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From Dan Denning at the Old Hat Factory:

--There's a horse race in Melbourne today, so it's kind of quiet around the Old Hat Factory. It's kind of quiet on St. Kilda Road too. The whole place has an empty feel this morning.

--How about those Chinese, though? They aren't idle. The directors of agricultural chemicals business Nufarm say they'll give the nod to a bid by a state-owned company from China. The Chinese are the biggest buyers of publicly listed stocks these days-and no we're not talking about PetroChina becoming the largest company in the world by market cap after its IPO yesterday in Shanghai.

--PetroChina's (NYSE: PTR) US$1 trillion market cap was fuelled by huge demand from Chinese investors on Chinese markets. But China's growing presence in the world economy is boosting demand for a lot of things. And cashed up with dollars, many state-owned Chinese firms are looking to meet China's needs by buying up foreign assets, preferably tangible.

--You have to admire the strategy. You could buy a trophy asset like a soccer team or some famous piece of real estate to flatter your vanity and show the world how rich and powerful you've become. But the China- backed private-equity consortium going after Nufarm (ASX: NUF) has a more practical concern-feeding China's millions.

--By all accounts the offer for Nufarm's global agricultural chemicals business is generous. The China bid values Nufarm at $17.75, which the company itself reckons is a 27% premium to the share's closing price on October 30th. The stock was up 11% yesterday to close at $17.34. But our friend at Fat Prophets Greg Canavan summed it up well saying, "It's obviously a really good price. It represents the strategic value of Nufarm, and the Chinese are loaded with cash."

--Members of the Reserve Bank will meet later today to decide whether to raise interest rates again right before the election. Everything points to a rate rise-which is why our top tip today is that the Bank will do nothing.

--Gold tacked on a couple of increasingly worthless U.S. dollars to trade above US$810 in New York. It was a mixed day yesterday in Australia, with Newcrest Mining (ASX: NCM) up two percent and seventy cents to close at $33.40 while Lihir (ASX: LGL) closed down a penny to $4.17.

--Meanwhile, Credit Suisse analyst David Davis at Credit Suisse is predicting a "quantum upward change in the gold price."

--A quantum change? What does that even mean?

--Davis says, "Our studies indicate that the dynamics surrounding the gold supply and demand has begun to change inexorably towards a diminishing supply of gold and increasing investment demand, which will ultimately impact the gold price."

--Got it?

--He continues, "Our studies indicate in the long term global gold production will begin to decline as the diminishing number of new reserves fail to compensate for dying mines…The decline in global gold production will likely be accelerated, should the gold mining industry continue to incur significant year-on-year inflation rates which are not offset by similar or significantly higher gold price increases year-on-year."

--Well, that's good news and bad news for investors. The good news is the higher gold price (especially for bullion investors or coin collectors.) For gold stock investors, the Credit Suisse report suggests gold producers will have trouble containing rising costs. In that event, it doesn't hurt to look for the lowest-cost producers.

--Copper prices fell to a seven-week low, closing at US$7,419 a tonne in London. Zinc touched a 19-month low and aluminium hit a three month low. What's going on? Stocks are up at the London Metal Exchange. That, plus the fear of a real recession in America is taking a little wind out of the bull market in base metals.

--The Dow recovered late in the day to erase most of its losses, but it still shed 50 points in New York trading. The financial stocks continue to get beaten like Wall Street's red-headed step-children. All is not well in the credit market.

--"Credit-market losses dragged financial companies to their worst quarterly earnings decline since Bloomberg began tracking the data in 1997," reports Bloomberg. "Members of the S&P 500 Financials Index that have released third-quarter results so far have reported an average profit drop of 22 percent, the biggest among 10 industries, and analysts expect a 4 percent decrease this quarter."

--How can you have a bear market in credit and a bull market in stocks? We asked this question a few months back and the only good answer was that "stuff"-tangible assets-would do better than "paper"-financial assets whose value went up when credit was cheap. That still seems right to us. And the bear market in credit has a long way to go.

