Weekly Markets

Precious Metals
For the week, gold futures rose 1.7 pct, reflecting a big rally on Tuesday after international markets nervous reaction to the Bank of Korea's announcement that they planned to diversify their foreign-reserve holdings away from dollars. The Indians, the Russians, Middle Eastern countries and others have already said that they have been and will be doing the same thing. Euros, Swiss Francs and gold may be the primary beneficiaries of this diversification.

Gold is now up 10.2% in the last 52 weeks.

Silver, after last weeks big price move up was down 1.3% for the week, platinum slipped 0.8%, palladium fell 1.5% and copper was virtually flat and remains at record highs. Silver at $7.31 is up 14.55% in two months since January 4th when it hit a low of $6.34.

According to Nymex inventories data, gold dropped by 675 troy ounces, putting total inventories at nearly 5.914 mln troy ounces as of the close of business Thursday, while silver inventories fell by 14,112 troy ounces from a day earlier to stand at 101.79 mln troy ounces.

Copper inventories were unchanged at 46,815 short tons. As for the benchmarks tracking mining stocks, the Philadelphia Gold/Silver Index closed at 98.88 points, up 0.4 pct, while the CBOE Gold Index ended up 0.2 pct at 87.50 and the Amex Gold Bugs Index gained 0.3 pct to 215.36.

Commodities
Massive global demand particularly from industrialising Asia, in particular China and India has led to a boom in commodities. The Reuters CRB index of 17 commodity futures (basic components include hard tangible assets such as Metals, Textiles and Fibers, Livestock and Products, Fats and Oils, Raw Industrials, Foodstuffs) climbed above the technically and psychologically important $300 on Friday. This was it's first time above $300 in 24 years and indicates that inflation is on the rise.The Goldman Sachs Industrial Metals Index also made a new high last week. Years of insufficient investment in commodity-supply infrastructure, coupled with surging demand from emerging Asian economies, have fuelled predictions that metals, grains, oil and other raw materials are in a sustained period of rising prices akin to the stagflationary 1970's.

These commodity price increases fed into the high Producer Price Index (PPI) number of +0.8% for January alone. These higher prices for raw materials used in all the goods we buy has somehow not yet fed into the Consumer Price Index (CPI) which remained surprisingly benign last week at +0.1%. This may mean that companies do not believe that US consumers will bear an increase in prices and thus are choosing not to pass on the increased costs to consumers. This has an implication for corporate profits going forward. The Wall Street Journal's Justin Lahart put it thus: "One might think that if importers and wholesalers are paying higher prices, they'd pass them on to consumers, but in practice this doesn't always work. The Labor Department's method for gathering prices varies from report to report, with the CPI based on telephone interviews with vendors and on staff visits to stores in the first 18 working days of each month, and the PPI and import-price index meant to reflect prices on a single day. At the same time, the reports aren't meant to show the same things. The CPI indicates what consumers are paying for goods, while the PPI indicates what producers are receiving for goods."

There are concerns that the Bureau of Labour statistics is underestimating the CPI. Bill Fleckenstein of MSN Money has written how the US government is manufacturing low inflation. "Please join me this week in a trip to the government department responsible for fun with numbers. Those D.C. statisticians may churn out their work with a straight face, but that doesn't mean we have to fall for it. Among the sceptics are Steve Milunovich of Merrill Lynch, Jim Grant of Grant's Interest Rate Observer, and, of course, yours truly. . . . The CPI will never show inflation of any consequence. The CPI has been engineered specifically not to. Housing-price increases have essentially been removed, via the way in which owner-equivalent rents are calculated, and they cannot possibly reflect what's happened to house prices. Then, when one adds in hedonics (which strips out many price increases by assuming they are quality improvements) and factors in the substitution allowances in the data, it is clear that the CPI is not going to ring any sort of alarm bells. Fleckenstein has also called hedonics a 'miracle' tonic for an ailing economy: "For those of you who don't know, hedonics is the way the government transforms price declines into quality improvements. . . . Our government has admitted its Alice in Wonderland hedonic-adjustment exercise has produced numbers so distorted that it doesn't want to show them to you. Yet it continues to use the "analysis" and some of the data in calculations of real GDP, productivity growth and CPI calculations."

