, the first decline since Feb. 6 and the biggest since Dec. 5.

Gold and the dollar generally move in the opposite direction. The correlation hasn’t held this year as demand for both the U.S. currency and gold have risen because of the financial crisis. The dollar index has gained 1.7 percent this week.

“The gold price will remain supported into the second quarter as fears towards world growth persist,” analysts at Deutsche Bank AG said today in a report. “However, we remain concerned that the gold price rally is based on shaky foundations as it has not been accompanied by a weakening of the U.S. dollar.”

Gold-Dollar Moves

Gold and the dollar last moved in tandem in 2008, when the Dollar Index gained 6 percent and gold rose 5.5 percent. Before last year, gold gained 18 percent in 2005 and the Dollar Index rose 13 percent.

Still, gold may be a better bet than the dollar as U.S. government spending and corporate bailouts eventually spark inflation and erode purchasing power, some analysts say.

The U.S. government has pledged more than $9.7 trillion to helping ease the recession and credit crisis. Investment in the SPDR Gold Trust, the biggest exchange-traded fund backed by bullion, reached a record 1,029.3 metric tons yesterday.

“The safe-haven trade is the major reason people are buying gold now,” said James Turk, founder of GoldMoney.com, which has $608 million of gold and silver in storage for investors as of today. “Within six months or so people will be buying gold for another reason — to protect themselves against inflation.”

Silver Outlook

Silver may rise as a cheaper alternative to gold, analysts have said. Before today, the metal had lost 31 percent in the past year while gold had declined 0.7 percent.

Gold reached $1,007.70 on Feb. 20, the highest price for a most-active contract since March 18. Gold touched a record $1,033.90 on March 17.

Silver futures for May delivery rose 13.5 cents, or 1 percent, to $13.11 an ounce in New York. The most-active contract fell 9.5 percent for the week, the first decline since Jan. 16.

Platinum futures for April delivery rose $32.20, or 3.2 percent, to $1,085.30 an ounce on Nymex. The most-active contract fell 0.9 percent for the week, the first drop since Jan. 16.

Palladium futures for June delivery fell $2.45, or 1.2 percent, to $195.70 an ounce.

Source: http://www.bloomberg.com/apps/news?pid=email_en&refer=&sid=aIyIUD2GhIOQ

———————————–

Dunno about you but my holdings have had 6 straight weeks of gains and as long as I have tracked weekly averages as in years, I have never seen that happen other than once before when it did  6 straight weeks in adjusted local currency. But as for 7, never…and I mean never in years of doing this. A correction was overdue and healthy. The only question is how deep and my guess as many experts alike, is probably not going to be very deep.

There are contrarians out there that are expert in DOW theory that have projected a mass drop still needed to do the final flush out in precious metals. They talk about the 9 year cycle and marvel that gold/ silevr have held up so well. They care nothing for fundamentals but purely chart orientated. To be fair to them they predicted a fairly substantial drop last year and they were right but even as we watch this massive money printing right now, acknowledge that to trust on a big drop in metals amidst events as such today is potentially risky.

And at the other extreme we have people crying death to the US dollar yet it seems to have held up very well and by some of the best guys I follow its considered the best looking beauty in a leper colony and who knows, all of 2009 could well be a year in which shorting the US dollar could be a very dumb move so to watch as we have lately - the US dollar climb on its index and gold and silver climb as well, to me surely demonstrates the monetary characteristics of all currencies being suspect.

Final thought, that comment in the article

Investment in the SPDR Gold Trust, the biggest exchange-traded fund backed by bullion, reached a record 1,029.3 metric tons yesterday.

Where are they getting the gold from in such a tight market… hmmm!, I believe the suggestion they are using derivatives (colloquial for futures contracts and similar) to hedge positions just to show on there books they have what they say…makes the ETF’s highly suspect and should global financial melt occur, look out.

Duncan Cameron
Affiliate
The Anglo Far East Company

Let’s go back to the gold standard.

