The G-20 finance ministers wrapped up their meeting in London and agreed to attack the bonuses of bankers. This probably feels good. But it doesn't do much to address any of the problems that led to the whole Global Financial Crisis.

One meaningful result of the meeting was the agreement to boost bank capital "once recovery is assured." Specifically, the G-20 finance gurus say something needs to be done about the "quality, consistency, and transparency" of bank capital!

Can we get an Amen brother?

But what do the gurus say should be done? They want to introduce a "leverage ratio." That would limit the size of bank assets relative to equity capital. In other words, banks wouldn't be able to borrow up and inflate the asset side of the balance sheet to dangerous levels. Dangerous levels are where losses on assets wipe out equity capital.

That would be a welcome reform. But we think there's a flaw in the G-20 plan. The flaw is that they want to wait to introduce this reform until "recovery is assured." Yet the other big item of agreement from the meeting-that it's too soon to withdraw government stimulus spending-nearly assures that the recovery will be much delayed.

Government stimulus plans keep alive the illusion that everything is normal. The whole array of stimuli, loan guarantees, and credit facilities perpetuates the zombie credit economy. And this, of course, prevents further write downs in bank collateral that would threaten capital adequacy levels.

You see...it's all a very cleverly worded way of trying to deny that there are any more bad investments to be written off. And in the meantime, spending other people's money is a lot of fun. It's no surprise there's government agreement to keeping borrowing and spending.

For investors, it means gold is going to have a good solid run at US$1,000. It's in the neighbourhood already. But in the lead up to the G-20 leader meeting in Pittsburgh later this month, we wouldn't be surprised to see gold price in a lot more fiat money creation.

This is not quite straightforward for Aussie investors. The Aussie dollar is at a one-year high versus the greenback. Normally, when the Aussie moves against the greenback, the Aussie gold price itself stagnates, even while the US dollar gold price rises.

However, as we noted in an update last week to Diggers and Drillers readers, the Aussie gold price has actually moved up more in percentage terms than the U.S. dollar gold price in the last 30 days. That's unusual, given the relative strength of the Aussie currency. So what does it tell you? And what should you do?

It tells us that gold is gradually picking up speed against all paper currencies. Remember, gold is in this fight for the long haul. It will never be hauled around in wheel barrows to pay for loaves of bread. The strength of paper money lies in the confidence people have in it. And that only lasts as long as politicians manage to preserve that confidence with prudent policies.

There's not much prudence going around lately. We think that explains the recent strength of precious metals. Institutional investors are starting to hedge against both paper money and stock market indexes that have raced well ahead of realistic earnings for this year and next. This is good for gold.

What's even better for Aussie gold investors is that Australia is set to become the world's second largest gold producer, according to Bloomberg. Aussie gold output rose 4% in the June quarter to 57 metric tons, according to Surbiton Associates here in Melbourne. The biggest producing mine was the Super Pit in Kalgoorlie, run by Newmont and Barrick. Newcrest's Telfer mine came in second.

Surbiton reckons that with Newmont's Boddington mine entering into production this quarter, the numbers will grow again. This'll put Australia second behind China in global gold production. For punters, though, we'd reckon that aside from owning the big boys (or trading their chart patterns), the biggest stock market gains will come from the junior producers who can increase production in the next year without blowing out costs.

More on gold and why it's such a stubbornly attractive asset class tomorrow.

Dan Denning
for The Daily Reckoning Australia

• AUD Price of Gold a Measure of Gold’s Strength Against Other Currencies
• Gold, the Aussie Dollar, the Greenback and You
• The Big Question: What is the Aussie Gold Price Doing?
• The Aussie Dollar as a Measure of Global Risk Appetite
• India Beats China to Walk Away With 200 Tonnes of IMF Gold

Friday, the Dow dropped 76 points. It's probably going down soon...but maybe not yet. The Dow would have to rise to about 10,350 to equal the '29 bounce. And heck, it's not September yet. September is traditionally the worst month for investors...followed by October, November, December, January, February, March, April, May, June, July and August.

