Peter Brimelow: Indians buying up gold supplied by Fed?

By Peter Brimelow
MarketWatch.com
Monday, March 31, 2008

NEW YORK -- The gold bugs are coming out of their holes again.

When I last wrote on gold, the metal was challenging $1,000, a level which was passed that day.

After that, gold's stumbled, down $70 at one point, although up $10.60 over this past week.

But two crucial factors have swung encouragingly, rallying the gold bugs.

The first: the price of gold in India, by far the world's largest importer of the metal. India is a massive buyer of bullion for jewelry and cares little for the rest of the world's concerns. If the Indians want to buy, they will.

India has a fairly high import duty on gold. If you subtract the duty from the world price, you find whether the domestic price makes importing profitable. It has been moved decisively into profitable territory for legal imports this week. This has not been the case for some time.

For reasons that mystify me, the only regular source of this Indian data is Bill Murphy's Website, Le Metropole Cafe. Yet this is the key calculation for verifying Indian demand.

Over the weekend, Le Metropole posted this: "Indian ex-duty premiums -- Friday: a.m.$1.85, p.m. $2.55, with world gold at $943.75 and $944.55. Ample for legal imports."

Anyone familiar with the physical trade must find it hard to envisage much further price decline.

The second encouraging gold bugs: The lease rate for gold. This is the cost of borrowing gold.

Thirty years ago, this was a detail, but with the huge expansion of lending to gold mining companies in the 1980s it became a big deal. In particular it was an important part of the argument of outfits like Gold Anti-Trust Action Committee (GATA), which argued that secretive activity in the gold market by central banks was crucial to understanding what was happening with gold.

In the past few days a strange thing has happened. Australia's The Privateer says, "the shorter term (one and two-month) rates have actually gone into negative territory this week."

In other words, gold is being supplied to the market by the central banks. The Privateer goes on: "We do not recall a previous instance of this, and there certainly has not been one since the cold bull market began in 2001-02. ...

"We have not -- until now -- seen a situation in which the central banks are actually paying the bullion banks, hedge funds, gold miners, et al. to borrow the stuff. And please don't forget that, in this context, leasing gold is actually 'shorting' gold. Gold is not 'leased' to be hoarded; it is 'leased' to be sold for something that pays a far higher rate of interest. ... The practice of 'leasing gold -- and silver' by the central banks has been one of their best means of suppressing the prices of these precious metals for a long time."

Interestingly The Privateer's wonderful $US 5x3 Point and figure chart withstood this week's slump. See chart:

http://www.the-privateer.com/chart/gold-pf.html

Goldbug conclusion: Central banks, led surreptitiously by the Fed, are supplying physical gold to the market. And wise heads like the Indians are buying it.

* * *

GATA: Fed may not want its cash loans back any more than governments want their gold loans back

Dear Friend of GATA and Gold:

The Federal Reserve's ever-increasing "short-term" lending to major commercial and investment banks, described in the news report appended here, is starting to recall the boast of Barrick Gold a few years ago that its huge gold loans were "evergreen," written for 15-year terms but always allowed to be extended for another year every year.

Barrick's suggestion was that its gold loans never had to be repaid -- that they were gold loans from central banks and that the central banks did not want their gold back, that the central banks wanted instead for the gold price to be suppressed. By contrast, demanding repayment of the gold loans would cause a short squeeze in the gold market and send the price soaring. That's what central bank gold sales seem to be: not delivery of new gold into the market but cash settlement of old gold loans that can't be repaid without causing that short squeeze.

For who else would want to "lend" gold on the virtually indefinite terms available to Barrick? Who else would even be able to lend gold this way? Who else would want to do so? And what purpose could such loans have other than to suppress the price?

Does the Fed want its burgeoning loans to the commercial and investment banks repaid? Probably not any time soon, for all these "short-term" billions can be deployed to rig a lot of markets -- not just the mortgage derivatives markets that are the center of attention but very possibly the commodities markets as well. Thus these loans would become just like the funds in the Fed's pool of repurchase agreements with the Fed's primary dealers in New York, a pool of funds that now stands near $300 billion. These funds too are nominally "temporary" loans, but the pool never goes back to zero or even close. To the contrary, it is usually growing and has nearly doubled over the last six months -- and its only purpose is market rigging.

News organizations and Congress have not yet realized the purposes to which infinite money may be put and so haven't begun questioning all the money being flung around. But it's not about free-market capitalism; it's what's called lemon socialism, wherein private interests take any profits and the public assumes any losses.

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

* * *

Fed Offers $100 Billion More to Banks

By Martin Crutsinger
Associated Press
via Yahoo News
Friday, March 28, 2008

http://news.yahoo.com/s/ap/20080328/ap_on_bi_ge/fed_credit_crisis_39

WASHINGTON -- The Federal Reserve announced Friday it will auction an additional $100 billion in April to cash-strapped banks as it continues to combat the effects of a credit crisis.

The central bank said it would make $50 billion available at each of two auctions, on April 7 and April 21.

Through the end of March, the Fed has provided $260 billion in short-term loans to commercial banks through the innovative auction process. It also has employed Depression-era provisions to provide money to investment banks.

All the moves have been designed to cope with a serious financial crisis that has roiled U.S. and global markets and caused the near-collapse of Bear Stearns Cos., the nation's fifth largest investment bank.

The Fed has been holding auctions every two weeks since December to provide short-term loans to commercial banks. It started with auctions of $20 billion, then pushed the level to $30 billion, and in early March raised the auction amount to $50 billion as the credit shortage grew more severe.

In announcing the move to $50 billion last month, the Fed said it would continue the auctions for at least the next six months, unless credit conditions show they are no longer needed.

The auctions are just one of a series of unorthodox steps the Fed has taken to battle the current crisis. The biggest of those moves was an announcement that it was allowing investment banks to borrow directly from the Fed. Previously, only commercial banks, which face tighter regulations, had that privilege.

The Fed also said it would make available $30 billion in financing to support the sale of troubled Bear Stearns to JP Morgan Chase & Co., hoping to prevent a bankruptcy that could have rocked Wall Street.

Private economists said the auctions were having a positive impact but that troubles still exist in many sectors of the credit markets because of multibillion-dollar losses many financial institutions have suffered as the result of soaring defaults on mortgage loans.

"The Fed has worked some positive magic," said Mark Zandi, chief economist at Moody's Economy.com. "At least the panic has subsided as the risk of another major failure has receded given that financial institutions now have access to a lot of cash through the various lending facilities the Fed has established."

The Fed's auctions have drawn criticism from some that the central bank, and ultimately U.S. taxpayers, could be financing a bailout for big Wall Street firms that had engaged in risky lending practices.

Fed Chairman Ben Bernanke will face questions about the Fed's recent moves when he testifies on Wednesday before the congressional Joint Economic Committee.

* * *

John Embry: Don't let gold's volatility bother you

In new commentary for Investor's Digest of Canada, Sprott Asset Management's chief investment strategist, John Embry, takes note of GATA's full-page advertisement in The Wall Street Journal and urges precious metals investors to ride out the market's short-term hairpin reversals. Embry's commentary is headlined "Sit Tight -- Don't Let Gold's Volatility Bother You" and you can find it at the Sprott site HERE

Jeff Randall: When going gets rough, banks yell for nanny

By Jeff Randall
The Telegraph, London
Wednesday, March 26, 2008

Bank customer: "What's the difference between a recession and a depression?"

Bank manager: "In a recession, you lose your job. In a depression, I lose mine."

Remarkable, isn't it, just how quickly champions of laissez-faire solutions can become advocates for state intervention? All it takes is for their gravy train to break down.

When freedom to play with barely any restrictions was making them rich beyond imagination, big-shot financiers applauded "light-touch" regulation. The looser the rules, the louder they cheered.

Now, however, as credit is crunched, losses mount, and prospects for lucrative employment come under threat, many titans of unfettered enterprise are suddenly crying out for nanny.

Not for them the tough love of supply and demand. No, sir. These are desperate times, requiring generous measures of tender, loving care.

The essential plumbing of commerce, it is alleged, has become dysfunctional. Or, as Josef Ackerman, chief executive of Deutsche Bank, said: "I no longer believe in the market's self-healing power."

Whyever not? Nowhere on the tin does it say that markets will correct themselves without someone being hurt. Indeed, for markets to function properly, pain, somewhere along the chain, is inevitable.

Markets work because they create winners and losers, not jobs-for-life security. Financial Darwinism doesn't just underpin the survival of the fittest; it ensures the extinction of pea-brained dinosaurs.

Corporations with too much fat and insufficient speed end up in evolution's Room 101. This is often forgotten when the trees are full of fruit.

In his book, "The Final Crash," Hugo Bouleau (the nom de plume of a City investment manager) predicts: "Reckless lending will come back to haunt many a greedy banker and catch up with those directors that set excessive sales targets, forcing bank employees to fund unsuitable projects, chase ever riskier clients, and sell inappropriate investment products."

This process is already under way in London and New York. Had it occurred anywhere else, one could be sure that Wall Street and the City would be nodding their approval.

After all, job losses = cost reductions; company insolvencies = sector consolidation; falling prices = buying opportunities. Great value is often found on a rubbish tip.

"But hang on a minute," the bankers yelp. "It's happening in banking. Banking. That means us."

Yes, boys, I'm afraid it does.

A smack by the invisible hand of market forces no longer seems such a good idea, does it? Far more appealing is the soft touch of Other People's Money. Cue: chorus of calls for taxpayers' funds to rescue distressed lenders.

We are told by the banks that they are too important to be allowed to fail, that their operations are so inextricably linked with the real economy we would be plunged into a 1930s-type calamity if a big one went under.

Forget moral hazard, we are urged; it's in everyone's interest to bail them out.

