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The Daily Reckoning Tuesday, September 15, 2009 The only area to get richer in the last year was Latin America... Scrambling for retirement savings at the worst possible moment... The Chinese could move the price of gold to $3,000 an ounce... Byron King on the floor beneath the gold price...and more! Mom and Pop Can't Catch a Break by Bill Bonner London, England "I'm Brazilian. I have gold. And I've just arrived from Rio richer anyone..." Thus sang one of the characters in an operetta by Jacques Offenbach. But that was in the mid-19th century. But hey...what goes around... Guess what happened last year? According to a study from Boston Consulting Group, the only area of the world that got richer last year was Latin America...led by Brazil! The rest of the world got poorer by 11%, according to BCG. Down in the rum and sun zone, on the other hand, they got 3% richer. So maybe our investments in South and Central America will turn out all right after all. Meanwhile, back in the developed world...what's going on? There are two main schools of thought. Ours. And theirs. Who's right? You decide. 'They' say, 'The crisis is over.' We can thank our lucky stars - and the feds. Now, we're getting back to 'normal'...or maybe a 'new normal,' with lower growth rates than before. Janet Yellen, San Francisco Fed governor, says the recovery will be 'tepid.' Others say it will be weak...soft...drawn out. "The slowest recovery since 1945," says a Bloomberg report. It may be slow, they say, but it's sure. The stock market proves it. Stocks are up 65% worldwide, with the United States a laggard...stocks in the US are up barely 40%. The Dow rose 21 points yesterday - still a long way to go to get to the 50% rebound mark, at 10,300. Gold closed down, but still over $1,000. And the dollar continued falling - reaching $1.46 per euro. In our view, there is no recovery. None. All of the improvement in the economy can be traced directly to bailouts. None of it - not a single penny - is organic, natural or durable. When the subsidies for new cars goes away, for example, so do auto sales. We wrote a book, Financial Reckoning Day with Addison Wiggin, in 2003. In it, we predicted that the United States would follow Japan into a long slump. We thought it would begin after the tech crash of 2000. We were wrong about that. But it seems to be beginning now. And the government, predictably, is doing the same things the Japanese government did - despite Bernanke's assurances that he won't allow the country to fall into the Japanese deflation trap. One thing the Japanese did was to reduce interest rates...practically giving away money to anyone who would borrow it. But Japanese consumers didn't want to borrow; they wanted to save. They had speculated on the bubble and lost money. Then, with retirement approaching they wanted to replenish their savings and rebuild their balance sheets. So, the Japanese government put out money...and it was taken up by speculators, not by the real economy. The speculators borrowed yen, at very low interest rates, and then reinvested the money in go-go sectors elsewhere - such as the US dotcom bubble. The yen became the world's "financing currency." If you wanted to build a factory in China or speculate on Argentine bonds, you could begin by borrowing cheap money from Japan. Thus, Japan contributed to a huge boom all over the world. But not in Japan. The land of the rising sun never seemed to get up in the morning. Property investors lost 80% of their money. Stock market investors lost as much. Even now, nearly 20 years later, they're still 75% down. And now, along comes the United States of America with super-low lending rates. But who's borrowing? Not the moms and pops of Middle America. They don't have anything to borrow against. And the banks won't lend to them. The banks need money for themselves. Besides, everybody knows the average household in America is losing income. What's more, mom and pop don't want to borrow. They've been through 10 years of losing money on Wall Street. Stocks are no higher now than they were a decade ago. And their houses - on whose rising prices they had counted for their retirements - have gone down 20-40%. And they're still going down. The poor moms and pops can't seem to get a break. They're now desperately saving for retirement - at the worst possible moment, when jobs are scarce and wages are falling. But what else can they do? [Many of these soon-to-be retirees are turning to the 'Plan B Pension' to supplement their income and make retiring early - or at least on time - a possibility. Learn more about this 'little talked about' retirement secret that could send a steady stream of work-free 'paychecks' you way. Click here.] More news from The 5 Min. Forecast: "Amazing. A few weeks of 'Cash for Clunkers'...700,000 new cars off the lot...et voila: Retail sales jumped in August by the most in three years! Wee-hoo!" writes Addison Wiggin in today's issue of The 5. "This morning's Commerce Department release of +2.7% places August retail sales well ahead of the 1.9% 'expert' consensus. "Great. Now that they've 'pulled forward' car sales for the next 12 months...what's next? How about... Appliances!? "Later this fall, Uncle Sam will being doling out up to $200 a pop (in borrowed money) to anyone who wants to replace an old appliance. Yeah, that'll keep retail and GDP stats humming along. "Wholesales prices rose last month twice as much as forecast...thanks largely to rising gasoline prices. The 1.7% jump in August followed a 0.9% decline in July. "'Core' PPI excluding food and energy rose a more modest 0.2%. But that was also double analysts' expectations. Turns out a good amount of that was driven by higher prices for cars and trucks, too. Whaddya know... 