If the very idea seems at odds with what is currently happening in our country — with Congress preparing to pass a massive economic stimulus bill that will push the fiscal deficit to triple the size of last year’s record budget gap — it’s because a gold standard stands in the way of runaway government spending.

Under a gold standard, if people think the paper money printed by government is losing value, they have the right to switch to gold. Fiat money — i.e., currency with no intrinsic worth that government has decreed legal tender — loses its value when government creates more than can be absorbed by the productive real economy. Too much fiat money results in inflation — which pools in certain sectors at first, such as housing or financial assets, but ultimately raises prices in general.

Inflation is the enemy of capitalism, chiseling away at the foundation of free markets and the laws of supply and demand. It distorts price signals, making retailers look like profiteers and deceiving workers into thinking their wages have gone up. It pushes families into higher income tax brackets without increasing their real consumption opportunities.

In short, inflation undermines capitalism by destroying the rationale for dedicating a portion of today’s earnings to savings. Accumulated savings provide the capital that finances projects that generate higher future returns; it’s how an economy grows, how a society reaches higher levels of prosperity. But inflation makes suckers out of savers.

If capitalism is to be preserved, it can’t be through the con game of diluting the value of money. People see through such tactics; they recognize the signs of impending inflation. When we see Congress getting ready to pay for 40% of 2009 federal budget expenditures with money created from thin air, there’s no getting around it. Our money will lose its capacity to serve as an honest measure, a meaningful unit of account. Our paper currency cannot provide a reliable store of value.

So we must first establish a sound foundation for capitalism by permitting people to use a form of money they trust. Gold and silver have traditionally served as currencies — and for good reason. A study by two economists at the Federal Reserve Bank of Minneapolis, Arthur Rolnick and Warren Weber, concluded that gold and silver standards consistently outperform fiat standards. Analyzing data over many decades for a large sample of countries, they found that “every country in our sample experienced a higher rate of inflation in the period during which it was operating under a fiat standard than in the period during which it was operating under a commodity standard.”

Given that the driving force of free-market capitalism is competition, it stands to reason that the best way to improve money is through currency competition. Individuals should be able to choose whether they wish to carry out their personal economic transactions using the paper currency offered by the government, or to conduct their affairs using voluntary private contracts linked to payment in gold or silver.

Legal tender laws currently favor government-issued money, putting private contracts in gold or silver at a distinct disadvantage. Contracts denominated in Federal Reserve notes are enforced by the courts, whereas contracts denominated in gold are not. Gold purchases are subject to taxes, both sales and capital gains. And while the Constitution specifies that only commodity standards are lawful — “No state shall coin money, emit bills of credit, or make anything but gold and silver coin a tender in payment of debts” (Art. I, Sec. 10) — it is fiat money that enjoys legal tender status and its protections.

Now is the time to challenge the exclusive monopoly of Federal Reserve notes as currency. Buyers and sellers, by mutual consent, should have access to an alternate means for settling accounts; they should be able to do business using a monetary unit of account defined in terms of gold. The existence of parallel currencies operating side-by-side on an equal legal footing would make it clear whether people had more confidence in fiat money or money redeemable in gold. If the gold-based system is preferred, it means that people fully understand that the purpose of money is to facilitate commerce, not to camouflage fiscal mismanagement.

Private gold currencies have served as the medium of exchange throughout history — long before kings and governments took over the franchise. The initial justification for government involvement in money was to certify the weight and fineness of private gold coins. That rulers found it all too tempting to debase the money and defraud its users testifies more to the corruptive aspects of sovereign authority than to the viability of gold-based money.

Which is why government officials should not now have the last word in determining the monetary measure, especially when they have abused the privilege.

The same values that will help America regain its economic footing and get back on the path to productive growth — honesty, reliability, accountability — should be reflected in our money. Economists who promote the government-knows-best approach of Keynesian economics fail to comprehend the damaging consequences of spurring economic activity through a money illusion. Fiscal “stimulus” at the expense of monetary stability may accommodate the principles of the childless British economist who famously quipped, “In the long run, we’re all dead.” But it shortchanges future generations by saddling them with undeserved debt obligations.

