Money and Metals

The Hartford Courant explores golds recent moves and the metals future. "There was a time, before national banks and paper currency, that gold, not cash, was king. As it spiked over $500 per ounce Tuesday, the first time it crossed that threshold since 1987, the regal metal that had been relegated to a relic for decades once again laid claim to its throne."

"'The price of gold is an early warning of a lot of other things,' said David Ranson. 'It's a much more important signal than the vast majority of economists give it credit for.'"

"Along with other precious metals such as silver and platinum, gold has historically served as a reliable gauge of what the future holds for key economic measures such as inflation, interest rates and unemployment. When gold goes north, it turns out, the markets turn south."

"'The more rapidly the dollar price of gold rises, the poorer performance the equity market turns in. It's a very strong relationship historically,' said Ranson, who specializes in commodities. 'It's really irrefutable.'"

"Since the price of gold is measured in U.S. dollars, any change in the metal's price is as much a measure of investors' confidence in the dollar as it is a barometer of investors' outlook on gold, itself. And with the prices of other precious metals rising along with gold, analysts said, it's much more likely that worries about inflation, rather than demand, are driving investors."

"'People are always saying it's the Indians buying more gold, but come on. Is that a new phenomenon? There's no reason to hold gold, which pays no interest, unless you're losing confidence in currencies,' said (economist) Michael T. Darda. 'And if there's a loss of confidence, then the purchasing power of money falls.'"

"Unlike other commodities, which are produced for consumption, gold is produced mainly for accumulation, even when it's used as jewelry. Because it's not an input in industrial production, gold's relative price does not fluctuate with the business cycle."

"'The currency, not gold, itself, is variable,' Ranson wrote in a recent note to investors. 'Thus for purposes of anticipating inflation one year in the future, there is no significant information in the price of oil that is not already captured by the price of gold.'"

"But analysts warn that betting on a further rise in gold prices is tantamount to betting against the Federal Reserve, which has committed to fighting inflation by raising interest rates, at which point the price of precious metals could retreat."

Bloomberg reports that China is in a deflationary trap. "Anyone notice how quickly ``overheating'' has been dropped from investors' China lexicon? The risk is that China may be flirting with the opposite of overheating: deflation. Economist Andy Xie of Morgan Stanley (is) eyeing a scenario in which Asia's No. 2 economy experiences falling prices as soon as next year. The reason: overcapacity. China is still producing too much cement, aluminum, textiles and other goods. It's also constructing too many factories, buildings and resorts."

"Cutting interest rates may even worsen deflationary pressure by encouraging capacity growth regardless of corporate profitability. As Hong Kong-based Xie explains, 'plentiful liquidity keeps interest rates low and, hence, sustains the on-going investment projects and funds new investments in bottleneck areas.'"

"'We can't go on stimulating the economy this way as this method will inevitably lead to oversupply, which in turn will take us back to deflation,' says Justin Lin Yifu, a Beijing based professor at Peking University."

"All this could have important economic implications. For one thing, it suggests Chinese currency revaluations may be smaller than investors and the Bush administration would like. Deflationary pressures and a weaker Japanese yen may leave Beijing even more reluctant to let the yuan rise."

"Would Chinese deflation be a crisis? Not necessarily, so long as it doesn't get out of control. (In) nightmare scenario, investment in China plunges, exposing huge industrial overcapacity. Consumption collapses as workers lose jobs. Trade frictions worsen with the U.S. as Chinese companies scramble to export more. China's central bank is unable to restore confidence among consumers, executives and investors."

"Or the opposite might happen: deflation compels China to upgrade its economy, improving the business environment and increasing government efficiency. In other words, deflation drives positive change, much as it has in Japan."

The Economist checks in on the Japanese situation. "Short-run hopes about Japan’s economy may be a little too rosy. The cyclical recovery seems this autumn to have hit a soft patch..Crucially, it is no longer so clear that inflation will remain positive for months to come. For a start, the core consumer-price index for the Tokyo metropolitan area, which is released a month ahead of data for the rest of the country, fell unexpectedly sharply, by 0.3%, in the year to November. This weakness could soon be reflected in national figures."

"Even a benign inflationary environment would not end the (Bank of Japan's) conflict with the government. After all, Mr Koizumi’s administration is set on a reform path. And an ambitious programme of deregulation could well prove deflationary. The government, in other words, wants the central bank to offset some of the pain."

"So bet on the BoJ continuing with its super-loose policy for longer than it might feel comfortable with. At some point, the continuation carries the risk that bond markets take fright at signs of incipient inflation; if bond yields spike, that could cut off the recovery."

