But then came the huge deleveraging of risk assets beginning in July of 2008. There's an old saying that when established currencies that are widely traded and very liquid, get grounded, the emerging market currencies (like the BRICs) get sent to the woodshed. And so, we had the BRIC currencies lose major ground to the dollar during this period of time.

However, in March of this year, the non-dollar currencies began to rebound versus the dollar once more. This rebound in the established currencies like, euro, francs, yen, and Aussie dollars, has led to an even stronger rebound in the emerging market currencies, including the BRICs.

So... I thought it best to take a step back, and look at the fundamentals of each of the BRIC countries, and see if the stage if set for yet another strong run on the dollar.

Before we start though, I wanted to tell you the two reasons I originally put these countries together to form EverBank's BRIC MarketSafe CD.

In the spring of 2009, China was making noise about the need for a new reserve currency to replace the dollar. The other BRIC nations joined in and at the next G-7 meeting, all four nations stood up and wanted to be counted as countries that want a new reserve currency, for they had see enough deficit spending in the US to convince them the dollar had no other avenue to follow but down.

The "markets" sort of shrugged off the BRIC nations call for a new reserve currency to replace the dollar. But I looked at it differently. I saw nations that had HUGE Treasure chests of dollar reserves, and nations that currently have a very large portion of the globe's population. I believed then as I do now, that these countries would need to be reckoned with, and eventually their cries for a new reserve currency to replace the dollar would be heard, loud and clear.

Since we announced the creation of the BRIC MarketSafe CD, where an owner of the CD receives the positive gains in the currencies over 3 years, but does not experience any currency risk, as the CD has 100% principal protection, the BRIC nations are receiving more notice!

At the last G-20 meeting, of which the BRIC nations are a part of, it was announced that the watchdog duties for the global economies were being taken over by G-20 (from G-8). And a week later, the G-7 Finance Ministers suggested that G-20 take over the currency watchdog duties!

Now G-20 has both global economies and currencies under their watch and care, and the BRIC nations are right there to offer their suggestions...

So... Now that we've gone through the background, let's take a look at the current fundamentals of these four nations, to see if the prospect of further potential currency appreciation is warranted.

First up... Brazil!

Brazil was the first Latin American country and first in the Americas to see its economy grind out of its recession. Brazilian GDP for 2009 overall will probably be just a nick over flat, while the forecasts for 2010 GDP show that economic growth will expand by 3.8%, as firmer domestic demand leads the economy.

For instance, Brazil's recent Industrial Production output grew 1.2% in August, which was the eighth consecutive month of growth.

Brazil currently enjoys a Trade Surplus of 1.5% of GDP, with forecasts for the Surplus to also grow to 3.1% of GDP by 2011.

Overall, Brazil's Current Account Balance is a narrowing 1.1% of GDP Deficit... as the economy gets back on track; the Current Account Deficit is expected to grow to 1.5% of GDP.

These are "manageable" deficit figures, and ones that would be welcomed in many countries of the world.

Inflation as always been a problem in Brazil, but assuming no economic shocks, and a strong currency (the real), it is expected that inflation could fall to 4.1% by year-end 2009, and remain stable throughout 2010- 2011.

Brazil is one of the world's largest democracies and emerging markets, which leads one to believe that their influence on the international stage will only continue to grow. Recently, China has moved past the US as Brazil's top trading partner. It is believed that Brazil and China will sign a currency swap agreement that would remove the dollar in trade settlements. I'll talk more about this in the "China segment".

The prospects for the real are good. However, one must always remember, that even with strong economic fundamentals, any mass sell off of risk assets, would be magnified for an emerging currency like the real.

Next, we have Russia...

When we announced the BRIC MarketSafe CD, I received a lot of responses to the announcement with wishes that we had not included Russia in the CD. Well, it wouldn't be a BRIC without Russia!

I told people that in essence, the only way I would buy Russian rubles is in a MarketSafe CD, and that the only way to look at Russia was as an "oil play"...

Who among us believes that oil prices will continue to remain in the $70 a barrel range?

OK... now that we've played that game... Let's get to the data!

Russia went against the flow in September, by cutting their base interest rate, when it was believed that a good number of countries around the world were preparing to begin rate hike cycles.

Russia's economy is still mired in a deep recession, as witnessed by the 10.5% fall in GDP from a year earlier, and industrial activity contracted by 12.6% in August!

Russia's economy had seen two consecutive months of growth before this step backwards in August, and thus the rate cut in September. There are only mixed signs that the recession in Russia has bottomed out. But that means the Russian ruble is much cheaper than a year ago, and will probably remain weak as long as 1. The price of oil remains in the $70 range, and 2. The Russian economy remains mired in a deep recession.

Growth for 2010 is forecast to be 3.5%, which would mean that Russia's recession will have ended late in 2009. An end of the recession and economic growth are very dependent on the persisting problems of the bad assets on the books of Russian Banks.

So... the rebound in the ruble may take some time to come to fruition. The good thing about that is that the ruble will remain cheap for new buyers.

Next... India...

India has maintained strong economic growth through the global financial meltdown, and will post a very impressive growth of 5.5% this year. This does represent a sharp deceleration from the 10% growth rates during the go-go years before the global financial meltdown. So, while 5.5% growth is lower than previous growth rates, it remains one of the best rates of economic growth in Asia!

Economic growth in India is forecast to grow 6.3% in 2010 as private consumption, investment and trade growth all show renewed strength.

Inflation in India, at present is not a problem coming in at 1.3% in 2009. However, as domestic growth takes hold, inflation is expected to rise to 5.1% in 2010.

The Indian Central Bank will continue to fight inflation, probably raising rates as we go along in 2010. The higher interest rates will go a long way toward additional currency strength.

India does not have a problematic current account deficit, like many emerging market countries. With rising exports at a 9.6% rate, the current account deficit will be the equivalent of 0.5% of GDP... Future growth in India will present itself as a problem as far as the Current Account Deficit is concerned. But it will remain manageable, and again, not the stuff that some countries experience.

The prospects for the rupee remain strong going forward.

And, last on the roster, but number one in the hearts of the fans....

China...

This is the proverbial 200 lb gorilla in the room! China has long been on my mind as the most undervalued currency on the planet, and as long as the Chinese government has their hands on the purse strings of the renminbi, it will remain that way.

However, there are signs that the Chinese government is looking to widen the use of the renminbi, which would eventually lead to more of a free float or at least a wider band of currency movement allowed.