Those who got us into this mess are demanding that we get them out of it. They put a gun to our heads, insisting that, without immediate action, everyone will feel their pain. (Funny, I don't recall feeling the joy of their jackpot bonuses.) Catharsis for a few will lead to nemesis for many.

Central banks seem to agree, so the Federal Reserve fixes a deal at Bear Stearns. This is no Northern Rock, a haven for small savers, but one of Wall Street's most egregious examples of knock-'em-down-drag-em-out investment banking.

At a time when so many Americans are losing their homes, it's hard to think of a company less deserving of state support.

Paul Krugman, professor of economics at Princeton University, forecasts: "As Bear goes, so will the rest of the financial system. And if history is any guide, the coming taxpayer-financed bailout will end up costing a lot of money."

The banks have landed us in this bad place because, over many years they learnt how to wriggle out of regulation. Special investment vehicles were created to park risk. Derivatives were invented that became the financial equivalent of Frankenstein's monster -- they took on a life of their own. In short, there emerged a parallel system of Wild West behaviour.

The banks' cocktail of greed and irresponsibility will, I'm sure, produce a wave of fresh regulation to clamp down on recent excesses.

Many of the new strictures will be counterproductive -- they always are -- in the same way that Sarbanes-Oxley legislation, after Enron and WorldCom, drove public share offerings out of New York and into London.

Never mind. For hyper-ventilating politicians -- those who can think of nothing better than sticking their fingers into the free-enterprise pie -- the sub-prime mortgage mess has turned into a two-inch tap-in. It's an unmissable chance to justify far-reaching extensions of their activities.

Christopher Fildes, who graced these pages for many years, once warned that while bankers and investors are counting their losses, the next worst thing is "the spectacle of finance ministers ... and their supporting cast of bag carriers and sherpas hurrying to meet each other and to think of something that they or their spokesmen can subsequently announce. They are tempted at such times to take initiatives."

One dreads to think.

* * *

Jim Rogers: Abolish the FED!

Gold Digger

from Fund Strategy
by Vanessa Drucker

Where were the gold bugs in 2001, when the metal touched a low of $255 an ounce? Long snuggled deep in the mattress, they began to creep out as the metal price rose. It reached a plateau in 2004 in the $400 range, and then took off in earnest after July 2005.

The gold bugs refuse to concede that we could be in a speculative blow-off phase of frothy glitter. They point to the 1980 high watermark at $877 an ounce, and claim that price would convert to more than $2,000 (£1,000) today.

Notwithstanding, there are plenty of reasons to be cautious, or even downright bearish, at today's lofty levels. A host of factors already signal a potential turn in the multiyear uptrend.

A confluence of disparate drivers has always buoyed or buffeted gold. Since about 2004, the mix of these drivers has shifted, with implications for the price action. Today, the critical factors are: the dollar; economic uncertainty; supply/demand forces; and the new-found popularity of the exchange traded funds. A look at how these factors are evolving may shed some light on where the gold price is heading next.

"We remain wedded to the view that the US dollar is the principal, longer-term driver of the gold price," says James Steele, chief commodities analyst at HSBC. He expects the relationship to continue as long as the dollar remains the world's reserve currency.

Gold, widely regarded as a hedge against a falling greenback, has performed an intimate inverse dance with the dollar over the past 40 years. Turning points coincided in 1976, 1982, 1988, 1994 and 2000. While the correlation remains high at 0.91, the two asset classes do not move exactly in lockstep. "If they did, we could do without precious metals traders," Steele says. "We could just trade foreign exchange."

Dan Smith, gold analyst at Standard Chartered, notes that a less linear relationship has developed over the past six months. Incremental dollar weakening keeps boosting the gold price, while dollar rallies barely affect the metal.

"It may show that people are steadily building long-term gold positions as they piggyback on dollar weakness," suggests Smith.

Interest rate cuts by America's Federal Reserve, instituted to boost a sagging economy, highlight the gold/dollar linkage. For example, on January 22, 2008, the Fed surprised markets with its announcement of a dramatic three-quarter point cut. That news rapidly depressed the dollar, as gold soared through $900.

"Real interest rates and the dollar are two sides of the same story. When people refer to inflation shocks, they are also describing a drop in real interest rate environments," says Michael Lewis, global head of commodities research at Deutsche Bank. He points out that as long as real rates run 2.5% or lower, as they did in the 1970s, gold performs well. At the moment, inflation appears poised to climb, while the dollar loses real interest rate support.

Yet the role of inflation is not straightforward. To the extent that gold remains denominated in dollars, yes, it embodies an inflation hedge. At the same time, the perceived correlation between gold and inflation is probably a carryover from memories of the 1970s and 1980s. When we examine more recent patterns of American inflation, we observe that core inflation fell from 3.38% in 2000 to 2.83% in 2001, and then down to 1.59% in 2002, according to monthly rates published by the Bureau of Labor Statistics.

Gold barrelled up and up during those years. From 2005 to 2007, inflation skidded from 3.3% to 2.85%. Gold kept ascending, at an even more feverish pace.

Political and economic risk and instability of all stripes is another prime driver. In its long-standing role as a safe haven asset, gold can react to any type of turmoil that strikes on the world stage. "It is not even the type of risk that matters, but rather the severity," Steele comments. When the credit markets seized up last August, why should gold then have fallen initially? The reason, it transpired, was that many investors, who needed liquidity, were selling their gold. Once again, the metal was duly performing its function.

Looking back, from 2001 through 2005, financial and political deterioration was building on all sides. At the same time, many investors still regarded the environment as a temporary blip that would soon readjust. It did not. By 2007, the economic uncertainty dwarfed that of the previous six years, as the subprime crisis, real estate weakness and financial illiquidity came together in a perfect storm.

Compared with economic dramas, reverberations from geopolitical incidents barely qualify as second order events.

"The idea that events such as terrorist attacks provide much catalyst has largely been discredited," says Andrea Hotter at Dow Jones Newswires. She points to the London underground bombings, and even the 9/11 terrorist attacks, as examples of incidents that produced fleeting reactions in the gold price.

Other fears prompt hoarding. It is worth noting that certain Middle Eastern investors, as well as central banks of countries that may be suspicious of American policies, have also been storing gold. "In the post 9/11 environment, some of them fear having their US accounts frozen, if there is a link to terrorist activity. So they invest in gold and other alternative assets," says David Thurtell, metals analyst at BNP Paribas. Similar behaviour occurred in the aftermath of the American hostage drama in Tehran in 1979.

Like all commodities, supply and demand must balance to clear the gold price. From the supply side, consider the case for "peak gold". Until it was overtaken by China, South Africa was the world's largest producer, providing more than 1,000 tonnes a year in the 1970s. Its output has contracted to 248 tonnes a year because of ageing mines, which are deeper and harder to access, and new legislation.

"Before, mine owners had the right to exploit their holdings easily, but now they need to obtain licences and agree to create jobs, undergo environmental audits and build schools and hospitals," says Ross Norman, director of TheBullionDesk.com.

Supply constraints got worse this January, when Eskom, a South African state utility, declared wide-ranging power cuts, forcing mines to close their operations for safety reasons. Many of the mines extend five kilometres below ground and rely on lifts and electricity. If Eskom cannot ensure uninterrupted power supplies, the mines cannot take the chance their workers might be trapped underground.

Mark Bristow, president of Randgold Resources, focuses on attracting first world capital to reinvest in African mining projects in Ivory Coast, Mali and Tanzania. He describes how cost and risk profiles have changed as "across the board, miners constantly run into first world intervention". Resistance from green movements has made mining more challenging in places such as Canada, America and Australia, and shifted the focus to emerging markets.

Production is also falling in Australia and Canada. "Even in China," says Norman, "where they are going for the richer grades, they may have exhausted their mines by about 2014."

Also affecting production are a dire shortage of mining equipment, inadequate infrastructure and a dearth of professional skilled labour at all stages of the production process. Steele says the global commodities boom has strained the supply chain and compelled the gold industry to compete with coal, base metals and other precious metals for "scarce human and material resources".

In another ongoing trend, the larger gold miners have been buying back their hedge books. Smaller operations may still be hedging to obtain finance, since banks are not necessarily willing to lend if they fear the commodity's price might collapse.

The miners have undergone a massive mindset change since the late 1990s. "In the past, they used to sell forward into every rally and kill it, and the price would sink. Now they let the price levitate higher as it goes from elastic to inelastic," says Norman.

The real sea change is the conduit forged between the gold markets and the investment world. The physical gold market itself is small, "but the derivatives traded on its back are huge", Bristow points out.

"Despite the dehedging programmes, about 39m ounces of gold are still hedged in paper, and that must be delivered."

Hitherto, trading had been focused on the Comex in New York, the Tocom in Tokyo and the London spot interbank market. Now, exchanges are racing to open their doors to gold trading across a much broader jurisdiction. In January 2008, a new futures market was added to the two spot exchanges in China, along with new platforms in Dubai, India, Singapore and Vietnam.

The chief catalyst of demand is the development of the various new exchange traded gold funds, beginning in March 2003. ETFs, which must back the shares they issue with bullion, now command at least 10% of world demand, which is a quite a sprint from nothing, in five short years. Hotter explains that they are attractive to both institutions and individuals because they are so easy to invest in, with "no storage to arrange and no punt on the futures market."

Lyxor Gold Bullion Securities, Europe's largest gold exchange traded commodity, now holds 108 tonnes, with a value of about $3,186m. Overall holdings from all the gold ETFs constitute about 630 tonnes, which ranks them up there among the top 10 central bank holders, according to Jon Nadler, senior analyst at Kitco Bullion Dealers in Montreal.

