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The Daily Reckoning Weekend Edition Saturday, January 2, 2009 Taipei, Taiwan China's gold rush and what it means for prices in the next decade, Subprime explosions...Bernanke's balderdash...Geithner's gaffs... Your 2009 selection of Daily Reckonings finest and plenty more... Joel Bowman, reading through a year of reckonings, from Taipei, Taiwan... We've got a pretty jam-packed issue for you today, Dear Reader, so we'll get straight to it. First up, former Daily Reckoning correspondent, Adrian Ash - who now heads up research at BullionVault in London - gives us his take on what's in store for the gold market over the coming years. After that, we've grabbed a selection of the very best Daily Reckoning columns from the year that was. All in, it's a bit longer than your usual DR Weekender but, after the New Year's celebrations, we thought a quiet afternoon's reading might be on the cards. Please enjoy... --------------------------------------------------------------- China's 2010 Gold Rush by Adrian Ash, Head of Research at BullionVault London, England The collapse in India's gold demand during 2007-09 might seem good reason to question the fundamental strength of gold buying worldwide. After all, if the world's No.1 gold buyers can't keep up with record- high gold prices, who can...? But the plain fact, as BullionVault first forecast in spring 2009, is that China has overtaken India as the number one private gold buyer this year. The typical Chinese New Year gold rush has already begun (thanks in part to 3% discounts at major retailers), and robust demand looks likely to continue through 2010 if not beyond. Full-year 2009 private demand in mainland China could outstrip India, the former No.1 buyer, by one quarter if not one third. Short of a (very unlikely) collapse in Q4 demand, full-year private gold buying - including jewelry and retail investment - is set to have grown 10% from 2008's record in volume terms, rising 26% by value to equal $13.5 billion or more. On recent trends, that would equate to more than 2.0% of China's famously massive household savings (up from 1.0% ten years ago) and account for almost one ounce in every eight sold worldwide. Basis the GFMS consultancy's data (published by the World Gold Council), physical gold purchases by mainland Chinese households in 2009 was already running 19% ahead of India's private demand for Q1-Q3. Given China's continued economic growth (certain to hit Beijing's 8% target according to the Chinese Academy of Social Sciences) - not to mention the surge in money-supply and credit growth over and above GDP (put at 23 and 27 percentage points respectively by Deutsche Bank) - private gold consumption in Q4 most likely remained very robust. Whereas India's private gold off-take during Oct-Dec. continued to shrink in the face of record-high prices. Indian bank and wholesale dealers have reported below-market bids from their clients throughout the autumn. Comments from the Bombay Bullion Association put Q4 imports 54% lower from 2008's already disastrous finish. Fourth-quarter Chinese consumption should be in the range of 116 tonnes (if it adds 37% to Q1-Q3 volume, as per the 5-year average) to 128 tonnes or more (if Q4 tops Q3 by volume, as it has each year since 2004). The running total to end-Sept. was 315 tonnes. It is likely to finish full-year at 431-443 tonnes. India's private demand, in contrast, ran 45% below 2008 levels during the first 9 months of the year, most notably depressed during Q1 (down 83% from Q1 08, with Indian investors becoming physical dis-hoarders on GFMS's data; overall, India was a net exporter of gold for the first time since the Depression according to market historian Timothy Green). Applying the 5-year average ratio of Q4 demand to Q1-Q3 figures (27% added to 264 tonnes), full-year private off-take would come in at 336 tonnes, the lowest total since at least 1991 on GFMS's data. India's full-year imports (it has virtually no domestic mining output) are forecast at 370-380 tonnes says the Bombay Bullion Association. They have not been below 400 tonnes per year since at least 1997 according to the Indian Bullion Market Association. It is impossible to predict the outlook for gold-buying in mainland China next year, but this decade's drivers for Western gold investment - credit excess and miserable returns to cash - also apply in China, with bells on. The People's Bank cut its benchmark rate from 7.5% to 5.3% in Dec. 2008, and has left it there since. Inflation in the cost of living was officially reported at minus 1.1% across the first 3 quarters, but real rates were negative in H2 2004 and again in at the turn of 2007-8. Some analysts are forecasting 4.0% inflation for 2010, and either way, commercial rates have been so attractive this year that new credit growth was CNY295 billion in Nov., equal to $43 billion. That was down from 2009's monthly average of $130bn, but took full-year credit growth to the equivalent of $1.35 trillion, equal to 27% of GDP. Pitched against this rampant credit excess, gold's quasi-religious and auspicious appeal in Chinese culture - as a solid, tangible, intrinsically valuable store of wealth - will only have grown. Most significantly, and in sharp contrast to Indian demand, private Chinese buying has grown as the price has risen (gold has than tripled against the Yuan since retail price controls were lifted in 2001). That might suggest gold is just another bull-market asset for China's increasingly wealthy and capital-rich middle classes. But owning the metal is most often viewed more as an end-in-itself than as an investment vehicle; it's the aim of accumulation, not the means. Given this last decade's average 15% annual gains for US-Dollar investors - plus the outlook for sub-zero real interest rates, struggling equity dividends, and the danger of sharply higher bond yields (i.e. falling bond prices) as the Treasury attempts to finance a new record deficit - might the Chinese approach