For starters it looks like we missed a $45 down move in gold. All up, gold is down over $100 in the last two weeks. Gold is still up nearly $300 in the last twelve months - or about 35%. But if you're a new gold investor - and many people are - a $100 move down gives you the willies.

The nice thing about being away from the news cycle for a week is that it gives you time to think. We did a lot of thinking last week. And a lot of listening. Our main observation for the week is that things are probably unfolding in just the way we're expecting, but not exactly at the pace we expected.

We'll get to what we mean by that. But we should have a look at the markets and see what's cooking. Behold the Santa Rally, says equities analyst Julia Lee of Bell Direct! Lee says that despite five daily declines last week, the index has risen in December twelve times in the last sixteen years.

"The Santa rally is not just a figment of the imagination," Lee says. "If history is any guide, expect another one this year to top off a year of strong gains."

Yes Julia, there is a Santa Claus! His name is Ben Bernanke and he drives the Fed Sled filled with money. But strong gains?

Well, it's true. The S&P ASX 200 is up over 1,000 points and 25% from where it began the year at 3,659. And from the lows the rebound is even more impressive. From the March sixth low of 3,111, the index is up 48%. Merry Christmas!

Not to be a Scrooge about things, but in that 16-year period, there WERE four years in which Aussie stocks did not rally in the month of December. Out of curiosity and for the sake of thoroughness, maybe those are worth investigating. Those years are 2000, 2002, 2007 and 2008.

You could say that in two of the last three years, the Santa Claus rally has failed to show, but that would not confirm the happy story. So what, if anything do those four years tells us? Are those four years recent evidence that the 16-year trend of happier Decembers is over?

Well you should know we don't really care about what happens in December. It's the longer trend that matters most. And by our reckoning, those four years DO matter a lot. They tell you a much different story about what to expect NEXT year.

Our version of this Christmas story is that a long-term bear market began in 2000. This was the fall-out from the dot.com boom and the end of an 18-year bull market in stocks that had begun in 1982. Left to its own devices, the market would have declined to more reasonable valuations and companies would have sorted out real ways to grow earnings.

But you know what happened next. Alan Greenspan cut interest rates over and over again. To be precise, the Greenspan Fed cut the discount rate 13 times from January 2001 to June 2003, lowering it from 6.5% to1% and leaving it there for a year. Cometh the rate cuts, cometh the boom.

However, to paraphrase an old saying, you can lead investors to liquidity, but you can't make them buy stocks. The rate cutting frenzy didn't save the stock market until 2003. But by then, low short-term rates had dragged longer-term rates down in sympathy. This lowered mortgage rates in the States, kicking off a mortgage bubble.

You know the rest of the story. Through CDOs and the magic of securitisation, America's mortgage boom was sold, via Wall Street, to the world. And in 2007 and 2008, that boom went bust, along with a lot of other leveraged asset bubbles made possible by historically low global interest rates.

Those four years, then, in which Aussie stocks did not finish up in December were all years in which the primary forces of deleveraging asserted themselves. In the first two of those four instances, rate cuts spurred rising asset prices again. But in 2007 and 2008, rates had already been cut as low as they could go. Which brings us to today - where stocks are again up and seeking further stimulus.

But today, interest rates are rising. It will be interesting to watch Wednesday's GDP figure. A weak figure (which economists are predicting) may slow down the Reserve Bank in its rate rise campaign. But that may not matter all that much anyway.

Our main observation - the one we gained from thinking and talking last week in South Africa with our mentor Bill Bonner - is that stocks are probably better sold than bought in the next decade. Not only are valuations high at these prices, but it's the trend that matters - in a world of excessive public debt and deleveraging, corporate earnings aren't going to grow at the go-go rates of the boom years.

Mind you stocks may be a better hedge against inflation than bonds. Bonds are probably the great "short" opportunity of the next ten years. But you have to be pretty selective with stocks. You have to pick industries or sectors that will do relatively better than declining paper money. Luckily for Aussie investors, we think that means precious metals and energy shares.

But who knows? Maybe that's just the jet lag talking. Still, when you step away from the computer screen, turn off your mobile phone, and stay away from the television, a funny thing happens these days. Time gets less compressed.

With the omnipresent news cycle, there's an urge to digest every piece of news as it comes in and instantly discount what it means to the economy and stock prices. But this is nonsense. In the aggregate, there IS some immediate pricing in of what people think "the news" means. But "the news" does not generally trump "the debt" or "the fundamentals."