The IMF recently wrote that the renminbi remains the most undervalued currency at probably a level of 40% undervalued versus the dollar. As long as the renminbi's daily movement is controlled so strictly by the Chinese government the renminbi will not be allowed to cut into that 40% figure by very much. However, with the signs of a wider use of the currency, it is thought that the renminbi could be allowed to float more in the future.

What is this "wider use" I'm talking about? Well... you see, the renminbi is not a transactional currency, it is not liquid, and is traded on what's called a "non-deliverable forward". Which simply means it cannot be converted to physical form, or deliverable form.

It is my belief that China is taking baby steps to one day, have their currency take over the title of reserve currency of the world replacing the dollar. And to do this, the Chinese must begin to obtain a wider use of their currency.

They began this process by signing currency swap agreements with most of the Asian countries, and then moved on to Argentina. As I said earlier, it is believed that China will soon sign another of these currency swap agreements with Brazil.

The currency swap agreement between two countries eliminates the dollar from any transaction between the two countries, and only uses the currencies of the two respective countries. This is the "first step" toward gaining a wider use.

The "second step" came in September when China issued renminbi denominated bonds in Hong Kong. These were the first renminbi denominated bonds issued by China.

A wider use, in my mind, is equal to a stronger renminbi versus the dollar going forward.

Now for some data!

China's GDP is expected to grow 8% in 2009, and 8.6% in 2010. China's economic recovery this year has been fueled by government stimulus. But Hey! China has a treasure chest of reserves and surpluses... So, if any country was going to spend some money to boost their economy, China would be the one, for they have the money to do so!

And... with China being a Communist country, they were able to dictate where and to whom the money was being directed to, and how it was to be spent. This has gone a long way toward seeing the results of China's stimulus.

Inflation remains a problem in China, and the sooner the Chinese realize that a strong currency can go a long way toward fighting inflation, the better!

So... For now, the renminbi remains pegged to a basket of currencies, and controlled by the Chinese Government, through the Chinese central bank. However, there are signs that this arrangement for the currency is changing, and a wider use of the renminbi is the objective... If that's the case, then the prospects for a potentially stronger renminbi versus the dollar are very good.

And that's how I see the BRIC currencies/ countries...

Regards,

Chuck Butler
for The Daily Reckoning Australia

• BRIC – Brazil, Russia, India and China Suffer High Rates of Inflation
• The Greenback Dollar Decline
• Brazil is a Good Place to Become Rich
• US Dollar Declining as China’s Currency Rises
• Emerging Markets in the New World Disorder

Indeed, Prime Minister Winston Churchill who had led his nation into an impressive military victory in World War II, confident that the defeat of Nazi Germany would help save the British Empire, failed to recognize that the enormous military and economic costs of the war had actually created the conditions for the liquidation of the empire, starting with the withdrawal from Palestine and the "loss" of India after the war.

But while the sun was setting on the British Empire, members of its political elite continued to live under the illusion that their nation had remained a paramount global power. If you traveled in a time machine to London 1949 and attended a debate in the British Parliament, browsed through the pages of the Times or listened to a BBC news program you would come across numerous references to Britain as a Great or "superpower,"; a term that was applied to the United States and the Soviet Union after World War II. And if you encountered diplomats in His and (after 1953) Her Majesty's Diplomatic Service and bankers in the City of London, you wouldn't be surprised if they continued to behave as though the world was still their domain to rule.

It was the humiliating abandonment of the Anglo-French invasion of Suez in collusion with Israel in 1956 that proved to be the turning point in Britain's retreat from empire and ensured that London would never again attempt global military action without first securing the acquiescence of Washington. The time lag between the effective end of the British Empire and the recognition that indeed it was all over, proved to be quite lengthy.

The concept of "recognition lag" is familiar to economists. It refers to the time lag between when an actual economic shock, such as a sudden boom or bust, occurs and when it is recognized by economists, central bankers and the government, like when officials signal a recession in the economy several months after it has actually begun.

And just like changes in economic conditions, changes in the global status and power of nations, are not always immediately apparent, especially to the politicians and the generals who yield that power and to the journalists who cover them. That the elites continue to share such misconceptions about their nation's ability to exert global influence has less to do with the power of inertia and more with the vested interests they have in maintaining the status-quo that could be threatened by challenges at home and abroad.

While no one is comparing the global political, economic and military status of the United States to that of Great Britain after World War II, there is an eerie resemblance between the resistance of officials, lawmakers and pundits in London 1949 and that of their contemporary counterparts in Washington 2009 to adjust their nation's foreign policies to the changing global balance of power. That may explain why so many members of the US foreign policy establishment seem to be so depressed in face of the Obama Administration's current difficulties in dictating global developments, ranging from the military quagmires in Iraq and Afghanistan, Iran's nuclear aspirations and the deadlocked Israel/Palestine peace process to the stalled negotiations on global trade liberalization (the Doha Round), the efforts to reach an international agreement on climate change and the global financial imbalances between the US and China. Where is US leadership on this or that global policy issue? Why can't the Obama Administration "do something" to resolve this or that international crisis?

As expected, neoconservative critics depict President Barack Obama as an idealistic peacenik, if not a 1930's-style appeaser. They blame the perceived erosion in US' ability to call the shots around the world on Obama's alleged failure to stand-up to Russia (by abandoning the missile shield program in Eastern Europe), to Iran (by trying to engage it), to Venezuela (by shaking hands with Hugo Chavez) and to Al Qaeda (by overturning torture practices), and on his supposed betrayal of allies (Israel, Georgia, Poland, the Czech Republic). Not to mention Obama's refusal to launch new crusades against Islamofascism, to promote the Freedom Agenda in the Greater Middle East and to annoy the commies in Beijing on a regular basis.

That's rich coming from the guys at the Weekly Standard and the American Enterprise Institute (AEI). After all, it was the mess that the Bush administration, guided by these neoconservatives, had made in the Greater Middle East - where US military power was overstretched to the maximum, and where American policies helped strengthen Iran and its surrogates in Iraq, Lebanon and Palestine - coupled with the dramatic loss of American financial resources, that has produced a long-term transformation in the balance of power in the Middle East and worldwide, and has significantly eroded Washington's geo-strategic and geo-economic clout. In fact, the increasing wariness of the American public regarding new US military interventions, as a consequence of the wars in Iraq and Afghanistan, and the expanding US deficits would have made it difficult even for a President John McCain to promote an aggressive US policy in the Middle East and elsewhere.

