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What more is there to say? Gold is money.

It always has been, and it usually will be.

The fact that gold is actually money is why central banks hate it so much.

Central banking institutions succeeded in creating national monopolies on currencies. Only the Bank of England can printing English bank notes. Only the US Federal Reserve can printing US dollar bills. Only the Reserve Bank of Australia can print Aussie dollars.

(Rare exceptions to this are Scottish and Northern Irish retail banks. They retain the right to print their own notes. However, there is an suggested backing from the Bank of England for these notes.)

However, even though central banks have succeeded in imposing legal tender laws, by outlawing just about all competing currencies, one thing is apparent.

As much as they may like to, main banks and governments cant abolish gold. They can try. The doyen from the progressive movement, the tyrant, Franklin Delano Roosevelt, signed an executive order in 1933 to confiscate privately held gold in america.

And Part IV of the 1959 Banking Act in Australia gives the governor general the power to demand the actual relinquishment of all private gold. Part IV is currently suspended, but the governor general could invoke this at any time.

Governments and central banking institutions may try to take private gold again. They detest gold because it gives individuals a way to protect against the wear and tear of paper money rising cost of living.

In todays Money Morning, my colleague, global strategist Jim Rickards, provides more background around the relationship between central banking institutions and gold, and where the actual gold price could mind next.

Read on below with regard to details

Cheers,

Kris

Gold the Once and Future Currency

Jim Rickards, Strategist, Strategic Intelligence

Is gold off the bottom?

Its unfortunate that markets are now decreased to reading Janet Yellens mind. But thats what happens after seven years of market intervention and central planning by the Federal Reserve.

Using my system, which combines complex dynamic systems analysis with unique access to relevant info, were able to draw some useful inferences about the future road to gold prices. Our estimation is that gold has now discovered a bottom and is ready to move steadily upward from current levels.

For those who are completely allocated in physical precious metal (I recommend about 10% of investible property), theres nothing more to do on that front. You can just sit tight and enjoy the ride.

For those who do not have the actual recommended allocation to physical gold, this is an attractive entry point and a chance to top up your allocation at the best prices in six years.

Its certainly already been a long and volatile ride for gold investors. Starting from a low of about US$250 per ounce in mid-1999, gold staged a spectacular rally of over 600% to about US$1,Nine hundred per ounce by July 2011. Unfortunately, that move looked increasingly unstable towards the end.

Gold was about US$1,400 for each ounce as late because January 2011. Almost US$500 for each ounce of the overall move occurred in just the last 7 months before the peak. That kind of hyperbolic growth is almost always nonsustainable.

Sure enough, gold fell dramatically from that peak to below US$1,100 per oz by July 2015. The 15-year chart still shows a gain of approximately 350%, but the four-year chart shows a loss of revenue of over 40%.

Those who invested during the 2011 rally are underwater, and many have given up on precious metal in disgust. For long time observers of gold markets, sentiment is the worst theyve seen.

Click to enlarge Gold in dollars for each ounce, Sept. 2010-Sept. 2015 Source:?Wall Street Journal

At?Strategic Intelligence, we glance behind the charts as well as sentiment and try to discern the actual systemic dynamics driving the price. Once those dynamics are specified, forecasting becomes much more reliable.

Weve identified three elements that well explain the gold price dynamics. These 3 factors are real interest rates, dollar strength and central bank intervention. Looking at the current status and likely path of these factors is the greatest guide to the future price of precious metal.

Real interest rates are one of the best predictors from the nominal dollar price of precious metal. When real interest rates are low (or negative), that provides gold a boost. When actual interest rates are high, which puts downward pressure upon gold.

The correlation is not perfect, but its much stronger than other correlations such as the stock market or economic growth. The reason for the actual correlation is easy to understand. Gold has no yield. Golds valuation needs to compete with other asset classes such as stocks and bonds that do possess yields. When yields upon competing asset classes are higher, the gold price tends to suffer, and?vice versa.

What matters for this function is not the?nominal?rate of interest however the?real?rate. Real rates of interest are defined as the nominal interest rate minus inflation. For instance, if the nominal interest rate is actually 5%, but inflation is 3%, then your real rate is only 2% (5% minus 3%). That sounds simple enough, but there are complications.