'Cash for Clunkers' gave automakers an excuse to cut back on factory- to-dealer incentives. "Dealers don't experience a squeeze without passing the costs along to customers. Which should make tomorrow's release of the consumer price index (CPI), well, interesting too. The consensus says a 0.3% increase. We'll see what tomorrow brings." You can get The 5 in your inbox 5 days a week, free of charge. It's one of the many perks that come along with being a subscriber to Agora Financial's paid publications, such as Options Hotline. This publication has been on an epic winning streak: no losing picks in 2009...2008...or 2007! Learn how you can multiply your options trading portfolio at least TEN times this year - guaranteed, or your money back. Get all the info here. And back to Bill, with more thoughts: So, the feds push money into the economy, but it's hot money. It's money that speculators use to place bets on gold...or on Brazilian bonds...or on oil exploration companies. The money never ends up in consumers' hands. It never bids for consumer goods. It never pushes up consumer prices. As in Japan during the '90s, America's hot money may go all over the globe. It may turn the entire world into a casino. But it won't bring about a real recovery... ..if cheap money from the government were all it took to bring prosperity, Zimbabwe would be richer than Switzerland. Obviously, it doesn't work that way. But here's the shocker. While we know easy money policies don't create prosperity, you may be surprised to learn that they don't necessarily cause inflation either. In other words, government may be incompetent, even at what it does best. So, why is gold rising? Ah...we were afraid you were going to ask. We've been doing a lot of thinking about it. Partly because our Family Office partners are smart people who ask smart questions. And partly because we're wondering what to do with our own gold. Buy? Sell? Do nothing? We spent half the night drinking and meditating on the subject. Finally, we're not sure we had a clearer idea...but at least we were able to sleep. We've already unveiled the idea to you. The feds can cause speculation in gold; but they can't easily cause consumer price inflation. As explained above, they can get cash into the hands of speculators, but not into the hands of consumers. Not in the middle of a major consumer retrenchment. The Roosevelt Administration was faced with the same problem. But back then, gold and the dollar were linked. Roosevelt could devalue the dollar by edict. The Japanese couldn't do that. Nor can the Obama Administration. In a deflationary credit cycle, you may only be able to cause consumer price inflation by resorting to extraordinary Zimbabwe-style money printing. You can drop money from helicopters, as Ben Benanke promised. But as Zimbabwe demonstrated, that cure is far worse than the disease it is mean to heal. All of that said...gold can rise...partly because people are betting on it as an antidote to inflation (not realizing that consumer price inflation may be a long way off)...and partly for other reasons. Lately, one of those other reasons may be heavy buying by the Chinese. The Middle Kingdom wants to diversify out of the dollar. It also has a central bank with very little in gold reserves. What better to do than to diversify out of the dollar by adding gold to its central bank reserves? Word on the street is that it is buying steadily. The Chinese have made a number of announcements on the subject. We don't really know who's in charge there, so we don't know whose comments to weight most heavily. One Chinese official has said that the government is buying gold and intends to buy more. Another says they will buy "when people don't expect it." Another says the Chinese expect gold to go to $3,000 an ounce. The Chinese have the money and the motive. They alone could move the price of gold to $3,000 if they wanted to. And maybe they do. Until tomorrow, Bill Bonner The Daily Reckoning P.S. Even if it doesn't go to $3,000, our intrepid correspondent Byron King thinks that it will still go at least to $2,000. Read his full report to learn how you can pad your portfolio with this yellow metal. See here. (And keep reading for more from him in today's guest essay, below...) The Daily Reckoning PRESENTS: As Bill mentioned, above, China is one on the key-driving forces in the gold market right now. Now that we know China is buying the yellow metal, how do you position yourself to profit? Byron King explores, below... A