The more we think about it, the more we think people are thinking less and reacting more. This leads to pricing mistakes; bubbles on one hand and oversold or ignored assets on the other hand. The problem with a liquidity boom is that it's hard to find anything that's really oversold. You have to settle for avoiding the obvious traps and picking your other targets carefully.

And finally, on a completely unrelated note, do a peacock's feathers contribute to its survival strategy? Whenever we see any kind of physical trait or behaviour in nature, we assume it exists because it promotes the survival of the animal or its species. We can understand how a peacock's feathers make it attractive to potential mates. But what about predators?

Of course in the garden at the hotel we were staying at in Johannesburg last week there were no predators. A solitary peacock was presenting himself/herself to some French airline pilots and Arab oil men. In exchange for the extravagant effort it was served up a few bread crumbs. It probably came out ahead in terms of calories received versus expended, putting on the show.

Incidentally, asking how a social behaviour is useful in evolutionary terms does not always work with human beings. Why? Surplus. Human beings - at least a fair portion of those living in 2009 - have more surplus time and calories than probably any other animal in the history of the planet.

This huge amount of surplus - partially a function of the misallocation of resources from the credit bubble - allows people to do indulge in incredibly stupid and wasteful behaviours, like karaoke and politics. Spend a few hours waiting in line in an airport and you'll quickly come to the conclusion that without so much surplus (and the division of labour) quite a few of today's homo sapiens wouldn't last long in a world of scarcity. They would be lion food.

Fortunately, 300 years of free trade has built up a lot of accumulated social and real capital in the world. Lions can be seen in zoos, circuses, on the television in high definition. They don't have to be dodged on your way to work (although that might make an excellent reality TV show). For most people, living standards have risen. But most of that was a function of cheap energy and cheap credit. And today...we reckon both of those economic inputs are getting more expensive or scarce. Uh oh.

Dan Denning
for The Daily Reckoning Australia

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"Bill, I can't believe you said the wrong side won the Civil War.
People are going to think you're a racist..." warned a colleague
yesterday.

The same subject came up on our flight down to Johannesburg. On our
last trip, we were seated next to a pilot's wife. She explained that
the NEW South Africa was being ruined by affirmative action, that
is...a kind of compensatory, racial discrimination-in-reverse. Her
white husband was being forced out of his job, she said, in order to
make room for black pilots who lacked sufficient training or
experience.

Even before we got on the South African Airways plane we noticed what
looked like the new South Africa at work. All the ground staff were
black. Friendly. Apparently competent. Efficient and courteous. This
was not NWA...in fact, it was much better than the frumpy, disagreeable
treatment we usually get from US based airlines, black or white.

Then, once we got on the plane, same thing...nice looking, professional
staff...all black. We began to wonder about the pilot.

Then, we saw him. A solid white man deep into his 50s. He looked like a
stiff-necked Boer...at least as we imagined them. But he looked like a
fellow who knew how to fly a plane. We gave an inward sigh of relief.
"No affirmative action pilot on this plane," we thought to ourselves.

Of course, that's the trouble with affirmative action; it undermines
its beneficiaries. You never know whether a pilot got his wings because
of who he is...or because of what he can do. And you feel guilty for
wondering.

South Africa has many of the same obsessions with race as America. And
bigger potential problems.

But this little circumlocution is about your editor and his alleged
racism, not about South Africa. He pleads neither guilty nor not
guilty...but ignorance.

In the early 1960s, the authorities desegregated the Anne Arundel
County schools. Your editor was 12 years old. He was there when three
little black girls showed up. After 300 years of being schooled
separately, Maryland decided to put black and white students together.

Sentiment out on the tobacco flats ran hotly against it. The tidewater
was George Wallace country. Of course, in the 7th grade, we were
unaware of the politics or history behind desegregation. But we had no
trouble picking up bad ideas from our elders.

On the first day the girls arrived, the boys felt they should make some
kind of remonstration. This took the form of pressing their backs to
the hallway walls as the girls walked by as if they were afraid they
would get cooties. To his everlasting regret, your editor joined them.

In a flash, however, even at 12 years old, a boy understands when he is
being a jerk. It was not that he is afraid of being labeled a 'racist.'
As near as he can tell, being a racist could be a good thing. But if he
is lucky he has a deeper compass to guide him.