Currencies
Against the euro, the dollar declined 1.3 percent this week to $1.3245 late yesterday in New York, from $1.3072 a week earlier. It fell 1.6% the previous week. The dollar weakened 0.4 percent to 105.23 yen, from 105.65.

The dollar dropped the most in six months against the euro and the most in four months versus the yen on Feb. 22, after the Bank of Korea said it intended to change the mix of its reserves, or holdings of foreign currencies. Denials the next day by Japan and South Korea, which hold most of the world's currency reserves, of any plans to sell dollars failed to alleviate investor concern. "One of the Asian central banks saying they may reduce their holdings of U.S. assets got everybody nervous," said Andrew Busch, a currency strategist at Harris Nesbitt Corp. in Chicago. "The risk involved with that possibility is going to make people be on pins and needles for a while." Lara Rhame, a currency strategist at Credit Suisse First Boston in New York said "Asset diversification among foreign central banks is having a big impact on the dollar. It will continue to weigh on the currency."

Stocks
The Dow Jones Industrial Average and the broader and more significant Standard & Poor's 500 index hit fresh closing highs for the year, topping off a three-day rally. The gains put the Dow back on positive ground for 2005 - up 0.54 percent. The Standard & Poor's 500 Index advanced 11.17, or 0.9 percent, to 1211.37, its highest since Dec. 31. The Nasdaq Composite Index added 13.70, or 0.7 percent, to 2065.40. For the week, the S&P 500 increased 0.8 percent, the Dow average added 0.5 percent and the Nasdaq finished up 0.3 percent.

Bonds
U.S. bonds were down for the week (with a corresponding increase in rates), particularly at the shorter end of the curve following Thursday's U.S. Treasury auction. Ten-year notes are headed for their first monthly decline in three. Benchmark U.S. 10-year yields held around the 4.28 percent mark, having slipped below 4 percent earlier this month, lending weight to the bearish view that a liquidity-driven rally in bonds had probably run its course due to rising U.S. interest rates, robust economic growth, and nagging inflationary worries. "The backup in bond yields in all major markets could signal the end of the bond rally and probably also the end of the big yield-curve flattening we have seen in the US," Morgan Stanley economist Joachim Fels said in a note to clients this week.

Should the recently flattening U.S. government debt curve invert, with short-term yields above longer-term yields, the graph could be flashing a warning - recession. The Federal Reserve would have to rethink its interest-rate policy, and soon. "If this curve were to invert, which I don't think it will, it would be the first time since Bretton Woods [economic summit in 1944] that the curve was flattening with short-term and long-term rates going in opposite directions," said Liz Ann Sonders, chief investment strategist with Charles Schwab.

Oil and the Irish and European Consumer
Crude oil for April delivery rose 5.1 per cent this week on the New York Mercantile Exchange. It closed at US$51.49 a barrel in New York, a four-month high, last Friday helped by cold weather in the United States and Europe, including snow flurries in London.

US Treasury Secretary John Snow also said the price of crude oil is "too high," in an interview. "I'm not happy about oil prices one bit," he said. Peter Mandleson also warned that the rising oil prices may have an adverse effect on EU consumers.

This week crude oil prices may rise from a four-month high on concern that production will fail to keep pace with strengthening demand, according to a Bloomberg survey of analysts and strategists. Twenty-eight of 54 respondents, or 52 per cent, predicted oil prices will climb next week. Thirteen, or 25 per cent, said prices will fall and another 13 forecast little change. A week ago, 44 per cent of respondents said prices would rise. Fourteen of the last 21 surveys correctly predicted the market's direction. Global demand may average 84 million barrels a day in 2005, while daily production in January was only 83.6 million barrels, according to the International Energy Agency. Oil prices have risen 11 per cent in the past three weeks in New York on growing concern that OPEC and other exporters will fail to keep up with demand this year.

