Eric Roseman's Eruptions: Stocks, Global Markets and Commodities BLOG

Tax Hikes and Bad Government

2009-11-20T09:30:22-05:00

Montreal, Canada

At exactly the wrong time many governments around the world are raising taxes to boost depleted coffers amid a spending binge since late 2008. Costly bailouts are compelling politicians in the West to raise taxes – probably the dumbest policy mistake amid a deflation in household assets and surging unemployment.

Other nations, in order to curb speculative excesses are now introducing excise taxes on currency (Brazil, Indonesia) and stock trading (Brazil). In the United States, Barney Frank wants to tax currency derivatives – another stupid initiative designed to cause more harm than good.

Most financial crises in the past have resulted in poor policy initiatives by government, which only exacerbate a challenging and difficult economic environment. The 1930s saw a host of such blunders – though some were actually positive, like Glass-Steagall (1933) and the 1940 Investment Company Act, but overall a series of new tariffs and trade restrictions made the situation only worse and prolonged the depression.

The only major government in late 2009 that seems to understand what domestic consumption needs now is Germany. Starting next year the Germans will cut tax rates in a smart effort to grow the economy – something that the late President Reagan understood when he was elected in 1980. The Germans, historically ambivalent about inflation and deficit spending, are nevertheless biting the bullet and growing big deficits to finance tax cuts. They understand the big picture.

The Reagan Revolution did cause a long-term acceleration of U.S. deficits in the 1980s. But at the time the United States was so badly mired in stagflation that the only way out was to boost consumption and encourage business capital spending. What resulted was a tremendous bull market for stocks starting in 1982 that lasted until 2000.

Unlike the 1980s and 1990s – the greatest decades for stocks since the 1950s – the 2000s will go down in history as the worst ten-year period for stocks – even surpassing the 1930s "Lost Decade."

Yet the United States, struggling to keep the financial system afloat with staggering government bailouts is convinced higher taxes is required to fix the economy. Obama is intent on raising taxes; after the Bush tax cuts expire next year, a badly fractured economy that's struggling to recover will face even more hurdles as individuals are left with less after-tax income.

The attack on tax havens is also bad politics. Major Western governments are attacking tax havens en masse over the last several years as they aim to grab lost tax revenues from evaders or undeclared accounts in countries like Switzerland. If governments would tax citizens and corporations less and let their populace keep more of their after-tax income then people wouldn't feel compelled to dodge taxes or hide money in the first place. Governments just don't get it.

History has clearly shown that low tax countries benefit enormously from such a regime and encourage capital inflows, foreign investment and ultimately result in an economic boom. This was the case with Ireland until recently and still the case in Hong Kong.

The jury is still out whether the ongoing debate and future introduction of tax hikes in many countries will serve to boost the global economy. In my view, it will serve the opposite purpose and prolong the economic agony for many businesses and those folks looking for a job. The government has its brain in the wrong place – somewhere the sun doesn't shine.

I'm off to Vienna next week and then London for meetings with hedge funds, convertible bond specialists and managed futures advisors. I'll report from Vienna on Tuesday. Dugald will blog on Monday. Have a good weekend.

Look to Small-cap Stocks as Leading Indicator of Market Fatigue

2009-11-19T09:38:57-05:00

Montreal, Canada

Small-cap stocks remain comfortably above their 200-day moving average in mid-November and have spearheaded the recovery off the March lows. But signs of weakness have begun to emerge over the last few weeks and might portend to a broader sell-off – long overdue at this stage of the historical rally.

Since March, the Russell 2000 Index of small companies has gained 75% compared to 64% for the S&P 500 Index – dominated by America's 500 largest companies based on stock market capitalization.

Since September 30, however, the Russell 2000 Index has tumbled about 4% compared to a 5% rise for the S&P 500 Index. And since August 31 the S&P 500 Index has risen 9% versus a 5% gain for the Russell 2000 Index.

Leadership has started to shift from small-caps to large-caps over the last three months and that might herald a defensive realignment among money-managers following torrid gains over the last eight months. Small stocks typically bust out of the gate at the start of an economic recovery and usually run out of gas before large-cap stocks peak; this action is consistent with the trend in corporate insider sales since August whereby most of the selling has occurred in the small-cap universe.

If small stocks led the recovery then it's fair to assume they will lead the next decline.

Many small companies are still shedding labor and are struggling to raise financing in a tight credit environment. American small business is responsible for about 40% of new employment; without a broad recovery in small business hiring it's hard to envisage a sustainable earnings rebound.