That Obama finds it so difficult to press Israel's Benjamin Netanyahu, Iran's Mahmoud Ahmadinejad and Afghanistan's Hamid Karzai to change their policies may have to do with the fact that unlike many of the elites in Washington, the above and other foreign leaders have succeeded in deconstructing the current geo-strategic reality and recognized that the global balance of power has been shifting and that US ability to exert its diplomatic and military leverage over them has been constrained. Let's hope that these changes will also be recognized in Washington as soon as possible, and that unlike the leaders of the British Empire, those in charge of Pax Americana will have enough time to readjust to the new global reality.

Regards,

Leon T. Hadar
for The Daily Reckoning Australia

• Global Warming and the Children of Israel
• America’s Decline as a Great Empire
• Barack Obama is a Strong Favourite to Win the Presidency
• 1 Out of 10 American Mortgages Are Owned by Other Countries
• The Crime of Central Banking

First though, if you think Australia's entry into-deficit land doesn't eventually threaten its credit rating, let us take you back to the quiet London conference room of a hedge fund, circa 2003. Your editor was in the small crowd, along his friend and author Addison Wiggin, listening to an informative speech by a U.S.-based analyst on the "duration gap" between Fannie Mae's short-term liabilities and its long-term assets.

It may not sound that exciting, but what transpired over the next thirty minutes was a real eye opener. The analyst pointed out that if you borrow short-term and lend long-term, you expose yourself to changes in interest rates. You may have to refinance your debt at much higher interest rates, while the value of your long-term assets falls.

This was a problem, for the GSEs, the analyst insisted, because their assets-residential U.S. mortgages or mortgage backed securities-paid off over their long-term while their liabilities-the bonds they issued to finance their purchases of mortgages in the secondary market-were short term.

Even though the GSEs enjoyed lower borrowing costs than other corporate borrowers because of their implied U.S. government guarantee, he said, they would face higher borrowing costs if interest rates spiked. If that were to happen, the GSEs would likely be unable to grow their balance sheets or earnings. When your business is essentially borrowing money to buy mortgages, higher interest rates not only make borrowing more expensive, they also (as we've seen lately) affect the value of your assets. Higher interest rates meant death for the GSE growth model, he predicted.

For the GSEs, the rest has been history. While the financial media were busy glorifying the results of the bogus stress tests last week, Fannie Mae quietly reported a $23.2 billion first quarter loss (this followed a $25 billion fourth quarter loss). It also asked the government for another $19 billion in 'capital'. The company said, "persistent deterioration in housing, mortgage, financial and credit markets continued to adversely affect our financial results."

To his credit, the analyst in our London conference room saw all of this coming. After his presentation we stuffed a few canapés in mouth and asked him this question, "If what you said about the GSEs is correct, and the U.S. government is forced to make its implied guarantee of GSE debt explicit, wouldn't the increase in Federal liabilities threaten the U.S. credit rating? After all, you're talking several trillion dollars [at the time] in GSE debt. That would be a big increase in government liabilities."

"Oh. Well. Gee. I don't know about that. I mean, if that happened it would mean....well...it would mean..."

"The end of the dollar standard and the end of the dollar as the world's reserve currency?" we helpfully suggested.

"Well, yes," he chuckled. He seemed to regain his composure. "That's highly unlikely. I mean, that's a major development. It would be a big deal. That probably wouldn't happen. It can't, really."

"But isn't what you've just described exactly the sort of thing that could damage a country's credit rating?"

"Yes. But like I said, it's unlikely. I have to go."

Remember, that was before GSE liabilities exploded and the U.S. government-through the Fed and the Treasury-piled on trillions in new liabilities to deal with the global financial crisis. Fast forward to IOUSA star David Walker's article in Tuesday's Financial Times.

"Long before the current financial crisis," Walter writes, "a little-noticed cloud darkened the horizon for the US government. It was ignored. But now that shadow, in the form of a warning from a top credit rating agency that the nation risked losing its triple A rating if it did not start putting its finances in order, is coming back to haunt us."

Moody's rating service warned last January that if the U.S. government made no policy changes with regard to Social Security and Medicare, "we would have to look very seriously at whether the US is still a triple-A credit." At the time, Moody's said that "look" would come in ten years time. But we reckon with the huge explosion in U.S. liabilities via the TARP and the budget deficit, that look may come sooner rather than later. And when it does, all bets about the value of U.S. liabilities (bonds) are off.

Here in Australia, the three credit ratings agencies (Moody's, Fitch, and S&P) say the prospect of a $58 billion Federal budget deficit doesn't threaten Australia's credit rating. Not yet it doesn't. But don't be surprised if the question comes up later this year.

We suspect that government tax takings will be smaller than the budget forecasts. And the budget assumes the economy will have "above trend" growth of 4.5% next year. And of course, no one is planning for a government-bailout of commercial property, residential mortgages, or the corporate bond market.

Maybe all that seems a little far-fetched right now, especially when Aussie companies have been successful at raising new capital through the equity markets and the private bond market. But in 2003, a roomful of investment professionals and money managers found it hard to believe the credit quality of the U.S. government was at risk from growing deficits. They were wrong, and those deficits are much worse now. That's the fate Australia wants to avoid.

With debtor governments tapping the global savings pool to rebuild public and private balance sheets (or just hand out money) it reminds us of another idea we discussed in London in 2004: that energy is becoming a kind of capital. Russia's new National Security Strategy reaches the same conclusion.

The Kremlin's policy paper says, "The international policy in the long run will be focused on getting hold of energy resources including in the Middle East, the Barents Sea shelf and other Arctic regions, the Caspian and Central Asia." It then added, rather ominously, "Amid competitive struggle for resources, attempts to use military force to solve emerging problems can't be excluded."

Energy wars can't be excluded. But for equity investors-and just for the people of the planet-it would be better if oil stocks rose because the market was bidding up the oil price as opposed to, say, a border war in one of the "stans" over oil and energy.

And as we've written in our "Long Aftershock" report, there are plenty of structural reasons in the oil market (collapsing capital spending in 2008) to believe an oil supply crunch is around the corner. Either way-macro-economically or geopolitically-the stars are aligned for higher oil prices. Naturally, NYMEX crude oil prices fell to just under $58 in New York trading on Wednesday.

