A historic moment - Gold surges above 1000 USD an ounce!

U.S. gold surges to record on Bear Stearns, dollar

At 10:33 a.m. EDT (1433 GMT), the active gold contract for April delivery GCJ8 on the COMEX
division of the New York Mercantile Exchange jumped $10.40 or 1.1 percent to $1,004.30 an
ounce. It traded between a bottom of $991.70 overnight and a record high of $1,007.30.

This is big! Check out the Kitco 24 Hour Spot Gold Charts here.

Here’s a snapshot of the 5-year gold chart.

I confess to taking a rudimentary interest in the financial markets, and most of what I’ve been seeing here isn’t pretty. I was having a chat with my mother earlier on about buying gold but she’s skeptical about gold as an investment because gold has already had a tremendous run in recent years. Will prices hold? Or is the investment scenario ripe for a medium-to-long term technical correction?

First, the bad news.

IMF tells states to plan for the worst

(Excerpts)

"Stressing that this was a global problem - not one confined to the US - he said it would have to be addressed in a "global -context"."

"He said this crisis was different from recent past crises because both the financial markets and the banking system "have faltered simultaneously"."

"He urged policymakers to "think the unthinkable" and prepare now for what they would do if the worst case scenarios materialised and "low probability but high impact events" threatened to jeopardise global financial stability."

This is what Jim Sinclair has to say. And if there’s anyone who gives the lowdown like it is, it’s Jim.

(Excerpts)

“Never in economic history has there been a night like tonight. I am writing later than usual because of the enormity of all the converging forces. The euro reaches for $1.60, the Middle East oil producers are in shock, and the IMF tells the world to “plan for the worst.””

“This paper is $550 trillion plus dollars in notional value. The horrible fact is that in bankruptcy notional value becomes real value with the capacity to destroy the world financial system.”

“There is no practical solution to today’s TERMINAL problems and that means you are up to your eyeballs in alligators.”

“You must protect yourselves.”

“Gold is going to $1650. In all probability my major error will be in forecasting a price that is much too low for gold.”

Now let’s try and piece together some bits and parts to form a bigger picture.

America faces day of reckoning with debt

Risk of a US recession high, India to be hit

As I mentioned in an earlier post, hiring in India’s IT industry has nearly halved compared to last year.

What exactly is a banknote? A banknote is actually an IOU or a promissory note, made by a bank and payable to a bearer on demand. Does a banknote have any value of its own in and of itself? None, except for the value attached to it by government dictum. In the 1940’s, US currency was backed by physical gold and considered to be as good as gold (1 dollar = 1/35 of an ounce of gold), until they started printing more notes and ended up with an inability to pay off debt with gold in the 60’s. After this, the new tactic to keep the dollar artificially strong was the agreement with OPEC to price oil exclusively in USD for all transactions worldwide. Sadly, the charade is up. A banknote now is no more an asset than the paper it’s printed on (though it will take some time before the markets start reflecting the real value of paper currency, thanks to all the fuel injections by various governments). The value of the money printed on it is on credit! So basically, your banknote is a promise to pay backed by – a tiny undeterminable amount of real gold.

While NYMEX oil futures have hit 110 USD a barrel, the dollar which is supposedly backed by oil has shockingly depreciated even below the Swiss Franc. Federal Reserve Chairman Ben Bernanke has been slammed for deliberately destroying the dollar in a bid to wipe out the American middle class. As far back as a year and a half ago, Prof. Lawrence Kotlikoff declared that the US Federal Reserve is, by some measures, already bankrupt! This is the fate all fiat currencies have met historically and history as we all know, repeats. Gold and silver are the only currencies not created and controlled by governments. ALL of today's other currencies (dollars, rupees etc) are fiat currencies, which means they do not represent anything tangible but are only worth something because the government has decreed it. And it's evident that the government has over-extended itself with credit and so most of this fiat currency is thin air.