Corporate earnings have recovered since April but mostly at the expense of cost-cutting, not top-line revenue growth. That's also true for most large-cap companies in the S&P 500 Index; most companies have shed redundant labor and have dramatically reduced bloated inventories since late 2008. Still, organic revenue growth is absent in this supposedly new bull market.

If anything, S&P 500 Index companies might continue to receive a boost from a weaker U.S. dollar since about half of their sales are derived from overseas. That pales compared to small stocks, which are mainly domestic-oriented companies.

For global investors, most U.S. assets are cheap. The dollar has lost about 2/3s of its value vis-à-vis the EUR this decade making American assets highly attractive to foreign suitors – if they can secure the financing.

America's on sale. That's especially true when you price U.S. real estate in EUR or most foreign currencies; it's no wonder the Germans are invading parts of the United States with their mighty EUR, purchasing distressed commercial properties since last summer. But stocks in the United States aren't cheap like real estate or the dollar. The big bargains for value investors definitely lie in real estate in late 2009, not in common stocks or speculative bonds.

Silver Poised for Major Break-out

2009-11-18T09:22:47-05:00

Montreal, Canada

As December gold tops $1,146 this morning (+10% in November) there's one missing ingredient required to legitimize this historical bull market; silver must exceed its March 2008 high of $20.78 an ounce. Spot silver trades at $18.71 an ounce this morning in New York.

The failure of silver to confirm new highs in gold prices is the only dangerous signal flashing for gold-bugs in late 2009. However, I do expect silver to break-out shortly and confirm the primary trend in gold. Indeed, this trend may have already started with silver breaking-out sharply over the last several days (see chart below).

Birds of a feather flock together. This old adage is especially true in the precious metals arena whereby gold and silver tend to rise or fall in tandem. Silver has lagged gold over the last several weeks as the latter has hit fresh nominal highs this year while silver remains $2.07 an ounce below its highs this decade. Silver hit an all-time high of $50 an ounce in 1980.

Adjusted for inflation since 1980, silver prices should trade north of roughly $128 an ounce now while gold should fetch at least $2,200 an ounce.

Silver, unlike gold, is more of an industrial metal used in a wide array of applications, including photography, dentistry and electronics. Its performance is more tied to the global economic cycle than gold and therefore is not to be confused as a pure hedge against monetary chaos or financial turmoil.

Though silver will almost always follow gold, I still prefer the yellow metal as a better store of value. Earlier this month the Indian central bank purchased 200 tons of gold from the IMF; no central bank, however, has amassed silver this decade.

From a speculator's perspective, the total return potential now in silver is probably greater than gold. On a percentage basis, the price of silver can easily outpace gold over the next few years as both metals hit record highs after adjusting for inflation since 1980. Silver might achieve that goal far more quickly than gold.

My target for gold remains about $2,500 an ounce in this bull market and about $75 an ounce for silver. If that's remotely correct then silver can gain another 300% from current levels compared to 118% for gold. If silver reaches its approximate 1980 inflation-adjusted equivalent then prices can surge another 575% from current levels.

I began making these forecasts on gold and silver seven years ago at various seminars for The Sovereign Society and the Oxford Club. At the time, investors would look at me wondering what planet I came from. Not anymore.

Bull markets are like a rubber band. The primary trend is always exaggerated much longer than we can anticipate. And in the age of violent capital markets, aggressive central bank printing and the prospect of higher inflation over the next several years it's no wonder investors and even central banks are accumulating gold. Smart people increasingly distrust paper money.

What will kill this bull market?

The only event that's likely to derail gold and silver is higher U.S. and European interest rates. Until the opportunity cost of holding gold and silver are compromised by higher paper money rates of interest this bull market will run its course. And fortunately for the bulls, the Fed won't be in any position to aggressively hike lending rates any time soon because credit intermediation remains badly fractured while bank balance sheets are still in repair mode.

One Last Hurrah for Treasury Bonds

2009-11-17T10:00:58-05:00

Montreal, Canada

The bull market in Treasury bonds since 1982 is heading into the bear's digestive system over the next 12-24 months. Some of the shrewdest investors, including Tiger Management founder, Julian Robertson, Jr, have begun to initiate bets against U.S. Treasury bonds in anticipation of higher interest rates (See October 20, 2009 blog on Julian Robertson, Jr.).