There is also the argument that gold-linked money deprives the government of needed “flexibility” and could lead to falling prices. But contrary to fears of harmful deflation, the big problem is not that nominal prices might go down as production declines, but rather that dollar prices artificially pumped up by government deficit spending merely paper over the real economic situation. When the output of goods grows faster than the stock of money, benign deflation can occur — it happened from 1880 to 1900 while the U.S. was on a gold standard. But the total price-level decline was 10% stretched over 20 years. Meanwhile, the gross domestic product more than doubled.

At a moment when the world is questioning the virtues of democratic capitalism, our nation should provide global leadership by focusing on the need for monetary integrity. One of the most serious threats to global economic recovery — aside from inadequate savings — is protectionism. An important benefit of developing a parallel currency linked to gold is that other countries could likewise permit their own citizens to utilize it. To the extent they did so, a common currency area would be created not subject to the insidious protectionism of sliding exchange rates.

The fiasco of the G-20 meeting in Washington last November — it was supposed to usher in “the next Bretton Woods” — suggests that any move toward a new international monetary system based on gold will more likely take place through the grass-roots efforts of Americans. It may already be happening at the state level. Last month, Indiana state Sen. Greg Walker introduced a bill — “The Indiana Honest Money Act” — which would, if enacted, allow citizens the option of paying in or receiving back gold, silver or the equivalent electronic receipt as an alternative to Federal Reserve notes for all transactions conducted with the state of Indiana.

It may turn out to be a bellwether. Certainly, it’s a sign of a growing feeling in the heartland that we need to go back to sound money. We need money that works for the legitimate producers and consumers of the world — the savers and borrowers, the entrepreneurs. Not money that works for the chiselers.

Ms. Shelton, an economist, is author of “Money Meltdown: Restoring Order to the Global Currency System” (Free Press, 1994).

Original Article here: http://online.wsj.com/article/SB123440593696275773.html

From an historical perspective, this price disparity pictured above is BACKWARDS. There is a reason:

Recently, I shared with my subscribers some unusual machinations which are acknowledged to have occurred by the U.S. Dept. of Energy [DOE] back in May / June 2008 – from the DOE 2008 annual report:

The excerpt above illustrates that the DOE stopped filling the Strategic Petroleum Reserve [SPR] as of last June [2008] – an activity that had been underway – more or less continuously – since 1999.

But the above excerpt says more than just that; it specifically states that,

“Oil from the MMS offshore leases has been exchanged for other crude oil”

The “exchange” cited in the aforementioned quote above is also known as an “OIL SWAP.”

Where Else Has the U.S. Government Done Swaps?

There is proof that the U.S. Government is involved in Gold Swaps. From James Turk’s, The US Gold Reserve is Now in Play:

I have long suspected that the US Gold Reserve is being used by the gold cartel as a tool to help it try capping the gold price. See for example the April 23, 2001 press release by the Gold Anti-Trust Action Committee [ http://www.gata.org/node/4223 ] which refers to my then recently published article, “Behind Closed Doors”. The complete article is available at the following link: http://www.fgmr.com/clsddoor.htm

“Behind Closed Doors” provided compelling evidence that part of the US Gold Reserve had been swapped for gold in the Bundesbank. Gold was then removed from the Bundesbank’s vault and loaned into the market as part of the gold cartel’s price capping scheme.

We now have more evidence that all may not be well in Fort Knox. Many thanks go to Bill Rummel of Charleston, South Carolina for bringing the following to my attention.

The US Treasury quietly made a subtle change to its weekly reports of the US International Reserve Position, which includes the US Gold Reserve. This change was first made on May 14th. The differences can be seen by comparing the report’s old format release on May 8th to the new format used the following week. Here are the links:

http://www.treas.gov/press/releases/2007581342179779.htm http://www.treas.gov/press/releases/20075141738291821.htm

Note the additional description of gold provided in the new reporting format. It says the US Gold Reserve is 261.499 million ounces and importantly, that the gold is now reported “including gold deposits and, if appropriate, gold swapped” [emphasis added].