China is also sucking in an increasing proportion of the world's resources. Last year's oil price spike was largely driven by the unanticipated explosion in demand from China, which was guzzling 1 million more barrels a day than in 2003.

'To give you an idea of the scale of it, in March last year, 1,000 cars a day were being registered in Beijing,' says Kevin Norrish, commodities analyst at Barclays. He believes China's extraordinary appetite for resources is far from sated. 'The potential for growth is enormous: China's moving up the development curve, and that's likely to continue for some time.'

The Chief Economist of Ulster Bank, Pat McArdle pointed out during the week how the rapidly rising oil price is more in dollar terms than in euro terms and thus should not be a concern to us in the Eurozone. This is a little simplistic as it forgets that the Eurozone's main export market is the US and an increasing oil price will curtail US consumers ability to continue purchasing goods manufactured in the EU and priced in euros. It also ignores the fact that oil shocks, like the one that may be developing, have an awfully perfect track record - they have always been followed by recession in the US.

The recent oil price rise has not created a recession as of yet and hopefully it will not. So far it still trails the big oil price moves of the past. In inflation-adjusted dollars, oil peaked in 1981 at $73 a barrel, 40% above where it's trading today (some $52 a barrel). Back then, moreover, the oil crisis sparked a full-blown recession. Today, despite some signs of a slowing, the economy continues to grow -- and, with it, oil demand, especially from rapidly industrialising India, China and Asia.

It's precisely this steadily rising demand, however, that is worrying the market. Unlike in the 1970s, the problem this time isn't primarily a supply shock in which the world's biggest oil spigots have been shut off. It's that, even though they're wide open, the world is consuming pretty much everything that comes out of the ground. The resulting fear is that isolated supply disruptions due to increasing tensions with Venezuela and or Russia, a war with Iran, geopolitical instability in the Middle East -- could push prices even higher. Complacency regarding the oil price is not advised and is certainly not prudent.

Weekly Commentary

Why should Irish, UK and European investors invest a small percentage of their investment portfolio in gold and silver?

There are a myriad of fundamental reasons that European investors, institutions and Central Banks should continue to diversify a small portion of their assets into precious metals. These include rising interest rates in the world's largest economy; record consumer, mortgage and national debt levels in the US & much of the western world; huge and unprecedented US trade and budget deficits and dwindling supply of and increasing demand for precious metals.

Two other fundamental factors to consider are the decline and depreciation of the US dollar and the rise of oil prices.

The dollar is currently the primary global reserve currency. To explain how this relatively recent monetary phenomenon came about I defer to this succinct explanation by John Mauldin, President of Millenium Wave Advisers: "The first Bretton Woods system came about when representatives of most of the world's leading nations met towards the end of World War 11 at Bretton Woods, New Hampshire, in 1944 to create a new international monetary system. Because the US at the time accounted for over half of the world's manufacturing capacity and held most of the world's gold, the leaders decided to tie world currencies to the dollar, which, in turn, they agreed should be convertible into gold at $35 per ounce.

Under the Bretton Woods system, central banks of countries other than the US were given the task of maintaining fixed exchange rates between their currencies and the dollar. They did this by intervening in foreign exchange markets. If a country's currency was too high relative to the dollar, its central bank would sell its currency in exchange for dollars, driving down the value of its currency. Conversely, if the value of a country's money was too low, the country would buy its own currency, thereby driving up the price.

The dollar became the world's reserve currency. Yet there were limits. Each country had to police its own reserves and currency or be forced to revalue. And the US was constrained because the dollar was fully convertible into gold. This changed in 1971 when Nixon closed the gold window.

Now we have what many are coming to call a Bretton Woods 2 system. That is where much of the world, but primarily the Asian countries, have more or less informally agreed to peg their currencies to the dollar. They do this in order to maintain their relative competitive ability to sell their products to the world and specifically to the US.

