The kind people at Stratfor sent us a note informing of us such, but granting us permission to use it nonetheless. We sent them a note abjectly apologising for the mistake and thanking them for letting us use it. We've been a bit touchy on that issue ourselves lately. It was a great chart and they made a great point with. So if you're into that kind of macro-political analysis, tool over to the Stratfor website for a look.

So how about the Fed? It's carried on with its wayward monetary policy. And it's carried on with the carry trade by keeping short-term rates low.

In deciding to make hardly any changes to its interest rate policy or even the language from its last statement, the Fed is encouraging traders to resume the dollar carry trade. For now, it looks safe to borrow in low-yielding currencies like the U.S. dollar and invest in higher-yielding assets like the Australian dollar, emerging market stocks, and some bonds.

Go you bubble beauties!

It's hard to believe the Fed is wilfully stupid. The market, through the price of gold, has clearly communicated that it thinks U.S. monetary and fiscal policy is lousy. But rather than defend the U.S. dollar - indeed the integrity of U.S. monetary policy itself - the Fed is choosing to support asset prices through easy credit.

It's also possible that the Fed thinks a weak dollar will reduce America's trade deficit, boost its export competitiveness, and lead to higher employment. We think this is a pipe dream. And we're not talking about a lead pipe. We're talking William Blake-style opium.

But smoke and mirrors aside, does this mean we were wrong about our call last week for the end of the dollar carry trade? If the U.S. dollar index rallied, we expected to see a falling Aussie dollar, falling Aussie stocks, and (even though it's strange) rising U.S. bond prices. All the leveraged risk trades would unwind a bit as dollar shorts covered.

But now what? Is this the all clear for stock indices to make new highs as traders borrow money and plow it into markets to engineer huge returns for the end-of-year statements to investors? The early returns are inconclusive. The Dow was all over the shop, unable to make heads or tails of what the Fed's non-change means. Gold futures made a new nigh, though. And about that...

Gold is very popular lately. It's not returning our calls anymore. And when we see it in public, all it does is glitter and bask in the glow of so many new found admirers. That makes us very nervous, and perhaps a bit hurt. We stood by it all those years when no one loved it.

We like it all the same, although we're just friends now and it's based on gold's ability to preserve the purchasing power of our wealth, not any inherent beauty it may or may not have. But as a practical matter, when you enter a position as the asset is making a new high, you usually get hammered.

That's what happens when you go along with the crowd. It's an axiom that an asset has to make new highs...to make new highs. But it would be nice to buy gold on a correction. Perhaps, though, we are seeing a big shift in market psychology with respect to gold. India's purchase of IMF gold, as we reported yesterday, is just one sign of that shift.

One interesting result from the events of 2009, Murray Dawes mentioned last week, is that gold is decoupling from the U.S. dollar. He sent over the chart below. It shows that two times in the last five years, gold (the black line) has strengthened eve as the U.S. dollar index (the blue line) rallied. And each time after this period of dollar strength, gold then took off to a new move up.

Click to enlarge

Why does that matter? Well, gold usually moves up when the U.S. dollar moves up, and down when the U.S. dollar moves up. For gold to show strength when the dollar is strong shows that gold itself may be breaking out of its correlation to the greenback. And what would that tell you?

For traders, Murray is showing that the movement of the U.S. dollar is what Aussie stocks are keying off of. Thus, knowing where the dollar is headed tells you whether you should be long or short Aussie stocks (as a trader). Murray is sorting which stocks specifically are there for the trading (and in which direction).

But in the bigger picture, gold breaking its negative correlation with the USD would tell you that gold is being remonetised in the world financial system. It would tell you gold is appreciating against nearly all paper currencies. And it would tell you that even if we do see a U.S. dollar rally, you could still new highs in the gold price. You may also see gold break out in a major way in Australian dollars.

Above all, it shows you how valuable it is to own an asset that is not anyone else's liability. We are entering a global sovereign debt crisis because the world's large economies have been engaged in a multi-decade long competition to devalue their currencies. The cheaper your currency is relative to your trading partners, the cheaper your goods are and the higher your exports.

Overly the last fifty years, nearly every country in the world has engaged in some kind of currency manipulation to keep its currency cheap relative to the American dollar. That's because the American economy was the world's largest, and everyone wanted to sell into it.

America's economy is still big, of course. But a lot is changing, yet the currency manipulation has not caught up with the new economy reality. And Western Welfare states are still borrowing money as if emerging market creditors will be happy to fund fundamentally flawed fiscal policies for ever. Not likely. But tomorrow is another day. Until then...

Dan Denning
for The Daily Reckoning Australia

• Prices of Gold in the Top 10 World Currencies
• Gold, the Aussie Dollar, the Greenback and You
• Trouble In Tokyo
• Aussie Dollar is Crushing Long-time Rivals Like the Pound and the U.S. Dollar
• More Money in Cash Right Now Than Equity in U.S. Companies

Something more than meets the eye is going on here. The IMF sale was part of a plan to unload 403.3 tonnes of gold. It's halfway there, and will use the proceeds to fund itself and loans to the developing world (or perhaps Britain and America when they go broke). But what else is going on?

In the past, larges sales of gold - mostly by European central banks - swamped the gold price and kept it in check. The European CBs either felt like they had too much gold doing too little work on the balance sheet. Or, they were manipulating the price of gold down by increasing the supply to the market whenever the gold price began rendering its verdict on global fiscal and monetary policy.

India's central bank is now the proud owner of 557 tonnes of gold. That gives it the tenth largest gold holdings among central banks. But it probably isn't finished. Gold makes up just six percent of India's foreign exchange reserves. There's plenty of room for that to grow.

But don't forget China. China has $2.3 trillion in foreign exchange reserves. But 70% of those - or $1.6 trillion - are in U.S. dollars. It owns over just a 1,000 tonnes of gold. That makes up less than 2% of China's reserves and makes China the seventh largest holder of above ground gold. In fact the gold exchange traded fund (NYSE:GLD) owns more gold than China. France, Italy, the IMF, Germany, and the United States round out top five (from fifth to first).

What this tells you is that China could double (and then double again) its gold reserves and gold would still make up less than 10% of its total forex reserves. Compare that to 66% in Italy, 69% in Germany, 70% in France, and 77% in the U.S., according to official numbers. So what's the big deal?

There will always be a threat that European Central Banks release gold supply on to the market. In fact, European central banks just renewed a five-year agreement (including the IMF) to sell down a maximum of 400 tonnes of gold per year from their holdings. They've agreed to this to disgorge their gold in an orderly fashion.

But it would not surprise us to see the Europeans fail to sell the gold they're allowed to sell under the agreement. Our old desk mate in London, Adrian Ash (now with Bullion Vault) is at the London Bullion Market Association's annual meeting in Edinburgh. Word from UBS analyst John Reade, also at the meeting, is that European Central Bank official Paul Mercier reckons that official holders of gold will, "no longer be net sellers of gold."

