December 27, 2004

OK folks, it's that time of year again when the Predictions for the following year come together. We should reflect on the past year, look in to the crystal ball for the following year and then share what we feel is going to happen next. If you've got a minute how about sharing your perspective on the following items [ending 2005], I'm sure all readers would benefit from seeing diverse perspectives:

1. Where will the dollar index end the year?

2. What will be the Price of Gold?

3. What will be the Price of Oil?

4. Where will the DOW end the year?

5. Will the Yuan decouple from the Dollar in '05, YES or NO?

6. Do you see a major Economic Collapse in '05, YES or NO?

Then add any general statement about 2005 which you feel is key to the coming year. There is no doubt in my mind that 2005 will be an important year for all of us.

Cheers Rich

Posted by richardlancaster at 06:38 PM | Comments (90)

GATA, streetTRACKS GLD Fund, The Bullion Desk & the "D2 Paradox"

December 09, 2004

D2 is a supporter of GATA, for obvious reasons. We believe gold needs to be freed from the manipulations of central banks, private mega banks, private special interests, bank-owned/operated major gold extractors and government interventions - - and that freeing gold will bring a level of decency & honesty back to the business world not seen since the mighty Socialist Roosevelt confiscated the gold of US citizens.

There is a seeming correlation between the gold price and eroding business ethics, lets call this the D2 Paradox - - whereby gold moves in the inverse to business ethics!

Gold Up means Ethics are Down: GU = ED

In the eternal struggle for truth, in all things gold, GATA has stuck to their guns and has engaged some of the biggest economic forces in the world today. Now they are going after complete transparency and full disclosure with the new streetTracks gold ETF [GLD]. Below you can see the latest skirmish in the battle between the forces of globalization, manipulation and central control of pretty much everything you hold dear vs. the voice of sanity, decency & freedom through the organization known as GATA.

GATA needs help - do what you can.


Dear Friend of GATA and Gold: today more or less accused
GATA of causing today's smashing of the gold
price. The accusation came in a brief market
note by the site's proprietor, Ross Norman,
suggesting that the World Gold Council's new
exchange-traded bullion fund had been forced
on Tuesday to sell 15 percent of its gold
holdings on account of "a foul attempt by a
rival to raise ill-founded concerns about the
product" -- that is, GATA's call this week for
the council to explain the duplicate serial
numbers on some of its gold bars and to answer
several questions about the fund's operation.

Reuters and Dow Jones Newswires distributed
reports about the huge dishoarding by the EFT.
Here's the Dow Jones story.

* * *

Fall in StreetTRACKS' Stock
Encouraged Gold Slide: Trade

By David Elliott
Dow Jones Newswires
Wednesday, December 8, 2004

LONDON -- The 3.5 percent fall in the price of
spot gold Wednesday may have been encouraged by
the sale of 15 percent of the gold held by the
StreetTRACKS exchange-traded fund, or ETF,
analysts in London said. The total net asset
value of gold in the trust stood at 88.02
metric tons Wednesday against 103.56 tons

Gold fell to $436.90 a troy ounce at the London
fix Wednesday afternoon against $451.80/oz
Tuesday afternoon.

While most participants agree the market was
primed for a slide -- in light of an overbought
technical picture and a bounce for the dollar --
they also believe the fall in tonnage in the
StreetTRACKS trust was responsible for some
of the selling.

The fall in the StreetTRACKS tonnage highlights
the expectation by holders of the shares that the
share price and price of gold is set to fall,
said an analyst.

"It hasn't helped sentiment," said Kamal Naqvi,
precious metals analyst at Barclays Capital.

StreetTRACKS gold shares were launched Nov.
18 on the New York Stock Exchange to track
the price of gold. Each share represents
one-tenth an ounce of gold.

In the first week of trade to Nov. 26 the trust
built up a total net asset value of just over
100 tons, but since then this remained virtually
unchanged until the decline Tuesday.

Over the same period the share price for the fund
has also remained steady, closing Tuesday at
$45.11 compared with the close on the first day
of trade at $44.38. At 1626 GMT Wednesday the
shares were trading at $43.62.

"Gold was primed for a correction but it seems to
me an interesting correlation that the
StreetTRACKS tonnage fell at the same time,"
said Philip Klapwijk, managing director of GFMS

The StreetTRACKS Web site says the tonnage in the
trust for Wednesday will be updated between 1615
and 1630 EST.