But this system is inherently more unstable than the first Bretton Woods. There is no gold conversion constraint upon the reserve currency. The US has few reasons to protect the value of the currency, and many reasons why they should want it to drop. And there is no formal agreement among the nations. Any nation at any time could begin to act unilaterally to change. Russia has specifically said they would start to have a larger euro component to their growing national reserves. Thailand has said the same, and indications are that they are putting actions behind their words."

Mauldin penned these thoughts only last week and published them on the 19th of February. His thoughts were very prescient as last Tuesday the 22nd, the Bank of Korea caused a sharp sell off of the dollar and uncertainty in financial markets when a senior official said that the Central Bank of Korea would be diversifying out of their huge dollar holdings. Subsequently this was understandably denied.

As of Feb 15, South Korea held foreign-exchange reserves of $200.25 billion, making it the world's fourth largest after Japan, China and Taiwan. Japan topped the reserves chart at $840.966 billion as of the end of January, according to Ministry of Finance data. China's foreign-exchange reserves stood at $609.9 billion at the end of 2004, good enough for No. 2 following Japan. China, like many countries, doesn't reveal the composition of its reserves, but U.S. dollar-denominated assets are believed to account for somewhere between 60 and 80 percent. Should these Asian countries or other countries stop buying US debt instruments or even worse start selling them and diversifying their foreign currency reserves into other currencies such as the euro and even gold it will create difficulties for the massively indebted US consumers, households, companies, financial institutions, states and government.

The New York Times editorialised: " . . . as the Korean comment ping-ponged around the world, all hell broke loose, with currency traders selling dollars for fear that the central banks of Japan and China, which hold immense dollar reserves -- a combined $900 billion, or 46 percent of foreign Treasury holdings -- might follow suit. That would be the United States' worst economic nightmare. Tuesday's market episode has its roots in American structural imbalances that will be corrected only by new policies, not more of the same tax-cut-and-weak-dollar deficit-bloating ploys." In a similiar vein CBS Market Watch article entitled 'South Korea reports raise 'what-if' talk about China', Lisa Twaronite wrote how "reports that South Korea is thinking of diversifying its currency reserves caused market ripples, but a similar hint from China could cause a tsunami. This once again highlights the economic vulnerability of the US. As the world's largest debtor there economic destiny is now in the hands of their creditors - the Chinese, the Japanese, the Koreans, the Indians and the EU. The US is dependent upon the rest of the world's savings in order to fund their massive debt - total credit market debt (government, corporations, and individuals) is at $34.62 trillion and growing. This debt is now three times the size of the annual value of all goods and services in the US or 305% of GDP. On the eve of the Great Depression in 1929 total credit market debt was 260%.

As the current global reserve currency the US dollar's performance against other fiat currencies has massive financial and economic implications for the individual economies of the world and for the global economy. This is especially the case as our global economy has become more integrated in recent years with increasing cross border trade and cross border flows of capital. In this increasingly globalised economy, the performance of the primary means of exchange and payment for commodities, goods and services internationally is of vital importance.

The economic and monetary paradigm of the final years of the 20th Century was a very benign one. The Clinton and Greenspan era of the booming 1990's when the US economy enjoyed tremendous rates of growth, low inflation and the increasing productivity brought about by innovative new technologies resulted in capital flowing into the US and consequently this led to the "strong dollar". With the Cold War over there was far less geopolitical uncertainty and investors, institutions and Central Banks around the world had confidence and faith in US capital markets and the US dollar.

Since 2000 the collapse of the Nasdaq, the Enron and WorldCom accounting scandals, September 11th and the Bush Administrations response to it in the form of the 'War on Terror' and the burgeoning trade and budget deficits have all led to a gradual and growing erosion of confidence in the US dollar and increasingly the US economy itself.

Investors, institutions and Central Banks are increasingly sceptical of the US' ability to correct the massive imbalances in their economy without an economic downturn. This has led to the falling dollar and has become so serious that some respected economic commentators are discussing the possibility that the euro may supplant the dollar as the global reserve currency in the next 10 to 20 years. This may happen in a far shorter time frame were OPEC or the authorities in Russia, Saudi Arabia, Iran and or Venezuela to price their oil in euros. This would likely end the economic paradigm of the petrodollar which has been in place since Nixon closed the gold window in 1971.