As we predicted earlier this year, the European central banks would rather hoard their gold than sell it in a rising market. There may be a price at which they do sell it, in order to pay down sovereign debts. But psychologically, the fact that central banks want to own gold and not sell it is pretty important.

Also, it shows you how the balance of economic power in the world has shifted East. True, the European banks can still dump gold on to the market to drown the price. But between the ETFs, central bank buyers in India and China, and the average man on the street in Beijing, Mumbai, and elsewhere, there are more buyers of gold now than sellers.

And if we were right yesterday that the GFC is slowly morphing into a sovereign debt crisis, then the case for gold is that much stronger. This explains why gold futures were up by nearly 3% overnight and old yeller hit a new high at US$1,084.90.

The only worry? So many hedge fund managers and pundits are singing the same tune: long gold and short U.S. Treasuries. As we mentioned yesterday, the bond bubble could go on much longer than anyone expects. And when so many people agree on something, none of them are usually right. As a contrarian, you'd be worried about becoming a victim right about now.

But yes, in the long term, the end of the Super Cycle in fiat money results in the remonetisation of gold. That is what you're seeing now. And it's probably what you'll see for a few more years. It also ought to benefit other precious metals, and of course, precious metals shares.

Dan Denning
for The Daily Reckoning Australia

• IMF Deems Gold An Idle Asset
• Gold: The Ultimate Unlevered Hard Asset
• IMF Gold to be Used
• Unlike China, India is Not Willing to Learn from its Mistakes
• Buying Gold, Gossip & Russia’s Tu-160 Bombers

Much will be revealed this week in the Aussie market, although a lot will probably remain obscure too. Producer price data for the September quarter comes out from the Australian Bureau of Statistics. Inflation anyone? Maybe not in wages. But certainly in raw materials (energy).

And speaking of inflation, the Housing Industry Association will report new homes sales data for September later this week too. What do you reckon it will show? Our prediction: how prices in Australia are outrageous and getting more so with each passing month, as the banks double down on home lending.

You may even see a move in the Aussie gold price this week. It could come if the U.S. dollar pulls itself together for a bit of a rally, as we're expecting. But the other reason Aussie gold may go up is a small item on the front pages of today's Australian Financial Review. "Big Banks gear up to lend again," reports the AFR. Uh oh.

No one's been too terribly worried about consumer price inflation lately, mostly because it's been masked - until recently - by cheaper oil prices. Of course the biggest factor affecting consumer price inflation is the growth in bank credit. The RBA reports on that later this week. But bank lending is the main engine for new money creation in the economy...and new money creation is the main engine for inflation.

"The Big Four banks are keen to lend more aggressively to large businesses as the economy recovers and competition for assets intensifies, in a development that is likely to drive down corporate borrowing costs," Katja Buhrer writes. "The major banks are seeking to take advantage of surplus capital and improving corporate growth prospects."

Hang on! Surplus capital? Just last week we were under the impression that Aussie banks were having to import capital from foreign lenders in order to fuel the housing bubble. Now there's surplus capital? And now the banks are eager to loan it out and build up the asset side of the balance sheet again?

So much for deleveraging in the financial economy! This sounds like re-leveraging. It also sounds like exactly the sort of thing - a fresh new wave of bank lending into the real economy - that could trigger much larger inflation. This is the sort of thing the RBA is trying to prevent by raising rates. But if banks start expanding the asset to capital ratio again, watch out! You could see higher Aussie interest rates AND a higher Aussie gold price.

"West Africa beckons as Aussies go for gold," reports Barry Fitzgerald in today's Brisbane Times. This answers a basic investment question: which Aussie gold producers benefit most from a rising gold price and a strong Aussie dollar? ASX-listed firms with greenfield West African gold assets generally have their costs in U.S. dollars. That's a big advantage over domestic gold producers.

Dan Denning
for The Daily Reckoning Australia

• RBA Rate Cut Does Little to Unlock Credit Market
• Global Credit Shortage is Over According to European Central Bank
• Australian Recession in the Works? Ask the Sharemarket
• Foreign Investment in Australia, How Much is Too Much?
• Banks or BHP?

The 4-lane Sheik Zayed road stretching between Dubai and Abu Dhabi is, at best, a competition for speed; at worst it's a death trap. Among the UAE's claim to world's largest shopping mall, world's tallest building and world's longest metro built in "one go", is this highways claim: to one of the world's biggest automobile pile-ups.

On March 12, 2008, 25 cars traveling along the route burst into flames after piling into one another as a band of fog rolled in from the Gulf. Nearly 60 cars were in the accident altogether... 347 people were injured in the crash, 6 lost their lives.

"The crash happened because everyone was speeding despite the severe weather conditions," an Abu Dhabi traffic police officer said at the crash site, as reported by the Gulf News. "Drivers weren't leaving a safe distance between cars and this resulted in everyone hitting each other after the first crash."

A documentary short posted on YouTube capturing the 911 calls placed from motorists describes 'Foggy Tuesday' as a morning devoid of "human caution." The film also heralds the obvious bravery of the men who arrived from the Abu Dhabi fire, police and rescue crews to save those who'd become entangled in the brouhaha.

We will not hold you in suspense any longer...the metaphor suggested by this fantastic auto accident is a perfect fit for those studying the Dubai property bust. And like the writer of a Hollywood script, we cannot help by bring it to your attention.

Yesterday, on the recommendation of our new friend Moe, we traveled the same stretch of Sheik Zayed highway where the accident had taken place. Mohammad "Moe" Fathi Al Abrozani a Bahrainian-Qtari whose mother was an Iranian-American. Moe was born in Abu Dhabi, educated in California, lived briefly in New York and Chicago, then spent seven years in Germany. (His German is so fluent our German friends, Andre and Vereena, here in Dubai did not expect him to be Arabic when they first met him in person.)

Moe had returned to the Middle East to take part in the expansive boom attracting so much attention around the globe. He's now an executive with TwoFour54 Media, a firm set up by the government in Abu Dhabi to woo Western firms into establishing their Middle East operations in the new Media City in the UAE's capitol city. The rulers of Abu Dhabi had witnessed the efforts, successes and failures of their fellow emirate, Dubai, and have since vowed to create a modern media communications hub greater than anything now in existence.

"Why mess with visas, permits and expatriate contracts down in Dubai?" Moe asked us at dinner the other night, "when you can come to Abu Dhabi and get them all from the government free...?" One foggy morning in the year 2008, the reckless speculation that spurned much of the outrageous development projects in Dubai began to pile up on each other. Now the motionless construction sites lay in wait for assistance. In a scene familiar across the West, Abu Dhabi, the company line suggests, has "come to the rescue" of Dubai; with low cost loans; paper money and the sincerity of an assassin.

When we met up with Moe and Andre at Shakespeare's a brand-new bar in the all-new Souk Al Bahar, they were quietly puffing from sisha - the traditional water pipes bubbling with aromatic smoke. Our mission in the region was and is simple. We want to establish a presence on the ground from which we can monitor the developments and assess investment opportunities in Dubai, the UAE and across the Middle East unfiltered by the mainstream press. But here we were being asked to consider moving the infrastructure of our publishing business, our families, our lives, half way around the world to the desert. Bloomberg, CNN, Forbes are all moving and or expanding their operations in either Dubai or Abu Dhabi.

