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Venezuelan leader to withdraw $11B in gold reserves to protect against “disturbances” in financial system
Despite a report from the World Gold Council showing that demand for the precious metal has subsided, gold soared to a new record high today on the back of another stock market plunge and an announcement from Venezuelan President Hugo Chavez that the country’s gold mining industry would be nationalized.
Gold touched a new record high of around $1827 dollars an ounce as the Dow Jones plunged by 500 points in early trading.
Gold soared to new heights even in the face of a World Gold Council report that said demand was down 37% year on year.
However, the report noted that there was “increasing acceptance of higher price levels” globally, which explained a modest 3% fall in recycling gold on the supply side.
Although today’s new high for gold is obviously being driven by a flight to safety as the stock market crumbles, Hugo Chavez’s announcement last night that he was to nationalize the country’s gold mining industry undoubtedly has had an impact on today’s trading.
Chavez likened the people that control the gold industry to “the mafia,” stating, “We can’t keep allowing them to take it away,” as he made public plans to withdraw $11B in gold reserves from U.S. and European banks, including 99 tonnes held with the Bank of England and other reserves held by J.P. Morgan Chase, Barclays, HSBC and Standard Chartered, France’s BNP Paribas and Canada’s Bank of Nova Scotia.
Of the country’s 365.8 tonnes of gold, 211 tonnes is believed to be held abroad.
“At the time of these disturbances, it’s preferable to recover our assets, in this case the gold, and have it here in the vaults,” Venezuelan Central Bank president Nelson Merentes said, adding that it would be re-invested in more stable economies like China, Russia and Brazil.
Venezuelan Foreign Minister Nicolas Maduro said the move was part of a plan to create a “new international monetary system” as an alternative to the crisis-hit dollar reserve structure that currently governs the financial world.
Chavez’ decision to pull gold reserves out of the United States and Europe is only going to increase concerns about lack of mine supply, which is already set to fall by around 5.1 per cent this year. This will ensure gold sails through the $2000 barrier sooner rather than later.
As the George Washington Blog notes, “Nationalizing Venezuela’s gold means less gold available in the free market, and the scramble for physical gold to make good on Venezuela’s recall demand could challenge the 100-to-1 leverage levels of paper gold derivatives to physical gold.”
Aug 2, 2011
Two weeks ago we presented a chart that shows the uncanny correlation between the debt ceiling and the price of gold. Now that we know the final amount of the next debt ceiling hike, somewhere in the $2.5 trillion ballpark, it allows us to extrapolate where gold will end up as a result of the debt ceiling hike which will likely be voted into law at 7pm PDT.
A simple correlation rule of thumb allows us to predict that gold will be at $1,950 by the end of the year if it simply retains it close correlation to the debt ceiling. Should Bernanke announce that he will additionally need to monetize some or all of this incremental debt amount, we anticipate that gold will be well over $2,000 by the end of the year, courtesy of yet another round of accelerated dollar debasement, which also means that real gains in US stocks will be negated courtesy of the devaluation of the currency in which they are priced. The same, however, does not apply for gold, which with every passing day is priced in nothing but itself.
The Bloomberg chart of the day first presented on July 20.
And our revised version including the projected gold price.
The Economic Collapse
April 7, 2011
The following is one statement that you should get used to seeing: “The price of gold set another record today.” Today, spot gold reached a new all-time record of $1461.91 an ounce before settling back a little bit. Silver is also skyrocketing. At one point today silver hit $39.75 an ounce. It seems inevitable that at some point we are going to be talking about $50 silver. The price of oil is also continuing to relentlessly march upwards. At last check U.S. oil was at about $108 a barrel. All of this is great news for those that are investing in gold, silver and oil, but all of this is also really bad news for the U.S. economy. Why? Well, because when these commodities go up in price it is a sign that the U.S. dollar is dying and that our country is getting closer to economic collapse.
Traditionally, there has been an inverse correlation between the price of gold and the value of the U.S. dollar. Usually when the U.S. dollar goes down, the price of gold goes up.
One of the main reasons why gold has been so strong over the past year is because the U.S. dollar has been rapidly losing value.
So why is the U.S. dollar declining?
Most economists point to all of the quantitative easing that the Federal Reserve has been doing.
So exactly what is quantitative easing?