* * *

The Bullion Desk's blaming GATA for the
gold crash was followed there by the
unusual posting of an open letter to your
secretary/treasurer by a Bullion Desk
reader, David Walker. The open letter
carried a preface declaring that the
Bullion Desk fully endorsed its views.

Walker's letter at the Bullion Desk can
be found here:

Walker echoed the Bullion Desk's own
complaint that GATA had wrecked the gold
market by criticizing the gold council's
ETF, and he attempted to answer the
questions GATA had directed to the gold

As authority of one of his answers,
Walker wrote that he had spoken with a
representative of the ETF, but when I
briefly engaged him by e-mail and asked
him if he was speaking for the fund or
the World Gold Council, he did not reply.
So it may be suspected that Walker's
letter was more or less ghosted for him
or that he is serving as an intermediary
for the fund or the council so that the
council might not have to engage directly
with people who press inconvenient

Later Walker's open letter was posted at here:

While GATA's questions about the ETF's
operations are still compelling -- and will
be reviewed again below -- the most remarkable
thing here is the old pattern of gold-news
Internet sites to avoid at any cost doing
real reporting on the gold market. For all
the space devoted to bashing GATA today
at the Bullion Desk and 321Gold, neither
of those sites, nor any other gold sites
to GATA's knowledge, has ever directed a
single question to the biggest participants
in the gold market, the central banks. Nor
do these sites seem inclined to question the
gold council directly even though its ETF
has been heavily publicized for months.

The Bullion Desk said today that it fully
endorsed Walker's letter about the ETF, but
how could the Bullion Desk do so without
doing or referring to any original reporting
on the fund? Would a Q&A with the gold council
or the fund's managers be so out of line for
the Bullion Desk? To most people it might
look like basic journalism.

Indeed, the greatest deficiency of the gold
market and the financial markets generally
may be the lack of basic journalism --
journalism that goes beyond the recycling
of press releases and government statements.

But to return to GATA's questions, and to
assume that Walker is acting as intermediary
for the ETF and the gold council:

1) Why does the bullion fund list ownership
of duplicate gold bars?

Tim Wood's admirable reporting last night
at, notice of which
was dispatched to you, seems to have
resolved this question, if only
unofficially, since the gold council still
does not speak directly. Different bars
refined by Johnson Matthey apparently carry
the same serial numbers and the ETF listed
the duplicate numbers without explanation,
thus erroneously suggesting double counting.
That is, the fund's practice was deficient,
was fairly questioned, and required

2) Why have all the custodians and potential
custodians of the fund's gold not been

Walker contends that they all HAVE been
identified and quotes the fund's prospectus:
"The subcustodians selected and used by the
Custodian as of the date of this prospectus
are: the Bank of England, The Bank of Nova
Scotia (ScotiaMocatta), Deutsche Bank AG,
JPMorgan Chase Bank, and UBS AG. The
Allocated Bullion Account Agreement provides
that the Custodian will notify the Trustee
if it selects any additional subcustodians
or stops using any subcustodian it has
previously selected."

But note that to notify the trustee is not
necessarily to notify the investing public
as well. Is it possible that ETF gold could
be stored with other custodians without
immediate notice to investors?

3) Why is the fund refusing to let its gold
holdings be fully and publicly audited?

Walker denies that the fund is refusing full
and public audits. But then he writes that
there indeed might not be audits if gold is
placed with certain subcustodians:

"If 100 percent of the gold bars are held
directly by the Custodian, which is the
current situation, then there is provision
provided for a 100 percent audit by the
trust as found in the SEC filings:

"'The Trustee may, upon reasonable notice,
visit the Custodian's premises up to twice
a year and examine the Trust's gold held
there and the Custodian's records concerning
the Trust Allocated Account and the Trust
Unallocated Account.'"

"However in the event a subcustodian is used
it would be up to the Custodian to audit
subcustodians per any audit provisions between
the Custodian and the subcustodian. Any gold
held would be in allocated form, thus property
rights to the gold have been established. Since
it is intended that HSBC has 100 percent control,
all gold would be subject to 100 percent audit
directly by the Trust's auditors."

4) Is any of the fund's gold being leased, made
available for leasing, or encumbered in any way?