Why shouldn't we? Our friends in Abu Dhabi are apparently ready and willing to help.

Dubai and Abu Dhabi, the two leading Emirates of the UAE are relatively new to the global finance and trade... but they want you to know they have arrived in high style. This weekend, Formula One racing makes its debut in Abu Dhabi. The government had to pull workers from several of its five star seaside resort project to complete the track and facilities on time. Ferrari World, a massive theme park dedicated to the sport sits nearby. Yesterday, the Emirates Palace Hotel - the world's first seven-star hotel - Demi Moore, Hilary Swank, and last year's Oscar winner, Freida Pinto (Slumdog Millionaire) graced the opening ceremonies of the Middle East Film Festival. The Abu Dhabi sovereign wealth fund has famously leveraged their way into both of the leading football franchises in the world - FC Barcelona and Manchester United.

Still, our friend Peter Cooper recalls a time in his own family history when Dubai was nothing but a backwater of the British Empire, a port full of smugglers, nomads and thieves. His great uncle had been stationed here during World War II. At the time, the strife caused by the war left the ragtag bunch group of 7,000 residents on the edge of starvation.

Sheik Rashid, the father of modern Dubai, dredged the Creek in the 1950s establishing Dubai as a free trade port. At the time, too, the Creek dredging project was roundly criticized, as it should have been. The project cost nearly 3 times Dubai's annual GDP. But it also established Dubai as the trading center for goods coming into the Middle East. If you go down by the creek today there are Iranian Dhows - the Middle East's answer to the Chinese Junk - bringing rice, rugs and refrigerators back and forth across the Persian Gulf. Iran's ports are about a two-day drift away for these wooden ships. Kuwait and Iraq a day or two more. Bahrain, Qtar, Oman closer still. Without the fantastic success of that initial dredging project, we wouldn't be writing to you from the desert today.

"Dubai the hot spot..." has been a center of trade, smuggling and the rougher trades ever since. As the back jacket copy on a 1970s novel about gold smugglers in Dubai written by the French Connection author Robin Moore indicates: "Dubai, where adventurers play the world's most dangerous games...gold, sex, oil and war. Cold- blooded adventurers in a blistering Mideast empire where life is cheap and no price too high for pleasure." The novel is still banned here because the sheiks don't like the image it portrays.

The promise of riches, however, is part of the region's allure and what has attracted those expatriates who chosen to ride out the bust and continue to live here to this day.

The most recent gold rush, the boom in Dubai property, came on the heels of the terrorist attacks on September 11, 2001 and the same policy response that spawned a housing and consumption bubble across the United States, London and much of the West. Arabs flush with energy and trading capital brought much of that money home to the Middle East fearing a Western clamp down. At the same time, investors in dirham backed assets - the local currency which has enjoyed a US-dollar peg since November 1997 - benefited from the same era of low interest rates that soccer moms in Montgomery County, Maryland or gamblers in Las Vegas, Nevada did.

And like all booms, the property in Dubai witnessed its excess and its pathos. An article in this week's Asian edition of Time Magazine laments the manmade island project meant to mimic all the countries on the planet. "The World is one of many architectural fantasies in Dubai that now appear to be shimmering mirages. The emirate boasts the 818m Burj Dubai, the world's tallest skyscraper; a manmade island shaped like a giant palm; a ski slope in a shopping mall; an 18-hole golf course in the middle of the desert that will slurp down 3.8 million liters of water a day. But the dozens of giant cranes that once littered the skyline are beginning to migrate elsewhere. Dubai today has the feel of a futuristic, five star ghost town blasted by sandstorms."

"The fools!" we can hear readers of Time Asia chuckle with superiority. Everyone likes to kick a gambler when he's down.

But the story remains. On our way to Abu Dhabi yesterday we passed by the free zone surrounding the new deepwater global trading port at Jebel Ali. Business Bay near Jebel Ali is the home to many of the Bubble Era development projects, 30-story towers standing side-by-side, dark windowed and tenantless.

We suspect many of these nutty projects - like the City of Arabia, which had boasted an amusement park full of life size animatronic dinosaurs as its calling card during the boom - will never find the funding to finish. More sober projects that are or are nearing completion will likely take years to find tenants. And those "investors" who bet big and large on Dubai property in 2003-08 are no doubt already wishing they never had.

But the free zone near Jebel Ali also the site of Dubai's real potential; banking and trade. Corporate tax rates in are effectively zero. You name a multinational and Moe can point to their local subsidiary. The Dubai Mall, for example, is reported to need 10,000 shoppers a day to break even but now only sports around 7,000. Why do the world's most famous brand names all have shops open and spiffy already, we couldn't help but wonder. It has to be for those fine tax rates, we couldn't help but conclude.

Among other racy themes we heard this week, Dubai is supposed to now be the world capitol of the flesh trade. And the gold price hit an all- time high early in the week after we arrived sparked by rumors the GCC would back a unified currency with gold and provide oil traders an alternative pricing unit than the US dollar...

We suspect this fantastic wreck in the desert is only one scene in a long, exhilarating drama. We're not "long" Dubai in any real investment sense. Not now anyway. But, like most onlookers to the spectacle, we struggle to avert our eyes. The story promises more exciting car chases, more steamy sex scenes and political intrigue to come...and we'd be lying if we didn't admit we're suckers for a good story. And, who knows, we may open an office of our own there.

Regards,

Addison Wiggin
for The Daily Reckoning Australia

• Qatar Relies on Natural Gas Reserves While Dubai Leans on Trade and Finance
• Arab Wealth Pours Back into Dubai
• Is Dubai the Bubble It’s Made Out to be?
• Equity Shareholders Are Wiped Out As Financial Shares Plummet
• DMCC and their Precious Metals Vault

So instead of reviewing the week's events, I thought I'd tell you about a noteworthy phone conversation I had on Friday morning. "Australians are staking a lot on their understanding of what's really going on with gold. I want this conference to be Australia's premier gold bug conference, where investors and serious thinkers can talk about gold and hear from some of the best minds in the the world about it."

We then discussed what I think will be one of the most interesting and thought provoking conversations about gold you will hear this year. And it's being held November 2nd-5th at the Australian National University in Canberra.

Now if you don't think gold is money or aren't much interested in the subject at all, then you can probably take a pass on the rest of this week's letter. But for 160 people, I reckon the weekend could be incredibly energising. So let me tell you a bit more about it, and how you can guarantee your participation.

"Gold is not an investment category," says Daily Reckoning founder Bill Bonner.

"It is more like a religion or a political position. True believers stick with it through thick and thin. When gold goes up, they are insufferable. When it goes down, they are unrepentant."

If you're a fan of the yellow metal, you'll know exactly what Bill is talking about.

And, chances are, you're preparing to once again play the insufferable 'gold bore' at dinner parties.