But what's this? The morning news: Chinese stocks suffered their worst day since November - with the Shanghai index down 6%.

The rally is probably not over; still we wouldn't want to be long when the market opens in New York this morning. [Ed. Note: By the time the US edition of the DR came out, the Dow had lost close to 200 points.]

Many analysts regard everything beyond the price data as noise. You never know whose ideas or whose explanation or whose predictions are correct, they say. All you really know for sure is the price.

According to the Efficient Market Hypothesis, the price has in it all the information, theories and delusions of all the players in the world. By this reasoning, the price information is 'perfect.' No one can know more about what a stock should sell for.

Many analysts think they can watch the patterns of price movements and find some clues at to what they will do next. They see 'heads and shoulders,' ascending triangles and descending tops...and think they mean something. For us, here at The Daily Reckoning, price movements tell us something, but only in their extreme form...and only because we have an intuition about the way nature works.

When we see a price that has suddenly shot up, for example, we expect that it will suddenly shoot down sometime in the future. When we see a series of price increases over a long period of time, on the other hand, we expect to see a series of price declines over a long period of time, too. If we look closely, we find that the price at the end of the long incline is exceptionally high...and the price at the end of the long decline is exceptionally low. We believe - intuitively and logically - that exceptional things don't remain exceptional for very long. That's why they are exceptional. Broadly, when prices are exceptionally high they will fall - to the point where they are exceptionally low, and vice versa.

Beyond that, we draw little nourishment from the price numbers. They don't tell us why things are happening. And while we recognize that it is impossible ever to really know why anything happens (the number of butterflies possibly flapping their wings in China is beyond our comprehension), we are nevertheless heirs to the old story-telling tradition of our deathward marching tribe. We want to know why things happen the way they do...we want heroes and villains...we want winners and losers...we want a plausible story that explains what is going on.

Bill Bonner
for The Daily Reckoning Australia

• The Price of Gold Has Not Retreated Permamently
• Inflation Protection at 1%
• How to Setup a Stop Loss for Your Trade
• In a Bear Market Most Stocks Go Down, So What Do You Do?
• The Best Time to Invest in the Market in 5 Years

Dear Dan,

P.S. If you're reading this, you ARE the resistance.

• Zombie Money and the Abolition of Cash
• Zombies at the Fed and the Treasury Department Try to Gnaw on Survivors’ Savings
• Here Comes More Snow!
• Entering into a Culture
• Government Pretending Debt-fueled Spending is the Same as Growth

Head-Smashed-In Buffalo Jump bears witness to a custom practiced by the native people of the plains for nearly 6,000 years. The native people were hunter-gatherers, so they understood both topography and animal behavior. And the native people killed large numbers of bison by chasing them over a cliff.

The bison used to graze on the plateaus adjacent to a deep river valley. The early human inhabitants would sneak up on the bison. Then they'd scare them with loud screams and burning torches. The bison would spook, run over the edge of a sandstone cliff and fall to their deaths on the rocks below. Then the natives would carve up the carcasses and leave the remains to the vultures and other scavengers.

People don't herd buffalo over cliffs anymore. Smashing in the heads of large herbivores - by luring them into a deathtrap - has gone out of fashion. But still, there is something similar in our modern time. It's called investing on Wall Street. Or so it seems.

Can you believe what is going on in the markets? Pardon me, but the markets are making almost no sense.

The future of the U.S. dollar looks terrible, yet the dollar is rising at a record-setting pace. And depletion is causing oil output in some areas to...well, fall off a cliff, if I may use that phrase. Energy and commodity stocks are tumbling like buffalo in the olden days of Alberta.

Let's start with the U.S. dollar. It's strengthening on world markets, but why? Is there some sort of good news about the U.S. economy we've missed? Is the U.S. tax code suddenly more capital friendly? Are national levels of wages and household incomes rising? Is the labor force suddenly more focused on producing goods that the world wants to buy by the boatload? Are government expenditures suddenly under control? How about none of the above? Really, where's the good news?