Dan Denning
for The Daily Reckoning Australia

• Government Sponsored Enterprise Debt and Australian Banks, a Ticking Time Bomb?
• GSEs Fannie Mae & Freddie Mac on Death Watch
• Australia to Borrow as Much as $300 billion
• Equity Shareholders Are Wiped Out As Financial Shares Plummet
• Irving Fisher Remains Immensely Important in the History of Economic Thought

WATCHING SOMEBODY ELSE slip on a banana-skin always raises a laugh. Not least in the divine comedy of money and finance.

"It took three generations," wrote a professional metals consultant in Feb. 2009, "but we now seem to have reached the point in the world's history where, for the first time, gold is valued only for jewelry use and speculation.

"The metal today has rapidly diminishing monetary use..."

Whoops! Within a matter of weeks, two of the world's biggest monetary powers - Russia and China - publicly said they wanted to discuss including gold in a new global "basket" to replace the Dollar as reserve No.1...

"What of the idea," The Economist then asked this week, "that China has [already] diversified into other currencies? The statistics are hard to make sense of [because] the State Administration of Foreign Exchange (SAFE), which manages the country's reserves, does not disclose such details."

Hee-Hee! The very next morning, the head of SAFE, Hu Xiaolian, told the world that her country's gold hoard has risen by 75% since 2003 to 1,054 tonnes...

"Just as it was a mistake to assume that the good times would keep on going in the 1990s," Christopher Davis now writes for MorningStar, "it's equally foolhardy to expect lackluster stock market returns to continue forever.

"In fact, the stock market has often gone on to post outsized gains after long periods of drought. [So] the moral of the past 10 years isn't that you should give up on stocks. To the contrary, it's probably a better time to invest in stocks than anytime in years..."

Well, at least he's trying. Because the funniest pratfall a forecaster can make is mistaking where she or he skips today for the path things will continue to take forever and ever, amen.

"Gold has a future, of course, but mainly as jewelry," declared finance historian Niall Ferguson 10 years ago, at the very close of the 20th century. Falling in price for almost two decades, "this ancient form of wealth is less an international currency and stable store of value than ever before," he went on.

"It's just another commodity that swings to the global rhythm of supply and demand."

Plenty of other historians and analysts - plus Europe's big central banks - queued up to throw dirt on gold's coffin, too. The Financial Times, Economist and BusinessWeek all announced the "death of gold" as the Nineties neared their end. Gold-mining directors leased gold and sold it, locking in then-current prices for fear of raising still lower prices in future.

You'll therefore forgive our caution today. Because after what then happened to gold - rising four times over and more against each of the world's major monies - making a grand call at the end of Gold's Decade would be a true buffoon's gambit. Tripping over a forecast only raises a laugh when it happens to somebody else.

So first, let's re-tie our laces and scan the pavement ahead for slapstick bananas.

"We calculate the market cap of all above ground gold, including central bank reserves, equals about 1.4% of global financial assets," reported John Hathaway of Tocqueville Asset Management a little over four years ago.

"In 1934 and 1982, when investor stress reached extreme readings, that percentage was between 20% to 25%."

Fast forward to the financial crisis/meltdown/deflation/depression of early 2009, and by our maths here at BullionVault, investor stress still remains low compared with those historic extremes.

That's not to say gold prices MUST rise, of course. Just that they haven't risen, in terms of the world's wealth, anything like previous bull runs in the value of gold.

World Financial Assets

• $4 trillion in notes and coins (global M0, Mike Hewitt at Dollar Daze)
• $25 trillion in bank deposits (mid-2008, eFinancial News)
• $16 trillion in short-term notes (all issuers, Bank of International Settlement)
• $60 trillion in domestic debt securities (again, both corporate & public, BIS)
• $23 trillion of international bonds (ditto)
• $33 trillion in stocks (World Federation of Exchanges)

Yes, we're ignoring unlisted business, because the numbers just can't be found. And yes, we also ignore both derivatives and real estate, because the one is unfunded (and simply too big to settle) while the other only counts as "investment" when you gear up using another guy's money.

But against this under-played $161 trillion total for the world's paper wealth - spread as it is across cash, banks, bonds and stocks - the value of gold compares at some $4.4 trillion, or scarcely 2.7% of the total. And that figure, please note, includes all gold ever mined in history, rather than simply the investment bars, monetary coins and tradable jewelry beloved of south-Asian consumers.

Whether as teeth, bracelets or micro-chips, best estimates (courtesy of our friends at GFMS via the World Gold Council) reckon just 2% of the 161,000 tonnes un-earthed over the last 5,000 years has been lost for good, slipping down the back of the sofa or buried beyond the reach of metal-detectors. Yet it's the total supply we use here, meaning the number above once again over-states gold as a proportion of investable wealth - a risible 2.7%.

Which again makes gold's still-tiny size all the more note-worthy when you consider what's supposed to have happened to the alternative choices for storing your wealth.

"At the low of 1974," as Mark Hulbert of the eponymous Financial Newsletter noted on CNBC this week, "average P/Es were around five or six. This time they were down more in the low 'teens..."

Indeed, the apparent "bear market" low of early 2009 saw US stocks trading for 13 times earnings - only a little below the 130-year average of sixteen.

"So you know," Hulbert went on, "it's hard to say that market-wide we were at values at all reflective of a major market bottom like in December '74."

"And dividend yields were at what, seven per cent?" chipped in anchor Joe Kernen. "Which they would've been now, if everyone hadn't cut their dividend!"

"That's right," confirmed Hulbert, "and it's interesting that at the bottom of a terrible recession [in late '74] you still had high dividend yields, whereas now we're not anywhere near those kinds of yields.

Outside the boardrooms and on the trading desks, meantime, "Where was the universal excess bearishness that typically marks the end of major bear markets?" asked Albert Edwards of Société Générale pointed out when global stock-markets hit their new low point in March.

"Before I can go overweight equities, I need not just cheap valuations, I need to see despair and revulsion," Edwards said. Which hardly squares with today being "the best time in years" to buy stocks given the chorus of bulls calling the bottom last month.