Unprecedented global government fiscal spending, quantitative easing, bulging budget deficits – even in Germany – and expensive entitlement and social welfare programs all promise to drive yields much higher in the West eventually. The cost to finance these and other financial time-bombs promises to become more expensive in the age of the super debt cycle and its near collapse in late 2008.

The cost of funding long-term government social welfare programs alone far exceeds the current revenue generated by the IRS. Some sort of entitlements crisis lies ahead.

But a bigger threat looms for U.S. Treasury bond investors – China.

The Chinese are up to their eyeballs in Treasury debt and U.S. dollars with the bulk of their mammoth $2.2 trillion dollars of reserves in American dollar-denominated paper. As Julian Robertson proposed last month it seems almost absurd for the Chinese to continue funding America's trade and budget imbalances if the dollar continues to decline. It also seems stupid for China to accumulate more Treasury bonds in the face of rising supply over the next two years – and the likelihood of higher long-term interest rates to draw international Treasury financing. Higher rates result in lower bond prices.

Yet if the ongoing inverse relationship between stocks and bonds continues into the next stock market sell-off, bonds might surprise everyone with another big rally. That's what the world's biggest bond fund complex is betting on.

Since 1997, Treasury bonds have been one of the few safe-havens amid systemic crisis or a stock market meltdown. After plunging last fall after Lehman Brothers failed, Treasury bond yields hit overbought levels and have ratcheted higher this year to 3.38% this morning compared to 2.25% on December 31 when the financial system was approaching the proverbial cliff.

Bill Gross, probably the smartest fixed-income advisor in the world under PIMCO, recently loaded-up on long-term Treasury debt in September; Gross believes long-term rates will decline under the weight of a double-dip economic recession in 2010 or 2011. The bond bull has made some savvy calls in his lengthy career and even amid a decline in Treasury bond prices this year Gross's PIMCO Total Return Fund is up 14%.

Longer term, I can't find a single reason to own U.S. or European government debt.

Deficits are likely to remain a constant theme for years and in the United States might drown the government as interest costs head through the roof – currently about $200 billion dollars. Mathematics 101 tells you this relationship can't last forever. We also can't expect the Chinese to fund these deficits indefinitely.

Before heavily shorting Treasury bonds, however, consider buying long-term Treasurys. That might be the next great trade for 2010. It's also one of the few assets that remains highly contrarian and unloved by the investment herd.

Bill Gross has rarely been wrong. If you believe, like I do, that the stock market won't continue to advance forever -- up almost 64% since March – then 30-year Treasury bonds are a great speculation right now. Inflation is non-existent, nobody is raising prices and credit intermediation is years away from recovering – especially in the absence of federal assistance.

Time for bonds?

All Eyes on China in 2010

2009-11-16T09:47:02-05:00

Montreal, Canada

Are we placing too much faith in China and central banks to save the global economy? The answer appears to be a resounding "yes" and the consequences of this hopeful relationship will be absolutely dreadful once the markets turn against the madness of crowds.

Stocks in the United States are still in the midst of their biggest rally in over 100 years since bottoming in March. The MSCI World Index of mature markets is also posting its biggest gains off March lows since the index was introduced by Morgan Stanley Capital International in 1969. And Chinese stocks have now skyrocketed 137% since bottoming about a year ago.

"Bubbles" are now firmly in place in assets like junk bonds, common stocks, Asian real estate, Latin American financial assets, including domestic currencies, non-dollar currencies and several commodities – mostly in the industrialized metals sector. Hedge fund speculation is back with many managers embracing leverage once again, reminiscent of the pre-2008 go-go days.

There's no way global industrial demand justifies current price levels when considering the enormous slack still evident in the United States and Europe coupled with weak pricing pressure across every single industry. Nobody is raising prices. I've got to wonder what sort of economic recovery we have in the West in the absence of massive government spending. The world's biggest economies are still on crutches.

China, which until this decade remained largely an isolationist country since the mid-15th century, is now rapidly being pulled back into the fore as the world seems eager to embrace its financial power and growing economic influence. It's no surprise this shift is occurring at the same time Washington is losing its post-WW II position as the world's only superpower; the United States remains the world's undisputed military champion but 2008 marked the beginning of the end as it pertains to American-style capitalism.

Gradually, over the next 25 years the balance of power will shift to China at the expense of the United States. This transition is inevitable the same way Great Britain reluctantly relented to Germany in the late 19th century and by 1946 was virtually bankrupt relying on U.S. financial assistance.