Despite the lack of good news, for the past two months, the dollar has been strengthening. The euro, in turn, has been weakening as Germany and France have slid into recession. Pretty much in tandem with the rising dollar, the prices for oil and natural gas have been falling. And prices for precious metals have also been declining. It's devastating the stocks in the Outstanding Investments portfolio.

Meanwhile, the U.S. banking system is badly hobbled. Back in January, in an Outstanding Investments weekly update, I predicted, "Three major banks will fail in 2008." Now here we are in the ninth month of the year, we've bagged a good deal more than three banks and the list is getting longer. (Last week, an acquaintance who works at a government agency described Citigroup to me as a "dead bank walking.")

Heck, the U.S. government just seized Fannie Mae and Freddie Mac. Don't these firms count as major banks, what with their $5 trillion and more of liabilities? They're both too big to fail, yet too big to bail. Really, does anyone have a spare $5 trillion lying around?

It used to be that the job of the Federal Reserve was, as former Chairman William McChesney Martin Jr. told it, "to take away the punch bowl just as the party gets going." Now it seems like the Fed is laying a direct pipeline to the distillery to keep everyone loaded. And in the process of taking over Fannie and Freddie, the U.S. government is socializing the financial side of the national housing market. The cynical view is that the federal government will loan you the money to buy an overpriced house and your local government will tax you for the privilege of living there. But where is the money coming from?

And what's going on with the price of oil? The other day, someone sent me an e-mail asking about the "plunge in oil prices." Plunge? Not quite. If you want to see a plunge, go to Head-Smashed-In Buffalo Jump. But oil has not plunged. Or at least it depends on your time frame.

This time last year - September 2007 - a barrel of oil cost about $80, and rising. I remember being in Houston in October 2007 - sitting about 10 feet from T. Boone Pickens and his wife - when oil crossed the $90 mark for the first time. Pickens commented, "We'll see $100 oil before we ever see $80 again."

T. Boone Pickens was right. Today, a barrel of oil is trading for about $107, or about a 33% increase year over year. That's no plunge.

OK, I know what people are talking about. Back in the spring and summer, oil ran up in price. Oil crossed $100 early this year and kept rising. By July of this year, oil traded for over $147 per barrel. At the time, I said that oil was "rising too far, too fast." I said that a lot of things in this world stop working when oil gets to about $130 per barrel. And I also said - on Fox Business News one early morning in June - "Oil OUGHT to pull back to around $100-110 per barrel." In the past two months, the price of oil has fallen by $40 or so.

That is, oil is down close to 30% from its recent high. But that's after more than doubling in the past year. So the recent price retreat is not a plunge. It's just a correction within a long trend of rising prices for energy.

Meanwhile, almost all of the world's largest oil fields were discovered over 30 years ago and have been lifting crude oil for 30, 40 or more years. So crude oil output from many of the world's oil fields is either flat (such as in Saudi Arabia) or falling (such as in Mexico).

Even Russian oil output is dropping this year. No less an authority than the head of Gazprom recently stated that oil should sell for $250 or more per barrel.

Closer to home, let's take a quick look at Mexico. Crude output from Mexico's Cantarell oil field - the third largest in the world - is falling at its fastest pace in 12 years. For the past two decades, Petroleos Mexicanos (Pemex) has badly underinvested in field upgrades and new exploration. So Cantarell oil output has fallen 34% within the past year.

Indeed, Mexico may cease to be an oil exporter as early as 2010 and, in all likelihood, no later than 2012. In all candor, even the "lack of investment" argument holds a large element of spin. It may well be that no amount of new investment can reverse Mexico's oil output decline.