to gold investment start to take hold in the West...? Adrian Ash For The Daily Reckoning Joel's Note: A version of this article first appeared in The Financial Times' China Confidential magazine. Formerly City correspondent for The Daily Reckoning in London and head of editorial at the UK's leading financial advisory for private investors, Adrian Ash is the editor of Gold News and head of research at BullionVault - winner of the Queen's Award for Enterprise Innovation, 2009 - where you can Buy Gold Today vaulted in Zurich on $3 spreads and 0.8% dealing fees. (c) BullionVault 2009 NB: This article is to inform your thinking, not lead it. Only you can decide the best place for your money, and any decision you make will put your money at risk. Information or data included here may have already been overtaken by events - and must be verified elsewhere - should you choose to act on it. --------------------------------------------------------------- ALSO THIS YEAR in The Daily Reckoning... Said the Joker to the Thief By Bill Bonner 01/09/09  Despite the US Treasury Secretary, and the US President saying that the US economy was in good shape, by July of last year, several things were clear: housing had not bottomed out, the subprime problem was not contained, the banks did not have enough cash, and every official - public or private - who opened his mouth was either a joker or a thief. Hoorah for Capitalism! By Bill Bonner 02/27/09  Everyone hates capitalism, so it can't be all bad. What is wrong with these people? Do they never learn anything? 'Capitalism has failed,' they say. 'We need government to fix the problems...' The rich hate capitalism because it threatens to take away their money. The poor hate it because they think it keeps them from getting any money in the first place. And everywhere you look, the chiselers are offering bailouts, boondoggles and bamboozles. With so many people trying to improve on capitalism, it's a wonder they've never come up with something better. Marooned on an Island of Debt by Greenspan's Money Flood By The Mogambo Guru 04/22/09 As usual, I put on an adult-sized diaper and my tinfoil hat in careful preparation to look at the change in Total Fed Credit last week, and it is a good thing I did, too, because the Federal Reserve (as expressed in their secret motto "We Are Evil") created, out thin air, $29 billion new dollars in bank credit! Wow! Transfer of Wealth By Puru Saxena 06/24/09  After decades of excess credit and over-consumption, the developed world is finally being forced to deal with private-sector deleveraging. However, the governments seem to have other plans and they've decided to fight these deflationary forces tooth and nail. Their solution - even more credit and consumption! Beyond Subprime By Chris Mayer 07/22/09  Subprime is only one slice of low-grade bologna. It sits at the bottom. Alt-A is the next riskiest slice of mortgages above subprime. Alt-A are mortgages to people who are better credit risks than subprime, but still not prime. Documentation is still spotty as far as verifying income, and loan to values are high. Plus, about a quarter  of these mortgages went to nonowner-occupied homes - which were subject to even greater speculation. Requiem for Ben Bernanke and his Second "Great Depression" By Byron King 07/30/09 Poor Mr. Bernanke. Does he really not understand his fate? I'll grant that he was dealt a bad hand - a draw of pure, malevolent evil - by his incompetent predecessor at the Fed, Alan Greenspan. But when you volunteer to run the nation's central bank, you're asking for a seat at the table of history. When history deals, you play the cards that you're dealt. And sometimes history holds all the trumps, if not a few aces up its sleeve. Social Security? Not Exactly By Addison Wiggin 08/11/09 The first public retirement pension scheme was created by Otto von Bismarck in 1880 Germany. Fifty years later, during the Great Depression, Franklin Roosevelt followed suit in the United States. As we've seen, the number of people expected to reach the retirement age of 65 was not considered to pose a threat to future funding. Life expectancy in 1935, in the United States, for example, was 76.9 for men. Workers relying on the plan for retirement would not receive much each month and were not expected to live long enough to drain the system. The Effects of Epic Stimulus By Chris Mayer 09/10/09 What makes investing particularly difficult now is that the distortion in prices, as if reflected in a funhouse mirror. Normally market prices should reflect underlying demand and supply. As in a vegetable stand, the prices come from the buying and selling of people in the market. Macro for Dummies By Bill Bonner 10/23/09  "He who goes a-borrowing, goes a-sorrowing." The quote comes from Ben Franklin. But it was recalled to us neither by America's president, nor Britain's Prime Minister. Instead, the Telegraph in London reported it from the mouth of Cheng Siwei, a "top member of the Communist hierarchy." Gold... Selling is the Hardest Part By Eric Fry 12/01/09 Ten years ago, everyone on the planet knew gold was a "Sell." (Incidentally,  everyone also knew that JDS Uniphase and Pets.com were "Buys.") Investors scorned it. Central bankers sold it. Economists eulogized it. Today, gold is hated less...which causes some gold investors to worry that their favorite precious metal has become too popular for its own good. "Is the gold bull market about to hit a wall?" they ask themselves. The Weekly Endnote: We return next week to your usual Daily Reckoning programming. Please send any and all comments to the address below and...enjoy a happy and safe long weekend! Until next time... Cheers, Joel Bowman Managing Editor for The Daily Reckoning joel@dailyreckoning.com   The Daily Reckoning - Special Reports: Gold: The Truth About Gold Fiat Currency: Using the Past to See into the Future "THE GREAT AMERICAN RECOVERY RP-OFF" Brace yourself for what's about to go down as the BIGGEST FINANCIAL SWINDLE in world history.