Floor Beneath the Gold Price by Byron W. King Pittsburgh, Pennsylvania The UK Telegraph recently quoted at length Cheng Siwei, former vice chairman of the Standing Committee of the Chinese Communist Party. He explained how Beijing is dismayed by the "credit easing" coming out of the Federal Reserve. "If they [the Fed] keep printing money to buy bonds," said Mr. Cheng, "it will lead to inflation, and after a year or two, the dollar will fall hard. Most of our [Chinese] foreign reserves are in US bonds and this is very difficult to change, so we will diversify incremental reserves into euros, yen and other currencies." Mr. Cheng was referring to over $2 trillion of Chinese foreign reserves, the world's largest holding. "Gold is definitely an alternative," said Mr. Cheng, "but when we buy, the price goes up. We have to do it carefully so as not to stimulate the market." From Mr. Cheng's lips to God's ears - and now to ours. We have direct testimony from a high-level cadre that China, while cautious, is a key driving force in the gold market. China is buying. We already knew that the Chinese are buying gold - and hoarding it. For example, China is the world's largest gold-mining nation. China mines more gold each year than the US or South Africa. Yet what are the net gold exports from China? Umm...zero. That is, China doesn't export gold (unless you buy a Panda coin or something.) Overall, in fact, China is a net importer of gold. "The implication from Mr. Cheng is that the Chinese will not overbuy gold, which may be why the yellow metal has hovered just below the $1,000 mark per ounce in recent weeks." Sure, the Chinese use gold in industry, such as for electronics, jewelry and the like. But much of the rest of Chinese gold purchases go into state coffers, or into "off-books" storage. I'll bet that there's a lot of gold in "industrial stockpiles" in China, which are really just strategic monetary reserves for China's Central Bank. The implication from Mr. Cheng is that the Chinese will not overbuy gold, which may be why the yellow metal has hovered just below the $1,000 mark per ounce in recent weeks. At the same time, it's more than likely that China will buy gold whenever there's a price dip. The significance is that the Chinese seem to be prepared to establish a floor under any correction in gold prices. This limits the downside for well-positioned gold miners such as we hold in the Energy & Scarcity Investor portfolio. Is there an upper limit to gold prices? Well, I expect to see the gold price rise, but slowly and in a long series of plateaus. I also expect to see pullbacks, usually based on world monetary and political events. So we'll surely have some roller-coaster rides with the prices for the mining shares. How it all unfolds for us as investors will depend on when, and to what degree, monetary-driven inflation begins to bite into the economy. When it becomes totally obvious, it'll probably be too late to protect and preserve your wealth and purchasing power. The problem for us in the West is that most of the politicians and major media just DO NOT GET IT. Or at least, the ones that do "get it" generally don't report things honestly to the citizens. They're probably afraid of what might happen when the citizens really figure out how much the political classes have screwed up the world. So you see these rosy-sounding headlines about how the economy is "improving" and things are "getting better." Huh? What planet are these guys on? The tide of inflation is rolling in. It'll lift the boats of the gold miners. Regards, Byron W. King for The Daily Reckoning Editor's Note: Byron King currently serves as an attorney in Pittsburgh, Pennsylvania. He received his Juris Doctor from the University of Pittsburgh School of Law in 1981 and is a cum laude graduate of Harvard University. Byron is also editor of Outstanding Investments and Energy & Scarcity Investor. The above essay was taken from the latest issue of Energy & Scarcity Investor. To read more, and to learn what 'well positioned gold miners' he has in the ESI portfolio, see here. The Daily Reckoning - Special Reports: Gold: The Truth About Gold Fiat Currency: Using the Past to See into the Future Introducing the Single Best Way to Make Sure You'll Never Run Out of Money...

AGORA Financial Resources: The Daily Reckoning Is: Economics & Politics Crisis & Opportunity Gold, Oil & Energy Growth, Tech & Medical Options Investing Founder: Bill Bonner Editorial Director: Addison Wiggin Publisher: Rocky Vega Managing Editor: Kate Incontrera Web Editor: Greg Kadajski About The Daily Reckoning: Now in its 10th anniversary year, The Daily Reckoning is the flagship e-letter of Baltimore-based financial research firm and publishing group Agora Financial, a subsidiary of Agora Inc. The Daily Reckoning provides over half a million subscribers with literary economic perspective, global market analysis, and contrarian investment ideas. Published daily in six countries and three languages, each issue delivers a feature-length article by a senior member of our team and a guest essay from one of many leading thinkers and nationally acclaimed columnists.