Guess which is the ocean and which is the bucket?

Many interesting things are currently happening in the financial markets. One that stands out and relates to the title involves the saga of the continuing IMF gold sales. To best illustrate the latest of this nearly 6 month drama follow the simple timeline provided below:

Per Bloomberg on February 17, 2010 - IMF to Start Open-Market Sales of Its Gold ‘Shortly’

The International Monetary Fund, which set out in September to sell about 13 percent of its gold reserves, said it will “shortly” expand sales to the open market after central banks bought 212 metric tons in private deals.

The institution has 191.3 tons left to sell after purchases by the central banks of India, Mauritius and Sri Lanka. Central banks still have the option to buy more of the metal, which would reduce the amount available on the market, the IMF said.

Per London Telegraph on February 23, 2010 - Concerns grow over China’s sale of US bonds

Evidence is mounting that Chinese sales of US Treasury bonds over recent months are intended as a warning shot to Washington over escalating political disputes rather than being part of a routine portfolio shift as thought at first.

A front-page story in the state’s China Information News said the record $34bn sale of US bonds in December was a “commendable” move. The article was republished by the National Bureau of Statistics, giving it a stronger imprimatur.

Use of China’s $2.4 trillion reserves to challenge US foreign policy is fraught with problems, not least because any damage to America will recoils immediately against China – which depends on the US market for its mercantilist growth strategy. Beijing cannot stop accumulating dollars unless it is willing to let the yuan ride, eroding the margins of its export industry. Some reserves can be parked in gold or even copper, but liquid commodity markets are not big enough to absorb the scale of Chinese surpluses.

Per Bloomberg on February 24, 2010 - China is Unlikely to Buy IMF’s Remaining Gold, Daily Reports

China may not buy gold from the International Monetary Fund to avoid causing market volatility, the China Daily reported, citing an unidentified official from the country’s gold association.

“They are not going to buy IMF gold unless prices are really attractive,” said Wallace Ng, executive director of the commodity derivatives team with Fortis Nederland. “They may be targeting below $1,000.”

“China has been increasing gold reserves not from international markets, but from the domestic market,” Ng said.

Per Pravda on February 25, 2010 - China To Purchase Half of IMF’s Gold

China has confirmed the intention to purchase 191.3 tons of gold from the International Monetary Fund at an open auction, Finmarket news agency said.

The IMF announced an intention to sell 403.3 tons of gold in accordance with the adequate decision made by the board of directors of the fund in September of 2009. India, Mauritius and Sri Lanka purchased about 212 tons of the amount at the end of 2009. India purchased most – 200 tons.

“Chinese officials have confirmed previous announcements from IMF experts and said that the purchasing of 191 tons of gold would not exert negative influence on the world market. China is interested in the development of the domestic consumer market,” the agency reports.

Most of Chinese citizens believe that investing in gold jewelry is a good way to avoid inflation, Rough & Polished agency said.

Just to reiterate a quote from the Telegraph article “Some reserves can be parked in gold or even copper, but liquid commodity markets are not big enough to absorb the scale of Chinese surpluses.” In a nutshell, this just about sums up why gold is NOT in a bubble. George Soros recently stated publicly that gold is the “ultimate bubble” – but strangely enough – Soros doubled his gold holdings just weeks before!

The periodic accounting performed by gold is historic and not really much of a debate. Mike Maloney, of www.goldsilver.com, describes this process simply in the following video:

UPDATE: Audit the Federal Reserve

http://www.auditthefed.com

• H.R. 1207: Federal Reserve Transparency Act of 2009 now has 317 co-sponsors, flat from 317 previously reported.
• S. 604: Federal Reserve Sunshine Act of 2009 now has 32 co-sponsors, flat from 32 previously reported.

Will be updated shortly!

Will be updated shortly!