The Chinese have orchestrated a tremendous state-sponsored economic recovery with almost $600 billion in stimulus spending and trillions more in government-assisted or forced real estate lending. If investors think China is home to a clean balance sheet, they're wrong; asset values in the biggest cities are clearly in "bubble" territory as speculation runs rampant in places like Shanghai and Shenzhen – many other smaller cities are also in a real estate boom.

As we head into 2010 in six weeks' time it is becoming more important to follow the events unfolding in China and, lesser so, in the United States.

Beijing basically controls the big money now and holds the Treasury by the neck as she grows more vocal about the dollar, Treasury bond guarantees and U.S. market regulation. But the irony is that China's economic unraveling is the next shoe to drop over the next 36-48 months because money-supply, bank credit, real estate and stock market speculation make what happened in mortgage-backed assets in the United States look like a side-show. China's lending apparatus is out of control.

If the Fed has done a miserable job controlling inflation since 1913 while basically destroying the dollar imagine what lies ahead in China. Do you honestly think the People's Bank of China can reign in all this credit without triggering a financial disaster at some point?

History is instructive in this argument because like China, the United States emerged as a global power after the Spanish-American War in the late 19th century. But even on the road to economic greatness the United States endured several crashes and economic depressions in the 1890s, 1907 and, of course, the 1930s. It's naïve to believe China won't suffer a similar trajectory.

Horseman of the Apocalypse

2009-11-13T10:09:21-05:00

Montreal, Canada

One of the true hedge fund greats has called it quits.

John Horseman, 51, who launched Horseman Capital in London nine years ago and who runs the Horseman Global Fund, has decided to resign after almost 30 years managing stock portfolios. During his tenure this decade Horseman has belted out more than 16% per annum while earning more than 30% in last year's global market meltdown when just about everyone else was mauled.

Since 2001, Horseman Global Fund earned a cumulative 274% compared to an 8% loss for the MSCI World Index.

Horseman turned net short on stocks in late 2007 – a prescient call that resulted in outsized gains almost every month for his investors until March 2009 when stocks bottomed.

The news came as a shock to his investors following his first calendar year loss in 2009 – down 24% because of his bearish views on global markets and banking.

I've been fortunate enough to meet John Horseman twice at his office in London since 2007. He's incredibly shrewd, bold and direct. He's probably one of the few money-managers in the world that truly understands what's unfolding in credit, the macro economy and how these and other variables affect the investment markets. I also appreciate and agree with his bearish outlook.

Horseman, who started his career at GAM, or Global Asset Management, in the early 1980s, ran the highly successful GAM International Fund for years. He earned more than 17% per annum at GAM picking global equities and was widely regarded as the best stock-picker at the group.

Horseman will remain on the board of the Horseman Global Fund and remains the largest shareholder of the company he founded. He will continue to advise the Fund but will resign from daily trading responsibilities effective January 1. A new manager with a strong emerging markets back-round, Russell Clark, will assume the helm of Horseman Global Fund.

Bearish views on the macro economy also claimed another star money-manager ten years ago.

Julian Robertson, Jr, who ran the successful Tiger Funds for almost 20 years and retired in 1999, also closed up shop because of his bearish investment position. Robertson, like Horseman, was also bearish in 1999 with big bets against technology stocks; that bull market railroaded Tiger and resulted in Robertson shutting down his funds just months before the NASDAQ peaked.

The Horseman Global Fund will remain net short for the rest of the calendar year and is expected to stay defensive under Clark.

Have a good weekend. See you on Monday.

Black Swan Circles Emerging Market Debt

2009-11-12T09:57:21-05:00

Montreal, Canada

There's no doubting that this decade belonged to emerging markets. Equity and fixed-income markets in this asset class will post their best ten-year stretch since the early 1990s as we shortly conclude another decade next month.

As advanced economy stocks have languished over the last ten years as measured by the MSCI World Index (-1% per annum since 1999) the MSCI Emerging Markets Index has rallied 8.8% per annum. The BRICS, or Brazil, Russia, India and China – the biggest emerging market economies -- have gained 13.8% per year over the same period. By stark contrast, the S&P 500 Index has declined 1% per annum since 1999.

The emerging markets are the only broad-based global index to post a positive trailing ten-year return this decade; others, include MSCI EAFE (excluding USA), MSCI World and non-MSCI global benchmarks have logged flat to slightly negative returns in the 2000s. Adjusted for inflation until recently, returns have been even less impressive.