--"Never in American history have people been able to buy a house with no money down," Bill's old friend Jim Rogers said in a recent interview in New York. "We have the worst credit bubble, and it's going to take a long time to work its way out. You don't cure a bubble in five or six months. It takes five or six years."

--Does that mean Australia's resource bull market has another five or six years to run? Maybe. But we do know that while U.S. financial assets deflate, the Chinese and other cashed up investors will be looking for tangible assets to buy, wherever they can find them.

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And now over to Bill Bonner:

We're back at home... back in Merry Ol' England... back in our London office, after a long trip that took us to South America, Germany and France.

What's new in England?

The British pound hit a 26-year high against the dollar while we were gone. It now costs US$2.07 to buy a pound; which means, our breakfast (coffee and two pieces of bread with butter and jam) cost us more than US$10.

Pull out an American dollar bill in Europe today and shopkeepers are likely to snicker. Moneychangers check the news regularly, just to make sure they are not short-changing themselves.

How come the pound is so strong? The English are spendthrifts too - just like Americans. They've loaded themselves up with debt - just like their yankee cousins - and now have the lowest disposable (after debt service) income in 10 years. Britain even has a current account deficit of 3% - not as much as the United States, but still not very healthy.

So why is the pound so robust?

Our answer: because it is not the U.S. dollar.

The pound is not going up against the euro... or against gold... or against oil. It is going up against the U.S. dollar, which is to say... the U.S. dollar is going down; it makes everything else look like it is going up. Almost every foreign currency, with the exception of the Zimbabwe dollar, is going up against the American money. And so are things that aren't made from trees - such as coal, wheat, steel, shipping prices, health care insurance, tuition, and gold.

Over the last eight years, we have made a number of suggestions... and given out a number of ideas... here at The Daily Reckoning. Dear Readers might recall how we thought Canada was a good buy... and Argentina... and even Japan. We also have liked commodities, generally, and oil. But we have made only one recommendation: buy gold.

This is because we are not clever enough to know any better. You might have made more money by investing in a go-go emerging market - such as China or Brazil. But what do we know about Chinese stocks? You would have made a lot more by buying Google when it went public, too. But what do we know about technology? Individual stock research is hard work. You can't buy Starbucks stock just because you just had a good cup of coffee. And you can't buy a health care stock just because you notice that people are getting older. No, you have to do a lot more research. You have to study the business, study the finances, get to know the industry and the people in it. That is, of course, what Warren Buffett does. It is why he is perhaps the greatest investor who ever lived. And it is precisely not what most people do... and why they are not investors at all - but merely yahoo speculators, hoping that prices go up.

That's why we stick to the big picture. And the big picture circa 1999, 2000, 2001... and so on... told us to buy gold.

We urged Dear Readers to buy gold when it was US$300... when it US$400... when it was US$500... and when it was US$600. Yesterday, the price shot up US$14.80 - to over US$808 per ounce. And guess what, dear reader? It's probably not finished.

Uh... long-term Daily Reckoning sufferers will notice that slippery word - 'probably.' Yes, Dear Reader, we weren't born yesterday. We know that there is more under heaven and earth than is contained in our philosophy. Our guess is that gold has a lot further to go... a lot further. But let us pause a moment and look at how things might go in a different direction.

Last week, the stock market quaked. The Dow fell more than 350 points on Thursday. Commentators said investors were 'disappointed' with the Fed's quarter-point cut. We don't believe it. They saw that cut coming a mile away. Instead, stocks sold off because that's what stocks do... occasionally. And they could have sold off a lot more. The Dow could go down 500 points in a single day...or more. Then, it could keep going down. No law says it couldn't. And there are plenty of examples of similar crashes. We keep our "Crash Alert" flag flying over The Daily Reckoning headquarters, just in case.

A crash in the stock market would knock down the only solid pillar still holding up American wealth. Residential housing is already down a little more than 4% according to Case/Shiller. No one knows how much more it could go down... but 10%, 20% or 30% are reasonable numbers. This alone represents trillions of dollars worth of 'wealth' that people thought they had - vanished!