In the case of the little boy now writing this remembrance, he knew
that what he was doing wasn't very nice. And he knew that if his mother
could see him she'd be ashamed of him. After a second, he pulled
himself together. So did the other boys. The clouds of desegregation
gathered at 9:AM. By 9:30 AM the storm had blown over. Boys and girls,
blacks and whites, lived happily together at Southern Jr. Sr. High
School ever after. Or at least until we left in 1966.

Human beings, like animals, feel an urge to separate themselves into
herds, tribes, groups, cliques, economy class and first class. That's
just the way they are. They are a competitive species, always angling
and butting heads, trying to get an advantage. Why do they do it?

Even blubbery walruses come ashore and try to gouge each other with
their tusks...hoping it leads to a dominant position and a chance to
mate. Girls like winners; there is no getting around it. There must
have been plenty of tough times in the dark beginnings of man and pre-
man. Perhaps only the fastest, smartest, toughest males were able to
get the food...and the girls. Their genes survived. Those who had no
competitive drive may have died out. We don't know.

But we know individuals compete. So do groups. They compete in
commerce. In sport. And in war. Most wars, as we mentioned yesterday,
are little more than violent sporting contests...with no more
significance than a game of football for mortal stakes. The 'reasons'
for war are little more than claptrap.

In the War Between the States, both sides probably deserved to lose.
The South had its slaves. But the North had the South. The desire to
boss someone around seems irresistible. While the Southerners whipped
their field hands, Lincoln suspended the Constitution and began bossing
everyone around. Marylanders, who maintained a Swiss-like neutrality,
were rounded up and sent to prison camps. Irish immigrants...who were
little better off than the slaves...were rounded up in New York and
forced to fight against the yankee's enemies. The Southerners, being
good shots, laid many of them in their graves.

But racism? They were probably all racists. Lincoln surely was. The
reason some were slave owners and others weren't was based on
economics, not prejudice. The North had no cotton fields. In the stony
ground and primitive workshops of the North, slave labor didn't pay. It
was cheaper to pay skilled workers slave wages than keep them in
chattel slavery. In Maryland at the time, slavery was disappearing
fast. Out in the tobacco fields, it was still a paying proposition, but
Baltimore's factories were only a short distance away. In the little
village where you editor grew up, surrounded by tobacco fields, there
was nevertheless a railroad station...on the 'underground railroad,'
this is. Slaves knew that if they could get to that big white house in
the village, they could get away. An abolitionist lived there.

Property that can run away so easily loses much of its property value.
Slavery was dying out everywhere...all over the world. Slavery was
unsuited to the industrial age. Within a decade of the end of the war,
it had been extinguished almost everywhere - without war.

Then, the war over, the southerners put on their sheets, nursed their
wounds and passed their Jim Crow laws. The North, having defeated the
most sacred principle of the American Revolution, continued on the road
to empire.

Regards,

Bill Bonner
for The Daily Reckoning Australia

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• Summer of Awakening
• Dinner in White
• An Interesting Cross-Section of Parisians

"INVESTORS will drive the next leg of this bull market in gold," said Philip Klapwijk, chairman of GFMS, at the London-based research consultancy's Gold Survey launch in Canary Wharf on Tuesday, "setting a new high above $1,000 in 2009 and with a real possibility of $1,100 per ounce."

Anyone pitching for $1,100 in short order, however, might have their work cut out for them. And all thanks to MC Hammer.

"We have seen people in Europe buying gold in quantities more typical of the Middle East and Asia...particularly in Germany and Switzerland," Klapwijk went on. Because "Inflation is the inevitable consequence of today's rapid money-supply growth and quantitative easing." All told, reckons GFMS, the monetary response to the financial crisis will prove "extremely powerful medicine for gold investment."

So far, so bullish. But why no new high, therefore, in the gold price already this year? Philip Klapwijk attributes gold's failure at $1,000 back in February to the "astounding" flow of scrap metal coming from cash-strapped consumers worldwide. And GFMS's raw numbers would suggest he's right.

Scrap supplies previously lagged both gold-mining output and central-bank sales by a wide margin each year. But recycled tonnage actually overtook new jewelry demand worldwide at the start of 2009 according to GFMS's analysis. That was after rising 27% in full-year 2008 to more than 1,200 tonnes.

Gold mining output, for comparison, came in at barely 2,500 tonnes, down yet again year-on-year despite the on-going rise in prices.

Come Q1 2009 and scrap supply surged further still, reaching above a massive 500 tonnes according to GFMS's research. New jewelry demand, in contrast, halved to just 420 tonnes, as traditional importers - such as former world No.2 Turkey - became gold exporters in a shocking about-turn.

