China Diversifying Reserves by Snapping Up Gold

Gold's successive run-ups to record highs are underpinned by hopes for central banks to further diversify reserves, particularly China's, a topic set to dominate a two-day industry gathering in Shanghai from Thursday.

* Safe-haven appeal overrides investor caution on gold rise
* Expectations for more central bank buying keep support firm
* Weak dollar puts China in quandary over beefing up gold buy
* China's physical demand and consumption seen rising
Reuters

No Bank Should be Considered too Big to Fail - Jamie Dimon, J.P. Morgan Chase CEO

"As Treasury Secretary Timothy Geithner recently put it, 'No financial system can operate efficiently if financial institutions and investors assume that government will protect them from the consequences of failure.' The term 'too big to fail' must be excised from our vocabulary.  - Jamie Dimon, J.P. Morgan Chase CEO WSJ

Gold is Cheaper Today than in 2001, Given Interest Rates and how the Government is Printing Money

by Fern Phan

“Gold won’t fall below $1,000 an ounce again after rising 27 percent this year to a record as central banks print money to help fund budget deficits, said Marc Faber, publisher of the Gloom, Boom & Doom report.
The precious metal rose to all-time highs in New York and London today as the dollar weakened. The Dollar Index, a gauge of value against six other currencies, has declined 7.9 percent this year and today fell to a 15-month low. News last week of bullion purchases by the Indian and Sri Lankan governments raised speculation that other countries would follow suit.
“We will not see less than the $1,000 level again,” Faber said at a conference today in London. “Central banks are all the same. They are printers. Gold is maybe cheaper today than in 2001, given the interest rates. You have to own physical gold.”
China will keep buying resources including gold, he said. Bloomberg

Gold hits a record near $1,100

December gold jumped $10.10 to $1,095 an ounce, after hitting an all-time trading high of $1,096.20 an ounce earlier in the session. On Tuesday, gold closed at a record $1,084.90 an ounce.

Gold, which is up 23% this year, surged on Tuesday after the International Monetary Fund said it sold 200 metric tons of the precious metal to India's central bank. CNN

Going to the Top of the Gold Bubble

Gold has a ways to go...

Historical Valuation...

 

EconomicPicData

Agricultural Commodities Pull Back; 80% of Banks Tightened Lending Standards for Prime Mortgages; The Dollar's Continued Rally; Fuel Subsidies Counter Productive for Emerging Economies

MWF (Monday) Briefing:

Last week, Bloomberg released their monthly survey of over 50 economists. The median estimate for US recession in the next 12 months was 51%, similar to the 50% readings in the prior two months. 

Commodities have been pulling back.  From Bespoke, gold now is in bear territory "with a decline of over 2% overnight, gold is the latest commodity to hit bear market territory.  The commodity is now down 21.5% from its highs during the collapse of Bear Stearns.  As highlighted below, gold is now at its lowest levels of the year and down over 6% YTD.  Looking back at the prior eleven bear markets in gold, the average decline has been just under 34% over a period of 18 months."  Commodity sales have surged by rising prices, particularly for grains, and by the decline in the value of the dollar, reducing the cost of American exports in other currencies. Both trends have recently reversed, suggesting that the rise in commodity sales will not be sustained.  The dollar rallied in a particularly strong way suggesting that it might hold it's own against other currencies.  That's very bad for exports and agricultural commodities.

China and India lifted much of their gas subsidies within the past few months.  Developing countries support of gas subsidies only hurt their economies more by encouraging waste.

• "In its latest quarterly survey of bank lending officers, the Fed found nearly 80% of banks had tightened their lending standards for prime mortgages since the previous survey in April, when 60% said they were imposing more stringent criteria. For so-called nontraditional loans, 85% said they tightened their standards, up from 75% in the previous survey. And in the subprime market, about six out of seven respondents said they tightened standards, up slightly from the previous survey." WSJ

• The commodities boom looks to be coming unwound, and dollar gains are looking more substantial, but the news isn't necessarily good.Cheaper commodities will ultimately reduce inflation pressure, but the cause of the decline, as well as dollar appreciation, seems to be rapid flagging of growth in Europe and Asia. Economist

• Surge of the Dollar raises global fears. Against sterling, the US currency notched up its 11th consecutive day of gains – its longest uninterrupted rise in more than 35 years – as markets became increasingly convinced that the US was best-placed to weather the global downturn. FT

• Fuel subsidies are a drag.  Many emerging economies employ subsidies that keep domestic fuel prices far below the world price.As a result, these countries consume far more fuel than they would otherwise, ending up being counter productive.  NYT

Corn Prices Respond to EPA Re-assessment of Ethanol Mandate; Hedging & Diversifying; Shifting Perceptions; The Big Gobbled by The Bigger

MWF (Wednesday) Briefing:

• Shift in corn prices.  September corn is in a retreat this morning to break below the $6-a-bushel level. That's nearly a $1 tumble from its peak.  Much might be related to pressure for EPA officials to re-evaluate the ethanol policy after a request to reduce the mandate.Also, the World Bank have working papers (the Guardian originally said they were secret, which isn't true according to the World Bank) reporting that ethanol demand added 75% to the cost of food.