"It also carries risks for the yen, since, with both the Federal Reserve and the European Central Bank in a mood to raise rates, interest-rate differentials with the rest of the world are only likely to widen. But those are worries for tomorrow. For now, you have a cast-iron invitation in Japan’s asset markets to take unlimited risk with free money."

Congressman Ron Paul had this assessment of the Fed nominee. "Mr. Bernanke is a consummate Fed insider, widely seen by the financial press as the logical heir to Alan Greenspan. In fact, judging by his public statements he may be more like Greenspan than Greenspan himself."

"What I mean is that Mr. Bernanke appears to have embraced the idea that the Federal Reserve can create prosperity more than Mr. Greenspan ever did. Like his predecessor, Mr. Bernanke views our system of fiat currency as a tool for creating wealth out of thin air by producing more dollars, whether paper or electronic. But he seems to take things further than Greenspan by refusing even to consider the destructive consequences of monetary expansion."

"In fact, he earned dubious notoriety for this quote in a 2002 speech discussing the supposed threat of deflation in the American economy: 'The U.S. government has a technology, called a printing press, that allows it to produce as many dollars as it wishes at essentially no cost.'"

"But there is a cost, and it's a heavy one. It's called monetary inflation, which destroys the value of the dollar and punishes those who save and invest. The money supply, as measured by the Fed's own M3 figure, has increased about 5 times since 1980. Yet for years officials at the Fed have insisted that inflation is firmly in check."

"The fundamental question is whether a central bank can manage the supply of money and credit better than the free market otherwise would..Centralized planning of the money supply is a form of economic control that significantly affects prices, wages, and production levels. I encourage all Americans to learn more about the Federal Reserve System and what it means for our economic future."

The Bullion Desk has this morning update. "After flirting with the psychological $500 level over the past few days the yellow metal has finally pushed higher after Japanese investor interest took advantage of the firm close in New York yesterday. The dollar went into retreat yesterday, ending its 3-day winning streak following a drop in US housing sales and rumours of more than one rate hike by the ECB."

"Overnight buying from Japanese investors has driven gold to set a new high of $502.30 and despite pockets of profit taking along the way the metal now looks set to target chart resistance at $503 and $509 as the current bull run generates its own momentum, despite slightly overbought signals. Data from the CFTC yesterday showed significant increases in speculative and commercial positions."

"Silver took its lead from gold yesterday, initially rising in Asia to $8.27 before drifting back in the run up to the US opening, fixing at $8.2675. The industrial precious metal dipped to $8.17 shortly after the COMEX opening but gradually found its feet, rally to $8.35 by the close as fund interest joined the bid."

"Platinum found support from both TOCOM and NYMEX fund players yesterday with NYMEX futures rising briefly above $1000 although OTC spot prices reached a high of $998 just after the AM fix, set at $997. The white metal briefly hit $1002 in Asia this morning but has slipped back towards $990 in profit taking from European traders. Industrial and investment demand will continue to keep prices underpinned in the coming months and further gains are likely to test $1040/1080."

"Palladium found a little support from the movements in gold and platinum yesterday, touching $268 but was overlooked for the large part with traders focusing on the larger markets."

Reuters is reporting that the yield curve is closer to inverting. "U.S. interest rate swap spreads were little changed on Monday in quiet action although the swaps curve flattened, led by a flatter Treasuries curve. The two-year swap yield eased slightly to 4.73 percent, down 1 basis point from Friday, while the ten-year swap yield fell 2 basis points to 4.95 percent."

"U.S. Treasury yields mostly moved in the same direction, with the two-year Treasury yield little changed from Friday's close at 4.33 percent, and the 10-year yield losing 2 basis points to 4.41 percent."

Bid-Asked Change Yield
1-Mo T-Bill 3.870-.865 up .025 3.933%
3-Mos T-Bill 3.835-.825 dn .030 3.924%
6-Mos T-Bill 4.130-.120 up .000 4.274%
2-Year Note 99.27+-.276 dn .002 4.324%
5-Year Note 100.25+-.256 up .016 4.318%
10-Year Note 100.24+-.25 up .07 4.402%
30-Year Bond 111.05 -.06 up .28+ 4.619%

Looking at these numbers, one can see the two and five year notes have already inverted.

The dollar traders don't like what they see. "Worries that the housing boom could finally be petering out in the US, drove the dollar down against all the majors in Monday’s New York session. In response to the news panic seized the dollar-bull crowd leading the benchmark currency to loose at least 200-pips against the four major currencies at the peak of the anti-dollar rally."