This description provides clear evidence that the US Gold Reserve is in play. Gold has been removed from US Treasury vaults and placed on deposit, presumably in the couple of bullion banks the Treasury has selected to assist with its gold price capping efforts.

The U.S. Treasury has only recently acknowledged that they have been involved in gold swaps. Not withstanding, for accounting purposes, they still claim to possess the SAME NUMBER OF PHYSICAL OUNCES. When gold is swapped or leased – it almost always physically leaves the vault and it is sold into the market – and it is replaced with an IOU.

As evidenced above, crude oil has also been swapped – likely sweet crude, WTI - for less expensive sour crude. Under such a scenario – physical sweet crude left the SPR – creating a market glut of “premium sweet oil”. This set off an engineered over-supply chain reaction in the crude complex which depressed WTI’s price relative to Brent Crude. Because supply chain storage facilities are finite and were completely filled in the Texas / Cushing region – this also contributed to further price declines in the crude complex.

This would also explain the phenomena of the world’s VLCC [very large crude carrier] Fleet being fully booked for storage purposes while the Baltic Dry Index is at or near record lows.

Like the price trend of gold - the price trend of WTI crude is widely viewed as a benchmark for inflationary expectations in the economy.

In the scenario described above, there would be NO APPRECIABLE ACCOUNTING CHANGE to the reported gross number of barrels in the Strategic Petroleum Reserve [SPR] – but only the “subtle acknowledgement” of the composition alluded to in the DOE’s annual report.

We know that such actions were contemplated because of law makers’ unsuccessful attempt [in May of 2008] to pass a law making such actions legal and above board when H. R. 6067 failed to pass into law – because it was deemed to compromise long-term U.S. energy security:

H.R. 6067, The Invest in Energy Independence Act

This item is from the 110th Congress (2007-2008) and is no longer current. Comments, voting, and wiki editing have been disabled, and the cost/savings estimate has been frozen.

Detailed Summary

` Invest in Energy Independence Act - Instructs the Secretary of Energy to publish a plan to: (1) exchange light grade petroleum from the Strategic Petroleum Reserve (SPR) for an equivalent volume of heavy grade petroleum plus certain cash bonus bids received that reflect the difference in the market value between light grade and heavy grade petroleum and the timing of deliveries of the heavy grade petroleum; (2) deposit into the SPR Petroleum Account, from the gross proceeds of the cash bonus bids, the amount necessary to pay for the costs of the exchange; (3) deposit 90% of the remaining net proceeds from the exchange into the Energy Independence and Security Fund established by this Act; and (4) deposit the remaining balance into the SPR Petroleum Account to acquire additional petroleum for the SPR.

So we do know that efforts were made to do this “above board”. Heck, even then candidate for President Obama liked the idea,

ANALYSIS-Obama oil plan may weaken U.S. emergency stockpile

Tom Doggett
Reuters North American News Service

Aug 07, 2008 11:43 EDT

WASHINGTON (Reuters) - Democratic presidential candidate Barack Obama’s plan to release oil from the Strategic Petroleum Reserve may lower crude and gasoline prices in the short term, but it could also leave the United States more vulnerable in a supply emergency.

Obama called this week for easing fuel prices by releasing some 70 million barrels of light, sweet crude from the nation’s stockpile and swapping it for less expensive heavy, sour oil.

The hope is that putting more oil on the market will push down crude prices and those savings will be passed on to consumers at the gasoline pump.

Cheaper crude would make it more profitable for refiners to make gasoline, diesel fuel and heating oil, and encourage them to produce more of those petroleum products. The additional supplies would lower the prices for the fuels.

“Would it bring down prices initially? Sure,” said Sarah Emerson, managing director of Energy Security Analysis Inc, a Massachusetts-based consulting firm. “It’s more supply and the price will go down.”