But the big story lies in the credit world this decade.

Incredibly, whereas major market credit dislocations almost destroyed the financial system in 2008, the emerging market credit environment has been buoyant, fueled by strong balance sheets on the corporate side, positive trade and budget surpluses and soaring commodity markets since 2002. The Brazilian real has ranked as one of the world's top performing currencies since 2002.

Ten years ago, the story was upside down. Asia was on the verge of total collapse as regional markets saw massive currency devaluations, a string of corporate defaults and a severe contraction of GDP in late 1997 and 1998. Russia defaulted on her GKO obligations in 1998 – or its foreign-issued sovereign debt-- ultimately resulting in a rouble currency collapse.

How things have changed…

The world's best-performing global bond index since 1992 remains the J.P. Morgan Emerging Markets Bond Index – up 12.1% per year. No other global bond index even comes close. And since1999, the benchmark has risen 11.4% per annum – outpacing the MSCI Emerging Markets Index by 260 basis points, or 2.6%, and with significantly less volatility.

But is this great performance already baked into prices? Credit spreads across the emerging markets spectrum either interpret a New Era for this asset class or a Black Swan in the waiting, or an unpredictable event that is totally unanticipated by the investment crowd.

Over the last several months I've been warning about a "bubble" developing in the emerging market credit world. Credit spreads, or the difference between these countries' debt markets and benchmark U.S. Treasury bonds, are sitting near all-time lows. Basically, investors have priced emerging market debt as almost less risky than T-bonds – not a senseless bet considering the scope of seemingly never-ending American deficits. But again, these developments are already baked into market prices.

For example, benchmark five-year Brazilian bonds trade at a 1.90% premium above Treasury bonds for the same maturity; and ten-year Brazilian debt sells at a 1.72% premium to T-bonds. These yield differentials have already discounted a host of U.S. economic challenges but do not discount any potential problems unfolding in Brazil. Indeed, Brazil is priced for perfection.

Even more remarkable is the current yield spread on Bulgarian US$ bonds. Bulgaria is basically a basket-case economically, battered by the credit crisis. Credit spreads on Bulgarian paper with a five-year maturity trade at just 2.57% above Treasury bonds. And Mexico, where oil production has crashed more than 50% since 2003 – ultimately leading to some sort of financial dislocation in the future -- is sitting on a 1.86% premium on six-year paper over Treasury bonds.

These and other sovereign credit spreads reflect anomalies that must come home to roost. Markets always work in cycles. Despite government efforts to seemingly control "bubbles" after the Mother of blow-ups in 2008, many countries harbor artificially low interest rates that don't reflect the current state of their economic woes or worse, the possibility of a Black Swan making an appearance.

Technically Speaking

2009-11-11T12:39:04-05:00

-Dugald Malcolm

Montreal, Canada.

I am looking very carefully at the movement of the S&P today, specifically at the 1101 level, which is being flirted with as I sit here typing. That represents the high made back on October 21st and is the current level of resistance.

Back in late October I had become convinced that the rally was finally running out of steam. I had had very little faith in the rally up to that point to begin with, seeing as that the earnings multiples were becoming completely out of touch with the fundamentals and that all upward movements seem to be happening on very little volume. So, when I saw that the upward trend line that had been in place since March on the weekly charts had finally been broken (see chart below), I assumed reality had finally sunk into the market. Several consecutive down days brought the S&P 500 below its 50 day moving average and a downtrend seemed to be forming.

Even when the price movement turned around in early November, I still thought I saw a possible Head-and-Shoulders Top formation in the works. But again, as it had done before in July, the market pulled a successful about-face and surged back up over the 50 day moving and quickly ascended to the highs made back in October.

While the S&P 500 might very well be attempting to re-establish an upwards trend, it is poised to face a very significant hurdle. Since October of 2007, a downward trend line has been in place and has yet to be breached. The trend line, as seen on the chart below, is currently at around 1150, approximately only 4.5% from our current levels. If the market closes today above the 1101 highs made in October, the long term downward trend line will represent the next major resistance level and, therefore, should be closely monitored.

As Eric mentioned yesterday, hedging is a very important tool that helps you reduce risk to the downside and should be employed here. The higher this market goes, the riskier it becomes.