In selecting minimal interest rates, you have to specify the maturity. Rates on 2-year Treasury information are much lower than rates upon 10-year Treasury notes. We use the 10-year note rate for our analyses because its a good proxy for mortgage rates and corporate bond rates, which represent the cost of financing long-term investments in housing and fixed property by individuals and companies. It makes more sense to consider gold as a long-term core keeping than as a short-term trading instrument.

The other complication arises once the rate of inflation is larger than the nominal rate of interest. In that case, the real rate is negative. This might happen when the 10-year note rates are 1% and inflation is 2%.

In that position, the real rate is negative 1% (1% without 2%). That is the ideal environment for gold. A zero yield on gold is actually greater than the negative real deliver on notes.

Wall Street analysts keep talking about how low interest are. Its true that nominal minute rates are low, but real minute rates are quite high by historic standards. For the past several years, 10-year nominal rates have mostly been more than 2%, but inflation has been about 1%, sometimes lower.

This means that the real rate on 10-year notes has been over 1%. Compare this to the situation in 1980 (when gold strike a new high of $800 per oz). Back then, Treasury bonds yielded 13%, however inflation was 15%, so the real rate was?negative 2%.?Dont end up being misled by low minimal interest rates. Focus on the real prices instead and youll have better insight into the future price of precious metal.

The second factor is buck strength. There the relationship is even more striking. Should you consider gold to be a form of money or currency?(that we do? thats why we cover it in?Strategic Intelligence), then its easy to see that the strong dollar signals an inadequate dollar price of gold, along with a weak dollar signals a powerful dollar price of gold.

The greatest measure of dollar strength (apart from gold itself) is the Price-Adjusted Broad Dollar Index maintained through the Federal Reserve Board.

The all-time low for this dollar index was 80.5001 in July 2011, the time of which corresponds exactly using the all-time high dollar price for gold.

Conversely, that index today reads 95.595. Thats the highest studying in over six years. Not surprisingly, just as the dollar reaches a six-year high, gold is actually near a six-year low. Once again, the correlation is not ideal, but it is surprisingly robust.

Wall Street analysts have tended to select the wrong dollar indexes in performing their analysis.

The Wall Road indexes are heavily heavy toward the euro and yen, whereas the Feds catalog looks at emerging markets such as China. At?Strategic Intelligence, weve used the Fed index all along. A glance at Page 253 associated with my book?The Death associated with Money?confirms that weve always used the right index tool.

The 3rd factor is central financial institution intervention.

Here the case is straightforward: a simple matter of supply and demand. Mining result has been remarkably constant over recent decades: about 2,Thousand tons per year.

Gold has not many industrial uses.

I consider jewellery to be wearable wealth, so I do not distinguish between jewellery demand and bullion demand both are types of wealth preservation. So along with constant output and variable demand for gold as a shop of wealth, it has been relatively easy for central banks to control the price of gold by throwing gold reserves on the physical market at critical junctures.

There have been three major waves associated with central bank manipulation within the physical market.

The first had been the London Gold Swimming pool of the 1960s, which collapsed in 1968.

The second would be a covert effort by the U.S. and IMF to dump 1,700 tons of precious metal on the market from 1975C79 to conceal the real impact of rising cost of living. This collapsed in 1980 whenever both inflation and the cost of gold spun out of control.

The third effort was the Washington-inspired Central Financial institution Gold Agreement (CBGA), which formed the sellers cartel of 11 national central banks (not?including the Ough.S.).

The CBGA was created in 2000 and renewed in 2004 and 2009. The largest seller under CBGA was Switzerland. This particular agreement has now failed, and there have been no sales by any of the signatories since 2010.

Since after that, central banks have moved from being net sellers to net buyers the very first time in decades. With couple of official sellers and many recognized and nonofficial buyers, gold need now exceeds gold supply from mines, putting pressure on scrap gold and other fragile hands to fill the gap.

The importance?of this?analysis is that it doesnt focus on where we are. This focuses on where were going. Central banks cannot tolerate higher real interest rates, because they load consumption and investment.

The Federal Reserve cannot tolerate a strong buck because it imports deflation (in the form of lower import prices) from around the world. Physical financial markets are skewed toward excess need because China, Russia, Iran along with other countries continue to demand precious metal to diversify reserves away from dollars while output is flat and official product sales by the West have stopped.