Up until 1933 gold was money and every dollar was backed by gold. This meant that dollars were in fact paper gold certificates or promises to pay a certain amount of gold. When Roosevelt ended the gold standard in 1933, he banned the export of gold, halted the ability of US citizens to convert their paper dollars into gold and also ordered a gold confiscation whereby US citizens had to hand in all the gold they possessed (this prohibition on gold lasted until 31 December 1974).

International governments could still redeem their their paper dollars for gold in the post War period and up until 1971.However this link between the dollar and gold was broken unilaterally by the US in 1971 after it had spent many more dollars into circulation internationally to pay for the Vietnam war than it had gold in Fort Knox to back them. Fearing that the dollar's value had become unsustainable, holders led by the French under President de Gaulle rushed to convert them to gold before a devaluation happened. A run on the global bank (the US) began and the manager, President Nixon responded by refusing the holders of the promissory notes the US had issued what they were due. He defaulted by 'closing the gold window', thus ending any fixed relationship whatever between the dollar and gold. This destroyed the key feature of the Bretton Woods system which, in retrospect, seems to have served the world reasonably well. What emerged in its place was a more haphazard arrangement which allowed the defaulter, the world's richest and most powerful country, to reap a massive benefit by creating the majority of the global money supply with no formal constraints at all.

"There can be no other criterion, no other standard than gold. Yes, gold which never changes, which can be shaped into ingots, bars, coins, which has no nationality and which is eternally and universally accepted as the unalterable fiduciary value par excellence." This is Charles de Gaulle, the President of France's famous quote. He realised that the basic laws of nature and economics - the law of supply and demand meant that gold was a safer store of long term value and thus a more trustworthy universal medium of exchange. This is because there are is a finite amount of gold in the world and it takes a lot of money, labour and time to extract the precious metal from the bowels of the earth. Ben Bernanke, Alan Greenspan's likely successor as Federal Reserve Governor recently told us " Like gold, U.S. dollars have value only to the extent that they are strictly limited in supply. But the U.S. government has a technology called a printing press , that allows us to print as many dollars as it wishes at essentially no cost". In effect Bernanke threatened a massive devaluation of the dollar in order to pay for their massive internal and external debt obligations.

While the euro supplanting the dollar would be hugely beneficial to the increasingly powerful European Union in the medium to long term, the transition would undoubtedly be painful in the short to medium term. The dislocations and uncertainty created would likely be damaging to the performance of equity, bond and property markets and result in an increasing flow of capital into the precious metals markets and a consequent increase in prices.

An increasingly strong euro is a double edged sword and confers advantages and disadvantages. A strong euro threatens the recovery of the large European economies. Jean Claude Trichet has called the rise in the Euro both brutal and unwelcome as the Euro zone's fragile recovery is export driven and thus European manufactured goods are becoming more expensive to US consumers and imports into the EU are becoming cheaper to European consumers. Already the two major economies in the Eurozone, Germany and France are experiencing unemployment rates of more than 10%.

Economic commentators such as Stephen Roach, the Chief Economist of Morgan Stanley have warned of a possible 1930's like beggar my neighbour type round of competitive currency devaluations. Dr. Richard Appel of Financial Insights in an article entitled 'Gold and the broadening spectre of competitive currency devaluations' explains what a global round of competitive currency devaluations would entail: "Throughout modern history, periods of worldwide economic decline have been accompanied by spates of competitive currency devaluations. These have repeatedly occurred during difficult times as country after country, in their effort to gain an advantage over their trading partners, fostered a weakening of their currencies. The hope of each domain has always been that a weaker domestic currency would stimulate world demand for their goods and services. This, they believed, would foster an increase in their output and generate a renewed round of economic expansion. It always began with one nation's attempt to benefit itself, but ultimately spiralled out of control when others followed their lead.