One attendee at the GFMS presentation even thought they under-played it, putting the flow of scrap metal far higher - and dwarfing world mining output - at perhaps 1,000 tonnes during the first quarter alone. Absurd as that sounds, world No.1 importer India took in next-to-no new gold at all between Jan. and March as the Bombay Bullion Association has reported.

That's an event not seen since the Great Depression of the 1930s according to gold-market historian Timothy Green, also chipping into the Q&A at Tuesday's GFMS presentation.

Most crucially for the new dynamic of gold demand-and-supply, the industrialized West has seen high-margin operations led by Cash4Gold - whose advert during this year's Superbowl hardly needs spoofing, featuring as it did MC Hammer and former Tonight Show sidekick Ed MacMahon spoofing themselves - make selling gold much easier for cash-strapped consumers.

"I can get cash for this gold medallion of me wearing a gold medallion!" gasped the Hammer in Cash4Gold's typically gag-laden Superbowl slot. The airtime alone reputedly cost $3 million, so based on the scrap market's average mark-up of 40% - if not the 60% to 80% mark-ups reported in this "consumer crusade" against America's No.1 - you'd have to guess they brought in a chunk of change...as did everyone else touting for scrap metal as the Christmas heating bills came due between Jan. and March.

Hence the "roadblock", or so Klapwijk reckons, on gold breaking above $1,000 an ounce in late February. But we're not so sure here at BullionVault.

First, Cash4Gold's parent company, Albar Precious Metals, reports 775% growth for the last three years. So why the sudden impact on gold prices - an impact regularly dismissed in 2008 in favor of de-leveraged by crisis-hit hedge funds fleeing the futures and options market? More crucially, back in Feb. this year, gold still broke new all-time highs vs. the Euro, Sterling, Swiss Franc, Indian Rupee, Turkish Lira and pretty much everything else bar the Dollar and Yen. Which would suggest the failure at $1,000 was more currency-capped than supply-driven.

More critically still for gold-market analysts, how can we draw a line between "investment" and "jewelry" for those two billion Asians still without Main Street banks in which to keep their savings?

Either way, gold investors might still want to beware the Hammer. Because the only cap on Middle Eastern gold sales after the Jan. 1980 top, as Timothy Green recalled from his experience in Kuwait and Dubai, was the inability of jewelers to raise enough cash each day to buy all the scrap gold offered daily. Whereas Cash4Gold, the leading US scrap buyer, also runs its own refineries as well as collecting scrap metal by post and touting for metal online and on TV.

Looking ahead, an estimated 82,000 tonnes of gold exists as privately-owned jewelry worldwide, some 52% of the total above-ground supply. The vast bulk of recent tonnage has been added by emerging-market consumers, most often in the form of lumpy "investment jewelry" that carries little added-value from fabrication, but which can still lose 10-15% in dealing fees when it's sold to raise cash. So how much of the 2008 and early-09 supply represented forced sales by truly cash-strapped gold hoarders - and how much represented "easy scrap" sales? You know, the really ugly old-fashioned stuff inherited from maiden aunts that the owners never much cared for, similar to that "rabbit gold" buried by generations of Frenchmen fearing (yet another) German invasion but now dishoarded by their grandchildren each year.

In the same way the earth yields up "easy gold" to open-cast mines, before forcing miners to start digging...and digging...down as far as four and even five kilometers below the surface in South Africa, the world's former No.1 gold-mining nation...perhaps the emerging markets are now racing through their "easy scrap" gold. Or perhaps the decision to sell has already been tough, "spurred by losing your job, losing money in the stock market, bad luck, or just needing some extra cash for holiday spending," as Cash4Gold laments on its website.

On the other side of the trade, meantime, GFMS now expects "concentrated buying" on any price dip to $800-850 per ounce. Down there, the consultancy says, pent-up demand will surge while scrap sales fall sharply, just as we've seen right throughout this bull market to date, with Indian jewelry demand triggered at ever-higher dips in the price.

And as Philip Klapwijk noted in London on Tuesday, if it weren't for a surprise jump in gold-jewelry demand during the plunge to $700 an ounce and below in Oct. 2008, "it's undoubtable that gold would have fallen further...down to $650 or lower."

Everyone's got their "deal price" in short - that level at which they're either a buyer or seller, depending on where they last bought or sold. And also depending, of course, on their outlook for inflation from here.

Adrian Ash
for The Daily Reckoning Australia

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