Bullion has hit $1,000 an ounce again... and even though it dipped below that level late in the week...it sure seems pretty comfortable there...

"It's interesting that the price has hovered around this level for longer than it has in the past. It seems to suggest that people are more comfortable with this price than they have been," says CRU analyst Prem Chaphekar. "It wouldn't be a surprise if it went up and stayed up."

Looking at the financial press, you'd think this recession is over and recovery is underway.

But looking at the gold price - an option on financial chaos - you'd think the world is about to end—or that the financial markets are finally giving serious thought to gold's real role in the monetary system.

So what is really going on?

You'll know that we at the Reckoning understand that gold persists because it is no one else's liability. What's more, no monetary system lasts forever. This current global fiat currency system is, historically speaking, an impromptu experiment, at best; premeditated larceny at worst. It's already lasted longer than most marriages. The bust-up, contrary to what the newspapers say, has yet to happen. And when it comes, it threatens to be nasty and expensive.

How will the final act of this financial crisis play out?

What role will gold bullion play?

And which gold-related investments will thrive as the final curtain falls on the global monetary system as we know it?

I invite you today to participate in a unique event where you'll discover answers to these questions and more...

Some of the smartest 'metal-heads' on the planet will be in attendance. (And, extraordinarily, I've been asked to deliver a presentation as well, which I've agreed to.)

If you are as fascinated by gold as much as I think you are, you'll want to secure one of just 160 available places right now.

Because - and I really mean this - there has NEVER been a more crucial time for gold.

In an effort to return to the bubble era, central banks across the planet printing mind-boggling amounts of money. They will keep doing so until inflation rates go up. They make no effort to hide it. They have as much as warned the world: prepare to be robbed.

The gold market now anticipates this inflation.

We have told this story ourselves; we still believe it. But today, I caution you: there may be a plot twist.

The problem with inflation is that, as yet, there is none.

Consumer prices are falling in China, Europe and America. But, with Feds are pumping the money supply as hard as they can, how can this be the case?

The problem is all this printed money has yet to reach the real economy.

The US money supply figures that relate to actual cash in people's hands - M1, M2, and MZM - are shrinking, at 28%, 4.9% and 6.2% respectively. Why?

In short, the Feds' money goes into cool bank vaults and hot speculative trades.

When it tries to find its way to the consumer, it gets lost.

This happens because the transmission mechanism has broken down. We live in a bust economy, not a boom one. In a bust, consumers can't borrow. They have nothing to borrow against. Both their wages and their assets are going down. Who would lend to them under those conditions? Not a bank that almost went broke itself twelve months ago.

Even if consumers had access to credit, they wouldn't take it. Consumers too almost went broke a few months ago. Instead of saving money during the boom years, they spent it - or gambled with it. When the bust came in 2008, they realised they were ten years closer to retirement with little money saved. Now they have to make up for that lost decade by cutting spending and saving as much as they can.

In the absence of consumer demand, consumer prices do not rise.

That's why inflation has yet to rear its ruinous head.

But that's about to change...

There are bull markets everywhere right now.

But not all of them have integrity.

The bull market everyone knows about is in stocks. Since March, aside from the odd correction along the way, stock markets around the world have kept going up.

The ASX 200 and the FTSE are up over 40%. The Dow Jones is up 45%, the main European stock markets, France and Germany, are up 48% and 52%. Emerging markets are flying even higher: Egypt +91%; Peru + 117%; Kazakhstan 129%.

But why are stocks going up?

Simple: investors think world economic growth is back on track.

Problem is there is no proof. Not. A. Jot.

According to one UN trade 'think tank' "the current financial market rebound is not a "real recovery" and any world economic growth recorded in 2010 was unlikely to exceed 1.6 percent."

This is not a real recovery.

As I've said many times, you cannot correct the global imbalances of a leveraged boom with more leverage.

There is no real integrity to the massive stock market rallies that we're seeing.

So which of the bull markets are worth buying into? The ones that are better placed to preserve your money in an inflationary environment - think hard assets like metals, energy and agricultural commodities.

More specifically: think gold.

Gold has finally broken above the magic $1,000 an ounce level. That's a massive psychological level and one that traders have been battling over since it was last above there in March last year.

Whenever the gold price has approached $1,000, sellers have driven the price down.

They've overcome the buyers. But it was only a matter of time before there were fewer bears left to sell. The fact that gold has now made it above $1,000 suggests that the bears are being gradually worn down.

There's a lot of money that has been waiting on the sidelines to jump in if it broke the $1,000 barrier. That money could be ready to crash into the market just as soon as gold looks like it is holding the $1,000 level.

Simply put: it's an exciting time for gold investors. And I'd like you to join me in November to get some ideas on what you should be doing about it...and to gain a better understanding of the real forces at work in market right now.

If you're serious about gold, you'll want to secure yours right now.

You'll hear from a stellar line-up of speakers who are coming from all parts of the globe. You'll get four days of brilliant gold-related investment strategies and ideas you can't find anywhere else. Consider it a chance to listen to and rub elbows with some of the smartest gold analysts in the world.

The conference will start by tackling the obvious but critical questions:

Will gold push on from $1,000 an ounce? How high is it likely to go? And what are the smartest gold plays you can make?

But that's just the beginning. You'll also be provided with thought-provoking insights into how the global financial crisis will develop in 2010, including:

• What next for the global monetary system? The truth about the current stock rally... The 'perfect storm' in the currency markets... And the prospects for gold during a rapid and deliberate inflation of money supply...

• The Gold Standard: Out-of-date relic, or merely pushed aside for the time being?

• Hoarding in the East: Why the Chinese government is urging its people to load up on gold and silver.

• The mechanism of capital destruction: How falling interest rates over the last 20 years have siphoned away your wealth... and what to do about it now...

• Revealed: why COMEX warehouse gold holdings are expanding in the current climate. If open Comex interest were a country, it would be one of the world's top ten holders of gold. You'll learn why this is the case.

• Gold mining and exploration - the coming dominance of gold Failing currencies mean that gold and gold mining will be centre stage going forwards.

• The gold 'backwardation' phenomenon explained: what it means for the mining industry and your mining stocks

The answers to these questions, and many more, will affect your financial decisions for the next decade... not to mention your everyday life.

They are answers you simply won't get reading the Financial Review.

Why? Well, because the mainstream still doesn't get gold.

In fact, even with the gold price once again knocking around the $1,000 mark, the majority of mainstream fund managers aren't much interested. They say that weak jewellery demand (a symptom of the recession) makes the "fundamentals" of supply and demand look bad; and, most frequently, they say it makes no sense for gold to have a role as a currency in the modern financial world.

They miss the point...

Gold investment demand is up 46% on this time last year.

The fact is that right now the gold price has little to do with the demand for bangles and brooches across the world's shopping malls. Instead, it reflects gold's monetary role: whether you think it makes sense or not, gold is seen by a large number of people as having a monetary function.

Most currencies are being debased in one way or another.