The best Walker can do here is assume that since
no risks of leasing are cited in the fund's
prospectus, there won't be any leasing. That's
a big assumption. How much more persuasive it
would be to get a simple, straightforward yes
or no directly from the fund rather than a guess
from an intermediary. Why should such a simple
question be so difficult?

5) Exactly what is the fund's relationship with
the Bank of England, a major lessor of gold?

Walker's answer is contradictory and
disingenuous and only validates GATA's concern:

"The Fund has no relationship with the Bank of
England. The Bank of England was listed as a
POTENTIAL subcustodian that the Custodian
MIGHT use in the normal course of business.
Certainly HSBC, being the largest LBMA
member, would more than likely have dealings
with the BoE from time to time. During my
conversation with the Fund representative, Mr.
David Smith, he mentioned that there has been
talk of discontinuing the BoE as a POTENTIAL

That is, there is no relationship but the fund
prepared for a relationship and now that people
are concerned about it, the fund might not go
through with it.

* * *

Let it be said again: The mystery and
deception carefully woven around the world's
gold reserves are the foundation of gold
leasing, the suppression of the gold price,
and the manipulation of the gold market.

GATA favors anything that democratizes
and clarifies gold ownership -- which could
include an exchange-traded fund -- provided
that there is every assurance of the security
and custodianship of the gold involved and
the fund doesn't become just another
derivative for market manipulation.

So far the World Gold Council and its
associates in the ETF have not provided that
assurance, and intermediaries making arguments
for them will not be good enough. Indeed, the
use of intermediaries by the council and the
ETF can only tend to confirm suspicions that
the true answers are not good ones.

If the World Gold Council wants to speak for
gold, it will have to speak. It should speak
not only about its ETF but, more importantly,
about the open and surreptitious intervention
of central banks in the gold market, a subject
about which the council long has been
deliberately and disgracefully silent.

In the council's silence, GATA will do its
best to speak for gold.

Since the last two weeks have been full of
anguished public statements by central
bankers about currency intervention and
commentary by gold market analysts about
the likelihood of a sharp decline in the
gold price, it is absurd for the Bullion
Desk or anyone to attribute to GATA the
power to crash the gold market or any
market. Surely if we had such power we
would not have just crashed the gold
market down on our own toes. (More than
our toes, actually.)

But let's see if the Bullion Desk is right.
Here's fair notice: Once we get positioned,
we're going to see if we can do it again on
Friday, this time to the bond market, and,
if that works, on Monday to the South
African rand!

CHRIS POWELL, Secretary/Treasurer
Gold Anti-Trust Action Committee Inc.


Would you buy stock in GLD?

Cheers Rich

Posted by richardlancaster at 07:12 PM | Comments (7)

The latest from Stephen Roach at Morgan Stanley

December 01, 2004

Roach is possibly the best contrarian economist within the established order, as Chief Economist for Morgan Stanley. Over the weekend he made his, already "now famous," remarks about the US having a 1 in 10 chance of surviving economic catastrophe in the years ahead.

This is his first column since his weekend lecture. Here he is discussing US Consumers and what a dangerous bunch they are. I think a good debate about exactly how the average Joe Consumer will react to a rapid credit tightening, rapid inflation and basic "pay-back" scenario's might play out would be useful for all D2 readers.

Here is Stephen Roach (from New York)

Global rebalancing has quickly turned into the global blame game. “It’s the other guy,” exclaim Asians, Europeans, and Americans, when the issue of responsibility comes up. America’s Bush Administration views the rest of the world as suffering from a growth deficiency, largely brought about by under-consumption and excess saving. Conversely, Asians and Europeans view the United States as suffering from a saving deficiency brought about by over-consumption and government budget deficits. Who’s got it right?

The truth is, they probably all do. There can be no mistaking the extraordinary disparities in the global consumption dynamic in recent years. Over the 1996 to 2004 period, annual growth in US personal consumption expenditures averaged 3.9% -- nearly double the 2.2% pace recorded elsewhere in the so-called advanced world. Americans, for their part, have spent well beyond their means -- as those means are delineated by the US economy’s internal income generating capacity. Over the 1996 to 2004 period, annual growth in real disposable personal income averaged 3.4% -- fully 0.5 percentage point slower than average growth in consumer demand. As a result, the personal saving rate plunged from an already-depressed 4.6% level in 1995 to just 0.2% in September 2004. At the same time, the consumption share of US GDP surged to a record 71% by mid-2002 -- an extraordinary breakout from the 67% share that prevailed, on average, over the 25 years from 1975 to 2000. Never before has an advanced economy taken consumerism to such excess.