Obama says releasing oil from the reserve is meant to provide short-term relief for consumers, and is not a long-term solution to the nation’s energy problems……

From all of this evidence – and yes it is EVIDENCE – it is now highly likely that after failing to gain legal authority to utilize sweet crude in the SPR – DESPERATE authorities – who, no doubt will wrap themselves in the flag and claim they acted in the name of National Security – DID CONDUCT oil swaps. The timing of all these events lines up perfectly with the Waterfall decline in oil prices:

Original article at this website:

http://news.goldseek.com/GoldSeek/1234386901.php

Zhou Juqiu, chairman of the gold and silver division at the China Non-ferrous

Metals Industry Association, said in an interview. Output may rise to nearly 10,000 metric tons this year from 9,092 tons in 2007, he said. Silver prices have more than halved from an 18- year high in March after hedge funds and speculative investors sold commodities to raise cash, while recession fears reduced demand for industrial use of the precious metal.

China’s annual silver output growth already slowed to 10 percent last year compared with an average 30 percent between 2001 and 2006, Zhou said. `There won’t be much growth going forward” in the next few months, Zhou said. While producers are still “doing ok,” they are faced with an increasingly difficult environment, including tighter financing and reduced export market, he said.

In July China revoked the export rebates on silver to control use of limited natural resources. This will force China to rely on imports to fill the needs for the precious metal.  “China has the world’s biggest potential for silver consumption,” said Li Xiaoni, vice president of China Chamber of Commerce of Metals, Minerals & Chemicals Importers & Exporters.

The country’s consumption already accounts for 70 percent of the global total for industrial use, she said. China’s consumption of silver has grown by over 10 percent recently reaching 4,000 tons last year, Zhou said. China has 26,000 tons of silver reserves, about 9.6 percent of the global total, and the fifth biggest in the world, he said. About 60 percent to 70 percent of China’s silver is the byproduct of smelting for lead, zinc and copper, he said.

This bit of news is interesting considering everyone is talking about the entire slowdown throughout the world. Perhaps the Chinese have not yet caught up with enough silver using I-Pods and Cell phones.

During our trip to Europe for the Silver Summit in three main cities London, Paris, and Munich it was relayed to this writer that the silver delivery times from the LBMA keep getting moved back. In fact it was suggested that any recognizable problem might actually take place out of London rather than New York.

However, even though the source was top-notch it is still considered a rumor by us and therefore should be considered such by you. However, if we examine this a bit further we know when there was essentially a default in nickel in London some time ago, the Association required those that had physical to “loan” it back into the market for those that were on the wrong side of the market.

In the meantime the Comex silver supply has decreased now standing at about 123 million ounces. A few months ago it stood much higher and as reported previously and over 10 million ounces have moved into investors hands (Eligible Category) within the Comex holding facilities. The dealers are now basically in control of roughly 60 million ounces of silver.

I have received some feedback on people that have just given up on the precious metals story, and some that trust gold only, or like the metal but wish they never heard of a mining company.

In today’s world black is white and up is down. Very little makes sense and sometimes even when you win you can end up “losing.” This does not mean that you should give up on this area of your portfolio. In our studied view nothing will be doing better in the future than the precious metals and eventually the underlying mining shares (that survive).

In conclusion, 2009 will be a trying year and we see a rally ahead but are approaching it with caution.

MENDRISIO/ZURICH, Switzerland, Dec 17 (Reuters) - Sealed off by grey concrete walls and barbed wire, the workmen in protective glasses and steel-toed boots at this smelter cannot work fast enough to meet demand from the nervous rich for gold.

This refinery near Lake Lugano in the Alps is running day and night as people worried about recession rush to switch their assets into something that may hold its value.

“I have been in the gold business for 30 years and I have never experienced anything like this,” said Bernhard Schnellmann, director for precious metal services at the refiner Argor-Heraeus, one of the world’s three largest.