Fitch Ratings reports the derivatives mess isn't going away. "Fitch Ratings said today that the continuing restatements and financial issues surrounding derivative and hedging activities of US companies are not expected to go away any time soon. Incomplete and inconsistent disclosure of derivative financial instruments by a number of companies, at least partly as a result of the complexity of the rules governing these instruments, continue to raise concern about comparability and uniformity of accounting practices with respect to derivatives."

"'While there seems to be no light at the end of the tunnel to make accounting for these instruments less complex than brain surgery, maybe help is on the way through better disclosures that can help investors understand the risk better,' said Raja Akram, Senior Director of Credit Policy at Fitch Ratings in New York."

"In the current year, giants such as American International Group Inc. and General Electric Co. have fallen on the SFAS No. 133 sword through painful admissions of running afoul the accounting rules. From the analysts' perspective, Fitch notes that it is difficult to assess whether such restatements signify any underlying problems in the companies' risk management. These two companies join hundreds of others within the past year that have restated their financials for misstating results. Such restatements make financial statements more confusing and complex to investors and analysts alike."

"'Given the complexity of current accounting rules, Fitch believes that financial statement disclosures should clearly address both the accounting and the economics impacts of derivatives. 'The best solution at the current time appears to be better and informative disclosures,' said Akram."

"Fitch has previously addressed the need for better disclosures in its report dated November 9, 2004, 'Hedge Accounting and Derivatives Study for Corporates, Disclosure, Hedge Accounting and Restatement Risk' in which it has recommended that companies should move beyond, current, bare-bones disclosure requirements."

Bloomberg reports on the housing numbers and the US dollar. "The dollar dropped against the euro and the yen after an industry report showed U.S. home sales in October fell more than analysts forecast. The report may damp speculation about how many more times the Federal Reserve will raise interest rates."

"'If the Fed sees the housing market start to soften, that may bring them a little closer' to completing the rate increases, said John Cholakis, a currency trader."

"The dollar's decline against the euro may be limited on speculation the European Central Bank will limit interest-rate increases in coming months, according to a Bloomberg survey. Fifty-one percent of the 55 traders, strategists and investors surveyed on Nov. 23 and Nov. 25 from Sydney to New York advised selling the euro versus the dollar, up from 42 percent a week ago, Bloomberg data show."

The New York Times examines the connection between pensions and hedge funds. "Faced with growing numbers of retirees, pension plans are pouring billions into hedge funds, the secretive and lightly regulated investment partnerships that once managed money only for wealthy investors. The plans and other large institutions are expected to invest as much as $300 billion in hedge funds by 2008, up from just $5 billion a decade ago. Pension funds account for roughly 40 percent of all institutional money."

"Pension officials who have been shaken by market downturns and persistent deficits are attracted by hedge funds' promise of richer, or more consistent, returns. But some consultants and academics question whether hedge funds, with risks that are hard to measure, are appropriate for pension funds, whose sole purpose, by law, is to pay out predetermined benefits to retired workers."

"Those benefits are considered so crucial that they are guaranteed: corporate pension failures are covered by the Pension Benefit Guaranty Corporation, a federal agency. 'It's very inappropriate when the company is offering a pension plan that is guaranteed by the federal government,' said Zvi Bodie, a professor of finance and economics at Boston University."

"Accounting rules let companies factor expected pension returns into their operating income; Weyerhaeuser's hedge-fund-laden portfolio allows it to claim expected annual returns of 9.5 percent. For Weyerhaeuser, each 0.5 percent increase in the expected rate of return is worth an additional $21 million to the company's pretax income this year, according to S.E.C. filings."

"Susan M. Mangiero said she had come across pension executives who..did not even know they had derivatives in their portfolios. 'A lot of well-intentioned people don't know they don't know,' she said."

"The surge of pension money is coming at a time when the returns of many hedge funds have not been as strong as in past years, raising questions about whether pensions are arriving at the party late. Hedge funds actually lost money in four of the first ten months of this year, although they still had an overall average return of 5.7 percent."

"Those returns easily beat the stock market. But as they continue to attract money, hedge funds may start to more closely mimic the performance of plain old stocks and bonds. 'There is no such thing as a free lunch,' said Frank Partnoy. 'And even if there were, nobody is offering it to pension funds.'"

The Dallas News explores just how much inflation is out there. "A J.P. Morgan senior economist recently explored this paradox in a short piece titled, 'When the CPI Isn't About Inflation.' Energy prices, he noted, are up by 52 percent in the last two years. Compare that to the annual growth in the consumer price index, which had crept up to 2 percent from 1 percent in 2003, but has since started falling again."

