The Baton May Change but the Tune Doesn’t

Scoops Lane
Thursday, 9 January 2014
Melbourne, Australia
By Dan Denning

  • The baton may change but the tune doesn’t
  • How much gold does China’s government hold right now?
  • Setting the stage for the next global struggle

In today’s brisk edition of Scoops, you’ll hear from three of my colleagues from across the globe. Vern Gowdie comments on what the change in leadership at the US Federal Reserve may mean for Aussie markets. Then, my old friend Matt Badiali chimes in with an eye-opening report on Chinese gold holdings. Finally, World War D keynote speaker John Robb sums up the state of the world in one paragraph.

Some weeks there is a lot to report on and analyse. Other weeks, like this one, are better for reading from trusted sources. Then, you incorporate that new information into your existing plan and make any changes you need to.

This week, Vern, Matt, and John all deliver ideas about what will happen this year. Vern shows that despite having a new leader, the Federal Reserve is still clueless about when the financial system is most at risk from too much leverage. Matt picks up the thread of China’s official gold holdings and tells you why you should circle April on the calendar. And John takes a very high level view of today’s events and raises the possibility that they might turn violent.

All three ideas are connected by the same thread: that the world’s current financial architecture is more fragile than ever, and there’s a quiet war being fought to replace it. This is what we’ve called ‘World War D’ here at Port Phillip Publishing. It’s a sprawling subject, to be sure. But let’s start with Vern and go from there.

The Baton May Change but the Tune Doesn’t
By Vern Gowdie, Founder, Gowdie Family Wealth

On 1 February, 2006 Ben Bernanke became Chairman of the US Federal Reserve. 

Bernanke succeeded Alan Greenspan, who had been Chairman since August 11, 1987.

With hindsight it is evident why Bernanke was chosen for such high office. 

In an interview published on the Federal Reserve Bank’s website in June 2004, he made this insightful comment: ‘I think it’s extraordinarily difficult for the central bank to know in advance or even after the fact whether or not there’s been a bubble in an asset price.’

Even after the bubble has popped ‘it is difficult to know whether or not there’s been a bubble‘. 

This is only a suggestion but perhaps the fact millions of people have lost trillions of dollars may, just may, have been a sign there was a bubble. But what the heck would I know; I don’t have a PhD in economics from Harvard.

Around the time of the handover, the present (Greenspan) and future (Bernanke) Chairmen were both in agreement about one thing…the US housing market.

The Washington Post headline on October 27, 2005 read: Bernanke: There’s No Housing Bubble to Go Bust.

Here’s an extract from the article: ‘Greenspan has said recently that he sees no national bubble in home prices, but rather "froth" in some local markets.’

Froth? How’d you like a beer with that much froth? Count me out please.

Here we are eight years later and Ben is ready to pass the baton to Janet. 

So what’s changed? The GFC sorted out the non-existent housing bubble. But what about the post-GFC share market bubble?

‘I don’t see much evidence of an equity bubble,’ Bernanke stated on August 20, 2013, testifying to the Senate Banking Committee. 

Or take Fox Business reporting on Janet Yellen’s testimony to the Senate Banking Committee on November 20, 2013, noting, ‘Yellen’s conviction that Fed policies aren’t yet contributing to the inflation of asset bubbles, notably in U.S. stock markets.’ 

‘This does not have the characteristics, as far as I’m concerned, of a stock market bubble,’ Alan Greenspan said in an interview on Bloomberg Television on November 27, 2013.

Well there you have it, the trifecta – past, present and future Chairpersons – all agreeing there is no bubble in the share market. What could possibly go wrong?

How Much Gold Does China’s Government Hold Right Now?
By Matt Badiali, editor Badiali’s Daily Resource Update

We all know it’s going to happen. It’s not a matter of ‘if’, but rather ‘when’. China’s currency, the yuan, will be backed by gold. And when that happens, it will likely push the US dollar off the top of the heap.

Europe and China already have a $57 billion deal set up so that they can do business together without resorting to US dollars. That’s the largest deal of its kind for China. If China plans to back the yuan with gold, it certainly won’t be the last.

The trouble is, China’s official gold holding was just 1,054 metric tonnes in 2009. That’s nowhere near enough gold to back its currency. The country spent the last five years importing tonnes (literally) of gold. 

It imported about 645 tonnes from Hong Kong alone. China’s domestic gold miners produced 3,072 tonnes of gold since 2004. That means the country has nearly 4,000 tonnes of gold for sure. But it’s likely much higher.

According to Thomson Reuters, China is the buyer for all the gold sold from the giant exchange traded funds. In 2013, physical gold ETFs sold nearly 800 tonnes of gold. Swiss refiner Argor-Heraeus is one of the largest gold refiners. It converts the large 400-ounce bars of gold from the ETFs into one-kilogram bars. About 70% of those bars went to China.   

This is a huge story. The question is when will China drop the curtain and show the world how much gold it actually acquired…

The rumour is April 2014…five years after its last official statement. If that’s the case, we could see the world’s current financial powers turned on their head in just four months.

Setting the Stage for the Next Global Struggle?
By John Robb, author, Brave New War: The Next Stage of Terrorism and the end of Globalisation

What happens when the global industrial bureaucracy that ruled the world for the past couple of hundred years becomes obsolete? We’re about to find out. This industrial bureaucracy is being made obsolete by the very same technological change that spawned it. Job growth has already stalled in advanced economies, and we’re about to explore the downward slope. The last time this occurred was the destruction of agriculture as a socio-economic system. That system didn’t go peacefully. It took two European civil wars and numerous revolutions to finally kill it. What will this one do?