All three factors real rates, the strong dollar and official sales are pointing towards a reversal of recent developments and momentum toward problems that favour higher gold costs.

Gold can move in either path, but it is much more likely to move upward than down given present conditions.

All the best,

Jim Rickards,

Strategist, Strategic Intelligence

For two years, financial markets have repeated the same error predicting that US interest rates will rise within about six months, simply to see the horizon recede. This particular serial misjudgment is the result not really of unforeseeable events, but of a failure to grasp the force and global nature of the deflationary forces now shaping the actual economy.

We are caught in a trap where debt problems do not fall, but simply change among sectors and nations, and where monetary policies on your own are inadequate to promote global demand, rather than merely redistribute it.

These two opening paragraphs came from an article on Project Syndicate. It calls itself the worlds viewpoint page.

Whether it is I dont know in the end, theres a whole internet for that!

But I reckon it summed up the global economy better than any popular article Ive read recently.

In under 100 words, the opening paragraph explains the three key economic problems were facing: interest rates, a deflationary period and the shifting of debt.

The author goes on to point out that no matter what the Fed along with other central banks try, they simply cant stimulate demand to grow the worldwide economy. Pumping up markets with quantitative easing isnt working.

The truth is that QE alone cannot promote enough demand in a world where other major financial systems are facing the same challenges. By boosting asset prices, QE is meant to spur investment as well as consumption. But its effectiveness in stimulating domestic demand continues to be uncertain.

Seven years after 08, global leverage is greater than ever, and aggregate worldwide demand is still insufficient they are driving robust growth. More radical policies C such as major debt write-downs or increased fiscal deficits financed by permanent money making C will be required to increase worldwide demand, rather than simply change it around.

After reading this article, Jim Rickards summed it up on his Twitter feed: Peoples QE is another form of helicopter money. Technical name is permanent monetization.

Seven years after the market accident started and emergency steps were introduced, it looks like those emergency measures are actually the brand new normal.

Less than a decade ago, it was impossible to think the actual American economy would end up with permanent monetisation.

The permanent part means its merely in case of emergency to keep the actual economy humming. It means government will continue to create debt for the central bank to buy, in the belief it will stimulate economic demand.

Continuing to monetise the governments debt all comes down to the rising cost of living outlook.

In the US, inflation information has run below 2% for 40 consecutive months.

So it makes sense that permanent monetisation would be considered.

You see, if inflation is actually running to target, or going back to targeted levels, permanent monetisation have a dangerously stimulative effective on the economic climate.

Right now, theres no chance of that happening. The Wall Street Journal wrote throughout the week that even Given staffers estimate inflation wouldnt hit the 2% goal after 2018.

Why is the Fed so hell bent on inflation?

Simple. It reduces the governments debt burden.

As Rick explained in his book The Book Drop exclusive to subscribers of Strategic Intelligence:

There is a stated reason and unstated reason.

The stated reason is that the Given occasionally needs to cut prices to stimulate the economic climate. The unstated reason is that rising cost of living reduces the real value of the actual U.S. debt. At this time the US has about $18 billion of Treasury debt outstanding. When the Fed can achieve, say, 3% rising cost of living for about 20 years, the real worth of the debt is cut in fifty percent, to about $9 trillion in todays bucks.

Of course, this slow, steady kind is a form of unseen theft from investors.

Its not really Inflation its deflation

They keep trying, but the US hasnt been able to manufacture inflation. However.

As the article above points out, theres a failure to grasp the strength and worldwide nature of the deflationary forces now shaping the economy.

Jim reckons it makes perfect sense. The way he views it, the US is in the depression, so its natural to be experiencing a deflationary period.

The problem is, few people under the age of 90 actually have lived through a sustained period of deflation.

Until inflation takes control such as Jim predicts over the subsequent few years in times of deflation it pays in order to load up on hard property. Think cash, land, art work and bullion.

These hard property are all part of Jim barbell technique. The idea is to prepare your portfolio to protect you from either a good inflationary or deflationary environment. You can click the link to learn more.

