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Friday, March 24, 2006

Vietnam Gold


The Vietnamese central bank has been creating too many Dong out of thin air so that the Dong has been losing its value rather fast. This creates a problem in Vietnam for Vietnamese who need to buy gold to pay their mortgage payments. Just another example of government central banks screwing up an economy and stealing stored value from people who have in their possession government fiat tokens. No wonder so many important transactions in Vietnam are done using gold as smart Vietnamese know not to trust their central bank and its Dong.


http://www.thanhniennews.com/business/?catid=2&newsid=13640

"Gold price rise pressures house loans

Skyrocketing global gold prices have boosted prices in Vietnam, causing concern for those who took out gold loans to buy houses as their debt rises.

Sharp climbs in the price of gold, which is widely used in housing transactions in Vietnam, threaten thousands of households as they face losing homes if they cannot handle the increased debt.

The price of pure gold currently stand at VND10.6 million (US$666) per tael (1.25 oz), while that in 1999 was only VND4.9 million.

Mrs. Anh from District 1 who bought an apartment on gold loan in May 2002 told Thanh Nien she had seen her debt in Vietnamese dong almost double.

She borrowed 27.5 taels of gold in May 2002, priced at VND5.9 million per tael, or VND162 million in total.

The loan was to be paid in installments over 10 years to buy an apartment in a building on Cong Quynh Street.

After four years of paying down the debt, her loan later was now VND288 million, an increase of VND126 million due to surging gold prices.

The worst case scenario is having to leave her house, after failing to pay the housing company contract after 10 years due to rising gold prices.

In another case, Mr. Luy from the Hiep Binh Chanh building, the Thu Duc District, said he bought the apartment worth VND122 million on a rent to own contract in 1999.

In the first months he had to pay VND400,000 per month to the bank but the sum later climbed over VND1 million, fueled by rising gold prices.

No solution yet

Real estate companies said thousands of households belonging to site clearance for projects and purchasing re-settle houses in the city fall into a situation like Anh’s.

The city’s District 1 housing management company has managed nine apartment buildings with the majority of house owners paying in installments.

Failure to pay house loans is common situation among households located in the building, according to Luy. Many had to sell their houses to pay off the debt.

Nguyen Quang Van, deputy director of the District 1 housing management company, said the company has submitted to the authorized offices solution on changing loans in gold into loans in dong, helping households escape the financial burden.

However the solution has yet to be approved.

The domestic market saw gold price hikes mirroring global prices towards the end of 2005 as demand outstripped supply – pushing the metal to a 24-year high of $541 an ounce Dec. 12.

Vietnamese gold rates have scaled to fresh new highs several times recently, peaking at VND10.9-10.91 million ($688) early this month.

Experts predict gold could climb as high as $600 per ounce this year, driven by fund hoarding, a weakening US dollar, and geopolitical tensions.

Reported by Thanh Xuan – Translated by Ha Viet"

"At any given moment there is an orthodoxy, a body of ideas which it is assumed all right-thinking people will accept without question. It is not exactly forbidden to state this or that or the other, but it is 'not done'... Anyone who challenges the prevailing orthodoxy finds himself silenced with surprising effectiveness." -- George Orwell

Gold Price Prediction

Ian Telfer has made a gold price prediction that is not out of line with other quite knowledgable experienced people in the industry.

"NP/DJ say ex Goldcorp CEO sees gold at $5,500 (U.S.)

Thursday March 23 2006 - In the News

The National Post reports in its Thursday, March 23, edition that former Goldcorp chief executive officer Ian Telfer can see gold trading at $5,500 (U.S.) an ounce. A Dow Jones dispatch to the Post reports that Mr. Telfer suggests a perfect storm is in place for gold to replicate exponential gains seen at least twice in the past century. "I happen to be bullish on gold," said the former chief of Goldcorp and current chairman of U.S. Gold Corp. Mr. McEwen is adamant that a number of key fundamentals have changed over the past six years to create another gold rush. Mr. Telfer says in 1966, it took 28 ounces of gold to buy the Dow Jones index. But in the 1970s, gold went from around $41 (U.S.) an ounce to more than $840 (U.S.) an ounce by 1980. That was a year when one ounce of gold could buy the index. In the late 1990s, it took 44 ounces of gold to buy the DJI. These days? it takes about 19 ounces to buy a DJI. Mr. McEwen said gold investors should watch this ratio carefully. If, down the road, the gold-to-index ratio moves to 5:1, investors should start thinking about an exit out of gold. If it moves to 2:1, investors should take their money off the table, Mr. McEwen said."

Further out in time, if the gold/Dow index is down to 2:1, the gold price predictions should be astronomical at that point in time from those that do not understand that the top of the bull is about in place.

Thursday, March 16, 2006

Fed to Discontinue M3

Yes, the Fed will be discontinuing M3 but some will be able to reconstruct the number since the components of M3 will still be published although spread amongst different places. The bottom line being that the number will not be readily available to the masses.