Still wary of stocks, the world could yet go further over-weight bonds, of course. Which would certainly make governments happy, seeing how many bonds they're going to issue this year in a bid to finance their historic, structural and unavoidable short-falls. Or maybe corporate bonds appeal, what with interest rates already at all-time record lows amid the worst recession since WWII, but without (as yet) a significant jump in defaults. They're also getting no rarer, but the value has already tipped lower. Worldwide - and in US-Dollar terms - the outstanding stock of corporate bonds shrank by 14% in 2008. Outstanding government debt, in contrast, swelled by one tenth (again, in terms of US Dollars) as new issuance of public-sector debt rose by a fifth compared with 2007.

Or maybe you'd rather choose cash...now paying less than even official inflation per month in pretty much every major economy. Again, you'll need to ignore that pesky risk of default (this time by banks) as well as the fresh flood of printing. Or perhaps you'd rather buy into private equity and small, local businesses...what with taxation set to surge (and keep surging) to try and pay for the worldwide stimulus in due course, while private borrowers keep competing with that flood of AAA-rated debt pumped out by the state.

None of this makes gold a buy in itself, of course. But buying gold still makes an unpopular choice against the broad mass of alternative stores of value. Which might just prove close to a tip if history's your guide.

Compared to the Great Depression or inflationary wipe-out of three decades ago, the world's wealth remains very under-invested.

Adrian Ash
for The Daily Reckoning Australia

Please Note: This article is to inform your thinking, not lead it. Only you can decide the best place for your money, and any decision you make will put your money at risk. Information or data included here may have already been overtaken by events - and must be verified elsewhere - should you choose to act on it.

• When Gold Ruled the Earth, Part I
• Investors to Drive Next Leg of Bull Market in Gold
• China is a Key Driving Force in the Gold Market
• September is the Best Month for Gold
• Prices of Gold in the Top 10 World Currencies

"I've just heard central banks have been selling. You hear anything?" asked one breathless contact of BullionVault on Wednesday...just before the Federal Reserve's $1.25 trillion shot in the arm gamed the gold price so hard, so fast, the perma-bulls at GATA should demand a Congressional hearing into Ben Bernanke's long Comex position.

More often than not, however, professional dealers get all aflutter about rumors of central-bank buying, not selling. In late 2008, it was supposed to be the Saudis. Last month it was the Russians - or so gossip claimed. Gossip that the Kremlin was only too happy to buoy.

Come mid-March, the People's Bank of China (PBoC) fired up the tittle-tattle - and again, as if on purpose - by forecasting that despite "safe haven" demand for the US dollar in 2009, gold prices would "fluctuate at high levels...possibly breaking through previous highs..."

Now this week a report by the oh-so-sexily-named Central Banking Publications says that out of 39 reserve managers controlling $3.2 trillion in official currency and bullion hoards - some 42% of the world total - well over one-in-two feels Buying Gold would make a smarter move today than it did this time last year.

So are the emerging powers hoarding gold today or not? What's a private citizen trying to look after his or her own to make of this chatter?

Well, as a rule, it means little or nothing for the price of gold day-to-day. And like GATA's claims - highly detailed, much derided - that Western governments regularly fix the gold market to cap its ascent, rumors of central-bank buying never prove quite as dramatic as central-bank action to either defend or debase the currencies against which it's priced instead.

Raise overnight interest rates to double digits, for instance - as the Federal Reserve's Paul Volcker did in the early 1980s - and non-yielding gold will tumble against high-yielding cash. Cut and hold rates at zero, in contrast...while creating, say, $1 trillion of fresh money in a 425-word statement, as Ben Bernanke did Wednesday...and you'll send gold prices higher, just as surely as the Maestro's apprentice strolling into London and buying 50 tonnes on his own account.

Investment-house analysts, meantime, are more focused on the possible 400-tonne sale mooted to help save the world-saving International Monetary Fund (IMF). Yet the really big driver so far this year remains mutual-fund managers buying paper-shares in gold ETF trusts. Western coin buyers paying 10% mark-ups (or more...!) are meantime wrestling with Asian scrap-jewelry sellers as to who can tip the balance of apparent supply and demand.

Large-scale gold purchases by Beijing or the Kremlin would anyway come at the pit-head, rather than on the open market, as they look to "slow and steady accumulation" in the words of UBS's highly-regarded John Reade recently, quoted by the Financial Times. Buying gold direct from domestic miners was how South Africa more than doubled its official reserves in the late 1960s. China and Russia now stand first and fourth among the world's gold-producing nations. Why announce their intentions, sticking a premium onto their dealer's offer, by going through the open market?

But behind the dealing-room noise, howwever, the cold facts of Asian, Middle East and Russian gold hoarding point to a deeper trend - an ugly if grand historical shift that finds its last cyclical turn almost 10 years ago to the day.

In mid-1999, the Swiss, European and UK central banks announced gold sales that did indeed shake the market. Back then, the gold price had been tumbling for the best part of two decades - thanks first to those double-digit US rates, and then to the fast-growing number of high-return alternatives for investment cash that sprouted worldwide as interest rates began to fall back but remained well north of the rate of inflation.

Prompted by investment-bank advisors and analysts, the late 20th century's heavy selling by West European governments coincided not only with both a multi-year low in the gold price and a bubble in earnings-free tech stocks. It also came together with Francis Fukuyama's "end of history" and Tony Blair - the UK prime minister then guilty of neither bombing Belgrade nor Baghdad - declaring his to be "the first generation [in Europe] that may live our entire lives without going to war or sending our children to war."

Put Blair's cant to one side (if you're not retching). Why did Europe's central banks have so much gold to sell in the first place? As BullionVault has noted before, the continent's 30-year scrap between its big nation states was preceded and worsened by frantic gold hoarding amongst the major players. Because a government must trust in another's long-term survival when accepting its paper as payment. Whereas gold bullion, as former Fed chief Alan Greenspan famously said - and just before the UK announced its 415-tonne sales back in May 1999 as it happens - "still represents the ultimate form of payment in the world.

"Germany in 1944 could buy materials during the war only with gold. Fiat money in extremis is accepted by nobody. Gold is always accepted."

Why else did the Nazis march straight to seizing the central-bank vaults on reaching Vienna, Prague and Warsaw? Why else did the United States grow its hoard from 500 tonnes in 1900 to almost 20,000 by the eve of World War Two...nationalizing privately-held gold on pain of a $10,000 fine or imprisonment when F.D.R. took office at the depths of the Great Depression?