In practice, using currency devaluations to enhance one's domestic economy has never worked for long. The reason is simple. It is one of human nature. What was consistently overlooked was that other governments would not stand by idly. They would not allow a competing country the ability to gain an upper hand and a trade advantage over them. To the detriment of all, the end result of each such experiment has produced animosity between the engaged nations, a worsening of their economic declines, and it has even led to war. It is a glaring frailty of mankind that neither individuals nor politicians rarely seem to learn from the experiences of their predecessors."

Competitive currency devaluations globally as well as higher import prices result in significant inflation and significantly higher interest rates in individual countries. Moreover, the price of gold increases in terms of these competitively devaluing currencies and the assets denominated in these fiat currencies.

This is one of the most fundamental reasons to consider diversifying a small percentage of one's wealth into precious metals.

Quotes of the Week

"I teach Financial Management on a part-time basis in DCU and a central tenet of what I teach concerns the virtues of portfolio diversification. I am a firm believer and have argued in numerous presentations on the topic of Property v Equities that it is not a case of either/or, but a case of both. I would be a big fan of holding gold as part of a diversified portfolio and would feel more confident about it than any other asset class at the moment."
Jim Power, Chief Economist, Friends First Ireland

"Irish property investors have roamed far and wide of late in search of the kind of investment returns seen at home over the past decade. . . . The average UK house cost over £152,000 (EUR 220,000) at the end of 2004, according to the Nationwide Building Society, against £75,000 five years earlier, a 100% capital return over the period. This upward trend has faltered of late, however, and the UK housing market has clearly slowed, lending support to those predicting a sharp correction or even a price collapse."
Dan McLaughlin, Chief Economist, Bank of Ireland

"However, within these positive signs lie serious threats and challenges. We are all aware of the large US current account and fiscal deficits. These are matched-or financed, if you will-by growing surpluses in Japan, emerging Asia, and certain oil-exporting countries. This constellation of large deficits in one country, with counterpart surpluses being concentrated in a few others, is what we mean when we speak of global imbalances. . . . What is undesirable, however, is an unsustainable deficit. And experience shows that the current account deficits of the order that the US has been running cannot be sustained indefinitely. . . . At the end of the day, today's accumulation of large deficits in the US, with matching surpluses in only a few countries, cannot go on forever. The current account deficit of the US is already being financed by record levels of debt in the hands of foreign investors. It is highly unlikely that such easy credit will continue to be available to the US on the basis of the existing policy path."
Rodrigo de Rato, Managing Director, IMF

"When a country lives on borrowed time, borrowed money and borrowed energy, it is just begging the markets to discipline it in their own way at their own time. . . . . . usually the markets do it in an orderly way - except when they don't."
Thomas Friedman, New York Times

"The world economy appears on the verge of a slowdown. (Japan and Germany, among the five largest economies, are technically in recession.) The consumer has begun to show signs of reining in spending. So one would think that semiconductor-equipment makers, as capital-goods suppliers to a cyclical industry -- one burdened by excess capacity and swimming in inventory -- would be the last place someone would want to invest. Yet that's exactly what passes for investment wisdom on Wall Street today."
Bill Fleckenstein, President of Fleckenstein Capital, MSN Money

"The US economy will have its 'Day of Reckoning' in the words of former US Treasury Secretary Robert Rubin, thanks to its monstrous indebtedness and a poor demographic outlook. The same factors also pointed to further weakness for the US dollar. Gold is a good hedge against dollar weakness and the twin US deficits."
Simon Brewer, Chief Investment Officer, Morgan Stanley

"When people ask what we are doing about these twin vulnerabilities [twin deficits], they have a hard time coming up with an answer. There is no energy policy and no real effort to reduce our voracious demand of foreign capital. The U.S. pulled in 80 percent of total world savings last year largely to finance our consumption. That's a big reason why some 43 percent of all U.S. Treasury bills, notes and bonds are now held by foreigners. These countries don't have to dump dollars - they just have to reduce their purchases of them for the dollar to be severely affected. Korea is the fourth-largest holder of dollar reserves. ... You don't want others to see them diversifying and say, 'We'd better do that, too, so that we're not the last ones out.' Remember, the October 1987 stock market crash began with a currency crisis."
Robert Hormats, Vice Chairman, Goldman Sachs International