“Production has dramatically increased since the middle of the year. We cannot cope with demand,” said Schnellman, wearing a gold watch on his wrist.

Spot gold hit a record $1,030.80 an ounce on March 17. It fell below $700 in late October, partly because investors sold their holdings to cover losses in equity and bond markets hit by the credit crisis, and is now around $830 an ounce.

The trigger for the price to rise again could come from a much weaker dollar, making gold cheaper for holders of other currencies, and a renewed aversion to paper assets as governments and central banks pump large amounts of cash into the economy, stoking inflation.

Smoke billows as the molten gold, like glowing butter, is poured. To cool it, the worker drops it into water. It hisses as it hits. Once hardened in moulds, the gold bars are embossed with the refinery’s seal. Workers wearing white gloves stack them into boxes like domino pieces.

Though Switzerland is not a gold miner, it is home to some of the world’s largest refineries, which process an estimated 40 percent of all newly mined gold.

Argor-Heraeus is part-owned by the Austrian Mint and a subsidiary of Germany’s Commerzbank. Commercial and central banks are its chief customers and it says it processes some 350-400 tonnes of gold and 350 tonnes of silver per year.

Customers buying gold bars, which can weigh more than 10 kg each, have to wait roughly a month, taking into account the year-end holiday season.

For those buying coins or ingots, which can fit into the palm of a hand, the delay is six to eight weeks. A year ago, these small products could be had within a couple of days.

Worries about the banking system globally have boosted worldwide demand for physical gold, the Gold Council said.

“Many (people) are afraid of leaving their money in banks,” said Sandra Conway, managing director at ATS Bullion in London, which sells bullion and gold coins to institutions and the retail market.

“It’s difficult to quantify, but I would say our turnover over the last three months has certainly doubled compared to the previous three months,” she said.

FULL CAPACITY

Other Swiss gold refiners also say business is booming.

“Since the summer we have experienced a sharp rise in demand for certain gold products. The one-kilo bar has become very popular,” said Fiorenzo Arbini, in charge of health and safety at Pamp, another large Swiss refiner.

“People used to buy certificates, now they want physical gold.”

Schnellmann said the Argor-Heraeus smelter is operating at full capacity, three eight-hour shifts a day. Conquering the backlog by hiring is difficult, because each candidate has to undergo a security check.

Gold refiners were established in Switzerland to supply the watch industry and, later, jewellery-makers in Italy.

Switzerland’s largest banks stepped in to replace a void in gold trading while the London gold market was shut after World War Two and again during a brief closure in 1968.

The former Soviet Union, another top gold producer, chose Zurich banks to handle most of its gold sales in the 1970s and 1980s.

“Gold has an image of being the asset of last resort. This could be viewed as old-fashioned but this is how enough people with enough money to matter think,” said Stephen Briggs, a metals strategist at RBS Global Banking & Markets.

GOLD TOUCH

India, China and the Middle East remain the biggest gold importers, particularly for jewellery. But demand for physical gold has exploded also in Europe, the Gold Council said.

In Switzerland, home to the world’s largest private banking industry, demand for gold bars and coins shot up six-fold to 21 tonnes in the third quarter of 2008, more than in any other European country.

Retail investment in gold rose 121 percent in the third quarter of 2008, an important contributor to the overall increase in global demand, the Gold Council said.

In that period purchases of gold bars by retail investors, who often buy through commercial banks, rose nearly 60 percent, notably in Switzerland, Germany, and the United States.

There was a surge of interest among professional investors shortly after the collapse of Lehman Brothers in September.

Private bank Julius Baer in October launched a fund to invest exclusively in gold bars stored in highly secured vaults in Switzerland.

“The fascination with gold has been there since the beginning of civilisation,” said Schnellmann. “It cannot be explained: you can’t eat gold, you cannot build anything resistant with it and yet people want to hoard it.” (Additional reporting by Pratima Desai in London; Editing by Catherine Bosley and Sara Ledwith)