Regards,

Shae Russell,

Editor, Strategic Intelligence

From the Port Phillip Publishing Library

Special Report: The End of Australia Vern Gowdies new book is known as The End of Australia: The actual Story Behind Australias Economic Fall and What You Can do to Survive It. We are mailing free copies of this guide to anyone who requests one online. It does not make for cheerful reading. But the idea is that youll be safer (and much wealthier) in 10 years time through receiving a more sober as well as realistic analysis of whats heading onwhat happens nextand what you should be doing about it now (more)

The last six months saw the double crash on the market.

Now theres a double bounce.

The double crash lasted longer than most people expected.

The question now is whether the double bounce will last so long too, or whether this is just a blip before the double accident resumes

From the end of April through to past due September, the Aussie S&P/ASX 200 index fell from 5,982 points to 4,918.

Over the same time-frame, the Aussie dollar dropped from 80 US pennies to 69.9 pennies.

Since then, both have bounced. The stock index is up 7.4%, and the Aussie dollar is up 4.8%.

The good times are back, correct?

Not so fast. Its not so much because of some thing good thats happened to the Aussie economy, its because of something that hasnt happened to the US economy.

What does this double bounce imply?

Heres a chart showing how the index and the currency possess performed over the past six months.

Source: Bloomberg

You can see the slump and the rebound.

Theres no difficulty understanding the reason why. One of the biggest reasons is that for many of this year, markets possess assumed that the US Federal Reserve would raise interest rates.

That place downward pressure on the Foreign dollar. Thats because the interest rate differential between your Aussie dollar and the All of us dollar would have shrunk.

As for that stock market, falling commodity prices and the fear of a recession pressed the Aussie market lower.

But since the end of September, the Aussie market and Aussie dollar have reversed course. Both are up.

After worse-than-expected work numbers in the US, the markets started to downplay the chances of a US Federal Reserve interest rate rise this year.

For instance, bond futures markets now only factor in the 10% chance of the Fed raising rates this month. Even as August, the marketplaces had priced in a 50% opportunity.

As for the Feds December meeting, the chance of a rate rise has fallen to 38.8%. Thats down from a near 50% chance as recently as August.

So, does this mean an american rate increase is off the cards?

Not so fast

Do it!

As this particular report from Bloomberg notes:

Federal Reserve Vice Chairman Stanley Fischer said the U.S. economy might be strong enough to merit a good interest-rate increase by year finish, while cautioning that policy makers are monitoring slower domestic job growth and worldwide developments in deciding the precise time of liftoff.

What does that mean?

It indicates the Fed is ready (almost) to raise interest ratesperhaps!

And thats just it isnt it?

Regardless of the situation, whether the market is feeling bullish or even bearish, confusion continues.

As Joyce Chang, global head of research from JPMorgan Chase & Co told Bloomberg, the actual Fed should get it over with.

Shes correct. But it goes to show just how anxious the Fed is to do anything whatsoever. It wants a lower marketplace, so it has the excuse in order to restart its bond-buying and money-printing program.

However, after witnessing the crashing markets over the past few weeks, the Fed may now be less eager to engineer a crash. In the event that move was the markets response without an interest rate rise, exactly what could the market do when the Fed does increase rates?

The Fed wants a lower market, however it doesnt want it to go too low.

As for which this means for the Aussie market, well, its anyones guess. Were certainly not about to give up on our crash protection strategy.

In fact, with uncertainty and instability set to continue through to a minimum of the end of the year, now is precisely the time when you should think clearly about protecting your investment portfolio.

The Aussie market has bounced properly. It would be great if it continued higher. But something tells us which investors shouldnt get too excited about a new bull market however.

Bottom line: stay invested, however stay cautious.

Cheers,

Kris.

PS: You can find out the facts of our crash protection strategy here.

I borrowed $2.2 million once.

I couldnt pay it back.

But it wasnt my fault.

It had been the coloured family down the road. They had borrowed $40,000, and couldnt pay that back.

They ruined it for everyone. Not me personally.

OK. Thats not a true story. Not really in the way Ive told it. But theres an even more unbelievable version. The issue here is, this story is true. As well as its set to have dire consequences

Lets put some numbers in framework.

By 2013, total world debt was US$223.3 trillion.

That was 313% of world GDP.

Of which, US$157 trillion was Western debt. US$66.3 trillion was rising market debt.

Keep those numbers in mind as you take in this particular comment from the International Financial Fund (IMF), as reported within the Age:

Governments and central banks danger sparking a fresh global financial crisis, the actual International Monetary Fund has stated, as it called time on a corporate debt binge within the developing world.