There’s no deep secret as to how the American consumer pulled it off. It’s all about the emerging power of the asset economy -- namely, how US consumers have turned increasingly from income generation to wealth creation in order to sustain current consumption. At work since 1995 has been the strongest and most sustained surge of above-trend growth in real household sector net worth of the modern-day, post-World War II era. American consumers were quick to make use of this windfall as an increasingly important supplemental source of purchasing power.

Moreover, there has been an important shift in the asset economy that took the US consumption dynamic to excess in recent years. The first wave came from the stock market, as household equity holdings surged from about 13% of total assets in 1991 to 35% at the peak in 2000. During the final stages of the equity bubble, individual stock portfolios supplanted real estate as the US household sector’s most important asset. By early 2000, residential property had fallen to less than 25% of total household sector assets, more than ten percentage points below the equity portion. It was only after the equity bubble popped that the asset economy took its most extraordinary twist. The increasingly wealth-dependent American consumer never skipped a beat. In large part, that was because the equity bubble immediately morphed into an even more powerful strain of asset appreciation -- a sustained burst of US house price appreciation that has continued to this very day. As a result, the real-estate share of total household assets rose back to 30% -- recapturing its role as the consumer’s leading asset class. According to Alan Greenspan, American households currently own some $14 trillion in real estate -- almost double their total equity holdings (see his February 23, 2004 speech, “Understanding Household Debt Obligations,” at the Credit Union National Association 2004 Governmental Affairs Conference, Washington, D.C.).

This multi-bubble syndrome was largely an outgrowth of the Federal Reserve’s aggressive post-equity-bubble damage containment tactics -- some 550 bp of monetary easing from early 2001 through mid-2003. Housing markets benefited handsomely from the support of 45-year lows in interest rates. And consumers, who had first discovered the joys of asset-driven wealth effects during the stock market bubble of the late 1990s, quickly put their newfound skills to work in reaping the gains of the housing bubble. Not only did they benefit from the psychology of feeling wealthier, but US homeowners were aggressive in taking advantage of breakthroughs in the technology of home mortgage refinancing. It wasn’t just the reduction in interest expenses, but the so-called cash-outs from rapidly appreciating housing assets enabled consumers to uncover a new and important source of incremental purchasing power. Freddie Mac puts the peak rate of equity extraction and second mortgages from residential property at $224 billion in 2003 -- almost 3% of the total value of home equity investments. Over the 2001-04, annual cash-outs appeared to average around 2% of aggregate home equity -- suggesting that households may have liquidated as much as 8% of their equity in real estate in order to fund current consumption. For an aging US society that needs to build saving in order to fund the not-so-distant retirement of some 77 million baby-boomers, even this partial liquidation of asset-based saving is disturbing, to say the least.

The asset economy does not just have its origins in America. It is very much a by-product of support from global investors and policy makers. One of the outgrowths of an increasingly asset-dependent economy is a shortfall in income-based national saving. America has taken this shortfall to an unprecedented extreme. The net national saving rate -- the combined saving of consumers, businesses, and the government sector after deducting for the depreciation of worn-out capacity -- fell to a record low in the 1-2% range in 2003-04. Lacking in domestic saving, American has had to import foreign saving from abroad -- and run massive current account deficits to attract that capital.

This is where the global enablers enter the equation. First, it was private investors seeking to share in the returns of the world’s greatest productivity story. Then, when doubts surfaced on that front, foreign central banks rushed in to fill the void. Over the 12 months ending September 2004, the “official sector” accounted for 28% of total purchases of long-term US securities -- nearly double the 15% share over the prior 12 months and about four times the portion during the 2000-02 period. This was only the latest chapter in a foreign-inspired dollar-support campaign. Dollar-denominated official foreign exchange reserves surged from $1.1 trillion to $2.1 trillion over the 1998 to 2003 period (as estimated by the BIS at constant exchange rates). That left dollar-based assets with approximately a 70% weight in official reserve portfolios -- more than double America’s 30% share in the world economy and, quite possibly, the biggest overweight in world financial markets today.

