Beijing Urged to Hoard Gold as Crude Oil Rebounds

By: Adrian_Ash

THE PRICE OF physical gold and silver bullion rallied near record highs once again in London on Wednesday, while European stock markets slipped and crude oil rebounded to recover half of yesterday's sharp losses.

The gold price rose back to $1435 while while silver hit $36.45 per ounce.

Eurozone citizens wanting to buy gold saw the price rise above €33,150 per kilo – just shy of what was then an all-time record high amid the Greek deficit crisis of June last year – as "peripheral" Euro bonds fell further, pushing debt-interest costs higher.

Portuguese bond yields hit to new record highs as 10-year Greek yields hit 12.85%.

Italian bond yields extended their rise above 5.0% – the highest level since the global banking crisis of 2008.

"China should increase its gold reserves appropriately, and must take every chance to buy, especially when gold prices fall," said Li Yining, a senior economist at Peking University and an advisor to the national parliament's Political Consultative Committee, quoted today by Beijing's official Xinhua News Agency.

Li's comments directly contradict Yi Gang – head of the politburo's foreign exchange management – who last month repeated his view that Beijing should not switch a substantial portion of its $2.85 trillion currency reserves into gold, since it would send the gold price sharply higher in the process.

"The Chinese people will bear the cost at the end of the day as China is often the key buyer in these markets," he said in Feb.

But Li's view "may carry more weight than most," says Reuters, because "many of his former students are now high-ranking officials," including prime minister Wen Jiabao's widely touted successor for 2013, Li Keqiang.

Meantime in North Africa on Wednesday, Libyan leader Colonel Gaddafi told Turkish television that a no-fly zone imposed by US or Euro forces "would be useful" in uniting his country – now descending into civil war – into fighting foreign powers instead.

In neighboring Egypt – where Gaddafi apparently sent a senior member of his government to "deliver a message" to military leaders today – hundreds of pro-democracy demonstrators in Cairo's Tahrir Square were attacked with knives and machetes, according to state TV reports.

"The weak US Dollar and intensifying violence in Libya drove gold to a new set of nominal record prices," says the latest gold investment analysis from Japanese conglomerate Mitsui's London team.

"The metal remains in a well-defined bull channel with parameters at 1420 and 1451," says technical analysis from Russell Browne, strategist at bullion bank Scotia Mocatta in New York.

"The potential risk is crude oil may continue to go higher, and if floods and drought happen again, we'll face further price increases," said the United Nations' Hiroyuki Konuma in an interview.

Senior HSBC economist Karen Ward told Sky News in London that "even in the developed world I think we could see social unrest."

"We have very, very low wage growth, so people aren't getting more in their pay packet to compensate them for food and energy."

"Speculators on Wall Street are using the [Middle East] unrest as an excuse to push prices up in the futures markets," reckons Tyson Slocum, director of energy program at the US non-profit Public Citizen, and now serving on commodity-watchdog the CFTC's new Energy & Environmental Markets Advisory Committee.

For US crude oil in particular, "There's no supply-demand fundamentals that are justifying this huge price spike," he believes.

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Gold Record High, How to Protect Your Profits

By: Money_Morning

Larry D. Spears writes: If you bought gold at any time during the first 10 months of 2010, you're sitting on some pretty healthy profits. 

And thanks to renewed inflation fears and the growing unrest in Egypt, Libya and other Middle Eastern nations, most forecasters believe the "yellow metal" still has lots of room to run.

But if you watched gold struggle during January 2011, you may also be worried about keeping those hard-won profits - even with the rebound and run to record highs that gold prices have made.

Not to worry: You don't have to just sit around chewing your nails and worrying gold prices will suddenly plunge. Whether you hold physical gold, trade in gold futures contracts or own the shares of major gold-mining companies, you can "insure" nearly all of your profits against a short-term price decline with the help of a very simple options hedge.

Insuring Your Profits
Specifically speaking, the strategy that we're advocating involves buying one or more "put options" to match the equivalent size of your gold-related holdings. That's your "insurance policy."

For those unfamiliar with options, a "put" option gives its owner the right to sell a specific underlying asset at a designated price for a limited period of time. For example, a June Newmont Mining Corp. (NYSE: NEM) put option with a strike price of 55 would give its holder the right to sell 100 shares of Newmont common stock at a price of $55 per share at any time between the date of purchase and the option's stated expiration date - in this case, June 17, 2011.

[Options-Trading Tip: A "call option," the other basic type of option, is the financial opposite of its put-option cousin. The "call" gives its holder the right to buy a given asset at a specified price for a limited period of time.]