Doesn't it make sense to hold one that can't be?

As Bill Bonner likes to say, gold is most useful in extreme monetary conditions - when "other money goes bad".

Bill isn't the only one with this view. Secure your place at The World Financial Crisis and the Vanishing Gold Basis and you'll hear from a sensational line-up of speakers and analysts who believe it's gold's time to shine in 2010:

• Prof Antal Fekete (Hungary), The Gold Standard Institute. Few people in the world have more knowledge of the inner workings of the gold market than Prof Fekete. He was appointed Assistant Professor at the Memorial University of Newfoundland in 1958, and since then has been a viting professor at Columbia University in the City of New York (1961), Trinity College, Dublin, Ireland (1964), Acadia University, Wolfville, Nova Scotia (1970), Princeton University, Princeton, New Jersey (1974). Since 2005 he has been Professor at Large of Intermountain Institute for Science and Applied Mathematics (IISAM), Missoula, Montana.

  Prof Fekete has developed the ideas of Austrian economics, in particular with respect to interest rates. He's an expert in the role of gold in the world monetary system and has followed the gold basis since the introduction of gold futures trading in the 1970s. Prof Fekete is a frequent contributor to the internet-based gold community and travels widely as a speaker.

• Philip Bruce (Australia), CEO, Hill End Gold. Managing Director of Hill End Gold Limited, Philip is a highly experienced international mining executive. Former Managing Director of Triako Resources Limited, General Manager of Plutonic Resources Limited, CEO of PT BHP Indonesia, and a Director of Buka Minerals Limited and Ausmelt Limited... Philip knows gold mining inside out and will pass on many potentially profitable secrets over the four days.

• Robert Lambourne (UK). Bob Lambourne is a veteran businessman, long-time gold investor and student of the markets and the international monetary system. His efforts to understand the structure of the bond market and long term interest rates led him to study in particular the link between gold and real interest rates.

• Darryl Robert Schoon (USA), www.drschoon.com. In the 1990s, Darryl began studying the Great Depression and realised his preconceptions about money and the economy were just that, preconceptions. After much time and research, he now has some insights to offer on what's taking place inside the global financial system.

• Bron Suchecki (Australia), Perth Mint. Born in Sydney in 1969, Bron was blissfully unaware of gold until 1994, when he joined the Perth Mint as an Administration Officer in their Sydney retail outlet. In 1998, he moved to Perth to work in the then fledgling Depository Division. He has held a number of roles since then in the treasury, risk, and governance areas of the Mint.When not hurtling through the Perth bush on his mountain bike, Bron spends his spare time sharing personal views on precious metals in his Gold Chat blog.

• Nathan Narusis (Canada), Bullion Management Group. Nathan Narusis, CFA, has been a gold advocate since he entered the investment industry in 1996 and is a long-time student of Prof Fekete's work. His particular interest in the Professor's work lies in its application to investment strategy during the transition to a new gold monetary system. Currently Nathan sells gold for Bullion Management Group, a Canadian-based global mutual-fund operator and bullion storage provider.
• Barry Dawes, B Sc F Aus IMM(CP) MSDIA. Barry Dawes is the Managing Director of Martin Place Securities Pty Ltd, a boutique investment company specialising in investment opportunities in small-cap resource and energy companies. Martin Place Securities (MPS) has raised A$650m in the past six years as underwriter, lead manager or lead adviser for ASX, NSX and AIM listings for resources and energy companies. MPS is well known for its support of successful growth companies in these sectors and for its views on the outlook for the resources commodity sector. Barry has had over 30 years experience in the resources sector and prior to establishing MPS had worked in senior executive roles of investment management with BT Australia, equities research for Bain Deutsche Bank and equities research and corporate finance for Macquarie Bank. Barry Dawes is also Director of ASX listed Uranium Exploration Australia Ltd, of Superior Coal Ltd, of several investment companies and of a number of unlisted public operating companies and has arranged development finance for dozens of listed resource companies.Well known and well respected for his outstanding knowledge and understanding of the resources sector Barry has helped MPS to be the company that leads the way for investing in Australian growth companies.Barry is a fellow of the Aus IMM and a master of SDIA

• Sandeep Jaitly (UK), mathematician and gold basis specialist. Sandeep Jaitly read Mathematics at Imperial College, London. On graduation, he began working in finance at Odey Asset Management in London. He is currently an analyst concentrating on global equities, with a bias towards India and China, at Soditic CBIP. Since encountering Prof Fekete's work, Sandeep has been concentrating on its application to practical investment.

• Philip Barton (Australia) , The Gold Standard Institute. A long-time watcher of the gold market, Philip is an Australian businessman and founder of The Gold Standard Institute.

In short, it's some of the world's greatest financial and gold market minds gathered in one place, both on the stage and in the crowd — sharing ideas and strategies you would have to spend thousands of dollars to learn about otherwise.

You'll get real ideas... real predictions... with a few actual investment recommendations thrown in for good measure.

If that sounds like something of interest, here's the deal...

As I said, the conference takes place over four days from Monday 2nd November to Thursday 5th November, 2009. You'll need to free up those dates.

It's in Canberra, so you'll need to arrange travel and accommodation.

There will be four one-hour sessions each day (10am-12 noon and 2pm-4pm) with tea/coffee and a nice lunch provided.

I've managed to secure places for Daily Reckoning readers at the same price as 2008: $790. That includes the seminars, networking opportunities, take-home materials plus refreshments and full lunch each day of the conference.

But I need to hear from you now.

The folks at the Gold Standard Institute want to keep this as intimate as possible. As such, only 160 places will be made available.

The interest level in this event is just as high as the 'Australia in the Red' debt summit we held earlier this year. The few remaining seats will fill up quickly. So please do not delay.

As Richard Russell says, a man should count his wealth neither in dollars nor in Euros....He should count it in ounces.

If you share this view, and would like to mix with like-minded 'gold bugs' and precious metal experts, you can reserve your place now.

Do so by contacting conference organiser Dr. Marcus Matthews, who is coordinating the event on behalf of the Gold Standard Institute. He can be reached with your expression of interest or intent to order at feketeaustralia@gmail.com.

See you in Canberra!

Regards,

Dan Denning

The Daily Reckoning Australia

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The burden of today's Daily Reckoning, then, is to remind these nattering nabobs of negativism that gold is not anyone else's debt. It is not anyone else's liability. It cannot be created with a few keystrokes. And for thousands of years, millions of people from all walks of life have been happy to use it as money because of its unique features (divisibility, durability, scarcity, difficulty in counterfeiting).

Gold is a commodity. But its price is not driven exclusively by the Indian jewellery market or investment demand. As a tangible commodity, gold has some of the aforementioned qualities that make it a fantastic medium of exchange.

And for people who trot out the canard that you can't buy a Big Mac with gold coins, what do you think goldsmith's notes were? They were receipts that indicated gold ownership and your ability to pay a debt. You could exchange goldsmith's notes as payment for goods and services because the paper claim was backed by a real asset. Goldsmith's notes were the precursor to bank notes. Same type of system, but with real money.