• "At what point does a diversifier become a hedge? Asset allocation has been driven of late by the desire to access a wide range of alternative asset classes.  University endowments like Harvard and Yale have become the gold standard in investment management.  (See this post byMebane Faber at World Beta on the subject.)  The entire drive for broad diversification is an attempt to access a diverse set of risk premia in addition to generating active alpha."  Abnormal Returns

• The financial crisis continues to create victims. Not only people but also some of our most cherished ideas risk falling by the wayside. Take the hugely influential idea that financial markets are efficient. Its proponents told us that when financial markets were left free, they would work miracles. FT

• The disappearing Genentech. One of the most important companies of the past 30 years could lose its identity inside Roche. That's not altogether a bad thing. Forbes

Jim Rogers, George Soros, & Goldman Sachs Have a Thing or Two to Say about Financial Markets & the Credit Crisis.

What was once considered rare  becomes the norm.  More changes ahead. Legendary currency trader Jim Rogers has called plans to bail-out of Fannie Mae and Freddie Mach an "unmitigated disaster". George Soros said banks were only the beginning of the "most serious financial crisis of our lifetime."  He noted that Fannie Mae and Freddie Mac have a solvency problem not a liquidity problem.  Sounds like we might have already gone over that precipice.

• The S&P 500 Financials sector had its worst day of the credit crisis today, declining 6.1%.  The one-day declines in many of the banks today reminded us of the worst days during the bursting of the Tech bubble. Bespoke

• The survey confirms that these strategies—now established components of many institutional portfolios—are no longer “alternative” at all. In fact, alternatives now play an essential role in institutional portfolio strategies, and we expect across-the-board allocation increases despite recent market turmoil. All About Alpha

• With Goldman Sachs, George Soros and Jim Rogers all coming out skeptical about the government plans for Fannie and Freddie, skittish markets look for more input. Telegraph  Seeking Alpha

Pop Goes Some Economic Bubbles. That & Inflation Aren't Necessarily a Bad Thing.

MWF (Friday) Briefing:

The G-8 will make an announcement next week to express concern over commodities being a challenge to the global economy.  Inflation is often the side product of growth, related to bubbles and innovation so it is a matter of trying to keep in check.  The dollar is coming back, though still quite weak against other major currencies.  That might not be all bad considering it makes American exports look like a deal.  The trade imbalance with China is still massive standing at $20 billion.  A lot of tough talking by fiscal types over this.  Asian markets took big losses, many of the indices down by half since Fall 2007.

• Economic bubbles, man's best friend.  Speculative fevers often emerge during times of major innovations and technological change. By definition, the impact of innovation is unpredictable. What will win out is impossible to predict. A bubble is capitalism's way of rapidly transforming an economy. Businessweek

• Asset allocation expert says go big on commodities exposure. Hard Assets

• The deal is officially dead. After first rebuff, Microsoft came back with a proposal to buy 16% of Yahoo at $35.  Yahoo then announced a search deal with Google that will add $250-$450 million per year to its bottom line WSJ  Wired or is it?

• Mass transit surge: Most riders since 1957. CNNMoney

• Consumer Price Index (CPI) rose .06% in May due to higher fuel and food costs. Department of Labor

• Gold ends the week with stiff losses as the dollar strengthens against major currencies lessening demand for precious metal as an inflation hedge.  Marketwatch

Understated Inflation in the U.S.; Decline in BRICs without Oil; More Defaults

MWF (Friday) Briefing:

Classic economists have some of the catchiest phrases.  Currently, Williamson's classic Transaction Cost Analysis (TCA) pops to mind since we are in a period of heightened, as he would say, "information impactness."Inflation is much worse than what's reported in the U.S.  All BRICs are not created equal, though they are not so different.  More Defaults are on the way from Wall Street to mainstreet.  The losses are trickling up and up.

The irony to Williamson's TCA is that it's not an agency-based economic theory whatsoever, which was what he assumed.  It's actually a sociological theory once you pull back and see that it's a structural argument to transactions.  Things are quite different sometimes when you look at the bigger picture.

• Bill Gross, in his June 2008 Investment Outlook, presents comparative charts on inflation reporting.  U.S. inflation is understated and commodities would then not be valued correctly at this time.  He questions the authenticity of U.S. inflation calculations"by presenting two ten-year graphs – one showing the ups and downs of year-over-year price changes for 24 representative foreign countries, and the other, the same time period for the U.S. An observer’s immediate take is that there are glaring differences, first in terms of trend and second in the actual mean or average of the 2 calculations. These representative countries, chosen and graphed by Ed Hyman and ISI, have averaged nearly 7% inflation for the past decade, while the U.S. has measured 2.6%. The most recent 12 months produces that same 7% number for the world but a closer 4% in the U.S."  Pimco