Similarly, one June Comex gold put option would give its holder the right to sell one June gold futures contract (controlling 100 ounces of physical gold) traded on the Comex division of the Chicago-based CME Group (Nasdaq: CME). 

The easiest way to explain exactly how this insurance strategy works is with an example, so let's assume that you bought an April Comex gold futures contract when gold pulled back in late January, paying a price of $1,325 an ounce (making the full 100-ounce contract worth $132,500). 

Gold rebounded through most of February, closing on Friday, Feb. 25, at $1,413.90 an ounce (the price that we're using for this example). That means that your 100-ounce futures contract had risen in value to $141,390, giving you a paper profit of $8,890.

Given the Middle Eastern turmoil and the related rise in oil prices - all of which could ignite a conflagration of inflation and stall the global recovery - you would expect gold prices to continue their advance.

But (and this could be a very costly "but"), you also believe that the odds are high that there could be at least a modest correction in prices before the April future comes due for delivery, forcing you to cash in.

What do you do?

The best answer would be to buy an at-the-money Comex put option - in this case, that would be the put with a strike price of $1,410 - giving you the right to sell your April gold futures contract at a price of $1,410 an ounce ($141,000), at any time prior to the expiration date on Monday, March 28.

Had you done that at the market's open on Monday, Feb. 28, you would have paid a premium of $19.00 an ounce for the gold put - or $1,900 for the full option. 

That's the only cost for the hedge: No margin requirement is imposed, nor is there any additional risk over and above the premium paid for the put.

Even so, that might seem a bit expensive - but the protection it provides is well worth it.

For starters, you guarantee that you will give back no more than $2,290 of your existing (aforementioned) profit of $8,890 - no matter how far gold prices fall. Even if the market collapses completely - plunging gold futures prices to, say, $1,200 an ounce - the most you will lose is $2,290. That compares to a whopping loss of $21,390, had you held only the futures contract (and not used a stop-loss order). 

By contrast, if gold prices keep climbing, you'll continue to add to your profits, reducing the total gain by only the $1,900 you paid for the insuring put. For example, should gold soar to $1,600 an ounce - or $160,000 for the full futures contract - your added profit on the hedged position would be $16,710, just $1,900 less than the extra $18,610 you'd have made on the futures contract alone.

To clearly illustrate, the following table shows all the possible outcomes for this particular example at any gold futures price between $1,200 an ounce and $1,600 an ounce (the top line of the table shows the opening values for the hedged position).

A Flexible Strategy
Keep in mind that the example we outlined in the preceding graphic is just that - an example. And it's just one example of a strategy that is surprisingly flexible and adaptable.

Indeed, the actual strategy itself can be adjusted in a variety of ways, depending on what your actual goal happens to be. For instance, had you chosen to buy the April $1,400 put instead of the $1,410 put, your cost would have been reduced from $1,900 to $1,450, though you'd have increased the amount of profit at risk from $2,290 to $2,840. 

You also could extend the time frame of your hedge by rolling the futures contract to a future delivery month - from the current example of April to, say, May, June, August or October - and buying the matching put option. Expiration dates for options linked to those futures months are:

•May - Tuesday, April 26, 2011
•June - Wednesday, May 25, 2011
•August - Tuesday, July 26, 2011
•October - Tuesday, Sept. 27, 2011

[Options-Trading Tip: The days of the week vary because expiration dates for options on gold futures are defined as the "fourth business day prior to the start of the futures contract delivery month."]

It's also important to remember that this "insurance" strategy can be adapted to most other methods of investing in gold, so long as the securities or assets involved have related options. 

The options on Comex futures - which have substantial liquidity (an average daily trading volume near 3,000 contracts and an open interest approaching 990,000 contracts across all months) - can be easily adapted to hedge physical-gold holdings over a limited period of time. All you need to do is buy one put option for each 100 ounces of physical gold you own.

Most of the leading large-cap and mid-cap gold-mining stocks also have options - generally traded on the Chicago Board Options Exchange (CBOE) - and you can insure your positions by purchasing one put for each 100 shares you own. 

Some of the leading names that have very liquid option markets include the afore-mentioned Newmont, Barrick Gold Corp. (NYSE: ABX), Freeport McMoRan Copper & Gold Inc. (NYSE: FCX), Agnico-Eagle Mines Ltd. (NYSE: AEM) and Gold Fields Ltd. (NYSE: GFI), among others.