Now, two generations later, China's official gold reserves remain unknown and unknowable to outside observers. But it has become the world's No.1 gold-mining state thanks to the collapse in South African output. And the fresh deluge of US money debasement only confirms why Beijing's bankers "hate you guys" as one policy-maker, Luo Ping - director-general of the China Banking Regulatory Commission - put it last month.

"Once you start issuing $1 trillion or $2 trillion," he said to the Financial Times, five weeks before the Fed issued...ummm...$1.25 trillion of new cash..."we know the Dollar is going to depreciate.

"So we hate you guys but there is nothing much we can do. Except for US Treasuries, what can you hold? Gold? You don't hold Japanese government bonds or UK bonds. US Treasuries are the safe haven. For everyone, including China, it is the only option."

Further west (but only a little, politically), Russia's official gold reserves have swelled by one-half this decade on the IMF's data, with new purchases peaking in August 2008 - just as the 58th army rolled into Georgia to defend South Ossetia's illegal, breakaway republic.

Under Vladimir Putin, the Kremlin said it wanted gold to grow from 2.5% to fully one-tenth of its foreign currency reserves, meaning four-fold growth of its bullion hoard if not a collapse in its paper assets. Just last month, the central bank stated that it was buying gold. On the available data, it had already added 109 tonnes to its hoard in the 15 months starting Jan. 2007 at a cost of some $27 billion.

Oh sure, that's peanuts compared to the total $4 trillion-worth of gold now thought to be above-ground at today's prevailing prices. But the vast bulk of that gold is held as jewelry, not monetary units like coins or bars. And according to Tsar Putin himself back in 2007, before this burst of gold-hoarding really got started, the ratio of Russian government debt to its national gold reserves was already stronger than for any other state in Europe.

Never mind how wide of the mark that metric was; Putin's claim shows how much gold bullion matters to Russia's political confidence - a confidence only called into use when debt and foreign currencies slide into crisis. And then this week, the current Kremlin incumbent, Dmitry Medvedev, goes and announces that he's "rearming" Russia, using the very word - "rearmament" - that Europe fretted over and feared all through its short 20-year peace between the first and second world wars.

Specifically, "[I will] increase the combat readiness of our forces, first of all our strategic nuclear forces," Medvedev declared Tuesday, piling historical weight onto Monday's more Cold-War-style news that Roscosmos, the Russian space agency, is planning a manned lunar mission for 2015.

Oh, and then there was the overnight news from Venezuela that socialist crackpot Hugo Chavez says Russia's long-range Tu-160 "Black Jack" bombers - each capable of carrying 12 nuclear warheads - are welcome to use the Caribbean island of La Orchila. You know, just for re-fuelling, cleaning the windscreen, emptying the ash-trays...but not ever as a permanent base.

So this isn't the Cuban missile crisis. Not yet at least. But the Kremlin's new saber rattling must still have caused a shock at the White House - just as it shocked anyone not tracking Russia's fast-growing gold reserves. Either that, or Team Obama is so smart, they were expecting some kind of pre-emptive strike ahead of the Fed's nuclear blast in the T-bond market.

"Foreign demand for long-term Treasuries has disappeared over the last few months," writes Brad Setser - an ex-US Treasury and IMF official, former economist for Nouriel Roubini's doom-and-gloom funsters at RGE Monitor, and a visiting or associate fellow pretty much everywhere worth having deep thoughts on big subjects.

Studying the latest official data (released Monday) in his blog for the Council on Foreign Affairs, "It is striking that for all the talk of safe haven flows to the US, foreign demand for all long-term US bonds has effectively disappeared," he explains.

In particular, "Over the past three months, almost all the growth in China's Treasury portfolio has come from its rapidly growing holdings of short-term bills, not from purchases of longer-term notes...and it is also still selling [mortgage] Agency bonds."

All told, China continued to buy US Treasury debt; it is "the only option" for China, Russia and everyone else at this stage of the game, as Luo Ping wailed to the FT last month. But of the $12.2 billion China purchased in January, fully 95% were short-term bills. "Russia also, interestingly, added to its holdings of short-term Treasury bills," Setser says.

And then, with the latest Treasury fund-flow data revealed...BOOM! The Federal Reserve prints $300bn to buy 30-year US debt, plus another $750bn to buy mortgage-agency bonds.

Someone's got to buy this stuff, and the forced buyers of this decade-to-date are starting to tire. They might just be looking to Buy Gold for much more than "portfolio diversification" as well.

There. How's that for rumor...?

Adrian Ash
For The Daily Reckoning Australia

• India Beats China to Walk Away With 200 Tonnes of IMF Gold
• China is a Key Driving Force in the Gold Market
• We Can Expect More and More People to Want to Own Gold
• Are Farm Prices Destined to Rise as More People Compete for Food?
• IMF Deems Gold An Idle Asset

The answer to that question will have to wait a few days. While we were prepared to launch into the history of British land banks (or banks capitalised land) reality intruded over the weekend. And while arable farmland may be one of the scarcest resources (and best investments) of the next twenty years, it's getting awfully cold in Europe. Which is bad news if you depend on Russian gas.

Yes energy, too, is its own kind of capital. Vladimir Putin is reminding everyone of that again. Earlier this weekend, Putin's man in the Kremlin Dmitry Medvedev nullified a three-way deal signed on Saturday that would have resumed shipments of Russian natural gas to Eastern Europe via Ukrainian pipelines.

Russia supplies Europe with 25% of its natural gas, and 80% of that gets to Europe via Ukrainian pipelines. The Russians say the gas is being siphoned off illegally and then sold at a higher price. Maybe it is. Maybe it isn't. Who knows?

The real issue is control of the energy resource and the network for transporting it. One is no good without the other. Both are critical, and happened to be owned by competing interests. If you're at the tail end of a long energy logistics network (like, say, the UK), you've got troubles.

But then, there are plenty of troubles to go around. In the U.S., oil service stalwarts Schlumberger and Halliburton are laying off skilled and experienced workers. The falling oil price is setting up an oil trap. It's leading to less drilling and exploration. That's going to lead to more scarcity. And THAT's going to lead to higher oil prices.

"It's not like Schlumberger & Halliburton don't know this," explains are friend Byron King back in Pittsburgh." So would they be laying off people if their forecasts were sunny for the coming months, or the next year or two? No. If things looked like they were picking up, they'd keep the people so they have enough work force to do the work. They're laying off because they see a significant period of slow business. Which if you're SLB or HAL, means less well-drilling. And that's bad for US energy output. Fewer wells means eventually less output, which means scarcity and higher prices.