"'Imagine what inflation trends would be if energy prices had been stable,' Mr. Glassman suggested. To satisfy his imagination, Mr. Glassman calculated that CPI growth would be close to zero by now if not for energy. Take it out of the picture, along with areas directly affected by higher energy prices, such as taxi and air fares, paper products and certain processed foods, and you're flirting with deflation, or falling prices."

"'If rising energy prices were the result of strong demand rather than underinvestment by the oil industry, why is demand not providing the same support for other prices?' he asked. 'Instead, more costly energy is squeezing household budgets, leaving little for other purchases. Many businesses are forced to hold the line because their customers cannot support higher prices.'"

"Like it or not, that's where the Federal Reserve's true dilemma lies. Stagnating prices are indicative of an economy that is far sicker than what meets the eye. 'Inflation low enough that the central bank has no desire to push it lower is one of the most significant economic developments since the end of World War II,' Mr. Glassman added."

"And that gets us back to the housing market, the economy's main engine of both growth and jobs in the last five years. Recent data that show a slowing housing sector hold deep implications for the future of inflation. Not only will wages suffer. Like the dot-com industry that created tons of jobs just to take them away, housing will claim a great many casualties in the years to come."

"But other business supported by housing will also lose what little pricing power they've had in recent years. To envision what's to come, imagine anything you buy to fill a home. Now picture it on sale."

Bloomberg reports the shifting discussion in the Fed minutes may hurt the US dollar. "The dollar may fall for a second day versus the euro on speculation the Federal Reserve is close to ending rate increases that began in June 2004, as the European Central Bank may raise rates for the first time in five years."

"The U.S. currency yesterday had the biggest decline versus the euro in almost a month after minutes from the Fed's last meeting showed some policy makers expressed concern the central bank may go too far in raising borrowing costs. After the minutes, interest-rate futures showed traders pared bets the Fed will raise rates three times by April."

"'In 2006, the risks are to the downside in the economy and the Fed will have to eventually bring its tightening cycle to an end,' said Harvinder Kalirai, a Sydney-based currency strategist at State Street Corp., the world's largest custodian of assets. 'If interest-rate futures build on gains we saw after the Fed minutes, we should see broad dollar weakness.'"

"The dollar traded at $1.1804 against the euro at 9:55 a.m. in Singapore from $1.1814 late yesterday in New York. The U.S. currency was at 118.76 yen from 118.74 yesterday. Japanese financial markets are closed today for a national holiday."

"The Fed discussed the need 'before long'' to change its outlook for the benchmark U.S. interest rate, which it has raised to 4 percent, minutes from the Nov. 1 meeting, released yesterday, showed."

"'Yield is playing an important part in currency Markets,' said Greg Gibbs, senior currency strategist at RBC Capital Markets in Sydney. 'The dollar will give up some of its strength.'"

"A decline in the dollar may be limited after Fed Bank of Richmond President Jeffrey Lacker said policy makers haven't finished increasing interest rates, Reuters reported. 'It is clear we're not done removing accommodation,' Lacker, a voting member of the Fed's policy-setting committee next year, said in an interview yesterday."

"'Dariusz Kowalczyk, senior investment strategist at CFC Seymour Ltd. in Hong Kong said, 'As long as Japan keeps its zero-interest-rate policy, the yen will continue to be under downward pressure. The rate gap is clearly negative for the euro too.'The Bank of Japan has kept its interest rate close to zero since March 2001."

A pair of stories on copper have implications for the global economy. "Financial markets are bracing for a second major scare in as many months as investors begin to question whether China will honour millions of dollars worth of copper futures trades."

"Emerging market bonds, equities and the currencies of commodity producing countries all face some fallout if confidence in China is shaken because investor faith in China’s booming economy and huge purchasing power underpins optimism in virtually every asset class."

"'The world’s financial markets are banking on China stepping up to the plate to keep things stable,' Paul Markowski, veteran investment advisor on China, said."

Bloomberg reports those fears may be playing out. "Copper prices fell the most in three months in New York as China prepares for another public auction from reserves of the metal used in housing, appliances and cars."

"The State Reserve Bureau plans to sell 20,000 tons tomorrow. The agency offered the same amount of metal on that day. Copper rose to records in New York and London last week after the state-run China Daily newspaper said China must deliver as much to 200,000 tons of the metal by Dec. 21. 'If the bulk of that position is covered, a downside move is inevitable,' said James Koppel."

"The copper premium for immediate LME delivery, above the three-month contract, fell to $164.85 a ton today, the lowest since Nov. 1 and down from $190 a ton yesterday."

Interfax is reporting on statements by the Russian president. "The Central Bank should review its gold and forex reserves policy in favor of increasing the weighting of gold, Russian President Vladimir Putin said in Magadan."