Options are also available on most of the popular exchange-traded funds (ETFs) that invest primarily in gold or gold stocks. For instance, highly liquid options can be purchased on a full range of expiration dates for the SPDR Gold Trust ETF (NYSE: GLD) and the iShares Comex Gold Trust (NYSE: IAU), both of which invest in futures and hold physical gold. 

Since their price movements fairly closely track the actual price of gold, you can use the puts on these ETFs to achieve either of two goals. You can either:

•Directly insure your fund shares.
•Or insure smaller holdings in physical gold.

Just buy puts on enough ETF shares to match the present value of your bullion.

If you hold a portfolio of gold mining stocks, you can also do a broad hedge by purchasing puts on some of the ETFs that focus on mining shares, an example being the Market Vectors Gold Miners ETF (GDX).

In other words, regardless of how you've placed your bets on gold, it doesn't have to be an all-or-nothing proposition. With a little study and the use of the appropriate options, you can easily protect your profits while continuing to stay in the game for more.

[Editor's Note: Did you reap the 88% gain generated by our call to buy gold? Or what about our recent 123% gain from our recommendation to buy cotton? The strength of Money Morning is the expertise of "gurus" who write for us.

If those are the kinds of returns that you demand - and you should - then you need to look at our monthly affiliate, The Money Map Report. The same global-investing experts who contribute columns to Money Morning also write for The Money Map Report. 

What's the difference? That's simple: While Money Morning is a news service augmented by special investment research, The Money Map Report (MMR) is a dedicated investment newsletter - from cover to cover.

Subscribers can just look at the MMR portfolio each month to see that each issue is filled with the very best investment thinking from our panel of experts. Let's be honest: Where else these days are you going to find that kind of investment insight? 

Certainly not from Wall Street. Not these days.

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That Ticking Sound You Hear is the U.S. Bond Market....

By: Money_Morning

Keith Fitz-Gerald writes: Many investors are afraid of inflation because they understand the run-up in prices will take a big bite out of their wallets - and their buying power.

While that's a valid concern, I'm much more worried about one of the other possible fallout effects of the expected inflationary surge - the potential for the worst global bond rout in nearly 20 years.

But here's the thing: Even if that happens, it doesn't have to hurt. In fact, 

Deja Vu All Over Again
The last time we experienced anything like this was back in 1994. And the surrounding circumstances at work back then were remarkably similar to those we face now. Bond yields were at historical lows that year, company wages were flat, and we were in the midst of an unprecedented 34-month economic expansion. 

Fortune estimated at the time that yields on the 30-year U.S. Treasuries - which rose from 6.2% at the beginning of the year to 7.75% by September - cost U.S. bondholders more than $600 billion and global bondholders as much as $1.5 trillion. (Those losses are listed in 1994 dollars; if we convert them into current-day dollars - even using the federal government's dubious inflation statistics - those losses would be $888 billion and $2.2 trillion, respectively.).

I grant you that those are staggering numbers. But they pale in comparison to what's on the line today.

As I noted in a Money Morning column late last month, the total value of the global bond market is presently estimated to be $80 trillion, with the U.S. accounting for roughly $31 trillion to $34 trillion - or 39% to 43% of the world's securitized debt.

Investors constantly tell me that "things are different now," and insist "this could never happen today."

As the late great investor Sir John Templeton liked to say: "The four most dangerous words in investing are: 'This time it's different'."

In fact, I'll even say this: Investors who claim we could never have a reprise of the 1994 global-bond-market meltdown are deluding themselves.

We are today securitizing ever-larger chunks of the global economy with everything from credit-card debt to home mortgages - which we're then selling into larger and larger pools of assets.

The upshot: There are now trillions of dollars of "derivative" assets involved in the mix, and the bond markets are no longer the "safe haven" investors have long thought them to be. In fact, this once-stodgy hangout for fixed-income investors have been transformed into huge speculative pools for the self-anointed Wall Street "masters of the universe" who traded the rest of us to the brink of financial oblivion in late 2007, and who are once again on the hunt.

The Farcical Fed?
I'm not alone in this view, with such investing notables as Dr. Marc Faber, Jim Rogers, Pacific Investment Management Co. LLC's Bill Gross and others all observing the potential for a massive correction once traders take interest rates into their own hands. 

In fact, JPMorgan Chase & Co. (NYSE: JPM) Chief Economist Bruce Kasman - a former Federal Reserve Bank of New York official - told Bloomberg News that "there is a recipe for disruptive dynamics in markets if policy adjustments have to gather steam in a synchronized way." 

Put in plain English, bonds could get clobbered if traders doubt the capabilities of the U.S. Federal Reserve - and if the U.S. central bank is forced to start raising interest rates before policymakers really want to do so.