In January 2006, David Davis, an analyst at Andisa Securities, famously described ETFs as the new "people's central bank - a force to be reckoned with". So far, the ETF money has tended to be sticky, apportioned 70% among individuals and 30% among institutions. "While central banks have been dumping gold, individuals have been quietly buying it and, even more amazingly, holding on to it," comments Owen Rees, head of business development, Europe, at Exchange Traded Gold, the World Gold Council's marketing arm for various ETFs.

Rees points out that the ETFs exhibit a volatility pattern similar to the S&Ps, compared with open interest on Comex, which "swings wildly". In mid-2006, when the gold sector corrected, the entire ETF franchise only lost about 3% of its assets, and then regained that value in about a month.

Those are the elements of the brew that has been simmering to keep the gold price soaring.

Is it ready to bubble over any time soon? That is the actionable question investors need to know. A quick survey of the drivers themselves - the dollar, the economic instability and supply and demand, especially investment demand - may reveal some clues as to why the price could head south.

If the fate of the dollar is the key determinant, much depends on its direction. While it has been in a long term downtrend, it is worth remembering that most dollar cycles last about seven years and this one is getting long in the tooth. "The dollar may continue to weaken against the euro to $1.60," suggests Lewis, "which could provide a last boost with overshooting and extreme misalignment." Every past cycle has ended with central banks coming to the rescue.

The currency team at HSBC holds a similar view. Based on purchasing power parity (how much it costs to buy the same items in different countries), it regards the euro as overbought already. It attributes much of the recent rally to capital inflows for the purchase of European equities, which are now quite expensive. Dollar bulls are beginning to emerge from the woodwork, though most agree that the Asian currencies will continue to pose formidable competition.

Next, look beyond the storm clouds gathered on the horizon. Imagine if the economic malaise began to clear up. At some point, the banks will finally write down the bulk of the subprime mortgages and leveraged loans that have triggered the credit contraction. Suppose that liquidity flows again in normalised patterns.

"When the credit markets settle, they will remove a supporting plank from gold," Steele predicts.

Even on the geopolitical front, there is some hope that military operations will wind down. Nadler believes we are now well into a speculative stage for gold - a last hurrah built on the post 9/11 anxiety premium. He says: "It began when the US invaded countries in the name of the war on terror, setting up an epic battle of religions, of good and evil. It snowballed over the past two years. Deficits mounted, with the haemorrhage of war expenditures. The panic may have peaked about the time Benazir Bhutto was shot."

Alternative asset classes have been commanding an increasing share of investors' portfolios as a method to boost risk-adjusted returns. At the same time, emerging markets, supported by the decoupling thesis, have been gaining popularity.

Part of the reason is that success breeds success, and those classes have generally outperformed. Yet commodities are no one-way street. Despite the ravenous appetite of emerging markets across the gamut, commodities remain volatile by nature. Nickel and zinc have fallen 50% from their 2007 highs. Copper has tumbled sharply and white sugar has declined from about 22 cents a pound in early 2006 to 14 cents this year.

How will the supply equation weigh up against the demand for gold? In a nutshell, jewellery fabrication demand is down, scrap sales are up, overall central bank sales are flat to sideways and investment demand is up - hugely so.

According to World Gold Council statistics, in the fourth quarter of 2007 the high price had a major impact on fabrication demand - most significantly in India, where identifiable tonnage demand fell by 17% from the year before.

Steele, who sailed with the Merchant Marines, uses a nautical metaphor. At sea, the first visible current is only 100 feet deep, moving on top of a massive subcurrent below. The shallow current is like investment demand - a driver for the gold price on any given day. The fabrication demand - the real bedrock - is like the current that flows beneath.

The supply story could also be ready to turn around. The mining community has spent more than $24 billion on exploration during the bull cycle, according to Nadler, and is now in a position to launch significant output. Between now and 2012, he foresees an increase of 25% a year. Whereas we are already seeing 2,200 tonnes of fresh mining output each year, by the end of that time-frame, expect a further 450 tonnes of additional supply. "Investors had better be willing to buy," Nadler warns.

Prospective buyers are not hailing from the central banks. Since the Washington Agreement established in 1999 that central banks could each sell 500 tonnes a year, many of the European institutions have been divesting their holdings. Many central bankers, newly minted MBAs, are keen to improve their investment returns, relying on equities and bonds instead. Their lending lease rates for gold are so low (about 0.35 for 12 months) that they have stopped lending it out altogether.

Only Russia, South Africa and Argentina are increasing reserves. The International Monetary Fund, whose 103m ounces of gold is second in quantity only to that of America and Germany, has announced plans to divest some of it soon.

Even the valiant ETFs may not be able to keep the party alive, but they helped to goose the price on the way up. They could add to selling pressure just as easily in the other direction. On January 16, the StreetTracks gold ETF dropped 21.5 tonnes in a record swoon.

Rees is not rattled. "It is the wrong question to ask, whether or not gold has gone too high," he insists. One should, of course, not always expect the price to go up, but should instead focus on assembling the right assets for protection, regardless of the economic environment. Studies from the World Gold Council demonstrate that gold is a more reliable diversifier than other commodities, and together with platinum exhibits the least volatility.

Rees adds: "We want people to invest responsibly, and we believe we can offer a sensible way to use a low-cost product."

Why gold?

King Midas learned the hard way. In India, people still eat it as a blood cleanser and use it as an aphrodisiac. John Maynard Keynes dismissed it as a barbaric relic. Many are curious as to how gold maintains its significance in a world driven by fiat currencies. Whatever the reasons, Joseph Schumpeter, the economist, acknowledged its predictive function as a barometer: "The modern mind dislikes gold because it blurts out unpleasant truths."

Jon Nadler, senior analyst at Kitco Bullion Dealers in Montreal: "It is portable money and universally acceptable. At the end of the day, it is a liability-free asset. No-one can print it at will so it is limited in quantity - unlike paper money." Dan Smith, gold analyst at Standard Chartered: "Across the metals complex, some - like zinc and copper - are leveraged to construction. But gold is not driven by fundamentals." Ross Norman, director of TheBullionDesk.com: "Gold is a bellwether of economic activity and goes both ways. It can tell you that things are very good or very bad." Axel Merk, manager of Hard Currency fund, California: "It's so dense, you can store a lot in a small space - unlike, say, silver. Another feature of gold is its lack of industrial applications. That makes it far less subject to the business cycle and a pure reference point for money. Gold cannot go to zero, but fiat money can." Michael Lewis, head of commodities research at Deutsche Bank: "It's indestructible, imperishable and can be stored. It is driven more by financial than by physical supply and demand. If you closed all the gold mines, you would run out in 45 years. If you closed every oil well, you would see power cuts in a couple of weeks." James Steele, chief commodities analyst at HSBC: "Other hard assets, like timber or property, can't be sold in such a hurry. And they are not fungible. Every parcel of land is different from every other one. The same goes for diamonds or rare coins."

Ron Paul: What the Price of Gold Is Telling Us

What the Price of Gold Is Telling Us

by Ron Paul

The financial press, and even the network news shows, have begun reporting the price of gold regularly. For twenty years, between 1980 and 2000, the price of gold was rarely mentioned. There was little interest, and the price was either falling or remaining steady.

Since 2001 however, interest in gold has soared along with its price. With the price now over $1000 an ounce, a lot more people are becoming interested in gold as an investment and an economic indicator. Much can be learned by understanding what the rising dollar price of gold means.

The rise in gold prices from $250 per ounce in 2001 to over $1000 today has drawn investors and speculators into the precious metals market. Though many already have made handsome profits, buying gold per se should not be touted as a good investment. After all, gold earns no interest and its quality never changes. It’s static, and does not grow as sound investments should.

It’s more accurate to say that one might invest in a gold or silver mining company, where management, labor costs, and the nature of new discoveries all play a vital role in determining the quality of the investment and the profits made.

Buying gold and holding it is somewhat analogous to converting one’s savings into one hundred dollar bills and hiding them under the mattress – yet not exactly the same. Both gold and dollars are considered money, and holding money does not qualify as an investment. There’s a big difference between the two however, since by holding paper money one loses purchasing power. The purchasing power of commodity money, i.e. gold, however, goes up if the government devalues the circulating fiat currency.

Holding gold is protection or insurance against government’s proclivity to debase its currency. The purchasing power of gold goes up not because it’s a so-called good investment; it goes up in value only because the paper currency goes down in value. In our current situation, that means the dollar.

One of the characteristics of commodity money – one that originated naturally in the marketplace – is that it must serve as a store of value. Gold and silver meet that test – paper does not. Because of this profound difference, the incentive and wisdom of holding emergency funds in the form of gold becomes attractive when the official currency is being devalued. It’s more attractive than trying to save wealth in the form of a fiat currency, even when earning some nominal interest. The lack of earned interest on gold is not a problem once people realize the purchasing power of their currency is declining faster than the interest rates they might earn. The purchasing power of gold can rise even faster than increases in the cost of living.

The point is that most who buy gold do so to protect against a depreciating currency rather than as an investment in the classical sense. Americans understand this less than citizens of other countries; some nations have suffered from severe monetary inflation that literally led to the destruction of their national currency. Though our inflation – i.e., the depreciation of the U.S. dollar – has been insidious, average Americans are unaware of how this occurs. For instance, few Americans know nor seem concerned that the 1913 pre-Federal Reserve dollar is now worth only four cents. Officially, our central bankers and our politicians express no fear that the course on which we are set is fraught with great danger to our economy and our political system. The belief that money created out of thin air can work economic miracles, if only properly “managed,” is pervasive in D.C.

In many ways we shouldn’t be surprised about this trust in such an unsound system. For at least four generations our government-run universities have systematically preached a monetary doctrine justifying the so-called wisdom of paper money over the “foolishness” of sound money. Not only that, paper money has worked surprisingly well in the past 35 years – the years the world has accepted pure paper money as currency. Alan Greenspan bragged that central bankers in these several decades have gained the knowledge necessary to make paper money respond as if it were gold. This removes the problem of obtaining gold to back currency, and hence frees politicians from the rigid discipline a gold standard imposes.

