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Monday, April 20, 2009


Market Commentary From Monty Guild

A VERY IMPORTANT EVENT IS TAKING PLACE

We believe that it demonstrates conclusively that CHINA AND INDIA ARE WISE.

This weekend, the intelligent and alert Ron Silverton sent me an important article which was posted in the Indian newspaper the Financial Chronicle on April 15th, 2009.  The article is summarized in its first sentence: “India and China may press for the sale of the entire gold reserves of the International Monetary Fund (IMF) to raise money for the least developed countries.”

According to the article, “The IMF holds 103.4 million ounces (3,217 tonnes) of gold that, if sold, can fetch about $100 billon.  A draft paper exchanged between New Delhi and Beijing proposed that the gold be sold in bullion markets over a period of two or three years.  The money thus raised must be used in tackling poverty in the poorest nations.”

The article continues “How the sale will affect the bullion market, with attendant problems for currencies, has not been assessed.  A large part of the gold may find its way into central banks and private players.  Since most of it will be out of reach of reach for retail markets, gold prices may not get hammered.”

If the proposal is approved by the governments of these two nations, it will be presented at the next IMF meeting in June.  First, the countries which actually own the gold must agree to the IMF sale.  We believe that some but not all of these countries could agree to the sale.

IF SOME COUNTRIES WERE TO APPROVE THE SALE BY THE IMF OF THE GOLD THAT THE COUNTRIES HOLD THERE, IT WOULD BE A HUGE BENEFIT FOR INDIA, AND EVEN MORE SO FOR CHINA

This is a stroke of genius for India, and especially for China.  In our opinion, this action once again demonstrates that the leadership of India and China are more intelligent and more forward thinking than other major countries, and that they are manipulating the world players to accomplish several of their goals simultaneously.

WHAT IT LOOKS LIKE ON THE SURFACE VERSUS WHAT IS ACTUALLY HAPPENING

1)   APPEARANCE—-It appears to be negative for gold prices. ACTUALITY—-Longer term, it is actually very bullish for gold prices.  The actual outcome will be that most of this gold will never hit the market, especially if retail sellers panic and the price of the metal falls in the short term.  Some central banks, primarily China’s, have plenty of liquid reserves, and are willing buyers of gold, and they will be thrilled to get it so cheaply.

2)   APPEARANCE—-It appears to be positive for the IMF, in that it helps to accomplish their goal of loaning to the incompetent and bankrupt countries that approach them for loans, after all other sources of financing have turned the countries down. ACTUALITY—-It is true that the cash from the gold sales would solve that problem in the short run, but in the long run, these same countries will likely make the same mistake again.  This is largely because their political organizations are focused on helping the political and business oligarchs who run the countries, and ignoring the best interests of the electorate.  These countries will probably return to a much less capitalized IMF for more money later.

3)   APPEARANCE—–It appears to be a selfless gesture on the part of China and India. ACTUALITY—-Both India and China would be buyers of the IMF’s gold were it sold at reasonable prices.  I imagine that China will be by far the biggest buyer of the gold, along with Russia and Saudi Arabia.  Increasing their gold reserves (in exchange for the dollars in their reserves) would strengthen the value of their currencies.  We anticipate that once China owns enough gold, they will partially back their currency with gold, making them the world economic and financial leader, and removing the U.S. from its position of economic power.  The effect of these maneuvers will go a long way to setting THE CHINESE YUAN UP TO REPLACE THE U.S. DOLLAR AS THE WORLD RESERVE CURRENCY.

4)   APPEARANCE—-It helps all countries who would have to make contributions to the IMF to fund the loans that the IMF makes to indigent countries, many of which are never repaid. ACTUALITY—-This is true.  However, it helps China and India more because their responsibility for financing the IMF grows as they become powerful financially.  It is a method to get the IMF to self finance in the short run and save China and India money.

Chinese Yuan (represents the number of Chinese Yuan per U.S. Dollar)

chinyuan

U.S. Dollar Index (ICE)  usdx

CHINA STOCK RALLY

New government regulations were promulgated last week to reduce speculative lending. Going forward, China’s banking system maybe slowing its availability of loans for stock market speculation.  We expect, this will slow down money flows into Chinese stocks for a few weeks.  We plan to wait for a pullback before we once again buy Chinese stocks.

In the May issue of Atlantic magazine, Simon Johnson, the former chief economist at the IMF gave a brilliant explanation of how the IMF works, and why the U.S. is starting to resemble  a third world country with financial oligarchs calling the tune in Washington.

The unfortunate marriage of financial services and government in the U.S. has been an old theme of ours, and we strongly recommend that you read the article.  It is entitled “The Quiet Coup”.

SUMMARY

The markets have had a good rally, and we are unsure if it will continue.  We believe that China may correct for a few weeks.  The U.S., Europe, and other developed markets bear close watching to detect signs of a market top.  It is quite possible the markets will rise another 20%, but it is also possible a quick 20% decline is in store.  In our opinion, vigilance is the watch word.

PORTFOLIO REVIEWS

We have been happy to review readers’ portfolios free of charge, and will continue with this offer for any portfolios submitted before April 30, 2009.  After that, we will be unable to offer the courtesy.

Thanks for listening.

Monty Guild and Tony Danaher www.GuildInvestment.com

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