• India and China aren't holding up well under the BRIC name. "Give me a BRIC...hold the I and the C" is an order many BRIC investors would have loved to have made over the last six months... Brazil is up 9% and Russia is up 7% since early December, while India is down 21% and China is down 31%.  If things don't begin to turn around for the two laggards soon, we'll probably start seeing just Brussia ETFs." Bespoke

• Fuel costs threaten trade. In the industrialized era, the cost of shipping manufactured goods fell by some 90%. This massive decline in transportation costs, and coincident improvements in communications technologies, allowed firms to fracture and disperse their production chains.  Globalisation owes at least as much to declining transportation costs as it does to institutional liberalisation. So what happens when transportation costs go up? And up and up and up? At Econbrowser, Menzie Chinn cites a Thomas Net story on the subject:The impact of rising transportation costs, driven significantly by high oil prices, is already being seen in capital-intensive manufacturing.  Economist

• The rate of new foreclosures and late payments surged to the highest levels since 1979 affecting 1 in 10 American homeowners.  The period from January to March 2008 marked the worst quarter for American homeowners in nearly a quarter-century, according to a widely watchedreport put out by the Mortgage Bankers Association, a trade group. NYT

• We highlight historical default risk for JP Morgan, Lehman, Morgan Stanley, Merrill, Goldman and Citigroup as measured by their 5-year credit default swap prices. After peaking in March during the Bear Stearns blowup, default risk for banks and brokers declined sharply but still remained elevated when compared to normal historical levels.Bespoke

Art, Russians, Hedge Funds, Commodities & Skyrocketing Prices

by Fern Phan

If I were to buy a balloon flower for several million dollars, my only requirement would be that it not be deflatable.

Flush with oil profits, many former Soviets (now capitalists) are bidding up the art market in modern and contemporary work. According to the NY Times, art dealers say they believe that the Ukrainian billionaire Victor Pinchuk, who lives in Kiev, bought both “Hanging Heart” and “Blue Diamond,” works by Jeff Koons. “Hanging Heart (Magenta/Gold)” set a record for $23.5 million at Sotheby’s for most expensive work sold for a living artist November 14, 2007. Koons sold “Diamond (Blue)” for $11.8 million at Christie’s that same month. Russians are believed to be major buyers of modern and contemporary art. Many of the expats live in London.

Image from Bloomberg

The below “Balloon Flower (Magenta)” is officially on Christie's London auction block. It's expected to bring in a minimum of US$23.5 million and was originally bought by the Rachofskys of Dallas for US$1.1 million in 2001. Mr. Koons made five “Balloon Flowers,” each in a different color, yellow, red, orange, blue, and magenta.

Background: Jeff Koons, the artist, started out as a commodities broker on Wall Street to feed his art habit. From that he parlayed it into a highly controversial, highly financed, and highly lucrative art career. The "Balloon Flower (Magenta)" is a signature piece from his series "Celebration," a body of work he created partly out of grief over a lost son and his attempt to communicate with his boy. Koons' only child was basically kidnapped by his ex-wife, the one time porn actress, Italian parliament representative for the Green Party, and a sex talkshow radio personality. Cicciolina (name christened from her habit of addressing male prison population radio callers "cicciolino" or little bear) also has an advanced degree. Koons' estranged son now lives in Italy with his ex-wife. It has been said he nearly went bankrupt over in the process of creating the "Celebration" series.

The Rachofskys (Howard Rachofsky runs a hedge fund), owners of the balloon flower, became art fanatics. They buy up and sell artwork to aquire more artwork to augment their two-pronged themed collection - minimalist and identity. The highly regarded collection will eventually belong to the Dallas Museum of Art along with the Richard Meier house where it is for now, floating in the pond out front. Though they love the sculpture, the Rachofskys are selling because it has appreciated so much and they would like to use the proceeds to add to their collection. They sold their first work by Koons in 2001, “Woman in Tub” at Christie’s for $2.8 million. The proceeds from that sale went to buyng “Balloon Flower (Magenta)” along with other artists works.

The Russians. Deregulation of state enterprises and the oil boom have created a new and extremely wealthy class in the former Soviet Union, including it's satellite countries. Many now live abroad including in London, a traditional oil expat enclave for rich middle easterners. The art they buy and whether or not they are pushing up prices of modern and contemporary works is somewhat conjecture considering the auction houses do not publish bidders or buyers names. They only provide nationality percentages. American bidders still predominate. There's is a high probability that the nouveaux riches of the former Eastern Bloc and Soviet Union are buying up culture since the money is there and new money being new money...

Skyrocketing Returns. The Rachofskys hit it big with the Koons buy and also maybe the hedge fund business. A 25x guaranteed return in seven years ain't bad. The prices are, by antecdote, driven by the new found wealth in oil, deregulating industries, and emerging market wealth related to infrastructure boom (which ties into commodities). Like what happened with the real estate and conglomerate rich Japanese buying all the impressionist works in the 1980s, this might be the harbinger of the beginning of the end until it all starts again - for art, anyway.