Many central bankers in the last 15 years became so confident they had achieved this milestone that they sold off large hoards of their gold reserves. At other times they tried to prove that paper works better than gold by artificially propping up the dollar by suppressing market gold prices. This recent deception failed just as it did in the 1960s, when our government tried to hold gold artificially low at $35 an ounce. But since they could not truly repeal the economic laws regarding money, just as many central bankers sold, others bought. It’s fascinating that the European central banks sold gold while Asian central banks bought it over the last several years.

Since gold has proven to be the real money of the ages, we see once again a shift in wealth from the West to the East, just as we saw a loss of our industrial base in the same direction. Though Treasury officials deny any U.S. sales or loans of our official gold holdings, no audits are permitted so no one can be certain.

The special nature of the dollar as the reserve currency of the world has allowed this game to last longer than it would have otherwise. But the fact that gold has gone from $252 per ounce to over $1000 means there is concern about the future of the dollar. The higher the price for gold, the greater the concern for the dollar. Instead of dwelling on the dollar price of gold, we should be talking about the depreciation of the dollar. In 1934 a dollar was worth 1/20th of an ounce of gold; $20 bought an ounce of gold. Today a dollar is worth 1/1000th of an ounce of gold, meaning it takes $1000 to buy one ounce of gold.

The number of dollars created by the Federal Reserve, and through the fractional reserve banking system, is crucial in determining how the market assesses the relationship of the dollar and gold. Though there’s a strong correlation, it’s not instantaneous or perfectly predictable. There are many variables to consider, but in the long term the dollar price of gold represents past inflation of the money supply. Equally important, it represents the anticipation of how much new money will be created in the future. This introduces the factor of trust and confidence in our monetary authorities and our politicians. And these days the American people are casting a vote of “no confidence” in this regard, and for good reasons.

The incentive for central bankers to create new money out of thin air is twofold. One is to practice central economic planning through the manipulation of interest rates. The second is to monetize the escalating federal debt politicians create and thrive on.

Today no one in Washington believes for a minute that runaway deficits are going to be curtailed. In March alone, the federal government created an historic $85 billion deficit. The current supplemental bill going through Congress has grown from $92 billion to over $106 billion, and everyone knows it will not draw President Bush’s first veto. Most knowledgeable people therefore assume that inflation of the money supply is not only going to continue, but accelerate. This anticipation, plus the fact that many new dollars have been created over the past 15 years that have not yet been fully discounted, guarantees the further depreciation of the dollar in terms of gold.

There’s no single measurement that reveals what the Fed has done in the recent past or tells us exactly what it’s about to do in the future. Forget about the lip service given to transparency by new Fed Chairman Bernanke. Not only is this administration one of the most secretive across the board in our history, the current Fed firmly supports denying the most important measurement of current monetary policy to Congress, the financial community, and the American public. Because of a lack of interest and poor understanding of monetary policy, Congress has expressed essentially no concern about the significant change in reporting statistics on the money supply.

Beginning in March, though planned before Bernanke arrived at the Fed, the central bank discontinued compiling and reporting the monetary aggregate known as M3. M3 is the best description of how quickly the Fed is creating new money and credit. Common sense tells us that a government central bank creating new money out of thin air depreciates the value of each dollar in circulation. Yet this report is no longer available to us and Congress makes no demands to receive it.

Though M3 is the most helpful statistic to track Fed activity, it by no means tells us everything we need to know about trends in monetary policy. Total bank credit, still available to us, gives us indirect information reflecting the Fed’s inflationary policies. But ultimately the markets will figure out exactly what the Fed is up to, and then individuals, financial institutions, governments, and other central bankers will act accordingly. The fact that our money supply is rising significantly cannot be hidden from the markets.

The response in time will drive the dollar down, while driving interest rates and commodity prices up. Already we see this trend developing, which surely will accelerate in the not too distant future. Part of this reaction will be from those who seek a haven to protect their wealth – not invest – by treating gold and silver as universal and historic money. This means holding fewer dollars that are decreasing in value while holding gold as it increases in value.

A soaring gold price is a vote of “no confidence” in the central bank and the dollar. This certainly was the case in 1979 and 1980. Today, gold prices reflect a growing restlessness with the increasing money supply, our budgetary and trade deficits, our unfunded liabilities, and the inability of Congress and the administration to rein in runaway spending.

Denying us statistical information, manipulating interest rates, and artificially trying to keep gold prices in check won’t help in the long run. If the markets are fooled short term, it only means the adjustments will be much more dramatic later on. And in the meantime, other market imbalances develop.

The Fed tries to keep the consumer spending spree going, not through hard work and savings, but by creating artificial wealth in stock markets bubbles and housing bubbles. When these distortions run their course and are discovered, the corrections will be quite painful.

Likewise, a fiat monetary system encourages speculation and unsound borrowing. As problems develop, scapegoats are sought and frequently found in foreign nations. This prompts many to demand altering exchange rates and protectionist measures. The sentiment for this type of solution is growing each day.

Though everyone decries inflation, trade imbalances, economic downturns, and federal deficits, few attempt a closer study of our monetary system and how these events are interrelated. Even if it were recognized that a gold standard without monetary inflation would be advantageous, few in Washington would accept the political disadvantages of living with the discipline of gold – since it serves as a check on government size and power. This is a sad commentary on the politics of today. The best analogy to our affinity for government spending, borrowing, and inflating is that of a drug addict who knows if he doesn’t quit he’ll die; yet he can’t quit because of the heavy price required to overcome the dependency. The right choice is very difficult, but remaining addicted to drugs guarantees the death of the patient, while our addiction to deficit spending, debt, and inflation guarantees the collapse of our economy.

Special interest groups, who vigorously compete for federal dollars, want to perpetuate the system rather than admit to a dangerous addiction. Those who champion welfare for the poor, entitlements for the middle class, or war contracts for the military industrial corporations, all agree on the so-called benefits bestowed by the Fed’s power to counterfeit fiat money. Bankers, who benefit from our fractional reserve system, likewise never criticize the Fed, especially since it’s the lender of last resort that bails out financial institutions when crises arise. And it’s true, special interests and bankers do benefit from the Fed, and may well get bailed out – just as we saw with the Long-Term Capital Management fund crisis a few years ago. In the past, companies like Lockheed and Chrysler benefited as well. But what the Fed cannot do is guarantee the market will maintain trust in the worthiness of the dollar. Current policy guarantees that the integrity of the dollar will be undermined. Exactly when this will occur, and the extent of the resulting damage to the financial system, cannot be known for sure – but it is coming. There are plenty of indications already on the horizon.

Foreign policy plays a significant role in the economy and the value of the dollar. A foreign policy of militarism and empire building cannot be supported through direct taxation. The American people would never tolerate the taxes required to pay immediately for overseas wars, under the discipline of a gold standard. Borrowing and creating new money is much more politically palatable. It hides and delays the real costs of war, and the people are lulled into complacency – especially since the wars we fight are couched in terms of patriotism, spreading the ideas of freedom, and stamping out terrorism. Unnecessary wars and fiat currencies go hand-in-hand, while a gold standard encourages a sensible foreign policy.

The cost of war is enormously detrimental; it significantly contributes to the economic instability of the nation by boosting spending, deficits, and inflation. Funds used for war are funds that could have remained in the productive economy to raise the standard of living of Americans now unemployed, underemployed, or barely living on the margin.

Yet even these costs may be preferable to paying for war with huge tax increases. This is because although fiat dollars are theoretically worthless, value is imbued by the trust placed in them by the world’s financial community. Subjective trust in a currency can override objective knowledge about government policies, but only for a limited time.

Economic strength and military power contribute to the trust in a currency; in today’s world, trust in the U.S. dollar is not earned and therefore fragile. The history of the dollar, being as good as gold up until 1971, is helpful in maintaining an artificially higher value for the dollar than deserved.

Foreign policy contributes to the crisis when the spending to maintain our worldwide military commitments becomes prohibitive, and inflationary pressures accelerate. But the real crisis hits when the world realizes the king has no clothes, in that the dollar has no backing, and we face a military setback even greater than we already are experiencing in Iraq. Our token friends may quickly transform into vocal enemies once the attack on the dollar begins.

False trust placed in the dollar once was helpful to us, but panic and rejection of the dollar will develop into a real financial crisis. Then we will have no other option but to tighten our belts, go back to work, stop borrowing, start saving, and rebuild our industrial base, while adjusting to a lower standard of living for most Americans.

Counterfeiting the nation’s money is a serious offense. The founders were especially adamant about avoiding the chaos, inflation, and destruction associated with the Continental dollar. That’s why the Constitution is clear that only gold and silver should be legal tender in the United States. In 1792 the Coinage Act authorized the death penalty for any private citizen who counterfeited the currency. Too bad they weren’t explicit that counterfeiting by government officials is just as detrimental to the economy and the value of the dollar.

In wartime, many nations actually operated counterfeiting programs to undermine our dollar, but never to a disastrous level. The enemy knew how harmful excessive creation of new money could be to the dollar and our economy. But it seems we never learned the dangers of creating new money out of thin air. We don’t need an Arab nation or the Chinese to undermine our system with a counterfeiting operation. We do it ourselves, with all the disadvantages that would occur if others did it to us. Today we hear threats from some Arab, Muslim, and far Eastern countries about undermining the dollar system- not by dishonest counterfeiting, but by initiating an alternative monetary system based on gold. Wouldn’t that be ironic? Such an event theoretically could do great harm to us. This day may well come, not so much as a direct political attack on the dollar system but out of necessity to restore confidence in money once again.