Portfolio Hedging Comes Cheap in Late 2009

2009-11-10T09:15:15-05:00

Montreal, Canada

Bulls and bears should both embrace portfolio hedging ahead of the next correction or panic. Learning how to apply a hedge or a series of hedges can mitigate market risk while protecting portfolios. That's especially true today with stocks in the midst of their greatest rally in more than 100 years.

In late September 2008 I turned my European-based mutual funds and managed accounts from almost market-neutral to net short using reverse-index funds or exchange-traded-funds. For dollar-based accounts, I bought SH, the Pro Shares Short S&P 500 Index, in New York and for EUR-based accounts the Frankfurt-listed DB X-Trackers Short DAX ETF. Both positions surged more than 20% in Q4 when world markets plunged about 22%.

Without employing reverse index ETFs last year my portfolios would have declined much more. Just how badly did I fare? Insurance-related funds declined 7.8% after all fees and managed accounts fell an average 4.8% in 2009. Not bad. This compares to a hefty 38.5% plunge for the S&P 500 Index, -40% for the MSCI World Index and -20% for the CSFB Tremont Hedge Fund Index.

Still, I'm bearish in 2009 and have failed to participate in this rally.

I was net short heading into March and then reduced my hedges ahead of the explosive rally; the only long positions I bought in March were convertible bonds. I sold my reverse index ETFs the first week of March. Still, my equity exposure has remained the lowest in ten years and I'm about flat this year versus a 25% gain for the MSCI World Index.

Since August, I've raised my long positions in stocks only slightly while remaining hedged. I anticipate buying more reverse-index ETFs as stocks climb even higher. There's still an avalanche of money sitting in cash, tempted to join this spectacular rally.

Reverse-index ETFs now trade at 52-week lows and offer a great entry point for investors looking to protect their stock positions – we all know this rally won't last.

Corporate earnings aren't supported by revenue growth and, for the most part, have benefited from cost-cutting and accounting changes since May. Consumer sentiment has declined for two months in a row (September and October) despite a stock market bounce. Stocks don't even react to bad economic news anymore.

In the absence of organic domestic consumption the government can't replace consumer spending indefinitely; the global economy is recovering yet $80 oil doesn't help to boost spending in a world still fractured by the loss of credit intermediation, rising unemployment and falling wages.

This is the Mother of all bear market rallies. Hedging your portfolio now is inexpensive and the wisest strategy ahead of 2010.

The View from Cabo

2009-11-09T09:28:55-05:00

In-Transit in Dallas, Texas

Gold was the buzzword at the Sovereign Society's Offshore Academy last week. And nobody is more bullish on gold than me. The majority of money-managers and bankers from Europe were generally bullish on gold while some expressed concern after a big rally over the last four weeks.

My view is that any correction should be interpreted as another in a long series of opportunities to accumulate gold in the age of violent capital markets, skyrocketing U.S. and Western government deficits and broad-based currency devaluations across the world.

Gold, though overbought near-term, remains in a formidable uptrend; I would, however, avoid making fresh investments into gold mining stocks after a stunning 165% rally since last fall. Wait for a pullback before buying gold stocks again.

When asked at Cabo San Lucas, Mexico, whether now is the "right time" to buy gold my reply was to apportion 50% of your allotted target right away and the balance on any impending correction. The market might run away from here -- though I highly doubt it because everyone is too bearish on the dollar and the buck should muster a violent but powerful short-term rally.

I would use this opportunity (dollar strength, however short-lived) to buy more gold, silver, the Norwegian kroner, Canadian dollar, EUR and Aussie.

News last week that the Indian central bank purchased 200 tons of gold from the IMF sent prices sharply higher again -- gold crossed the $1,100 mark intraday on Friday before pulling back to close at $1,095 an ounce. This morning, gold trades at $1,109 an ounce.

Though the Indian central bank is buying gold at these levels, they're defying the broader trend in Indian fabrication demand, which has collapsed since $750 gold last year. The majority of Indians, the world's largest consumers of gold jewelry, aren't lunging after gold at these prices.

Traders commenting in an editorial in the Financial Times last week believed India's $6.7 billion dollar purchase was the largest by a central bank in more than 30 years. Other central banks are likely to follow.

Clearly, global investment demand for gold is booming as investors, institutions and central banks in Asia accumulate gold at the expense of the IMF and heavily indebted Western nations.

I expect this trend to continue for many years as we witness the greatest transfer of wealth from West to East, marking the end of Anglo-Saxon global financial domination after nearly 300 years.