When I've warned of this scenario in the past, I characterized this as a "potential" outcome. Now it seems like more of a certainty. The only question is ... when ? 

Most investors acknowledge this - even if that realization is hidden in some deep, dark recess of their brains. But what many are missing in their quest to second-guess the Fed is that, this time around, the catalysts are events that are actually taking place thousands of miles from our own shores.

As I've noted here in Money Morning on several prior occasions, the only reason we've been able to stave off inflation in the face of $14 trillion debt and a Fed that wants to keep interest rates artificially low is that our nation has been able to offload inflation to China, India and other emerging-market economies where monetary policy could absorb our own special brand of export: f iscal lunacy.

Ironically, this has all been okay at least as long as the developed world kick-started everybody else. But now that the emerging markets represent a third or more of the world's economic might, you have a very different story. 

For instance, it's no longer inconceivable if things really get out of hand that yields on our own 10-year Treasury notes could zoom to 10% in the next 24 months, an increase of 183% from the 3.53% yield the notes were trading at on Monday. The odds of such a scenario aren't high. But it's not impossible, either. 

My "trader's forecast" stands as a complete contradiction to the expectations of Team Fed and legions of economists who are forecasting a subdued bond-market decline that sends yields up only to 4.25%, according to Bloomberg.

The way I see it, the tiger has already escaped his cage and is on the prowl. Fifteen of the 20 emerging-economy countries my team and I watch are already raising rates to cope with higher inflation - chiefly the food and oil prices that are either nearing, or in, record territory.

Normally, raising rates in the face of inflation is a good thing. But the danger here is that the central bankers around the world aren't raising rates enough - particularly in the China-dominated Pacific Rim. And that could come full circle to bite U.S. investors. 

According to Bloomberg data, eight of 14 countries in the Asian-Pacific region are running negative real interest rates. This is especially problematic because a negative real interest rate means that the rate of inflation is greater than the central-bank-set interest rates. 

This matters - and hang with me on this - because negative real rates, although relatively rare in the annals of global financial history, essentially steal money from savers in order to "subsidize" debtors. Over time, this engineers an involuntary redistribution of wealth from those who have been responsible with their assets to those who haven't. 

You see, central banks tend to manipulate interest rates in the interest of self-preservation - especially when it comes to the short-term interest rates that are arguably the most "controllable." In practical terms, these central bankers will drive short-term rates down below the prevailing rate of inflation, which means that savers actually lose real purchasing power - hardly a reward for the savers' prudence.

I'll admit this is a pretty abstract concept, so here's an example that might help. If you lend $10,000 in 2011, it might be worth $10,100 in 2012 - even though the same money is only capable of purchasing $9,900 worth of goods or services. 

And that leaves investors in quite the pickle: Should they "lend" money to those who will squander it, or do they hoard their cash in an attempt to save it from central bankers and politicians who don't seem to understand (or even care) that giving money away ultimately destroys our economy as well as the economies of our trading partners? 

History shows the Fed is pretty much damned either way. If it continues to take money from the private sector under the guise of engendering growth, it risks crushing investors via short-term rates that will ultimately rise. Everything from adjustable-rate mortgages (ARMs) to credit-card debt will be affected. 

If the Federal Reserve doesn't rates interest rates, the money that U.S. President Barack Obama and Team Bernanke desperately want spent here will continue to migrate to other capital markets where interest-rates are higher (and rising) and more reflective of actual growth.

Moves to Make Now
Negative-real-rate environments traditionally support investments in gold, silver and other commodities, since assets of those types help hedge the very real loss of purchasing power that accompanies them. Agricultural choices are solid, too - especially with food costs at record levels around the world.

Two of my favorite investment choices of this type are the SPDR Gold Trust Exchange-Traded Fund (NYSE: GLD) and the MarketVectors Agribusiness ETF (NYSE: MOO). 

I also happen to like exchange-traded notes (ETNs) that are tied to the Rogers Commodities Index created by the afore mentioned legendary investor. Two include the Elements Rogers International Commodity Index Total Return ETN (NYSE: RJI) and the Elements Rogers International Commodity Energy Total Return ETN (NYSE: RJN).

I know that the run in such choices has already been significant with gold trading at near-record levels, oil punching through new highs almost daily and agricultural commodities also flirting with never-before-seen prices in many parts of the world, but the fact that we have seriously negative real rates of return around the world suggests we'll continue to see growth in those asset classes for some time to come. 