"And while we're talking about 'old' things, much of the existing energy infrastructure is old. The Alaska Pipeline, for example, was completed in 1977 from steel pipe that was rolled in 1969 and 1970. Most of the US pipeline system -- for example, the main trunk lines that carry natural gas from the Gulf Coast to the Mid-Atlantic & Northeast states -- is older than that. The Colonial Pipeline was built in the early 1960s. Many other lines (Texas-Eastern comes to mind) were constructed in the 1930s and 1940s. How long until the steel rusts away? These are not the Roman aqueducts, that will last for 2,000 years or something."

No. Byron is right. They just don't make them like they used to.

Yet it would be negligent to suggest all the news from the energy patch is bad. Kris Sayce, our colleague over at Money Morning and the editor of the Australian Small Cap Investigator, has begun 2009 better than a New South Welshman opening up the batting for Australia's 20-20 cricket team. For you non-cricket fans out there, that means Kris has two energy-related share tips that are each up over 100% from the price he tipped them at.

That is stunning stuff, given how wretched the market's been in the last-four months. But as Kris pointed out in his latest weekly e-mail update, even when the big indexes are caught in a trading-range, the real story is in the specific companies. For small-cap punters, range-bound markets are just fine-provided you find the sectors and firms that are bucking the trend.

And what would those sectors be? How about LNG? While Schlumberger and Halliburton are swinging the axe in Houston, Santos is hiring workers in Gladstone. Bloomberg reports that Santos is recruiting nearly 600 workers for its $7.7 billion liquefied natural gas project in Queensland.

LNG is one the big stories of 2009. Fortunately, Kris got on the story in 2008 and is reaping the benefits already. And though Australia doesn't have a great deal of oil, it does have plenty of thermal coal, coal-seam-methane, LNG, and, of course, uranium.

In other words, there are plenty of energy stories to invest it. And in a world where energy, too, is capital, that's good news for investors.

Dan Denning
for The Daily Reckoning Australia

• LNG – The Energy Play for 2009
• Red Bear Rising: Russia’s Resource Based Geopolitical Strategy
• Russians Can Cut Off Natural Gas to Europe Anytime They Want
• Gorgon LNG Deal with China a Really Big Deal
• What Makes the Wheels on a Bus Go “Round and Round”? Electricity!

"This story coming out of Ossetia is very revealing," said a fellow diner last night. "The region is much more complex than I realized. These people have been at each others' throats for centuries. You know, they have about 50 different languages - and none of them related to any of the others. It is only when there is a strong imperial power in place that they settle down and behave themselves. The Tsar pacified the region in the 19th century. Then, the different cultures lived side by side. There were Catholic churches next to Orthodox churches next to mosques. And people mostly got along. And then, Stalin took over. He tried to erase a lot of the ethnic divisions...making them all communists...and forcing them all to learn Russian. But the Russians - either from the time of the Tsars or the time of the Soviets always had trouble along the southern periphery of the empire. They could never very easily bring the Muslims under control. That's what the Crimean war was all about...and then, in Afghanistan, the Muslims kicked them out.

"But what I think is most interesting about this story is the way Russia is asserting itself. I don't know what was going through the Georgian president's head. You don't attack Russia with just 17 tanks. He must have thought he had support from the U.S. and Europe. But what could the U.S. or Europe do? We know that the Russians can cut off natural gas to Europe anytime they want. They have the energy; we don't. If they cut off the gas, it will be a long, cold winter for us. And the United States? Putin knows that the U.S. is bogged down in Iraq. And he knows too that the U.S. doesn't have any money. In geopolitics, the country with the energy and the money wins. And right now, that's Russia."

Yes, dear reader, Russia looks like a winner. And China. And India. And all the countries that seem to be on the way up. Who knows which will succeed...or when? But it looks to us as though these countries are catching up - first in economic terms...later in military terms - to the United States.

What does this mean for investors? It probably means that, over the long run, shares in growing, developing countries are a better bet than those in the United States. And it probably means that the dollar is a bad way to store wealth - since it is tied to an economy in (relative) decline.

It probably also means that limited resources - gold, copper, land, water - will become (relatively) more expensive, because there are more and more people who want them and have the purchasing power to buy them.

Regards,

Bill Bonner
The Daily Reckoning Australia

• Price of Oil May Rise Due to Scale of Georgian Conflict
• Latin America Has Suddenly Become Very Interesting
• The U.S. Took Advantage of Russia During the Soviet Collapse
• LNG in 2009
• BRIC – Brazil, Russia, India and China Suffer High Rates of Inflation

At the time this gambit was first set up, in the early 1990s, there was some notion (or wish, really) among the so-called western powers that the Caspian would provide an end-run around OPEC and the Arabs, as well as the Persians, and deliver all the oil that the US and Europe would ever need - a foolish wish and a dumb gambit, as things have turned out.

For one thing, the latterly explorations of this very old oil region - first opened to drilling in the 19th century - proved somewhat disappointing. U.S. officials had been touting it as like unto "another Saudi Arabia" but the oil actually produced from the new drilling areas of Kazakhstan, Turkmenistan, and the other Stans turned out to be preponderantly heavy-and-sour crudes, in smaller quantities than previously dreamed-of, and harder to transport across the extremely challenging terrain to even get to the pipeline head in Baku.

Meanwhile, Russia got its house in order under the non-senile, non- alcoholic Vladimir Putin, and woke up along about 2007 to find itself the leading oil and natural gas producer in the world. Among the various consequences of this was Russia's reemergence as a new kind of world power - an energy resource power, with the energy destiny of Europe pretty much in its hands. Also, meanwhile, the USA had set up other client states in the ring of former Soviet republics along Russia's southern underbelly, complete with U.S. military bases, while fighting active engagements in Iraq and Afghanistan. Now, if this wasn't the dumbest, vainest move in modern geopolitical history!

It's one thing that U.S. foreign policy wonks imagined that Russia would remain in a coma forever, but the idea that we could encircle Russia strategically with defensible bases in landlocked mountainous countries halfway around the world...? You have to ask what were they smoking over at the Pentagon and the CIA and the NSC?

So, this asinine policy has now come to grief. Not only does Russia stand to gain control over the Baku-to-Ceyhan pipeline, but we now have every indication that they will bring the states on its southern flank back into an active sphere of influence, and there is really not a damn thing that the U.S. can pretend to do about it.