• The troubles that countries are having with sovereign debt are growing exponentially. First it was Dubai supposedly with $100 billion in debt problems, which in fact may be underwater three or four times that number. Then, of course, there are a host of others. In the case of Dubai, British banks are holding the bag and probably will go down in flames. Greece cannot find any support even from Goldman Sachs. The Germans don’t want to help even though they knew Greece never was qualified to be in the euro. Greece is in a state of denial; is demanding reparations from Germany, which in 1960 paid a substantial amount to Greece in compensation. Germans for some time have wanted to exit the euro and the eurozone, some 71%. They have been sick and tired of carrying most of the rest of the zone with their balance of payments surplus. Greece makes up about 2.4% of GDP of the zone hardly enough to be concerned about. Eurozone governments would be better off writing off Greek bonds than subsidizing the country. Any bailout would be short lived, because so many other nations are in serious trouble. Let’s face it the eurozone is really Germany, France and the Netherlands.
• For the last two months the dollar with the help of insiders Goldman Sachs, JP Morgan Chase and Citigroup, who knew the Greek problem was on the way, has had an unusual rally that is about to end. They obviously knew the IMF would announce another gold sale and that the Fed would raise the discount rate. How could they not know with Goldman controlling the Treasury and Morgan the Fed? They also knew like any other observant economic professional that M3 was being reduced to almost no expansion as was happening simultaneously by the ECB and England, an event that would tend to strengthen the dollar. Doing this they all are playing a very dangerous game. If they lose control deflation will overwhelm inflation and a deflationary depression could begin. That will happen eventually, but the elitists would like it to happen on their timetable. The US has to find a way to end monetization and they have run out of options. The only possibility is for government to steal Americans’ retirement plans. The trouble is almost all sovereign debt cannot be avoided. Now the only question is when will the big conference begin to revalue, and devalue currencies, settle debt default and form a new international currency-trading unit in part backed by gold? All nations have been well aware for a long time that sovereign debt and some corporate and individual debt will never be repaid. That is why nations have reduced dollar holdings from 64.5% of foreign reserves to 61.4%. With the exception of four nations sovereign debt is not worth the paper it is written on. They are Switzerland, Canada, Australia and Norway.
• The dollar rally will soon end and speculators should begin to take short positions. All the good news for the dollar is out. For the moment it is the best of a bad lot. Then only real money is gold and silver. In the future more and more people worldwide will realize that and eventually there will be a stampede into the two precious metals. America will produce a debt to GDP ratio or 95% to 100% this year.
• The latest TIC data had to be sobering for anyone who follows America’s debt problems. Chinese holdings of US Treasuries fell by $34.2 billion, or 4.3%. Japan increased holdings by $11.5 billion. This gives Japan the dubious honor of being the Number 1 Treasury holder in the world. Worldwide Treasury holdings fell $53 billion in December. $53.2 billion of sales were the result of foreign central bank sales. In 2008, their holdings rose $456 billion and in 2009, they fell $500 billion. As a result in 2009 the Fed purchased 80% of Treasuries via monetization.
• This day of reckoning or of choice is upon us. You either purge the system of its excesses, and allow the bankrupt to fail, suffer a doubling of unemployment, bankruptcy in the states, a fall in stock and bond prices, or you continue to stimulate with more dire consequences later. The game of chicken has begun and it’s a game the Fed and the Treasury will lose, no matter which way they go. Government is not going to tell you the truth; you have to figure it out for yourself by listening to talk radio and going on to the Internet. Government won’t tell you that over the past ten years debt has increased 120%, or by $6.7 trillion, or $677 billion annually. The new average projection of additional debt over the next ten years is $853 billion annually. That is hardly fiscal restraint and it renders the debt unpayable. This is not a happy story, but government and the Fed have no intention of changing anything, although we believe they will soon be forced too, due to similar problems worldwide.
• There is no question Greece and others have very bad debt problems, but we look at Greece’s problems, as a diversion, something to distract investors and Americans away from America’s growing unserviceable debt bomb. Foreigners have dramatically reduced purchases of Treasuries and real interest rates on 10-year T-notes are up 3/8% to ½% in recent months as buyers demand more yield on long dated bonds and notes. The Greeks took a ratings cut and the US, UK and others had the heat taken off for the time being. Unfortunately, Europe has as a result had fallout in the form of pressure on the euro, which may be on its way to being a non-currency. In fact future events may not only end the euro, but the European Union as well.
• We find it difficult to take talk of an “exit strategy” seriously when the Fed continues to purchase tens of billions of marketable securities. Why can’t they wind down the MBS purchases early (scheduled to end in March at $1.25 TN)? Apparently, the Fed’s immediate objective remains to ensure that markets remain highly liquid. They may discuss various future methods to ensure that the massive liquidity pool does not turn inflationary, but the marketplace is not really fooled. Markets see ultra-easy “money” indefinitely.??