"When the US loses its appetite for borrowed money, the effects will be felt around the world. American consumers are going in the same direction as those in Australia and Britain, slashing saving because of the property wealth illusion. This trend has come under Greenspan's worried scrutiny. When tighter monetary policy begins to bite, consumers will spend less. This has happened in Australia in the past six months, for the same reason. By the end of this year, GDP growth in the US will fall below Greenspan's rosy prediction of 4%. But that is not the end of it. America's big-spending consumers have kept factories busy in Europe, Japan, and especially China. Any fall in this profligacy will be felt around the world."
Gerry van Wyngen, Investment Banker, Chairman of CPI Group

"The new economic paradigm is that credit deflation begets inflationary outcomes. Gold, far from being irrelevant and antiquated, is the ideal lens through which to appraise this reality. As perfect credit, it will become more highly valued when investors attempt to shed assets impaired by decades of imperfect credit. A four-digit handle on the dollar gold price will signify not that the markets love gold. Instead, it will mean that they despise the alternatives. There is no specific reason to think that the movement in this direction should be precipitous. Bear markets have a way of taking their time, the better to deceive and to entrap as many as possible. Those who believe a business upturn will end the bear market [in stocks] will be among them. While there may appear to be no particular rush, violent shifts in market views usually come with little warning. An allocation in favour of gold would seem to be timely. The dollar's days as the premier global reserve currency are numbered. The repercussions of a dollar devaluation will be profound and long-lived. It is not too soon for investors to assume defensive positions in light of these prospects and it will not be long before they discover that gold is a core component of investment defence."
John Hathaway, Tocqueville Asset Management

"Gold is not exclusively linked to the vagaries of US currency markets and, while other factors sometimes fail to make the headlines, they are no less important for the long-term outlook for gold. . . . Investment demand for gold has also picked up over the last couple of years. That's a very important source of demand because it's not always price sensitive - investment demand can rise as the gold price goes up because people like to buy things that go up in value. . . . If you believe the US dollar will weaken further, as many people do when they have a look at the big trade and budget deficits in the US, the gold price might do quite well . . . .We're definitely in a bull market for gold."
Richard Davis, Merrill Lynch Fund Manager

"The U.S. current account deficit is more than five percent of gross domestic product despite the dollar's three-year slide. . . . The oil exporting countries' central banks ... have been switching out of dollars mainly into euros, and Russia also plays an important role in this. That is, I think, at the bottom of the current weakness of the dollar. The value and fate of the dollar is linked to the price of oil. . . . The higher the price of oil, the more the dollars there are to be switched to euro (so) the strength of oil will reinforce the weakness of the dollar. That is only one factor, but I think there is such a relationship. . . . . . The dollar's fall should help to lower the U.S. current account and trade deficits but a fall beyond a tipping point would severely disrupt markets."
George Soros, Financier and 'The Man Who Broke the Bank of England'

Peter Costello's [Australian Treasurer & Chief Economic Adviser] closest adviser fears the US is heading for a devastating financial crash that could ravage Australia's economic growth. As the Reserve Bank considers raising interest rates at its board meeting next Tuesday, Treasury Secretary Ken Henry likened the flood of money pouring into the US to support its budget and current account deficits to the stockmarket's dotcom bubble of the late 1990s. Were it suddenly to stop, there would be shockwaves felt throughout the world's economies. The financial crash feared by Dr Henry would involve a sharp fall in the US dollar and a bond market sell-off, which would push up US and world interest rates. . . . Fears that the world economy is in grave danger are growing in the major financial capitals. The International Monetary Fund, which is responsible for stability of the world economy, also warned yesterday of a sudden collapse.
Uren & Eccleston, 'US deficits risk crash: Treasury', The Australian

"There are a lot of people who think the American budget deficit is too high . . . . . I certainly would like to see the American budget deficit reduced ... but it's too alarmist to talk about a crash."
John Howard, Australian Prime Minister