Could the U.S. stock market go down 10% too? It not only could... it will. The only question is 'when'. But when it does, it too will take trillions of dollars out of Americans' wealth.

And then, there's the U.S. dollar. Already this year, the greenback is down about 10% against major currencies. The estimate we remember is that all the stocks, property and other wealth of Americans - quoted in dollars - is worth about US$50 trillion. Take 10% off that number and you have a loss of "implied wealth" of $5 trillion.

This, dear reader, is flation with a capital 'D' in front of it. Deflation, at least according to our definition, means that people just don't have as much money one day as they had the last. Then, their whole outlook quickly changes. Where once they were bold, they quickly become fearful. Where once they foolishly trod, they now are afraid to rush in. Where once they spent, now they leave their money in their pockets.

The pollsters tell us that Americans are growing more pessimistic. They're afraid things aren't working out - neither in Iraq, nor in Washington, nor on Wall Street. It is as if they had awoken from a long sleep. They find themselves with a long gray beard... and no money in their pockets. For thirty years, their hourly earnings have not really increased. Now, because their expenses and debt service have gone up, they find themselves with less discretionary income than they had during the Carter administration. What is going wrong, they ask themselves?

No ready answer comes to them. But a gloomy sentiment creeps upon them. "No..." they say to themselves. "Maybe we won't buy a new car this year..."

And now, Dear, Dear Reader... consider this:

One out of every five dollars of consumer spending worldwide is spent by an American.

So you see, it is not just the U.S. economy that depends on U.S. consumers; it is the whole world economy. Everything depends on the willingness of people who don't have any money to keep spending it. When they stop spending it, the world economy enters a new phase... a Japan-like phase of slump and deflation.

Ah... there's the rub. At least, there's the possibility of a rub. Consumer prices in Japan are, believe it or not, still going down. People in Japan do not need to buy gold as protection against inflation. Their own currency is protection enough. And if the world were to enter a Japan-like funk, the bull market in gold would be over. The bear market in the dollar would be over too.

Gold is a traditional measure of wealth. It took about an ounce to buy a toga during the Roman era. It takes about an ounce to buy a nice suit now. (Actually, since new supplies of gold are running behind GDP growth rates, you can reasonably expect to be able to buy two or three suits for an ounce. But it depends where you shop.) Gold will not really go down...but its price in dollars may vary. And if the dollar stops going down, it will look as though the price of gold is no longer going up.

Do we expect this to happen? Not exactly. Not soon, anyway. And not for long.

[Editor's Note: Bill Bonner & Lila Rajiva's new book, Mobs, Messiahs and Markets, is now available in Australia from The Educated Investor. Order here for a 15% discount.]

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The Daily Reckoning Presents: In the past, one did not need so much faith in human nature to stock up on dollars, pounds, francs or deutschemarks. Behind every one of them, until fairly recently, was a fixed quantity of something that man did not make; gold.

You Gotta Have Faith
by Bill Bonner

Early in WWI, the French were urged to turn in their gold in exchange for paper bank notes. They would not lose "any part of their savings," they were told. Nor would they have to "pay any more for anything they wished to buy."

The war over, France was unable to keep its commitments. But what did you expect?

More recently, we recall visiting Argentine president Carlos Menem in the 1990s. At the time, Argentina had boldly solved its inflation problem by fixing the peso to the dollar, one to one. This stability gave the Argentine economy a boost. Foreign investors felt they could invest safely. Lenders felt they could place money down on the pampas, collect high yields, and still get back money of more or less the same value as the money they lent.

Still, there was some doubt about whether Argentina could maintain the fixed- rate exchange policy. So, we put the question directly to the head of state: "Will the peso/dollar exchange rate hold" we wanted to know.

"Yes," he replied.

About two years later, Argentina abandoned the dollar peg, defaulted on its debt and the peso lost two-thirds of its value.