Historically, paper money never has lasted for long periods of time, while gold has survived thousands of years of attacks by political interests and big government. In time, the world once again will restore trust in the monetary system by making some currency as good as gold.

Gold, or any acceptable market commodity money, is required to preserve liberty. Monopoly control by government of a system that creates fiat money out of thin air guarantees the loss of liberty. No matter how well-intended our militarism is portrayed, or how happily the promises of wonderful programs for the poor are promoted, inflating the money supply to pay these bills makes government bigger. Empires always fail, and expenses always exceed projections. Harmful unintended consequences are the rule, not the exception. Welfare for the poor is inefficient and wasteful. The beneficiaries are rarely the poor themselves, but instead the politicians, bureaucrats, or the wealthy. The same is true of all foreign aid – it’s nothing more than a program that steals from the poor in a rich country and gives to the rich leaders of a poor country. Whether it’s war or welfare payments, it always means higher taxes, inflation, and debt. Whether it’s the extraction of wealth from the productive economy, the distortion of the market by interest rate manipulation, or spending for war and welfare, it can’t happen without infringing upon personal liberty.

At home the war on poverty, terrorism, drugs, or foreign rulers provides an opportunity for authoritarians to rise to power, individuals who think nothing of violating the people’s rights to privacy and freedom of speech. They believe their role is to protect the secrecy of government, rather than protect the privacy of citizens. Unfortunately, that is the atmosphere under which we live today, with essentially no respect for the Bill of Rights.

Though great economic harm comes from a government monopoly fiat monetary system, the loss of liberty associated with it is equally troubling. Just as empires are self-limiting in terms of money and manpower, so too is a monetary system based on illusion and fraud. When the end comes we will be given an opportunity to choose once again between honest money and liberty on one hand; chaos, poverty, and authoritarianism on the other.

The economic harm done by a fiat monetary system is pervasive, dangerous, and unfair. Though runaway inflation is injurious to almost everyone, it is more insidious for certain groups. Once inflation is recognized as a tax, it becomes clear the tax is regressive: penalizing the poor and middle class more than the rich and politically privileged. Price inflation, a consequence of inflating the money supply by the central bank, hits poor and marginal workers first and foremost. It especially penalizes savers, retirees, those on fixed incomes, and anyone who trusts government promises. Small businesses and individual enterprises suffer more than the financial elite, who borrow large sums before the money loses value. Those who are on the receiving end of government contracts – especially in the military industrial complex during wartime – receive undeserved benefits.

It’s a mistake to blame high gasoline and oil prices on price gouging. If we impose new taxes or fix prices, while ignoring monetary inflation, corporate subsidies, and excessive regulations, shortages will result. The market is the only way to determine the best price for any commodity. The law of supply and demand cannot be repealed. The real problems arise when government planners give subsidies to energy companies and favor one form of energy over another.

Energy prices are rising for many reasons: Inflation; increased demand from China and India; decreased supply resulting from our invasion of Iraq; anticipated disruption of supply as we push regime change in Iran; regulatory restrictions on gasoline production; government interference in the free market development of alternative fuels; and subsidies to big oil such as free leases and grants for research and development.

Interestingly, the cost of oil and gas is actually much higher than we pay at the retail level. Much of the DOD budget is spent protecting “our” oil supplies, and if such spending is factored in, gasoline probably costs us more than $5 a gallon. The sad irony is that this military effort to secure cheap oil supplies inevitably backfires, and actually curtails supplies and boosts prices at the pump. The waste and fraud in issuing contracts to large corporations for work in Iraq only add to price increases.

When problems arise under conditions that exist today, it’s a serious error to blame the little bit of the free market that still functions. Last summer the market worked efficiently after Katrina – gas hit $3 a gallon, but soon supplies increased, usage went down, and the price returned to $2. In the 1980s, market forces took oil from $40 per barrel to $10 per barrel, and no one cried for the oil companies that went bankrupt. Today’s increases are for the reasons mentioned above. It’s natural for labor to seek its highest wage, and businesses to strive for the greatest profit. That’s the way the market works. When the free market is allowed to work, it’s the consumer who ultimately determines price and quality, with labor and business accommodating consumer choices. Once this process is distorted by government, prices rise excessively, labor costs and profits are negatively affected, and problems emerge. Instead of fixing the problem, politicians and demagogues respond by demanding windfall profits taxes and price controls, while never questioning how previous government interference caused the whole mess in the first place. Never let it be said that higher oil prices and profits cause inflation; inflation of the money supply causes higher prices!

Since keeping interest rates below market levels is synonymous with new money creation by the Fed, the resulting business cycle, higher cost of living, and job losses all can be laid at the doorstep of the Fed. This burden hits the poor the most, making Fed taxation by inflation the worst of all regressive taxes. Statistics about revenues generated by the income tax are grossly misleading; in reality much harm is done by our welfare/warfare system supposedly designed to help the poor and tax the rich. Only sound money can rectify the blatant injustice of this destructive system.

The Founders understood this great danger, and voted overwhelmingly to reject “emitting bills of credit,” the term they used for paper or fiat money. It’s too bad the knowledge and advice of our founders, and their mandate in the Constitution, are ignored today at our great peril. The current surge in gold prices – which reflects our dollar’s devaluation – is warning us to pay closer attention to our fiscal, monetary, entitlement, and foreign policy.

Meaning of the Gold Price – Summation

A recent headline in the financial press announced that gold prices surged over concern that confrontation with Iran will further push oil prices higher. This may well reflect the current situation, but higher gold prices mainly reflect monetary expansion by the Federal Reserve. Dwelling on current events and their effect on gold prices reflects concern for symptoms rather than an understanding of the actual cause of these price increases. Without an enormous increase in the money supply over the past 35 years and a worldwide paper monetary system, this increase in the price of gold would not have occurred.

Certainly geo-political events in the Middle East under a gold standard would not alter its price, though they could affect the supply of oil and cause oil prices to rise. Only under conditions created by excessive paper money would one expect all or most prices to rise. This is a mere reflection of the devaluation of the dollar.

Particular things to remember:

* If one endorses small government and maximum liberty, one must support commodity money.

* One of the strongest restraints against unnecessary war is a gold standard.

* Deficit financing by government is severely restricted by sound money.

* The harmful effects of the business cycle are virtually eliminated with an honest gold standard.

* Saving and thrift are encouraged by a gold standard; and discouraged by paper money.

* Price inflation, with generally rising price levels, is characteristic of paper money. Reports that the consumer price index and the producer price index are rising are distractions: the real cause of inflation is the Fed’s creation of new money.

* Interest rate manipulation by central bank helps the rich, the banks, the government, and the politicians.

* Paper money permits the regressive inflation tax to be passed off on the poor and the middle class.

* Speculative financial bubbles are characteristic of paper money – not gold.

* Paper money encourages economic and political chaos, which subsequently causes a search for scapegoats rather than blaming the central bank.

* Dangerous protectionist measures frequently are implemented to compensate for the dislocations caused by fiat money.

* Paper money, inflation, and the conditions they create contribute to the problems of illegal immigration.

* The value of gold is remarkably stable.

* The dollar price of gold reflects dollar depreciation.

* Holding gold helps preserve and store wealth, but technically gold is not a true investment.

* Since 2001 the dollar has been devalued by 60%.

* In 1934 FDR devalued the dollar by 41%.

* In 1971 Nixon devalued the dollar by 7.9%.

* In 1973 Nixon devalued the dollar by 10%.

These were momentous monetary events, and every knowledgeable person worldwide paid close attention. Major changes were endured in 1979 and 1980 to save the dollar from disintegration. This involved a severe recession, interest rates over 21%, and general price inflation of 15%.

Today we face a 60% devaluation and counting, yet no one seems to care. It’s of greater significance than the three events mentioned above. And yet the one measurement that best reflects the degree of inflation, the Fed and our government deny us. Since March, M3 reporting has been discontinued. For starters, I’d like to see Congress demand that this report be resumed. I fully believe the American people and Congress are entitled to this information. Will we one day complain about false intelligence, as we have with the Iraq war? Will we complain about not having enough information to address monetary policy after it’s too late?

If ever there was a time to get a handle on what sound money is and what it means, that time is today.

Inflation, as exposed by high gold prices, transfers wealth from the middle class to the rich, as real wages decline while the salaries of CEOs, movie stars, and athletes skyrocket – along with the profits of the military industrial complex, the oil industry, and other special interests.

A sharply rising gold price is a vote of “no confidence” in Congress’ ability to control the budget, the Fed’s ability to control the money supply, and the administration’s ability to bring stability to the Middle East.

Ultimately, the gold price is a measurement of trust in the currency and the politicians who run the country. It’s been that way for a long time, and is not about to change.

If we care about the financial system, the tax system, and the monumental debt we’re accumulating, we must start talking about the benefits and discipline that come only with a commodity standard of money – money the government and central banks absolutely cannot create out of thin air.

Economic law dictates reform at some point. But should we wait until the dollar is 1/1,000 of an ounce of gold or 1/2,000 of an ounce of gold? The longer we wait, the more people suffer and the more difficult reforms become. Runaway inflation inevitably leads to political chaos, something numerous countries have suffered throughout the 20th century. The worst example of course was the German inflation of the 1920s that led to the rise of Hitler. Even the communist takeover of China was associated with runaway inflation brought on by Chinese Nationalists. The time for action is now, and it is up to the American people and the U.S. Congress to demand it.


March 15, 2008
Dr. Ron Paul is a Republican member of Congress from Texas.

Jon Nadler: $1000 Falls. Quo Vadis?

$1000 Falls. Quo Vadis?