Emerging market companies possess over-borrowed by an estimated $US3 trillion ($4.Two trillion) in the last decade, threatening to trigger a sharp capital crunch and capital outflows within economies that have already been hit hard by low commodity prices, the fund cautioned on Wednesday in its newest Global Financial Stability Report.

Its typical of a Western establishment. On one hand, its saying Western countries should go further into debt. At the same time, it blames the developing world for the global debt binge.

Its a new take on accusing foreigners for everything that goes wrong. Its like a bad 1970s sitcomblame the darkies with regard to stealing all the jobs! In this instance, its blaming them for taking on all the debt.

In reality, just as immigrants dont take all the jobs, the emerging markets havent incurred all the debt either.

IMF attempts to shift the blame

But relative to how big the Western worlds debt, the actual over-borrowing by emerging market businesses is the equivalent to them borrowing an extra $40,000 while the Western binges on $2.2 million of debt.

And bear in mind the IMF has this particular to say about the actions of the US Fed, again from the Age:

Monetary policies in key advanced economies must remain accommodative and responsive, the actual IMF said.

The report called on the US Federal Reserve to hold off on its first interest rate hike in nine many for the authorities in the eurozone and Japan to continue with unparalleled stimulus measures.

The word hypocrite one thinks of.

So lets get this straight: emerging marketplace companies have borrowed $4.1 trillion more than they should possess (according to the IMF). The IMF wants these to stop borrowing.

At the same time, the IMF says Western governments should keep pumping out debt, as well as Western central banks should keep buying it.

Something aint right.

Its the clown show

This whole story has a particular ring to it.

Think back to the actual 2008 meltdown. What or whom did the popular media and Wall Street blame for that crash?

They blamed subprime mortgage borrowers. Many of who lived paycheque to paycheque. But the banking institutions told them they could afford multi-hundred thousand-dollar mortgages.

It wasnt the borrowers who were to blame. It was those in government, in the central banks, retail banking institutions, and investment banks who created the conditions for the subprime meltdown.

Subprime borrowers couldnt get into such a chaos on their own. They needed the facilitator. The facilitator had been Wall Street.

Subprime borrowers had been the victims of the last turmoil. Emerging market companies will be the victims of the next turmoil. But theyll still cop the culprit.

In truth, blaming emerging market companies for the coming financial crisis is akin to blaming a rape victim for being assaulted, or blaming a patient for any doctors malpractice, or native Africans for that barbarity of the slave trade.

The IMF is really a clown show. And those running it are the biggest Bozos youll find inside any government or lender.

But the latest report from the IMF confirms one thing that we already know: a significant financial crash is coming, and also the IMF is powerless to stop this.

In fact, its thanks to the IMF that the next crisis is certain to happen.

Cheers,

Kris

Yesterday the S&P/ASX 200 index was up 98.5 points. Thats a 2% gain.

European stocks acquired too.

The FTSE 100 index closed trading up 2.8%.

The gains carried through to US trading, where the Dow Jones Industrial Average gained 1.9%, or even 304 points.

Has the world averted another crisis?

Is the worst over? Or is this just the newest false dawn for the markets before the last crash begins?

One of the things we enjoy most about the markets is the accidental positioning of news tales particularly in recent years.

Take this screen shot from Bloomberg:

Its a great contrast.

One news item screeches about the strength people company earnings. Meanwhile, the story below it reports on the collapse of retailer, American Clothing [NYSE:APP].

Its no wonder the company collapsed. It features a market capitalisation of US$20 miland more than US$200 mil in outstanding debt.

Even reduced rates couldnt save this business

It just goes to show that even record low interest rates cant help every business.

Even with report low interest rates, American Apparels annual interest costs have increased from US$11.Eight mil in 2006, to US$39.9 mil this year.

As usually, the best way to show the performance and the success of a organization and its stock, is to look at the price chart. Here it is:

Source: Bloomberg

The inventory is down 98.5% because 2006.

After peaking above US$15 in 2007, it last traded upon Friday at 11.2 cents.

But this isnt just about a middle-of-the-road retailer.

That companys debt position is definitely an example of whats happening right across corporate America. Its why weve said to closely watch the yields on junk bonds.