Robert McHugh, Ph.D. at:
http://www.financialsense.com/fsu/editorials/mchugh/2006/0311.html

in the context of the Fed wanting banks to restrict commercial real estate loans (a good read) writes:

"The Fed announced again on March 9th, with no palatable explanation, that they will no longer publish M-3 as of March 23rd. While they claim that M-3 is useless, in the blurb on their website, the fact is banks are still reporting all the data on their Call Reports used to calculate M-3. The Fed has not eliminated the unique M-3 components from the Bank Call Reports.

Why don’t they want to be transparent with the most important statistic, the very measure of why they were established by a minority of Congress during a late night session back in 1913? Because they cannot wait to pump money to high heaven like some sort of fiat tower of Babel.

M-3 was increased by $28.3 billion last week, a 14.2 percent annualized rate of growth. Over the past 2 weeks, M-3 was boosted an amazing $81.9 billion, for an annualized rate of growth of 20.7 percent! Over the past 8 weeks, M-3 is up 129.6 billion, an 8.2 percent rate of growth, and is up a whopping $249.7 billion over the past 12 weeks, a 10.7 percent annualized rate of growth, a $1.0 trillion annual expansion."

Wednesday, March 08, 2006

otc derivatives

The BIS (Bank for International Settlement) is saying that their total of otc derivatives in the world are around $300 trillion. otc derivatives are a zero sum game like futures and options. There is no way that there is a group of entities out there that can take a $150 trillion dollar hit and still stay standing.

The following is a bit from Berkshire Hathaway's recent report. All this in a relatively calm financial environment:

http://www.berkshirehathaway.com/2005arn/2005ar.pdf

from page 11:

"Long ago, Mark Twain said: “A man who tries to carry a cat home by its tail will learn a lesson that can be learned in no other way.” If Twain were around now, he might try winding up a derivatives business. After a few days, he would opt for cats.

We lost $104 million pre-tax last year in our continuing attempt to exit Gen Re’s derivative operation. Our aggregate losses since we began this endeavor total $404 million.

Originally we had 23,218 contracts outstanding. By the start of 2005 we were down to 2,890. You might expect that our losses would have been stemmed by this point, but the blood has kept flowing. Reducing our inventory to 741 contracts last year cost us the $104 million mentioned above.

Remember that the rationale for establishing this unit in 1990 was Gen Re’s wish to meet theneeds of insurance clients. Yet one of the contracts we liquidated in 2005 had a term of 100 years! It’s difficult to imagine what “need” such a contract could fulfill except, perhaps, the need of a compensation conscious trader to have a long-dated contract on his books. Long contracts, or alternatively those with
multiple variables, are the most difficult to mark to market (the standard procedure used in accounting for derivatives) and provide the most opportunity for “imagination” when traders are estimating their value.
Small wonder that traders promote them.

A business in which huge amounts of compensation flow from assumed numbers is obviously fraught with danger. When two traders execute a transaction that has several, sometimes esoteric, variables and a far-off settlement date, their respective firms must subsequently value these contracts whenever they calculate their earnings. A given contract may be valued at one price by Firm A and at another by Firm B. You can bet that the valuation differences – and I’m personally familiar with several that were huge – tend to be tilted in a direction favoring higher earnings at each firm. It’s a strange world in which two parties can carry out a paper transaction that each can promptly report as profitable.

I dwell on our experience in derivatives each year for two reasons. One is personal and unpleasant. The hard fact is that I have cost you a lot of money by not moving immediately to close down Gen Re’s trading operation. Both Charlie and I knew at the time of the Gen Re purchase that it was a problem and told its management that we wanted to exit the business. It was my responsibility to make sure that happened. Rather than address the situation head on, however, I wasted several years while we attempted to sell the operation. That was a doomed endeavor because no realistic solution could have extricated us from the maze of liabilities that was going to exist for decades. Our obligations were particularly worrisome because their potential to explode could not be measured. Moreover, if severe trouble occurred, we knew it was likely to correlate with problems elsewhere in financial markets.

So I failed in my attempt to exit painlessly, and in the meantime more trades were put on the books. Fault me for dithering. (Charlie calls it thumb-sucking.) When a problem exists, whether in personnel or in business operations, the time to act is now.

The second reason I regularly describe our problems in this area lies in the hope that our experiences may prove instructive for managers, auditors and regulators. In a sense, we are a canary in this business coal mine and should sing a song of warning as we expire. The number and value of derivative contracts outstanding in the world continues to mushroom and is now a multiple of what existed in 1998, the last time that financial chaos erupted.

Our experience should be particularly sobering because we were a better-than-average candidate to exit gracefully. Gen Re was a relatively minor operator in the derivatives field. It has had the good fortune to unwind its supposedly liquid positions in a benign market, all the while free of financial or other pressures that might have forced it to conduct the liquidation in a less-than-efficient manner. Our
accounting in the past was conventional and actually thought to be conservative. Additionally, we know of no bad behavior by anyone involved.