Now, this past weekend, Henry Paulson, told a crowd in India that the US is "strongly committed to a strong dollar."

According press reports, the U.S, Treasury secretary neither smiled nor waited for laughter. Instead, he continued speaking, just as though he had not just told one of the biggest whoppers in financial history.

If there has been any progress in central banking it is surely this: the authorities don't have to lie as much as they did in the past. French officials in 1915 had to separate the public from its money. In 2007, the public and its money have already been parted. Now, we all have bank notes, and plenty of them.

Today, anyone who is a bull on the dollar (or on the pound or the euro, for that matter) has to be a bull on human nature…and on economics too. Economics is merely the study of man and his money. But reported in the International Herald Tribune was the curious finding that people who had studied economics for 6 months scored no better on tests of basic economic principles than people who had never opened an economics book. The researchers were too timid, in our opinion. A follow-up study will show that those who go on to study economics at an advanced level will actually score lower than those who never studied it at all. It is a value-subtracting discipline. The longer you study it, the less you know.

Still, this week, the whole world seemed to hold its breath, wondering what a committee of economists would say. Would the US central bank lower rates? Or raise them. Economics itself has been in a bull market for many years. Now, economists control our money and get their faces on our news magazines.

But we live in a world of remarkable wonders. Improbably, even the Iraqi currency - the dinar - is going up against the US dollar. In January, 2004, it took 1,480 dinars to buy a dollar. Now, Iraqis willing to stand in line in a public place can buy them for just 1,240. While the inflation rate was recently clocked at 30% per year, the Iraqi central bank nevertheless lends out money at 20%. Last week, at an auction in Texas, a bookstore owner reported paid $100,000 for a lock of Che Guevara's hair. And in Argentina, this past April, it rained spiders.

We don't know what to make of it all. So, we will draw only the most obvious conclusion: there's no telling what nature - even in its human form - might get up to.

In the past, one did not need so much faith in human nature to stock up on dollars, pounds, francs or deutschemarks. Behind every one of them, until fairly recently, was a fixed quantity of something that man did not make; and neither could he duplicate it, destroy it or diddle with it - gold. Ultimately, everyone who held a franc or a dollar could count on exchanging it for gold, at a stated rate. Only in the case of an extreme emergency - such as World War I - would the central banks renege. And even then, the default would be only partial…tentative…and shameful.

But the man who walks the street with a pocket full of paper money today is a man walking on air. A public official may tell him that his dollars are 'strong,' but what does that mean? Against other major currencies, the dollar has lost nearly 10% of its value this year alone. Measured in oil, gold, or wheat the damage has been even greater. Meanwhile, the supply of dollars is increasing at 15% per year - 5 times faster than America's output of the goods and services the dollar is supposed to buy. And the Financial Times tells us that the world market in credit derivatives, almost entirely in dollars, grew 32% in the first half and increased 75% over the year to the end of June.

A dollar bull has nothing solid beneath his feet. He only has faith. He has to have confidence in modern economists. He must not worry that members of Congress will spend too much. When the Treasury secretary says we will have 'strong dollar,' he must believe him. And he must believe that the American president will show restraint and prudence. And, most importantly, he has to think the folks at the Fed, America's central bankers, will exercise their authority with foresight and intelligence.

Do we need to say any thing more? We didn't think so.

Bill Bonner
for The Daily Reckoning Australia

Editor's Note: Bill Bonner is the founder and editor of The Daily Reckoning. He is also the author, with Addison Wiggin, of The Wall Street Journal best seller Financial Reckoning Day: Surviving the Soft Depression of the 21st Century (John Wiley & Sons). Buy it online at The Educated Investor.

In Bonner and Wiggin's follow-up book, Empire of Debt: The Rise of an Epic Financial Crisis, they wield their sardonic brand of humor to expose the nation for what it really is - an empire built on delusions. Buy it online at The Educated Investor.

His most recent book, Mobs, Messiahs & Markets co-authored with Lila Rajiva, was just released in Australia.

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