To measure individuals yields, we follow the SPDR Barclays Higher Yield Bond ETF [NYSE:JNK]. Its an ETF that holds higher yielding, non-investment grade bonds.

Today, the yield on this ETF is 6.27%. One month ago, it was 6.1%. One year ago, it was 5.83%.

This is how bonds work

While the actual yield on a bond ETF may not seem important, it gives you a peek inside the mind of investors.

In order to understand why, well give you a quick lesson in Ties 101.

Bond prices and bond yields move inversely. The easiest way to explain this is to use a bond that matures in one year having a face value of $100, and an rate of interest of 5%.

When you buy a relationship, youre lending money. So, if you lend $100 when buying a bond in this example, youre expectation is the fact that youll get your $100 back one year from now. In return for lending the $100 you also expect to receive a few compensation for it. In this case, youll receive a coupon (interest rate) of 5%.

In short, following one year, youll have made $5 on the $100 a person loaned, plus youll get your $100 back again.

OK, thats simple. But now lets include an additional variable. Lets say that the bond you bought is tradeable. Now lets say that other investors like that bond, simply because they see it as a safe wager. So, they decide that theyd prefer to buy it from you a month after you bought it. But because they see it as a safe bet, theyre happy to pay more for it compared to you paid.

In this instance, theyre happy to buy it from you with regard to $101. Why would they do that, although the face value is just $100? Since they know theyll also receive the $5 discount.

So, at the end of the year, theyll receive $100 back from the company, as payment of the bond (loan), plus theyll have earned the $5 coupon. They lose $1 on the bond, but gain $5 on the discount, leaving them $4 better off.

For the customer, the yield theyll get from the investment is only 4.9%. Remember, these people paid $101 in order to make get that $5 discount. And their total return around the investment is only 3.9%. Once again, because they paid a higher cost for a fixed return.

For your part, sure, you didnt get to get the $5 coupon, but you sold the text for $1 more than you bought itand you probably did so just a month after buying the bond. On an annualised basis, thats not necessarily a bad return.

However, what happens if lot of money swings the other way?

When things go wrong

As with any investment, theres always a downside.

Lets say you buy the bond for $100 face value, but several weeks later the company that issue the text reports a big loss and investors start worrying about the way forward for the business.

In that case, youve got $100 on the line. The bond doesnt mature until the end of the season, and you wont get the coupon for now either.

Youre worried. What if the company goes bust? What if the organization is unable to repay the loan, let alone the coupon?

In this case, you go to the market to see how much other investors are prepared to pay. Simply because they know the same information as you, theyre unlikely to pay the full face value.

In fact, because of the risks of buying this bond, additional investors are now only ready to pay $60 for the bond with a $100 face value. You have a option: risk losing everything, or at least get back 60% of your investment.

You take the latter choice. Youre out. But what about the new owner of the text? Well, theyre taking a calculated risk. Theyre betting that either the organization will be able to meet its financial debt obligations, or that if the company goes bust and is broken up or sold off, that theyll still make back more than their $60 investment.

Thats because bond holders spend time at the front of the queue when companies go bust.

If the company comes through and repays the bond at face value, and pays the coupon, the new owner will cash in the text to receive $100, plus theyll get the $5 couponall for making a $60 bet.

In terms of the impact that has on the investors returns, in effect theyre getting an 8.3% yield ($5 on the $60 investment), but the general return is around 57%, once they cash in the bond at face value.

Theres no new way to go broke

Perhaps you can see why its important to watch these junk bond yields.

If companies can continue to meet their financial debt obligations, then everything is going to be fine. Investors who bought from a panic will have lost, however investors who bought opportunistically may have gained.

But what if companies cant repay their debts?

The fact that the produces on junk bonds have risen by half a portion point over the past year is significant. It shows that investors are worried about the ability of a few companies to repay debts.

If companies are struggling to pay back loans when interest rates are at record lows, it just goes to show there are many much more problems with the worlds economy than most people think.

As our old buddy Vern Gowdie often says, There isn’t any new way to go broke. Hes right, its the same way every time too much debt.

Cheers,

Kris

PS: Vern explains all this in great detail in his new guide, The End of Australia. Weve already imprinted and posted more than Sixteen,000 copies, but we cant keep printing them permanently. Go here to find out how to claim your copy now.