It could be a different story for others in the future. Imagine, if you will, one or more firms (troubles often spread) with positions that are many multiples of ours attempting to liquidate in chaotic markets and under extreme, and well-publicized, pressures. This is a scenario to which much attention should be given now rather than after the fact. The time to have considered – and improved – the reliability of New Orleans’ levees was before Katrina.

When we finally wind up Gen Re Securities, my feelings about its departure will be akin to those expressed in a country song, “My wife ran away with my best friend, and I sure miss him a lot.” "

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Smart people already have been aquiring small, if not large, pieces of gold and silver as a store of wealth that they can actually own, that is actual usefull money, also. You sure do not **own** your wealth that is stored as digital bits on the hard drives owned by the world's big or small financial institutions. If you don't own the hard drive that your digital bits are on, you don't own your digital bits. That's for sure.

Sunday, March 05, 2006

Reasons for a Gold Price Increase

Strickly speaking rising interest rates are not a reason for a gold price increase, but they correlate very well with a rising gold price.

Coming out of a depression or long deep recession people will start saving and increase the rate at which they save. Then there will come a point when they will start to decrease their savings rate and increase their consumption rate usually because the purchasing power of their savings is going down so that there is less incentive to save. They may as well start buying stuff that has real value now rather than wait till later when it will be more expensive.

Particularly since 1971+ when the world gave up using currencies redeemable for something that is nobody's liability like gold and silver, governments have noticed the high savings rate and taken advantage of it by creating unusually large amounts of government fiat tokens. People would save anyways which would keep most of those extra fiat tokens out of the market for goods and services. But there comes a point when those extra fiat tokens start to increase prices despite high savings rates.

It appears that Japan is entering into that phase. The Japanese government has taken advantage of the high savings rate of the Japanese savers particularly since 1990 when Japan went into a deep long recession. The Japanese government since the high point of their economy in 1990 has created massive amounts of debt and Yen fiat tokens, all the while keeping interest rates artificially low. Really low. So low that everybody and their brother wanted to borrow Yen at 1% - 0% and use the Yen to buy debt from other countries that had much higher yields. It was called the Yen carry trade. This carry trade has been going on for years and looks to be coming to an end. The Japanese government needs to raise interest rates to try and entice the Japanese to save more. The more savings there are, the more capital can be bought to create new wealth.

The days of easy, no brainer money made from carry trades look to be ending because of rising interest rates in low rate countries. This means a slow down or end of the easy "money" being sent and loaned to the profligate higher rate countries like the US, UK and Australia. Now there is pressure on the countries that the carry trade used to loan "money" to, to increase rates to attract savings. But increasing rates will slow down these economies that are slowing anyways due to too little capital formation over the years used to create too little wealth or no wealth or outright capital consumption like in the US. These country's central banks are between a rock and a hard place. A situation that the governments and central banks created themselves.

No wonder that in the US, at least, the Fed is screamingly unconstitutional. When Americans started to not really care about their constitution, they got a central bank layed on them.

All this because governments will do just about anything to be able to buy their citizen unit's votes. All this because there is now too many USD and Yen in the world. As there is more and more of something, it decreases in value. No wonder people want a higher and higher yield on something that they loan and will not be getting back till further out in time when the thing loaned is worth less.

Increasing interest rates correlate with a gold price increase.



Wall Street's Fixed-Income Profit Engine Shows Signs of Slowing

...

Fourth-quarter fixed-income trading revenue at New York- based JPMorgan Chase & Co., the No. 3 U.S. bank, plunged 65 percent from the third quarter. The business accounted for $5.7 billion, or 10 percent, of the bank's revenue in 2005.

``Several of our trading books were on the wrong side of interest rates,'' JPMorgan Chief Executive Officer James Dimon, 49, said on a Jan. 18 conference call with reporters. ``It was a bunch of positions that didn't work out.''

...

Thursday, March 02, 2006

Gold Price Correction

If you think a gold price correction is underway, you better think again. During the first 2/3s of 2005, gold based out. Since then it has formed a nicely sloping uptrending channel. More precisely speaking, gold bottomed and started that channel at the beginning of November of 2005. It has made 2 more bottoms since. What is interesting is that since that bottom, gold has been moving up for about 2 weeks. What is even more interesting is that just the other day gold's momentum and MACD indicators turned positive in an unequivical manner. They took 2 weeks to get really positive. This is normal. There is nothing out there that is readily apparent that says gold should not move up to or near the top of the channel that it is currently in. Depending on how long gold takes, the "top" of the channel can be roughly 600-620.

This can be seen in this 6 month long gold futures chart

Conversely, the USD's technical indicators have turned positively bearish, which is bullish for gold. There is a gold price correction out there in the future, but that is not what is going on now.