Along these lines, I surely do not envy the next U.S. president. One of these days, the morning National Intelligence Brief will begin, "Mr. President, we have some really bad news about Mexico's oil exports to the U.S. Pemex told us that within the next two months, it just can't deliver the oil that we're expecting. And none of the other oil suppliers in the world can begin to make up the difference."

Yet in the face of all this, the market is currently selling off oil and other energy players. The market is selling off oil field service companies, infrastructure companies, precious metals companies and even basic metals.

So how do we deal with this? I hate to see what's happening to the Outstanding Investments portfolio. It's painful to watch such great companies decline in value. But I also have to keep my eyes on the future.

And what does the future hold? The dollar will weaken, what with all the new credit being created to bail out banks, and probably the automakers, and everybody else with a hat in their hand, it seems. And the energy and resource plays are going to stage a comeback. Of that I am convinced.

For now, just be careful when you walk next to any cliffs. Remember what happened with those buffalo out in Alberta.

Until we meet again...

Byron W. King
for The Daily Reckoning Australia

• We Are Facing a Global Oil Crunch
• Buy Oil Stocks… No Matter What
• Making Sense of Today’s Financial News
• Eurozone Drops GDP Bombs
• Peak Oil: Supply Data Doesn’t Lie

"More importantly, you're wrong about Diocletian. Not about his economic policies, but about the Piazza di Navona. It was not Diocletian who built a stadium there; it was Domitian. Big difference."

Our reader is wrong and right, in that order. That is, he is wrong about emerging markets and right about the Piazza di Navona. As to the latter, we were misinformed...and realized it when we were having a cup of café latte out in the square and looked over and saw the "Ristorante Domiziano" on the opposite side. Why would they name a restaurant after Domitian in Diocletian's square, we wondered. Turned out, it was Domitian's square, not Diocletian's.

About Domitian, we knew nothing. So we looked him up. (More below...)

As to emerging markets, our Dear Reader has noticed that they have taken a beating. Shanghai was in a bubble - as we pointed out a year ago; it is down now 50%. Vietnam is down 53%. Many others have been hit hard too - although, the Latin American market has held up well.

Emerging markets are among the many things we know little about. But that doesn't stop us from having opinions. And our opinion is that the world is turning. That will come as no shock to you, Dear Reader. You get up in the morning and see the sun rise. In the evening you see it go down. You took science classes. You know how it works. The planet spins on its axis.

You've read the poets too. "Gather ye rosebuds while ye may..." they warn us. Because "this same flower that smiles to-day To-morrow will be dying..."

You know what we're getting at, in other words: things change. "You're riding high in April...you're knocked down in June..."

Well, that's our point. This is April. June is coming soon. And that bright light that shined so beautifully, warmly, wonderfully on the West...is now headed East - to the emerging markets. Those markets are having a correction...which could turn out to be a buying opportunity.

Long time Daily Reckoning sufferers know we don't know...that our 'big picture' analysis is just guesswork. We breathe. We eat. We are mortal. And like all mortals, we live in darkness...with only an occasional flicker of light to shine upon our path.

Looking ahead, what we think we see - through the dense fog of news and opinion - is a world of 'flation.' That is the fundamental condition of the world economy ever since 1971, when the golden shackles were taken off and the world's money supply was allowed to run wild. The U.S. money supply is said (the government no longer gives out the numbers) to be increasing at 20% per year. Interest rates are being pushed down by the Fed. The U.S. federal government is running a record deficit...and financing the most expensive war in history with borrowed money. (This 'world of 'flation' is what our documentary I.O.U.S.A. looks at closely. If you're in the Baltimore area, come see the film at the Maryland Film Festival next weekend. See here for all the details.)

Rome got itself into a similar bind. It couldn't support the empire from its own resources. It had the reserve currency of the day...but it was a metal-based money. All emperors could do was to send more slaves to the mines to try to dig out more silver and gold...levy more taxes...and squeeze more money and resources from Rome's far-flung tributary nations.

