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October 08, 2006

Balance of Power Shifts - Good for Gold - Part 1
by Julian D. W. Phillips

From - Gold Forecaster - Global Watch 6th October 2006

With figures from the Economist we can quantify just how they will feed global uncertainty and spur the bull market in gold.

The importance of these shifts cannot be over-emphasized, because they are changing the 'Balance of Power' in the world significantly and shaping the global economy and will deeply affect the state of the global monetary system. So far the $ has managed to hold onto the reins of power in the world monetary system, despite the catastrophic, persistent and unhealthy, Trade deficit of the United States, about which the States is doing absolutely nothing, which has and will be good for gold, but not for the U.S. Should this state of affairs persist continuously, there is no doubt that the $ will face an enormous crisis and in turn create one for the global monetary system.

Last year the combined output of all emerging economies achieved more than half of total world G.D.P. (measured at purchasing-power parity). This means that the rich countries no longer dominate the global economy. The developing countries also have a far greater influence on the performance of the rich economies than is generally realized. Emerging economies are driving global growth and having a big impact on developed countries' inflation, interest rates, wages and profits. As these newcomers become more integrated into the global economy this osmotic influence will change the face of the world economy forever. On the surface it would seem reasonable to believe their wealth and individual incomes would catch up with the rest of the world and we all enjoy the biggest boost to the world economy ever, far outperforming the industrial revolution. But we feel this is wishful thinking. To date the effect has been that the developing nations have drawn off wealth from the developed nations to themselves. It seems likely that as has been the case with Japan and its development, their products will dominate the global economy and with the bulk of the world's population in these developing countries global wealth and power will shift away from the developed nations before the global economy leaps in size.

It is already clear from the state of the U.S. Balance of Payments that the drain on the U.S. trading power is well along. The poor prospects for the $ are clear to most observers so there is little reason to believe that the U.S and other developed nations will enjoy continued wealth alongside these nations, except for that they enjoy within their own close sphere of influence, which is shrinking already.

The emerging countries we are talking about are not solely China and India, as is the present impression in many quarters, but nations from all corners of the earth that can provide products of the same quality at lower prices. Consequently, due to this all-pervasive process, the 'ripples' flowing from this evolution will breed structural monetary breakdowns because of the capital flows and exchange rate pressures that are far greater than ever before!

So many developing countries together with former Soviet block nations have embraced market-friendly economic reforms, opened their borders to trade and investment, industrialized and are now a present part of the global economy, alongside China and India.

Because of the synthesizing of these nations into developed nation's economies within the global economy, their influence changes national developed economies dramatically. The prime example of this is being seen in the United States where the record share of profits in national income [production by U.S. companies of goods in these emerging economies at prices far lower than they cold previously produce in the States], sluggish growth in real wages [because U.S. workers are in effect competing with emerging nations wage levels], high oil prices [as global demand rises] alongside low inflation [the goods produced in emerging economies are a fraction of the cost of U.S. and other developed nations goods], low global interest rates [because developed world economies are now fragile and cannot withstand much higher interest rates] and from where the U.S. Trade deficit and other developed nations deficits, emanate.

Emerging countries share of world exports has jumped to 43%, from 20% in 1970. They consume over half of the world's energy and have accounted for four-fifths of the growth in oil demand in the past five years. They also hold 70% of the world's foreign-exchange reserves.

So although measured at purchasing-power parity (which takes account of lower prices in poorer countries) the emerging economies now make up over half of world G.D.P., at market exchange rates their share is still less than 30%. But even at market exchange rates, they accounted for well over half of the increase in global output last year. [China and India together made up less than 1/4 of the total increase in emerging economies' G.D.P. last year.]

In the past five years, their annual growth has averaged almost 7%, its fastest pace in recorded history and well above the 2.3% growth in rich economies. The International Monetary Fund forecasts that in the next five years emerging economies will grow at an average of 6.8% a year, whereas the developed economies will notch up only 2.7%. If both groups continued in this way, in 20 years' time emerging economies would account for two-thirds of global output (at purchasing-power parity).

Since 2000, world G.D.P. per head has grown by an average of 3.2% a year, thanks to the acceleration in emerging economies. That would beat the 2.9% annual growth during the golden age of 1950-73, when Europe and Japan were rebuilding their economies after the war.

Because of lower wages, many developed countries have moved their production into new factories, trained local workers and boosted productivity in China. The products had established markets, so to be able to supply these markets at far lower costs and from high productivity factories and workers. When America and Britain were industrializing in the 19th century, they took 50 years to double their real incomes per head; today China is now doubling its real income per head within nine years!

The sum of China's total exports and imports amounts to around 70% of its G.D.P., against only 25-30% in India or America. In 2007, China is likely to account for 10% of world trade, up from 4% in 2000. These exports go to virtually every nation on earth, not just the developed world. The speed of these developments has been accelerated tremendously through the Internet, which virtually destroys geography, taking the search for new products or [the other way] new markets across the globe, to a quick and personal level, in a moment, a far cry from the painstaking searches of the past.

As the incomes of these emerging countries grow, so their demand for wants as opposed to needs will grow, creating a huge demand for non-essential items, but once they have learned how to produce them, they will produce them and export them to the developed world as well. With Japanese cars taking the first place in automobile popularity in the States, the trail don this road has been blazed.

Right now the demand from the developing world for infrastructure goods is being felt in the developed world as over half of the combined exports of America, the € area and Japan go to these poorer economies. The rich economies' trade with developing countries is growing twice as fast as their trade with one another, but will this continue as these emerging economies gain the expertise to even outperform the developed world in items currently only being manufactured in the developed world. As China, India and the former Soviet Union has embraced market capitalism, the global labor force has, in effect, doubled, but sad to say the new labor force can do the same work, with the same quality for a small part of the price.

Next part - Denial ahead of crisis impact, with gold soaring!

HIGHLIGHTS in "Gold Forecaster - Global Watch"
Silver - COT, Gold: Silver Ratio EDR, SSRI, PAAS, SLW Portfolio / Platinum.
SHARES: HUI, NEM, FCX, NG, VGZ, GFI, GOLD, HMY - Portfolio
Index:
1-2. Market Forecasts / Short-term forecasts across the Board!
2-3. Comex Update
3-18. Central Bank Gold Sales in 2006 /Gold E.T.F. - A rise on the fall / The Evolution of the global economy/ The Oil crisis / Gold: Oil Ratio / Dow Jones / Technical Analysis of the Gold Price: Long / Gold price drivers 2006 / Short term in the U.S. $ / Treasury Notes / CRB Index / Gold and the host countries & Market currencies - Europe - S. Africa - Australia - Canada - Japan - India
18 - 30. Silver / Gold vs. Silver / Gold: Silver Ratio / Platinum / Silver & Gold Shares

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Julian D. W. Phillips
Gold-Authentic Money

"Global Watch: The Gold Forecaster" covers the global gold market. It specializes in Central Bank Sales and details, the Indian Bullion market [supported by a leading Indian Bullion professional], the South African markets [+ Gold shares shares] plus the currencies of gold producers [ Euro, U.S. $, Yen, C$, A$, and the South African Rand]. Its aim is to synthesise all the influential gold price factors across the globe, so as to truly understand the global reasons behind the gold price. FIND OUT MORE

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