Nor is it difficult to discern the motive behind this foreign dollar-buying binge. It’s all about the lack of internal demand in Asia and Europe and the related need to draw support from export-oriented growth strategies. And, of course, central to such growth tactics are cheap currencies that underwrite export competitiveness. Asia has led the way in that regard -- with hard currency pegs in China, Hong Kong, and Malaysia and soft currency pegs in Japan, Korea, India, Taiwan, Thailand, and Indonesia. Asia’s official foreign exchange reserves surged to $2.2 trillion by mid-2004 -- more than double the holdings of early 2000. With the bulk of that incremental surge going into dollars, Americans enjoy a subsidy to domestic interest rates that is very much made in Asia. It’s hard to quantify the exact magnitude of that subsidy but my guess is anywhere from 100 to 150 bp at the intermediate and long portions of the yield curve. That means, in the absence of this foreign support campaign, yields on 10-year Treasuries would have been in the 5 to 5.5% zone -- implying a rate structure that would have been far more problematic in providing valuation support to US asset markets and concomitant wealth-driven support to America’s asset-dependent consumer. With the dollar appreciating over most of the past decade, this was a win-win strategy for Asia -- providing the region with competitive currencies, as well as portfolio gains on dollar holdings. Now that the dollar is going the other way, that calculus suddenly looks very problematic.

As the world now grapples with the imperatives of rebalancing, it is important that all parties understand the roles they have played -- both in creating the problem and in forging the solution. Asset-dependent Americans truly have an excess consumption problem. It is still astonishing to me that the bursting of the equity bubble didn’t spawn a culture of prudence that weaned US consumers from the perils of an all too fickle wealth effect. With US house price inflation now at a 25-year high of 8.8% and with 15 states now experiencing double-digit house price inflation, this voracious appetite for risk is all the more disturbing. Similarly, Asian and European financiers -- be they private investors or central banks -- need to accept responsibility for the important role they have played in keeping the music going for saving-short, over-extended US consumers. They have taken the easy way out -- putting off the heavy lifting of structural reforms needed to unlock domestic demand and choosing, instead, to recycle foreign exchange reserves into dollars and rely on currency manipulation as a means to sell everything they can to America. In my view, America, Asia, and Europe are all equally guilty of opting for an extraordinarily reckless way to run the world.

Financial markets have an uncanny knack in restoring a sense of order to a dysfunctional world. The dollar is now center stage in this global wake-up call -- as well it should be, in my view. But dollar depreciation is not the endgame of global rebalancing. It is the means toward the end -- a potential trigger for a long overdue realignment in the mix of global saving and consumption. By failing to face up to the imperatives of rebalancing, the world has collectively created the ultimate moral hazard -- a US consumer that is now “too big to fail.” This is a serious warning sign. The key to a successful global rebalancing, in my view, hinges critically on facing up to the risks of the world’s most serious excesses. The over-extended American consumer is at the top of that list. And a weaker dollar could well be key in forcing the interest rate adjustments that might well temper the asset-driven excesses of US consumption. This is a shared responsibility that the world must now collectively redress.

Long ago, I learned that most of the time it doesn’t pay to bet against the American consumer. There are rare occasions, however, when that rule doesn’t apply. That was the case in the early 1970s in the aftermath of the first oil shock. Back then, as a young staffer at the Federal Reserve Board, I was chastised by Fed Chairman Arthur Burns for being too negative on the US consumer. He argued that I didn’t appreciate the unflinching cyclical resilience of the US consumer -- a resilience that, ironically, was about to give way to America’s first consumer-led recession. A lot has changed in the ensuing 30 years. But for very different reasons, I now believe that another exception is in the offing. The American consumer is an accident waiting to happen. The sooner the world comes to grips with this problem, the better the chances of a successful rebalancing.


One of the first things that jumped in to my head after reading this was the need to characterize the average Joe Consumer - what do they look like in terms of their consumption, what are they likely to do when the dance stops and what are the ramifications for all of us?

Of key importance is the psychology of it all, for instance; is Joe Consumer, because of his undisciplined ways, more likely to panic early or resilient to impending disaster and likely to sit it out? The mass psyche is going to be the curve ball in future events, no amount of planning or strategizing can accurately predict the fall-out from economic meltdown - so based on what we know do we collectively spin out of control or do we enter an orderly disarray whereby common decency revails?

Cheers Rich

Posted by richardlancaster at 12:16 AM | Comments (26)
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