The population of Rome itself rose to over 1 million people - far more than could be supported by the local economy. What resulted was the equivalent of a huge trade deficit - with shiploads of wheat, marble, wood, wine and other products arriving at the port of Ostia, near the capital, and then shipped up to Rome itself.

By the time of Domitian, this trade deficit - combined with almost constant warfare - had already brought a substantial inflation to the empire. Domitian's father, Vespasian, had devalued the currency. But Domitian was the Paul Volcker of Emperors. He actually restored the value of the denarius to Augustine levels, increased tax collections, and managed to leave the government with a surplus.

*** Let us return to the news and to our look at the essential picture. From the Financial Times comes the view from the sunny side of the street:

"The optimistic view is based on two distinct elements. First, that the deleveraging process is reaching its natural end as valuations stabilise and institutions come clean about their losses and raise capital; second, that a series of previously unthinkable policy responses have been effective in restoring liquidity to the financial system.

"Both views have merit. Financial institutions, particularly in the US, have recognised the scale of the problem and are taking remedial steps. Just witness the recent round of capital raising by Citigroup, Merrill Lynch, JPMorgan and Wachovia. At the same time central banks in Europe and the US have opened up their financing windows, expanding the size of the financing, the range of institutions that can access it and the list of eligible collateral."

The report goes on to suggest the alternative...that policy reactions (by the Fed and other central banks) may be "too little, too late."

And here, we think the writer is wrong on both scores. That is, the real problem is not one that can be fixed by putting more money into the banking system. It's more basic than that. When a bubble pops, it's almost impossible to pump it up again. You pump and pump...but the air goes somewhere else. The consequence of the dot.com bubble, for example, was that expectations for the new age of computerized communications were over-bought. New money could be put into the system. But the new money didn't go into dot.coms. It went into housing and finance. Now, those bubbles have popped too. The authorities are pumping new money into the banking system...but where is it going? We already have plenty of houses in America - more than enough. Don't expect a boom in the housing industry anytime soon. And take all those leveraged, sophisticated CDOs, MBSs, SIVs, and the rest - please! Who's going to put more money into those?

No, dear reader, that's not the way it works. New money looks for a new home...a new bubble to inflate...not one with a hole in it.

Our guess...and again, we warn readers that we are just guessing...is that this inflation is going into gold, commodities, oil...and, yes, emerging markets. Our guess is that the setback for emerging markets is just a correction, not a fundamental shift of direction.

Our guess is that the setback for gold - down below $900 - is also just a correction, not the end of the bull market. Indian stocks...the Vietnamese economy...commodities...gold - all still have a lot of room on the upside.

Our resident commodities guru, Kevin Kerr, couldn't agree more. "A nasty rumor has been going around that the commodity markets are old hat and will soon go the way of the dinosaur," says Kevin.

"'They' have been saying that since I started on the floor almost 20 years ago. I'm here to tell you that not only are these markets stronger and more modern than ever, but there's never been a better time than right now for investors like you to make lifestyle-changing profits, and probably more quickly than you ever thought possible. I know, because I've done it myself!"

*** But let's go back to the Financial Times for a look at the dark side of the street:

"Pity the US consumers. Their ability to sustain spending is already challenged by the declining availability of credit, a negative wealth effect triggered by declining house values, and a lower standard of living as the result of higher energy and food prices and a depreciating dollar. Job losses will accentuate the pressures on consumers, leading to income declines and a further loss of confidence.

"While the financial system has taken steps to enhance balance sheets, they speak essentially to addressing the consequences of excessive leveraging and imprudent financial alchemy. As such, the nasty turn in the real economy may fuel another wave of disruptions that, this time around, would also have an impact on mid-size and smaller banks."

Bill Bonner
The Daily Reckoning Australia

• “Did you see Berlusconi?” asked Elizabeth
• The Century of the Emerging Markets
• Vietnam: The Next Bubble in the Emerging Markets
• Commodity Inflation Causes Consumers to Cut Back on Spending
• Still Opportunity in Emerging Markets – Especially India