Is this all just some nostalgia for a financial system that no longer exists? Does gold have a real role to play in the future financial system? Of course it does! Gold is a threat to the fiat money peddlers from the warfare/welfare State because it exacts a heavy price for deficit spending and money creation. The expansion of credit or deficit spending is always possible in a fiat money system and thus placates voters with false prosperity borrowed from the future.

The rise in the gold price is telling us that markets are increasingly suspicious of the government-backed money and its ultimate affect on the real economy. Or, as guest essayist Greg Canavan says, " Gold is saying that the crisis is not over, that it is in fact getting worse. We are seeing Gresham's Law in action, as bad money pushes out the good. Gold is being swept off the market by millions of individuals who know that without fail governments always ruin the value of their paper money."

The only real - albeit shallow - criticism of the gold story is that it's primarily a U.S. dollar story. For Aussie investors, a collapsing greenback doesn't equate to a higher Aussie-dollar gold price. We would say, though, that this is a short-sighted appreciation of what gold is saying about the modern money system.

The modern money system is built on credit, debt, and government money backed by nothing. To believe that does not mean you'd covert all your assets to bullion, or all your shares to gold stocks. But it IS to believe that the architects of this system are criminals who effectively steal your wealth through inflation and control of the money supply.

If you have confidence in that system, you're a sucker. And if you don't hedge against its collapse, you're unprepared. After the last two years, is it so farfetched to believe that the foundations of financial capitalism - based on unsound money as they are - are weak by design and will fail in a world of increasing complexity and interconnectedness?

If you don't think it could happen, you haven't been living on Planet Earth. Either that or you're in a business where you want everyone to go back to doing what they were doing pre-Lehman collapse because it's good for your business. If that's the case, it's fine. But it's foolish to ignore 5,000 years of monetary history.

Yesterday we wrote about what happens when a complex network of trade and commerce begins to shrink as credit is withdrawn from the global system. Another side effect of the Lehman collapse is a bear market in trust. Trade, once free flowing and robust, becomes politicised. Trading partners begin to bicker.

Take Barack Obama's decision to slap a large import tariff on tyres made in China. It will probably just drive up the cost of cheap tires of middle-income Americans. But it makes America's unions happy, and Obama needs them to push through his health care agenda. China has responded with warnings about possible tariffs on U.S. poultry and auto parts exports.

It's probably not in neither country's economic interests to get in a trade war. But it reflects the ambiguity and hypocrisy of trade practices by both countries. There is no such thing as free trade. China subsidises production with cheap labour and produces at below production cost for some goods and services. America is happy to lose those manufacturing jobs if American shoppers get lower prices and have access to credit to make up for falling real wages.

But that whole strange relationship that has driven global growth for the last ten years has reached its use-by date. We're not sure what's going to replace it. But both parties are guilty of being currency manipulators and subsidisers. Formerly, their interests were aligned. Now, it's not so clear.

And finally a note from JL in Queensland about networks, nodes, and certain monetary commodities.

"Just my two cents worth. The difference between a node in a computer network vs. a node in the financial/economic system is that the node in the network can be self sustaining (provided that it's plugged in to electricity), whereas, most of the nodes in the financial/economic system are NOT self sustaining.

"The ONLY financial/economic node that would be self-sustaining and immune from ALL shocks (i.e. Exhibit the financial equivalent of homeostasis) is one that is 100% backed by a financial asset which is no one's liability. I'll leave you to guess what THAT financial asset may be.

Dan Denning
for The Daily Reckoning Australia

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There's a time to buy gold; and there's a time to sell it. Which time is it?

The question rose with the gold price itself. It needs an answer.

The price of gold today, adjusted for inflation, is about where it was 26 years ago. After peaking out at nearly $2,000 (again, in 2009 dollars), in 1980, the price fell to the $1,000 level (in today's money) in 1983.

We were gold bulls back then. And we were idiots. It was the end of the gold bull cycle, not the beginning. The gold price fell for the next 17 years.

Some people draw the wrong lesson from this experience - that gold is always a bad place for your money.

Today's Financial Times:

"In spite of low interest rates, that make owning gold cheap, the opportunity cost of owning it is still unattractive in the long run. Smarter ways to anticipate inflation include bricks and mortar, mineral rights or even equities, all with vastly superior historical returns."

But we would prefer to look at it a little differently. Gold is not always a bad place for your money; and we are not always idiotic.

What were the returns from stocks over the last 10 years? The Dow has lost about 15% in nominal terms. In real, inflation adjusted terms, it is probably down nearly 40%. Meanwhile, gold has nearly quadrupled.

Was it smart to buy stocks or bricks and mortar during the '70s? Not at all. Stocks bounced around, but they were no higher at the end of the decade than they were at its beginning. Meanwhile, high inflation rates took a big toll on real values. Stock market investors lost 75% of their money - maybe more. As for those who bought bricks and mortar, they lost too - but it's hard to say how much.

And meanwhile, gold went from $41 an ounce to over $800.

Which would you prefer?

As you can see, dear reader, timing is everything. There are times to be long gold. And there are times not to be.

For thousands of years gold has been the money of last resort. It is the money you can trust. They can't make more of it. They can't counterfeit it. They can't put extra zeros on it and pretend it is worth more.

But it is most useful when other money goes bad. Inflation rates in the United States during the '70s went over 10%. Clearly, gold was a better thing to own to protect your wealth than dollars. You could have bought an ounce of it (outside the United States...it was still illegal for private citizens to hold gold in America) for, say, $45 in the early '70s. By 1982, you could have used that single ounce of gold to buy up the entire list of Dow stocks. Gold and the Dow traded at a ratio of only one-to-one that year. Then, if you'd held onto those stocks, you could have sold them in 2006 for $14,000.

Not bad, huh? Two transactions. Forty-five bucks to $14,000. Invest $100,000 and you would have ended up with $30 million.

But let's get back to where we are now. Still in a bull market in gold...or at the end of one? Are we idiots for holding it now...or idiots for not buying more?

Bill Bonner
for The Daily Reckoning Australia

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Last August Bill Bonner wrote in the Daily Reckoning:

"On Friday, the meltdown of gold and commodities continued. Oil slipped $1.35. The commodities index, the CRB, fell below 500. The dollar rose to $1.46 per euro. The pound is losing value faster than at any time in 37 years. And get this - gold dropped $21 to close below $800, at $792."

In all honesty he could have been describing any day between then and now. So has gold, commodities and the markets travelled since then?

Well, gold is now at USD$856 an ounce. That's an 8% rise in the price of gold since August 19th. And in Aussie dollar terms it has done even better, rising from $920 an ounce to over $1,300 today. That's a rise of over 40%.

The stock markets, as you are no doubt aware, have not performed quite as well. The S&P/ASX200 is now down about 30% during the same timeframe.

And if you look at the chart below you can see he CRB futures index has more than halved...