Then the real fireworks will begin - when everyone else (those who don't read Money Morning) realizes we've all been had by misinformed central bankers who thought they understood the laws of money and who enabled the very conditions that will make $200 a barrel oil and $2,500 gold seem like bargains in the rearview mirror.

Actions to Take: Inflationary pressures continue to spiral - even in the face of interest rates that are being held at artificially low levels by central bankers in the United States and other select countries. The upshot: Fixed-income investors who view the bond markets as a stodgy safe haven from the nasty price swings and wrenching volatility of the "evil" stock markets are in for the surprise - and the financial thrashing - of their lives. 

You don't have to make that same mistake.

In fact, if you recognize certain financial truisms, and invest accordingly, you can at least protect yourself from this thrashing, and possibly even profit from the thrashings that other investors (who refuse to acknowledge reality) allow themselves to undergo.

As an investor, make sure that you understand that periods of negative real interest rates:

•In the long run are deadly for fixed-income investments such as bonds.

See the original article >>

COPPER & COMMODITY MADNESS….

by Cullen Roche

First it was Chinese cotton farmers hoarding cotton in their kitchens.  Now it’s Chinese trading firms using copper as collateral for financing business deals.  This latest note from Standard Chartered (courtesy of FT Alphaville) just wreaks of bubbly commodity madness:

Warehouse sources report substantial volumes of copper inflows after the Chinese New Year holiday. A very small proportion of this copper has been sold to the domestic market so far. Chart 4 shows that Shanghai copper has been trading at a significant discount to LME copper since October 2010, reflecting pressure from increasing stock levels.

With more material available, trading firms have been diverting metal into finance deals and using copper as collateral. Copper tied to these deals will be released to consumers, but only when demand picks up more decisively. We estimate that roughly 550kt of copper was stockpiled in bonded warehouses in Shanghai in late February, the majority of which is tied to financing deals.

The Americans started the financialization of everything, but the Chinese appear to be attempting to perfect it….In the end, their speculative mania is certain to end the same way all American bubbles have ended….The Chinese have adopted many facets of capitalism from their Western economic textbooks.  Unfortunately, they’ve adopted many of the very worst parts….

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Higher coffee prices to stay for a while : ICO

by Agrimoney.com

International Coffee Organization said rising coffee prices are to stay on top as it cuts estimate for world crop while highlighting rising consumption.

According to ICO, coffee prices, which came within an ace of hitting $3 a pound for the first time in 34 years are to remain strong as a precarious balance between supply and demand of beans continues to favour firm prices.

Although exports, of Arabica beans – if not Robusta coffee - were soaring, up by nearly one-quarter to 23.4m bags in the first four months of 2010-11, "the prospect for replenishment of stocks in producing countries remains weak", the ICO said.

Indeed, the organization cut by 1.1m bags to 133.7m bags its estimate of world output last year, noting that "adverse weather continues to affect the coffee-growing areas in many parts of the world".

Estimates for output in Mexico, Nicaragua, Tanzania and Uganda saw particular downgrades.

Meanwhile, world consumption continues to grow, especially in producing countries - by 3.3% in 2010, the ICO said in its first forecast for the year, compared with flat demand in importers such as the European Union.

Brazil's consumption jumped 4.1% to 18.9m bags, leaving the country within 3m bags of overtaking the US as the top coffee-drinking nation, as well as the top grower of the bean.

World use rose by 1.0% to 132.5m bags last year, the ICO said, a figure signalling a production surplus of only 1.2m bags to spare – and this in an "on" year in Brazil, which has a two-year cycle of higher and lower production.

"Given the limited availability of arabica coffee on the international market, and the strength of domestic consumption in Brazil, high levels of production in Brazil… failed to have a negative impact on prices," the group said.

"Market fundamentals continue to favour firm prices."

The jump in exports so far in 2010-11 has been led, among the top producing countries, by Colombia, which is recovering from successive seasons of weather-hurt harvests, and whose shipments jumped 38% to 3.4m bags.

Brazil's exports rose by 23% to 12.8m bags.

However, world robusta shipments fell by 5.9% to 10.3m bags, depressed by a tendency among growers in Vietnam, the producer of the bean, to hold back crop in expectation of higher prices.

Robusta beans for May delivery jumped 3.9% to $2,557 a tonne in London on Wednesday, the highest close for a nearest-but-one contract for three years.

Arabica beans for May set a fresh 34-year closing high of 294.85 cents a pound, a rise of 2.7% on the day, having touched 296.65 cents a pound earlier.

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Market Scorecard 2 years after the March 9th, 2009 low