Well, it is basically like playing Monopoly with someone that reaches under the table and pulls out a bunch of extra money when they are almost broke.
The Federal Reserve has been creating huge amounts of money out of thin air and has been pumping it into the financial system. It is essentially cheating, and it is highly inflationary. The rest of the world has not been amused.
But quantitative easing is not the only issue.
The truth is that whenever the U.S. government goes into more debt, more money is created. The U.S. has been running trillion dollar deficits for several years now, and this has created a lot of new money.
This is another reason why it is so important to get the U.S. government debt situation under control. The Obama administration is projecting that the budget deficit for this fiscal year will be about 1.6 trillion dollars. This is highly inflationary and it will continue to destroy the value of the dollar.
In addition, the rest of the world is beginning to have serious doubts about the sustainability of U.S. government debt. They are starting to lose faith in the U.S. dollar and in U.S. Treasuries.
In fact, investors are losing faith in paper currencies all over the globe. The euro is on the verge of a massive crisis. On Tuesday, Moody’s downgraded Portuguese government debt for the second time in a month. Portugal needs a bailout, but they are far from alone. A half dozen European nations are experiencing a financial meltdown and the European debt crisis could spiral out of control at any moment.
Because of all of this financial instability, investors have been seeking some place safe to put their money.
For many investors, precious metals and commodities have been the answer.
In fact, silver has been doing even better than gold lately. On Wednesday, silver set a new 31-year high for the third day in a row.
People are even starting to talk about the possibility of $50 silver. Most analysts would have considered such talk complete nonsense a year ago.
But now nobody is laughing.
The price of oil is also soaring. Some of that is due to inflation, but not all of it. The truth is that when it comes to oil there are other factors at play.
Unfortunately, a high price for oil is far more damaging to the U.S. economy than a high price for gold is.
The U.S. economy has been designed to use massive amounts of cheap oil to transport massive quantities of goods over vast distances. When the price of oil goes to $100 or $150 a barrel, it fundamentally changes the dynamics of our economic system.
Nobody has ever been able to prove that the U.S. economy can successfully handle a price for oil over $100 for an extended period of time.
Do you remember what happened back in 2008? The price of oil hit a record high in June and then the entire financial system came unglued just a few months later.
When the price of oil goes too high, some types of economic activity simply become unprofitable. If the price of oil stays this high from now on, there are many businesses across America that will be forced to close.
A high price for oil is also going to hit U.S. consumers really hard. According to AAA, the average price of a gallon of gasoline in the United States is now $3.70.
Many are convinced that the average price of gasoline is going to shatter the all-time record of $4.11 that was set back in July 2008.
So how much did a gallon of gas cost a year ago?
One year ago the average price of a gallon of gasoline was just $2.83.
Over the past 12 months the average price of gasoline has gone up about 30%.
So has your paycheck gone up by 30% over that time?
The truth is that wages have been very stagnant in the United States for a long, long time.
That means that U.S. household budgets are being increasingly stretched. People have to fill up their cars so that they can get to work or to school. Americans can cut back on pleasure driving to save money, but most of the driving that all of us do is to get to places that we have to be.
So if gas costs more that means that consumers are going to have less to spend other places. Consumer spending accounts for approximately 70 percent of the U.S. economy, so any slowdown in U.S. consumer spending would be extremely significant.
Already a substantial percentage of the American people are feeling quite stressed about gas prices.
According to a recent Associated Press-GfK poll, approximately two-thirds of the American people believe that rising gasoline prices will cause significant hardship for their families over the next six months.
We are heading for some really difficult economic times. As I wrote about recently, this economy has millions of Americans feeling depressed, but that is not the appropriate response.
Rather, once we understand how bad our economic problems are we should feel empowered because then we can start focusing on real solutions.
And somebody really needs to start focusing on solutions because panic is starting to abound. Many top corporate insiders are selling off stock like there is no tomorrow. The biggest bond fund in the world, PIMCO, has been getting rid of all of their U.S. Treasuries. When Wall Street big shots start freaking out you know that the hour is late.
It certainly doesn’t help that the Middle East is in a state of chaos and that the Japanese economy is falling apart as a result of the recent disasters.
In these uncertain times investors are seeking something safe. They are turning to real “global currencies” such as gold, silver and oil. Paper currencies are rapidly losing favor and rampant inflation is on the horizon.