While the pound sterling has almost collapsed and the Euro is significantly weaker against the US dollar. Pound sterling has been hurt especially hard due to the hopeless state of its economy and the flight from any risky looking currencies into the US dollar and the Japanese Yen.

It is hard to know when the current downturn in the market will end. Global indices are within touching distance of the November lows. The key events will be whether companies release earnings results that are better or worse than the market expects. And how much further damage will be done to the global banking sector.

As we mentioned during the week, Australian banks are not as safe and sound as we are being led to believe. So don't be surprised to see some nasty stories during their earnings announcements.

The Most Important Money Morning Story This Week: There has been plenty of talk for the last year about the stability of Australian banks. Overseas, banking collapses have been a monthly occurrence. So far, our banks have been lucky. However, a quick look at the balance sheets of Australian banks reveals a picture that is not quite as idyllic as the banking executives, regulators and government are making out. Is it time to panic and pull out all your cash? Or is that just an over-reaction that will make things worse? This week we looked at the banking sector to see just how close to the edge it is. Click here for more...

Monday: This is probably one of the worst charts that you can find on the global commodities markets. It has been declining since early July like many other energy-related products. First it fell sharply during July, then at a slower pace but following a clear and regular bearish trend. Click here for more...

Tuesday: You only have to look at the fear in the politicians eyes at the prospect of a company going belly-up or laying off staff. Last Friday's The Age newspaper ran a story with Julia Gillard pleading with employers not to get rid of "skilled staff." We're not sure if she means all the unskilled staff can get stuffed or not. Click here for more...

Wednesday: Now the immediate targets for the price action are the lows hit in November, first at 3,353 points which is the lowest closing price of the year, and then 3,217 points that is the lowest during intraday session. Respectively those levels are 3.53% and 7.45% away from the opening price this morning at 3,476 points. Click here for more...

Thursday: So with such a small gap between assets and liabilities how can the banks lend more money? They can't. In fact, when you consider the falling asset values in the property sector, many of the loans that the bank already has on its books are likely to be in negative equity if the underlying asset had to be sold. Click here for more...

Friday: With six and a half billion people in the world, the demand for energy has never been greater. This demand - especially from China and India - is the hidden engine behind Australia's economy. One Perth based company is perfectly poised to capitalize on the voracious demand for energy. The "energy metal" they mine is critical for sustained renewable energy. Click here for more...

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• The Collapse of Gold and Commodities
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• Prices of Gold in the Top 10 World Currencies

This is very good news. It means you will have a chance to buy gold at lower prices before it goes up higher later this year. Much higher, in fact, according to the 2009 forecast made by Diggers and Drillers editor Al Robinson. Look for Al's special gold forecast issue later today in your in box.

Not everyone agrees that gold is going higher, mind you. "The deflationary scenario is still incredibly intact, even though the government has thrown trillions of dollars at it," one Leonard Kaplan told Bloomberg. Kaplan is the president of Prospector Asset Management in Evanston, Illinois. "Gold has a long ways to go down," he added.

Daloob. Seriously daloob. Daloob is a word that means whatever you'd like.

But what does it mean to say that the deflationary scenario is "incredibly" intact? Does this mean that the scenario is "not credible?" Or does it mean the scenario explains and predicts what's ahead? The statement is incredibly opaque.

Either way, the deflationary scenario that Kaplan refers to is worth a few lines. The scenario is one where commodity and stock prices fall as the credit depression gets its hands around the neck of the economy and squeezes. Under that scenario, gold would fall. And under that scenario, the cost of paying off debts would rise massively as cash gained value. Old debts would become economy-killing burdens for households, businesses, and, dare we say it, governments too.

In fact, the real economic consequences from this kind deflation are so destructive that we would bet our left big toe that the Federal Reserve is going to do everything in its power (and perhaps some things not in its power) to prevent it. It's not a risky bet. The Fed is firmly moving down the path to monetary weirdness. We are well and truly down the rabbit hole in 2009.

In the meantime, falling commodities prices are telling you that the forecast for the economy in 2009 is not good. Gold, oil, metals, and grains all moved down yesterday while the U.S. dollar moved up. It will be worth watching if commodity shares follow commodity prices down. Commodity shares, as we know all too well, were decimated in 2008.

But based on some analysis from our old friend Dr. Marc Faber in his latest Gloom, Boom, Doom report, commodities as an asset class are about the only stocks actually in a similar position to where stocks found themselves in 1987. That is, while the entire market was savaged last year, commodities may be the only sector worth taking a punt on in 2009, based on Dr. Faber's analysis of previous bull and bear cycles in various asset classes.

What cycles? Faber says that the length of the cycle immediately preceding a correction or crash has a lot to do with what you can expect next. "If an up-cycle was brief," he writes, "the down-cycle is also likely to be brief. If the up-cycle lasted a very long time and was accompanied by huge excesses, the downturn from the peak of such a cycle is likely to be lengthy-as was the case for gold after 1980, and for the Nikkei and the Japanese economy post-1990. Similarly, if a down-cycle lasted a long time (20-30 years), the up-cycle is also likely to last for an extended period of time."

The bull market in commodities began in 1999 and was preceded by an infamous 20-year bear market. Equities, on the other hand, enjoyed an 18-year bull market from 1982 to 2000, but have been in a bear market since then (with a robust, credit-induced bear market rally from 2003 to 2007).

By that logic, the down-cycle in equities should be a lot longer because the up-cycle preceding it lasted so long. On the other hand, the down-cycle in commodities should be shorter because it was preceded by a much shorter up-cycle and a very long down-cycle. Stocks down. Commodities up. Got it?

But is it right? The reasoning makes sense, especially if you compare it with the historic numbers Dr. Faber presents (which we will not replicate here for the sake of space). But there is a simple objection that must be dealt with. What if the commodities cycle is itself a function of an even larger cycle, namely the credit cycle?

If you argue that the bull market in credit began in 1973 and a world of floating exchange rates and competitive currency devaluations (or 1913 when the Federal Reserve was founded, or 1694 if we want to go all the way back to the Bank of England again), then the direction of asset prices would be dictated by whether credit was in an up-cycle or down-cycle.

It's pretty safe to say that credit appears to be in a down-cycle, starting in August of 2007. What's more, it was preceded by a massive "up-cycle" in which the supply of money and credit grew globally. That "up-cycle" drove up all assets in all countries simultaneously. We will find out this year if another "up-cycle" can be artificially by Obama and Bernanke.

But if we are now in the "down-cycle" for credit-the Credit Depression-then how can commodities possibly outperform equities and rally while stocks fall?

Well, the only possible way for commodities to go up in price during a credit depression when global economic activity shrinks...is if we experience massive, central-bank backed money printing and the inflation that ensues. Not that this is an outcome we find desirable. But it's clear as day from the Fed's actions and words that it will produce inflation at any cost to prevent being crushed by debt and deflation. For all its real wealth destruction, the Fed appears to prefer hyperinflation to credit depression.