Good Afternoon,

The countdown to $1,000 gold finally ran out at 10:35 am New York time today as spot bullion reached a historic high of $1,000.25 bid amid the global market conditions that had emerged overnight. The final push to the peak came on the heels of a slump in US retail sales and following a lack of reassuring words or offer of aggressive remedies for the credit black hole by the Mr. Paulson this morning. This was an achievement of a lofty objective, as well as a long-standing one. Very long.

Gold prices appeared to be all primed to finally achieve the $1K mark as early as last night, when background market conditions shifted from bad to worse overnight. Today's spike will likely become known as the "Carlyle/Drake Rally" (or cave-in, depending on your preference). The imminent doom of the Washington-based bond fund and probable demise of the hedge fund sent icy shivers through the financial markets that way overshadowed the (nanosecond-brief) cheer we witnessed following the Fed's term facility plan the other day.

Today, the Treasury's Mr. Paulson offered the President's Working Group on Financial Markets no more than lip service by concluding his remarks with platitudes such as: " We will continue to re-assess conditions, monitor progress, put forward new recommendations and take additional steps as necessary." US President Bush himself managed to say about the current predicament of the greenback only that it was not 'good tidings'(?!)

However, a retreat in the commodity complex emerged shortly after cues from the Dow (previously down 215 points) showed a reversal in sentiment and the index went into positive territory by 60 points. Stocks erased all of their earlier losses after Standard & Poor's suggested that the "bulk of write-downs linked to bad home loans may be behind for banks." As we said earlier, every bit of news counts these days, and has twice the impact it may normally have. Bad news, as well as good news. We have also opined that once the credit vortex is assigned a final dollar figure, the markets will not feed off of uncertainty like pirahnas anymore. They will have to take into account fundamentals as well. Tall order these days...

A quick scan of values recorded at gold futures closing time in New York revealed crude oil prices at $109.76 per barrel and the dollar off of the 72 mark on the dollar index. New York spot gold was up $6.90 per ounce, showing at $990.30 bid per ounce ( a full $10 under the historic high seen earlier) and related metals were still rising in concert, albeit with more moderated gains of their own. Silver was up 29 cents at $20.30, platinum was up $17 at 2088 and palladium rose $7 to $510 per ounce. Commodities markets continued in a state of disarray, with huge sums of fund money being thrown at them, while still trying to absorb the pyramid of long positions which has already been piling skyward in previous weeks.

Keep an eye on the Dow and on gold's closing levels. Dollar-denominated commodities have all benefited from the intense fund attention. It has taken an estimated $600 billion credit debacle and six months to lift gold from $730 to $1,000. The same funds will now become increasingly conflicted on whether to push the envelope further based on potential further billions being added to the problem or whether to scale back from the sector as some corners begin to be turned. At such a juncture, we may expect volatility of a much larger order of magnitude in these markets and every single news item to matter much, much more. Keep very alert and take nothing for granted. Even on a day of such celebration. We already know how we got here. The bigger/better question is: "Whither Goest Thou?"

Happy Trading,

Jon Nadler
Senior Analyst
Kitco Bullion Dealers Montreal

Dramatic Fed Move to Unlock Markets

By Ambrose Evans-Pritchard
The Telegraph, London
Wednesday, March 13, 2008


The US Federal Reserve has taken the boldest action since the 1930s, accepting $200 billion (L100 billion) of housing debt as collateral to prevent an implosion of the mortgage finance industry and head off a full-blown economic crisis.

The Bank of England, the key European central banks, and the Bank of Canada all joined in a co-ordinated move with a mix of policies to halt the downward spiral in the credit markets, expanding on the "shock and awe" tactics used late last year.

The Fed's dramatic step came after an emergency conference call by governors on Monday night.

It followed the meltdown of the US chartered agencies -- Fannie Mae, Freddie Mac, and other lenders -- which together guarantee 60 percent of the entire US home loan market.

Fannie Mae's share price fell 19 percent on Monday after Barron's magazine said it may need a rescue package.

"The agency crisis was a tsunami event," said Tim Bond, global strategist at Barclays Capital. "The market was starting to question the solvency of bodies that stand at the top of the credit pile. These agencies together wrap or insure $6 trillion of mortgages. They cannot be allowed to fail because it would cause a financial disaster. That this sector has blown up has caught everybody's attention in Washington."

The Fed action set off a powerful relief rally, lifting the Dow Jones index more than 350 points in late trading. Both US and European equities have been hovering on key support lines in recent days, threatening to break down through 18-month lows in a second leg to the bear market.

Stress indicators across almost all parts of the global credit system fell from extreme levels on the Fed news.

The CDX and iTraxx Europe indexes that serve as a default barometer for corporate bonds retreated from record highs, although it is too early to judge whether the latest action will start to thaw the credit freeze. The stock market rally after the last central bank intervention in December fizzled out after just one day.

"This is not going to be enough," said Hans Redeker, currency chief at BNP Paribas. "The Fed is doing the right thing by soaking up mortgage debt nobody else wants. This will have an impact on spreads, but we're seeing the deflation of a major bubble. The Fed is still going to have to cut rates by 75 basis points next week."

It is a groundbreaking move for the Fed to accept mortgage collateral, even if the debt is theoretically "AAA-grade" debt.

The Fed is not allowed to buy mortgage bonds outright, but it can achieve a similar effect by letting banks roll over collateral indefinitely.

The European Central Bank is already doing this, shielding Dutch, Spanish, German, and some British banks from the full impact of the credit crunch.

The Fed is to create a facility that allows banks to swap mortgage bonds for US Treasuries. It is a well-targeted move to avoid adding fuel to inflationary fire. It follows the Fed's separate pledge last Friday to add up to $200 billion in liquidity.

The Bank of England also said it was widening the range of eligible collateral as it offers L10 billion of three-month loans, saying pressures in the money markets "have recently increased again."

The ECB and the Swiss have boosted swap agreements with the Fed to provide $30 billion and $6 billion respectively in dollar liquidity to their own lenders.

Bernard Connolly, global strategist at Banque AIG, said the Fed action may help calm the markets for now, but it cannot solve the root problem of eroded bank capital.

He said: "There is the risk of a very damaging credit contraction. We face the most serious global crisis since the Great Depression. But at least the North American central banks are doing their best to stop it spreading to the real economy."

The emergency actions appear to have been co-ordinated by the Fed's top two figures, Ben Bernanke and Donald Kohn, working with the Bank of Canada's Mark Carney.

"We should be thankful we have people in charge who appreciate the gravity of the situation," said Mr Connolly.

The travails at Fannie Mae and Freddie Mac had combined in a deadly cocktail with a fresh wave of panic over the solvency of the investment banks with heavy exposure to sub-prime debt. Mr Bond said the mortgage agencies may need to be nationalised. Fannie Mae's shares have fallen 70 percent since October, even though it has an implicit federal guarantee.

* * *

Jim Sinclair: Federal Reserve Action Announces New Loan System To Member Banks

Dear Friends,

The Federal Reserve action today formalizes what has been its policy from almost day one of the credit and default derivative meltdown and credit market lockup.

What is occurring is THE MONETIZATION OF BANKRUPTCY. The predictable result of monetizing bankruptcy is a significant increase in inflation and a sharply lower dollar.

The result of a sharply lower dollar is sharply higher gold regardless of the dress up process being applied to the US dollar and gold today. The dress up is to prevent a stinging rebuff for the Federal Reserve paying a FARCE price for bankrupt derivative packages purely to keep the banks solvent.

This action speaks negatively for 30 year US Treasury bonds. What needs to be understood is that there are more than $20 trillion dollars worth of credit and default derivatives out there.

The next key point is that nominal value of this over $20 trillion of credit and default derivatives becomes full value when the derivative fails to perform. This comes on a modest capital injection into a bond guarantee company that facilitates pinning a tin AAA debt rating on them - something that is a total fallacy.

The problem at the heart of the deteriorating credit lockup situation is OTC credit and default derivatives that have failed to perform.

The inviting conclusion then is that $200 billion is a pimple on the ass of an elephant. Nobody in his or her right mind wishes to see what is coming in 2011. The only protection is hard assets of any type, shares (preferably not US companies) and the Federal Reserve Gold Certificate Ratio, modernized and revitalized.

This time gold is not going to crater after achieving its maximum market valuation. That nullifies every top caller from $248 to middle-late 2011 without exception as well as those now so inclined. This will make mining companies very attractive businesses.

Respectfully yours,

Jim

Sprott sees financial turmoil pushing gold to $2,000

By Stewart Bailey
Bloomberg News Service
Monday, March 10, 2008

Turmoil in global credit markets may lead to the collapse of a North American bank, pushing bullion prices up to $2,000 an ounce as investors seek a haven in gold, Eric Sprott said.

This year's decline in banking and brokerage stocks will worsen, said Sprott, 63, founder and chairman of Sprott Asset Management, which manages about $7 billion. In response, the company is short-selling financial stocks and increasing holdings in bullion and mining companies, Sprott said. He declined to name which bank he thought may collapse.

"We're in a systemic financial meltdown," Sprott said in a March 6 interview at the company's Toronto headquarters. "There are probably 10 companies that are broke that are still trading -- banks and financial institutions."

Sprott, who in 2004 foresaw uranium and crude-oil prices rising, expects that the global financial system will come under increased stress as banks, faced with slipping stock prices and capital erosion tied to subprime-mortgage loans, battle to raise money to offset losses caused by asset writedowns.

Bear Stearns Cos. dropped as much as 14 percent today on speculation the company lacks sufficient access to capital. The company, the second-biggest underwriter of mortgage-backed bonds, led Wall Street shares lower in the past six months as the world's largest banks and securities firms wrote down $188 billion of assets linked to devalued loans.

The "concentration" of Sprott's short selling is in financial stocks, housing, and consumer products, he said. Short selling involves selling borrowed stock on the expectation share prices will fall, allowing the short seller to buy the equities in the market at a lower price to repay the debt.