We could have spent the past ten years getting our own house in order - waking up to the obsolescence of our suburban life-style, scaling back on the Happy Motoring, reconnecting our cities with world-class passenger rail, creating wealth by producing things of value (instead of resorting to financial racketeering), protecting our borders, and taking the necessary measures to defend and update our own industries. Instead, we pissed our time and resources away. Nations do make tragic errors of the collective will. The cluelessness of George Bush is nothing less than a perfect metaphor for the failure of a whole generation. The Boomers will be identified as the generation that wrecked America.

So, as the vacation season winds down, this country greets a new reality. We miscalculated in Western and Central Asia. Russia still "owns" that part of the world. Are we going to extend our current land wars there into the even more distant and landlocked Stan-nations? At some point, as we face financial and military exhaustion, we have to ask ourselves if we can even successfully evacuate our personnel from the far-flung bases in Uzbekistan and Kyrgyzstan.

This must be an equally sobering moment for Europe, and an additional reason for the recent plunge in the relative value of the Euro, for Europe is now at the mercy of Russia in terms of staying warm in the winter, running their kitchen stoves, and keeping the lights on. Russia also exerts substantial financial leverage over the U.S. in all the dollars and securitised U.S. debt paper it holds. In effect, Russia can shake the U.S. banking system at will now by threatening to dump its dollar holdings.

The American banking system may not need a shove from Russia to fall on its face. It's effectively dead now, just lurching around zombie-like from one loan "window" to the next pretending to "borrow" capital - while handing over shreds of its moldy clothing as "collateral" to the Federal Reserve. The entire US, beyond the banks, is becoming a land of the walking dead. Business is dying, home-ownership has become a death dance, whole regions are turning into wastelands of "for sale" signs, empty parking lots, vacant buildings, and dashed hopes. And all this beats a path directly to a failure of collective national imagination. We really don't know what's going on.

The fantasy that we can sustain our influence nine thousand miles away, when we can't even get our act together in Ohio is just a dark joke. One might state categorically that it would be a salubrious thing for America to knock off all its vaunted "dreaming" and just wake up.

Until next time,

James Howard Kunstler
for The Daily Reckoning Australia

• Russians Can Cut Off Natural Gas to Europe Anytime They Want
• LNG in 2009
• BRIC – Brazil, Russia, India and China Suffer High Rates of Inflation
• Australian Iron Ore Shares on China’s Menu
• Are Farm Prices Destined to Rise as More People Compete for Food?

The balance of power in the world has shifted to resource producers (because of relative scarcity) and not consumers. You see a mini version of this in China (an iron ore and coal consumer) and its steadfast objection to a Rio Tinto (ASX: RIO) - BHP Billiton (ASX: BHP) merger (Aussie resource producers). The merger, from China's perspective, would create the so-called OPEC of Iron ore. If pricing power shifts to the producers, so does a greater share of the profits. Profit margins on Chinese steel would go down and the cost of steel-essential to China's great industrialisation-would go up.

Second, we see that in the execution of this strategy a resurgent Russia asserting itself against former Soviet territories and controlling all the energy corridors to Europe from Siberia and the Caucasus-you have a potential floor in energy prices. This will scare the heat and daylight out of natural gas consumers in Europe. But it also puts a premium on non-Russian energy projects, which investors might want to consider owning. Hello North West Shelf.

Finally, symbolically (along with the hosting of the Olympics by an authoritarian capitalist State) this indicates the end of benign globalisation and the beginning of a bull market in State on State warfare over resources. It will be a much darker, competitive period of economic history. Not quite a New Dark Ages. But that would be the worst-case scenario.

The good news in all of this? You can do something about it! The resource sector has been pounded so much recently that world-class projects are selling at pretty significant discounts.

Dan Denning
The Daily Reckoning Australia

• Wayne Swan Approves Chinalco Investment in Rio Tinto (ASX: RIO)
• Australian Iron Ore Shares on China’s Menu
• BHP Billiton (ASX: BHP) to Report Second Half Results Today
• Chinese Steel Price to Rise in Wake of Coal and Iron Price Hike
• The Australian Resource Boom Isn’t Dead Yet

The headline is a sign of our time. Today, the world believes in money. In economics. In material progress. Everything else takes second, third, or fourth place. It is easier to see small changes in the price of oil than big changes in the way you look at the world. You can tell when the world changes; but when you change it goes unnoticed.

If this were August 1914, instead of August 2008, the headlines might read:

"French Bonds Fall on Invasion of Belgium." Or, if this were August of 1939, the headline might read: "Oil price jumps on threatened German invasion of Poland."

Or how would the modern press report the big event of 2000 years ago? "Miracle worker's earnings cut short by untimely crucifixion..."

But in years zero, '14 and '39, money was not the main issue. People believed in politics, nationalism, racism, religion...and reported the news otherwise.

Today, it is money that counts.

The price of oil fell heavily last week. It ended Friday at $115. But this morning, it is rising - on news of a political struggle in South Ossetia. And if this continues, we wouldn't count on the price to stay 'low' for long. The only good news is that when energy is under the gun, the soaring oil price itself opens you up to all kinds of soaring investments.

The region is between Russia and Georgia, on the Black Sea. Ossetians, whoever they are, have been there since the days when the ancient Greeks set up colonies around the Black Sea. In the 1930s, the Pontic Greeks were still there - until Stalin deported them to Kazakhstan. The Ossetians, too, disappeared into the maul of the Soviet Union. They were forgotten for most of the 20th century. Then, when the Soviet Union disbanded - there they were. But who then had the right to tell the Ossetians what to do? The Russians? Or the Georgians? The Russians expressed themselves on the issue over the weekend. According to one report, 2,000 people have died in the fighting.

U.S. Vice President, Dick Cheney, had Georgia on his mind over the weekend. He reportedly said that this violence "must not go unanswered." What sort of response he had in mind, we don't know. But inasmuch as the United States and Russia are the world's two most heavily armed nuclear powers, there may be more at stake than the price of oil.

Bill Bonner
The Daily Reckoning Australia

• Latin America Has Suddenly Become Very Interesting
• Russians Can Cut Off Natural Gas to Europe Anytime They Want
• Pirates of Private Equity Flying Colours Off Australia’s Shores
• The Rise in the Dollar Doesn’t Have Everyone Convinced
• The United States Matters Less and Less to the Oil Market