And don't worry that the Fed is out of interest rate bullets in its pursuit of reinflating the credit bubble. There are other weapons. It will mail checks directly to people or buy assets directly on stock markets. You can expect the debt-to-GDP ratio in the United States to approach and exceed 100% before Obama's first term is over. You can also expect to see more direct government asset purchases and intervention in markets.

How can we be so sure that we're on the verge of a brave new world of government-managed markets and economies? It's simple. Central banks and national governments the world over face an existential crisis-the loss of public confidence in paper money. Action must be taken to restore confidence or real economic activity (lending, borrowing, spending, and investing) will grind to a halt.

Perversely, the monetary authorities will destroy public confidence completely through massive inflation. It will also unleash a great deal of social and political disorder. But the authorities appear to prefer this chaotic result (which they can then police and manage with new rules) to another Great Depression characterised by too little money and price deflation. The excesses of the credit bubble will not be liquidated. Instead, they will be perpetuated and subsidised. The resulting economic and social disorder will be met with more State activity in your personal and economic life.

All of this is a long way of explaining why the current lull in the gold price is a great buying opportunity. You know the tactics and strategy of the central bankers. And you have a pretty good idea that any rally in the stock market is a fake out rally, not sustainable based on the economic forecast OR previous cycles (where markets are coming off 20-years of rising prices). What you don't know is if gold prices are going to fall further before eventually heading higher.

To find the answer to that, you can consult 1974. At that time, stock markets looked oversold and gold had begun to move and was on the verge of a correction. "If someone really felt that the similarities between the 1974 low and the current market conditions are overwhelming," Dr. Faber adds, "he should consider purchasing gold and oil rather than U.S. equities (and also shorting U.S. bonds)...Gold corrected between the end of 1974 and the summer of 1976 by 40%, while the stock market surged. But from its August 1976 low, the gold price increased eight-fold."

"If we are really in an environment such as we were in at the 1974 lows (and I have serious reservations about this assumption), then we should expect some further weakness in gold prices when equities rebound. Such weakness would then provide an excellent buying opportunity."

"However, keep in mind that even if you bought gold at its 1974 high at US$196 per ounce, by 1980 you would still have quadrupled your money, which was far better than the return the stock market provided. So even if you endorse the view that we are in a similar situation as in 1974, I would be reluctant to stay out of the gold market entirely in the hope of buying it at lower prices."

"Another reason why gold may not sell off as much as it did between 1974 and 1976 is that governments' interventions with monetary and fiscal measures around the world are unprecedented. ..Therefore, based on my time/cycle analysis above, commodities and commodity-related shares would also seem to be in a far more favourable position to resume their up-trend than broad U.S. equity indices, which (a sharp rebound aside) are unlikely to enter a sustained longer-term bull market."

If Faber is right, what will it mean for Australia's broad equity indices? Well, you'd expect them to go higher as commodity prices react to the increase in global money supply. It certainly seems like most of the deleveraging is done in commodity stocks, meaning it would take something monstrous for mining shares to retest the 2003 lows.

Monsters are real though, so we can't completely discount the possibility that 2009 will be worse for resource shares than 2008. However, one needn't be a raging bull on Aussie resource stocks to see that the case for gold looks good. It's distressing that gold looks so good because the outlook for the economy is so bad. More on that tomorrow.

Dan Denning
for The Daily Reckoning Australia

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Well, gold has meant 'wealth' for ages. Before the economic revolution in the 18th Century, the two ideas were inseparable. If you wanted wheat you went and found some wheat. If you wanted wealth you went and found some gold.

This was before economists began to toss around other ideas of wealth. The new ideas varied in quality. Adam Smith said a man's real wealth came from accumulating capital and investing it. Karl Marx said capitalist wealth only ever came at the expense of workers. Craig James said shares always go up, so buy them and you'll be wealthy.

Some ideas are better than others. But before Smith's idea, gold held sway as wealth. Everyone agreed on this. Even Isaac Newton was a part-time alchemist. Between inventing calculus and gravity, he'd pop out to the back shed to whip up a batch of gold.

That's the funny thing about alchemy though. What if you actually could make gold from other metals? Gold would be worth about the same as those other metals. Basically worthless. It wouldn't be rare any more. It wouldn't be precious.

Yet today we have an economic system founded on this fallacy. Paper money is 'wealth' backed by the government. The government employs alchemists like Glenn Stevens and Ben Bernanke to create more money. And that means the whole stock of money is worth less.

Meanwhile, no-one's printing gold yet. We've tried every combination and permutation of every ingredient in our cupboard. None of it makes gold, although with a hybrid of vegemite and honey we think we've invented a grand new condiment. No new gold supply though.

Meanwhile, Bloomberg says South African gold production dropped 10% last year. Energy production over there is unreliable. And when it comes down to it, the lack of new gold supply makes it a better wealth-holder than cash. We'd take scarcity over abundance any day. Gold is scarce. Fiat money is abundant.

That'll become very obvious soon. The failure of Fannie Mae and Freddie Mac is pushing Bernanke and the US Fed closer to a wholesale dollar-printing scenario. But you might not have to wait that long for gold to react.

Demand from the Indian jewellery market hits its stride around this time of year. Or, at least, that's been the case every year for the last 6 years. Since 2002 gold investors have gotten a 10% Christmas present. Ten percent, on average.

Deck the halls with bullion. But for goodness sake, do it in September.

Last year the September-December surge was 24%. Following that Indian jewelers and worried investors helped take gold to its highest peak ever. The fundamentals of the gold market haven't changed much in a year. And the price is where we left it at the end of last year, US$800.

The gold companies, however, are a completely different story.

You'd expect big gold producers to track with the gold price. They have, sort of. But in the last month they've gone off the rails. With the exception of Newcrest, most of Australia's larger gold producers have lost two years of share price gains. They're trading at 2006 prices. Back then gold was US$600.

A lot of commodities are cheap now (like our favourite metal for the energy boom). But gold producers have taken the most serious of whackings. They've been the scape-goats and whipping-boys for commodity bears.

If you go further down in the gold food chain, things are even cheaper. Smaller gold producers are about as fashionable as a pink mohawk at the Melbourne Cup. Take our favourite Diggers and Drillers gold pick. It's on sale at 2005 levels. That price implies something even more dire than a US$600 gold price. There's nothing wrong with the company. It's selling lots of gold. But it's at a huge discount.

There's a point for discussion. When the market for gold equities turns around, what'll lead it up? Chronically oversold juniors? Or producers with more leverage to gold itself?

We don't know to be honest. We probably lean towards producers. To ride the gold express you'll need a ticket. To benefit from a rising gold price, you need some gold. Some explorers 'might' have gold. But a lot of them only have patches of spinifex-ridden desert. And even if there's gold in the ground, it might not be mine-worthy.

Considering that this sell-off hasn't been completely rational, it's difficult to tell exactly when it'll turn around. You can't predict what a crazy man will do next. He might just keep acting crazy. But we do know that these things turn around eventually. Nothing's as cyclical as the commodities sector. And gold firms have taken a bigger haircut than most.

Al Robinson
for The Daily Reckoning Australia

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