HSBC is currently losing $51 million dollars a DAY because of this. Citibank lost $11 billion till Nov last year. Within the space of 5 months, the dozen biggest Wall Street firms and the commercial banks with the largest investment arms - a list that includes Bank of America, JP Morgan and Credit Suisse lost more than $240 billion in market value last year. Dozens of smaller companies in the mortgage business have suffered huge losses or folded completely. ICICI has taken a $263 million mtm hit, and our very own SBI and PSU banks combined have suffered a $1.5 billion loss till now. We in India are not as insulated from the subprime shocks as we’d like to believe. In fact, Jim Walker, economist and CEO of Asianomics, says, “Financial institutions in India probably have sub-prime problems that are “waiting to be exposed.”

And this is BEFORE the derivative bubble comes crashing down… nope not my prediction... all credit (how I abhor that word now!) goes to Buffett and Gross.

Derivatives are the new 'ticking bomb'

What they’re really saying is, derivatives are the sub-prime equivalent of the stock market. Multiplied by a factor of about 2000. This is what Warren Buffett had to say about it:

“"We try to be alert to any sort of mega-catastrophe risk, and that posture may make us unduly appreciative about the burgeoning quantities of long-term derivatives contracts and the massive amount of uncollateralized receivables that are growing alongside. In our view, however, derivatives are financial weapons of mass destruction, carrying dangers that, while now latent, are potentially lethal."”

How’s this for a fairly good idea of the kind of scale we’re talking about…

- Total value of the world's real estate is estimated at about $75 trillion

- Total value of world's stock and bond markets is more than $100 trillion

- BIS valuation of world's derivatives back in 2002 was about $100 trillion

- BIS 2007 valuation of the world's derivatives is now a whopping $516 trillion

“Bottom line: Little things leverage a heck of a big wallop. It only takes a little spark from a "bad 2% deal" to ignite this $516 trillion weapon of mass destruction. Think of this entire unregulated derivatives market like an unsecured, unpredictable nuclear bomb in a Pakistan stockpile. It's only a matter of time.”

Doesn’t it give you a warm, fuzzy feeling to know that our NSE’s emergence as the ninth largest F&O bourse in the world in 2007 by trading volumes – 15 billion F&O contracts last year – is being hailed as cause for celebration?

In fact, the money in derivatives alone puts the US $9.4 trillion national debt ($79,000 per American taxpayer) to shame. When push comes to shove, who’ll be bailing out who here?

Federal Reserve bank New York President Tim Geithner stated we are in the midst of FINANCIAL MELTDOWN: New York Times

Now you know why they're worried! The derivative bubble, when it does burst, will be fast, furious…. and catastrophic.

Gold, on the other hand, is a durable physical commodity. If you really need more convincing, here are 15 solid reasons to buy solid gold. The high price of gold is due to its rare amount. Only three parts / every billion parts in the Earth's crust is gold. That's how it will remain. The price of gold is up and rising because better informed people know what they need to do to save their future generations. The World Gold Council chief executive is optimistic about strong demand and steady gold prices in India. After all, we Indians have traditionally been one of the highest consumers of gold, and at present buy about 1.5 times as much gold as the Americans though our GDP stands at about a twentieth of theirs. Our gold buying patterns are too deeply ingrained in our cultural milieu for high prices to thwart us. Added to that is gold-buying as an investment, a trend which is on the rise.

Gold demand of China, India and the Arabs

“"From ancient times Gold (and gold jewelry) has enjoyed safe-heaven status. Gold jewelry is the only way to protect against depreciation of the Indian rupee against US dollar. In the long term the Indian rupee price of Gold has been in an up-trend. Inflation has continuously, year after year, eroded the value of currency."

"Based on demographical and cultural studies of India, one may accurately conclude that its Gold demand cannot go down unless the psyche of the Indians undergoes a sea change—a very unlikely event in the next few decades."”

This one’s a whopper. As per the World Gold Council, Indian households combined own about 16,500 tons of gold (you can add 9 billion USD in government reserves for posterity). Compare this with just 8,139 tons of gold in the US Federal Reserve.

My mum will be heading to the jeweler’s tomorrow. Have a nice weekend!!