... 'Easiest to Short'

"The brokerage companies, the investment banks are the easiest to short," Sprott said. "Do I understand what's happening in the business? Yes, there is no business."

Sprott said his company's offshore hedge funds have increased the proportion of gold in their portfolios to about 30 percent. The company is also buying small mining stocks that have yet to "blossom," including Dynasty Metals and Mining Inc., Golden Star Resources Ltd., and MAG Silver Corp., he said.

Gold has gained for seven straight years and reached a record $995.20 an ounce in New York on March 5. The precious metal rose 16 percent this year before today, compared with a 12 percent drop in the Standard & Poor's 500 Index and a 24 percent slump in the seven-member S&P 500 Investment Banking & Brokerage Index.

... Funds double

The Sprott Gold & Precious Minerals Fund and the Sprott Canadian Equity Fund have both more than doubled in the past five years. The S&P 500 Index gained 58 percent in the same period.

Sprott says the collapse of U.K. mortgage lender Northern Rock in September precipitated some bullion purchases by skittish depositors seeking a safe investment for the money they had withdrawn from the bank. That presages the larger effect that a banking failure in North America would have on gold demand, he said, since investors will have few good alternatives.

"Government bonds are a joke at the interest they're paying," Sprott said. "You can buy gold or other real things -- gold, silver, platinum, palladium -- things that hold value."

* * *

Gold probing towards the $1000 mark

Peter Brimelow from MarketWatch.com sniffs the precious metals air and finds it charged with anticipation from gold bugs everywhere....

"NEW YORK -- Gold finishes a fabulous February, and the gold bugs' attention is turning to gold shares, and silver.

When I last wrote about gold, with the pleasingly prescient headline "Gold's path to $1,000 now clear?," bullion had just staged a three day-bounce back after a terrible beating received on Feb 1st.

Since then, as Australia's The Privateer put it recently: "The last two weeks have been absolutely stellar for gold, as it has moved three-quarters of the way between $U.S. 900 and the big $U.S. 1,000 over that period."

The Privateer's $U.S. 5x3 point-and-figure gold chart is designed to respond glacially to gold price changes. Now it has been struck with scalding global warming: It has changed 18 times in February and now looks spectacular:

http://www.the-privateer.com/chart/gold-pf.html

The questions now interesting the gold bug investment letters are:

-- Can gold go much further, percentage-wise?

-- What does this mean for silver?

-- Why aren't the wretched gold shares moving?

Silver leaped a stunning 9.7% in the past week, with Comex May silver closing up $1.767 at $19.915. The Privateer was a little dismissive: "For many of those who are dipping their toes into the precious metals markets, gold is simply seen as being too expensive. That is why silver ('the poor man's gold') has outperformed gold so far this year."

But other observers were more excited. At Le Metropole Cafe, Bill Murphy, who has followed gold closely for years, was motivated to put out a special Sunday alert: "To say that silver has been trading differently the past couple of months is an understatement. ... As a veteran commodities trader, I could see, on a daily basis, somebody quietly accumulating silver on price dips ... never pushing the envelope, but buying silver at times when it normally would get trashed."

At Jim Sinclair's MineSet, Dan Norcini plunged into the technical entrails of silver futures trading -- the "commitments of traders" supplied by the Commodity Futures Trading Commission -- and pulled out an unusual augury: "The funds have not been reducing their net long position. ... The funds continue to buy. Guess who is doing the selling -- the small specs! Apparently, some of the public is trying to pick a top in the silver market. They have built up the largest outright short position in two years. Talk about a bullish signal. The most undercapitalized traders on the planet are adding new silver shorts as the market breaks into a 28-year high."

Norcini adds: "Remember, it is a new calendar month on Monday and that often means new allocations of fund money to the markets. If that occurs, the silver shorts are in serious, serious trouble as the longs will show them not one ounce of mercy. Blood in the water draws sharks and the silver shorts are not only bleeding, they are hemorrhaging massively."

But gold shares, of course, continue to break their owners' hearts. GoldMoney's James Turk, in this weekend's FreeMarket Gold & Money Report, shows with a 20-year chart that the ratio of gold to the Philadelphia Gold and Silver Index has only been meaningfully lower briefly once -- right before the gold upswing began in 2001.

Perhaps the answer to the question if the shares will notice $975 gold is the same as that provided by The Privateer, discussing the general lack of attention paid by the public to the gold surge: In "the early 1980s, when the Dow Jones Industrial Average was challenging the all-time highs it had set in 1969 and slightly exceeded in 1972-73. ... It took quite a while, until mid-late 1985, in fact, for the majority of people to finally be satisfied that the Dow wasn't going to fail at the 1,000-1,100 level as it had done for the previous 15 years. Once that happened, the markets took off. ..."

Privateer's prediction: "That is what is in store for gold, as and when it exceeds $1,000 for the first time."

* * *

The new global gold rush

by ANDY HOFFMAN
From Saturday's Globe and Mail
February 29, 2008 at 8:54 PM EST


Tye Burt has always been able to get the most out of the unwanted, the discarded and the overlooked.

As a young boy growing up in Green River, Ont., he would vigorously polish bruised apples from his family's orchard and then sell them to motorists on the side of the highway at full price.

It was a trait that he carried with him. Four years ago, on a trip to Nova Scotia, Mr. Burt purchased a decrepit wooden schooner, a vessel that had been a star exhibit at Expo 67 but had been so neglected it was barely seaworthy.

The mining executive oversaw painstaking work that restored the schooner's former grandeur to the point when last fall the Atlantica was suitable for the Duke of Edinburgh to enjoy as part of a Canadian charity tour.

Those were mere fix-up jobs, however, compared to what Mr. Burt has done since taking on the top job at Kinross Gold Corp. in 2005. He gutted the management team and orchestrated a corporate restructuring, and is now taking the Toronto-based miner into places many once feared to tread. His favourite destination? Russia.

"As we see the traditional sources of gold production, like South Africa, like the United States, like Canada in decline, Russia is growing in prominence and in prospect," Mr. Burt says. He suggests there are 300 million to 400 million ounces of untapped gold in Russia.

Kinross is by no means the only gold miner jetting off to wild and wooly regions. Amid record gold prices — bullion settled at $975 (U.S.) an ounce in New York after surging to a record $978.50 yesterday — the entire industry has had to look beyond its comfort zone. Way beyond.

"The places you can go to find and develop new deposits in a friendly way are shrinking," Mr. Burt says.

In what could be a new gilded age, countries like China, Russia and some developing parts of Africa are poised to become the new bullion-producing juggernauts, despite the fact that foreign miners have had trouble securing certainty of their land titles in these areas. Those willing to take on the risk of trying to build mines in these countries could be in for huge rewards — or humongous heartbreak.

"Regions that a few years ago the majors wouldn't look at are becoming increasingly attractive," said William Tankard, a senior analyst at GFMS Ltd., a London-based consulting firm to the precious metals mining industry.

China, with a hundreds of small gold mines operated by a seemingly inexhaustible labour force, recently ended South Africa's century-long reign as the world's top-producing gold nation, according to GFMS.

China produced 276 tonnes of gold in 2007, or roughly 9.7 million ounces. That was a 12-per-cent jump from 2006, GFMS said. By contrast, South Africa — the world's largest gold producer since 1905 — produced 272 tonnes, an 8-per-cent decline from the year before.

Faced with the rising technical and safety challenges to mine ever-deeper deposits, as well as production cuts due to electricity shortages, South Africa is unlikely to ever regain its title as the planet's best place to mine gold.

In South Africa's wake, the smart money is all over the map.

Just last month, Richard O'Brien, the head of Newmont Mining Corp., conceded that the world's second-largest gold company will have to travel to places it had once considered off limits in its quest for rich sources of the precious yellow metal.

"We enjoy staying in regions with a more stable environment like Canada," Mr. O'Brien told analysts. "[But] people ask when we will go to China, Russia or the Democratic Republic of Congo. I can't say when, but at some point, I anticipate we will be in all of those."

Gold miners have always had to go where the gold is but the current dearth of large-scale deposits in mining-friendly countries has created unprecedented challenges. The sands of the gold mining industry are shifting and they are headed toward places mired in alarming uncertainty.

"I'm going to predict that other major mining companies are going to go to Russia in some size in the future," Mr. Burt says. "There will be partnerships in multiple metals. So yes, we're well positioned."

KINROSS REBORN

That wasn't a claim Mr. Burt would have made when Kinross lured him from a senior management position at Barrick Gold Corp.

At the time, Kinross was a basket case of a gold company, burdened with a scattered portfolio of high-cost and mostly low-grade assets, largely controlled by the company's joint venture partners. Its prospects for growth were dismal.

Kinross looked destined to be stuck with shrinking reserves and flat production hovering around 1.5 million ounces of gold per year. The situation was so bleak that, in the midst of an investigation by the U.S. Securities and Exchange Commission into the way the company had accounted for a three-way merger with a pair of Canadian rivals, Kinross didn't published financial results for a year.

"Nobody was considering Kinross as a serious investment or a serious player," said Catherine Gignac, an analyst at Wellington West Capital.

Many investors thought its best hope was as a takeover candidate.

Less than three years later, Mr. Burt has orchestrated a stunning turnaround, positioning the company as a growth leader rather than suffering prey.

The company's gold mine portfolio has been transformed to focus on better-quality mines in fewer regions, including Chile and Brazil, where Kinross has full control of operations, cost expenditures and exploration spending.

A $3.5-billion takeover of Bema Gold that closed early last year helped give Kinross bragging rights to the best near-term growth prospects among major gold producers.

Annual production is forecast to rise 60 per cent over the next two years to 2.5 million ounces as a massive expansion of its low-grade but long-life Paracatu mine in Brazil comes to fruition, along with a new mine in Washington state.

Yet with the price of gold charging toward $1,000 an ounce, Kinross's most promising asset in the short term is also its most contentious.

Less than three months from now, Kinross will begin commercial production at its $705-million (U.S.) Kupol project in Russia, well north of the Arctic Circle.

The mine is endowed with an exceedingly high grade of roughly 19.5 grams of gold per tonne of ore. That will make it one of the lowest-cost gold mines in the world at a time when bullion producers are grappling with soaring costs.

In gold mining, however, a mine's location can be just as important as its economics. And with Kupol, more daunting than its remoteness is Moscow, nine time zones to the east.

'THE NEXT BIG PLACE'

Few dispute Russia's promising mineral potential. Currently the world's fifth-largest producer of gold, it has 9 per cent of the world's gold reserves.

Mr. Burt believes his company is blazing a trail that will soon be crowded with larger competitors looking to partner with Russia's domestic producers. "From a resource perspective, I think Russia is the next big place," he said.

Seventy-five per cent owned by Kinross, Kupol will be the largest foreign-controlled mining operation ever in Russia. (The minority is held by the local state government of Chukotka.) Kinross, of course, is no stranger to the country. The company has been mining gold in the far east of Russia for 12 years, first with its now mothballed Kubaka mine, which it sold to Russian producer Polymetal last year for $15-million, and currently with its Julietta mine, which it acquired as part of the Bema takeover along with Kupol.

Key to the company's success in Russia, according to Mr. Burt, has been keeping strong ties with Moscow, vigorously avoiding corruption and being a "good corporate citizen" by funding social programs and infrastructure development in the local areas where it operates. "You have to put in the time," he said.

Russia, he says, has proven to be a far more stable mining jurisdiction than countries such as Venezuela, Ecuador and Bolivia that have seized resource assets from foreign companies, or even Argentina, which recently imposed unexpected export duties on gold and base metals production.

"There has not been any history of government interference in the mining sector. Nobody has been expropriated. There have not been radical changes to the tax regime. That behaviour has been seen in many other jurisdictions. It has not been seen in Russia," he said.

THE MOSCOW FACTOR

Kupol is, however, a far more valuable deposit than either Kubaka or Julietta, particularly as gold prices hit new records. While Kupol has only 3.2 million ounces of proven and probable gold reserves, its high grade is expected to make it one of the world's highest-margin gold mines, with production costs averaging between $210 and $220 an ounce — more than $100 below the industry average.

Russia accounts for just 8 per cent of Kinross's 47 million ounces of gold reserves but TD Securities analyst Greg Barnes recently told clients that Kupol is the second-largest contributor to his calculation of Kinross's net asset value behind Paracatu.

"The company's significant exposure to Russia provides some cause for concern … any political interference in the mine would, in our view, have a materially negative impact on Kinross's valuation," Mr. Barnes wrote in a report.

Kinross maintains that the mine's ownership structure will be a crucial element to success. The mine is expected to create 1,200 local jobs and spinoff employment for local businesses. As well, Kinross will pay a corporate tax rate of 24 per cent and an off-the-top royalty of 6 per cent.

As for possible legislation that would deem major deposits "strategic assets," Kinross said Kupol will be grandfathered under any new law.

"As a currently permitted and already-built project, we are exempted from that. We have had assurances in writing and in the legislation," Mr. Burt said.

Canadian gold guru Pierre Lassonde thinks otherwise, saying in an interview: "I wouldn't put a dime in Russia."

Mr. Lassonde — the former president of Newmont Mining Corp. and current chairman of relaunched mining and energy royalty company Franco-Nevada Corp. — believes the rule of law in Russia is far too murky for a Western mining company to invest the hundreds of millions of dollars needed to build a mine.

"It's bandit capitalism. Every time a foreign company has success in Russia, they find a way to legally take it away from them," he said.

Well-regarded gold investor Charles Oliver of Sprott Asset Management said he is "cautiously optimistic" about Russia as a destination for mining firms, but he is not as enthusiastic as he once was.

"There are concerns on [mining] title. We haven't seen anybody had their mine taken away, but it is the kind of thing where you want to tread carefully," Mr. Oliver said.

Despite the political noise, Mr. Burt maintains that Russia, with its massive store of gold reserves, is simply too big to ignore and even his old employer Barrick will be lured back to country.

"The supermajors have no choice. That's why you see Barrick in Pakistan and that's why you hear [Newmont's] Richard O'Brien saying those things. They have a big tiger to feed and they are going to have to go to those places. Do we have a head start? I firmly believe we do. Are we going to be unique in five years? No. These big companies have lots of resources and they'll be coming, too. I think we have an edge. Part of the edge is our size, part is our experience and part is our relationships. We are there."

ADVANTAGE CANADA

Canada has seen its share of global gold production cut by nearly half over the past 13 years. In 1995, Canada accounted for 6.8 per cent of world gold production, but by last year, it had fallen to just 3.8 per cent, good enough for eighth place among gold producing nations, GFMS said.

Between 1995 and 2005 Canada's gold reserves plunged 40 per cent, according to the Mining Association of Canada, falling to 971 tonnes from 1,540 tonnes.

Yet with the largest concentration of junior mining firms, Canada as a country still ranks No. 1 in mineral exploration spending, accounting for 19 per cent of the $7-billion (U.S.) spent on exploration in 2006 according to Halifax-based Metals Economics Group.

Despite the current disconnect between exploration spending in Canada and gold production, Mr. Lassonde thinks the money is going to the right place. He believes more Canadian exploration success is certain because of improvements in geological technology.

"We are the second-largest land mass in the world, [behind Russia] and that gives us a huge advantage. Do you really believe that everything has been found in Canada? Absolutely not," he said.

OVER THE HORIZON

While Canada as a country is no longer a leader in gold production, Canadian gold miners still dominate the top of the bullion mining ranks. A willingness to operate in far-flung jurisdictions beyond their own borders has kept Barrick, Kinross and Goldcorp Inc. among the sector's heavyweights.

Producing roughly eight million ounces of gold a year, Toronto-based Barrick remains the world's largest gold miner but has just two small in mines Canada among its stable of 27 worldwide. It has been a prolific acquirer of foreign companies and assets and has major operations in Nevada, South America, Papua New Guinea, Australia and Tanzania.

Vancouver-based Goldcorp's Red Lake operations in Ontario were the largest single contributor to the company's overall production of 2.3 million gold ounces last year. Red Lake produced more than 700,000 ounces while two other Ontario mines brought the Canadian total to over one million ounces.

Yet like Barrick, Goldcorp has also been an aggressive buyer of foreign assets, avoiding the fate of Canadian nickel stalwarts Inco and Falconbridge, as well as aluminum major Alcan, which each had their flagship operations in Canada and were all snapped up by opportunistic foreign mining giants.

While the record gold price has given producers the financial incentive and wherewithal to look further afield for new gold deposits, China, the new world leader in gold production, has proven an elusive place for most. There are a few foreign companies operating relatively small deposits, including Australia's Sino Gold Mining Ltd. as well as Canada's Jinshan Gold Mines Inc. and Eldorado Gold Corp., but major Western gold producers have had little success in the country.

Barrick has had an office in Beijing since 1993 but has no mines in China.

"We have been there 15 years and we haven't found anything big enough geologically that makes sense," Alex Davidson, Barrick's executive vice-president in charge of exploration and corporate development, said in a phone interview from Tanzania.

Barrick has turned to places like Tanzania to replenish reserves, but has wrestled with labour problems that hampered production last year at one of its mines in the east African country. (Barrick fired the mine's entire work force but has since hired back more than half the workers.) Among a slew of development projects is a massive gold and copper project in Pakistan, where violence and political unrest marred recent elections.

THE LONG-TERM VIEW

In Russia, a lack of large-scale deposits has not been the problem. A survey of mining companies conducted by the Fraser Institute found that Russia ranked No. 1 out of 68 countries in terms of mineral potential.

However, it came second-to-last when it comes to regulatory duplication and inconsistencies and ranked 62nd in terms of stability of policies, narrowly besting the Congo and Mongolia but trailing behind nations like Honduras, Ecuador, Bolivia, Indonesia and China.

Russia, where an election tomorrow is expected to see Vladimir Putin's handpicked successor Dmitry Medvedev anointed president, is considering legislation that would deem all large-scale gold deposits "strategic assets." The law would prohibit foreign companies from controlling major mining operations. There have also been concerns that Russia's nationalization of oil and gas assets, in which major Western energy firms transferred ownership of assets to state-controlled Gazprom, could be repeated in the mining sector.

Political issues left Barrick so frustrated that it largely abandoned the former Soviet Union in 2006, shuffling its Russian exploration assets into producer Highland Gold Mining Ltd. for a minority stake in the company.

"I don't think it's possible for a company the size of Barrick to go into Russia and find a big deposit," Mr. Davidson said.

Turning 51 this month, Mr. Burt takes a longer view. He has been a part of the mining business for more than 20 years, first as an investment banker and as an industry executive for the past six. In 1985, he joined the former brokerage house Burns Fry, specializing in mining sector deals. In 1998, Deutsche Bank tapped him to create a global mining team — until low commodity prices led the brokerage giant to abandon the effort two years later.

In 2002, he came out of "retirement" to join Barrick. He spent much of his time in Russia and led the gold giant's foray into the country. Given the chance to skipper the Kinross ship instead of "being an admiral on an aircraft carrier" at Barrick, he made the switch.

Now Mr. Burt is heading a company with a stable of mines centred in what he believes are some of the world's most promising gold mining regions. He won't say where Kinross will look to expand next, but he certainly isn't ruling out a deal in Russia with a local partner.

"Russia, if you know your way around, is a global mining power that is on the come," he says.

***