"'I think that the CB should pay more attention to precious metals on Russian territory when forming its gold and foreign-exchange reserves,' Putin said at a gold industry conference in the city."

"'The reserves are after all gold and forex reserves. Let's not be too restrained here,' Putin said."

The Mail and Guardian has this editorial on the rising US dollar. "If you were using logic to play the forex markets in the past few weeks, you would have lost money. All sorts of reasons have been trotted out to explain why the dollar has been going up, none convincing."

"When you get down to it, there are only two reasons for an appreciating dollar. One is that it is going up because it is going up; the herd mentality of markets means that you do what everybody else is doing even if you think they are wrong. The second is that the markets have deluded themselves into thinking that a country that is spending one dollar and six cents for every dollar that it is earning doesn’t have a problem."

"As a new book by Bill Bonner and Addison Wiggin notes, 'They [the Asians] have enough Treasury bonds have enough Treasury bonds to destroy the US economy on a whim.' One day China may want to do just that, but not yet. For the time being, it does not have any incentive to halt a process that allows it to grow at three times the pace of the US economy, and is prepared to take the risk that the symbiotic relationship will fall apart. Whether it is in the interests of Americans to sit back and do nothing is another matter."

"Bonner and Wiggins argue that the US can’t stop itself. Drawing parallels with the last days of Rome, they argue that Americans believe they can go on spending more than they make indefinitely. Washington would undoubtedly prefer to see the trade deficit cut by rejigging currencies and rebalancing global demand. Indeed, it may use the threat of protectionism to seek a third way out of the current predicament."

"Let’s not delude ourselves, it’s not going to happen this side of an almighty crisis that brings everyone to their senses. At some point, the shopkeeper who keeps extending credit to a customer having problems paying the bills in the hope that he will eventually straighten himself out can end up sharing the pain. Until the crunch comes, however, it’s easy to keep believing the fantasy."

The Financial Times looks at who is buying gold. "Strong speculative demand lifted gold to a new near-18 year peak in London on Monday. Gold rose to $489.75 a troy ounce, its highest price since December 1987 on speculation that some central banks may want to increase their reserves and after a report showed hedge funds increased their holdings in the metal."

"Investors also were being drawn to gold as a haven because of the threat to financial markets from avian flu in Asia, the war in Iraq and the riots in France’s suburbs, traders and analysts said. Analysts expect gold price to hit $500 within the next few months."

"Copper stayed near its Friday’s all-time high on the London Metal Exchange although a report said China’s State Reserves Bureau would export 30,000 tonnes of the red metal by month-end."

Bloomberg reports that Fitch Ratings sees a problem in the derivatives markets. "The $12.4 trillion market for credit derivatives is dominated by too few banks, making it vulnerable to a crisis if one of them fails to pay on contracts that insure creditors from companies defaulting, Fitch Ratings said."

"JPMorgan Chase & Co., Deutsche Bank AG, Goldman Sachs Group Inc. and Morgan Stanley are the most frequent traders in a market where the top 10 firms account for more than two-thirds of the debt-insurance contracts bought and sold, Fitch said."

"Investors use so-called credit-default swaps to insure debt payments or bet on credit quality. Demand surged this week for swaps protecting payments by General Motors Corp. 'Risk concentration remains high,' said Ian Linnell at Fitch in London. 'In the event that there was a major default, for instance General Motors, and then one of the major dealers also defaulted, the market would be in major trouble.'"

"Credit-default swaps are the fastest growing part of the $270 trillion derivatives market, based on the so-called notional value of the debts that underlie the contracts, according to the Bank for International Settlements. The default swaps market worldwide jumped 60 percent to $10.2 trillion in the first half of 2005, the BIS said in a report yesterday."

"In a credit-default swap, the buyer pays an annual premium to guard against a borrower's failing to pay its debts. In the event of default, the buyer gets paid the full amount insured, and hands over defaulted loans or bonds to the swap seller. Swap prices typically decline when creditworthiness improves, and rise when it worsens."

"The annual cost of insuring $10 million of GM debt for five years using default swaps rose to a record of $2.35 million upfront plus $500,000 a year, compared with an annual premium of about $1 million early last week, according to Deutsche Bank prices. The debt-insurance contracts changed hands at about $260,000 at the start of this year."

Reuters has a report on the Bank of Japan. "The head of Japan's central bank, said keeping an ultra-loose monetary policy would cost the economy amid signs that the government is strongly against an early change. Toshihiki Fukui, governor of the Bank of Japan, said keeping an 'abnormal' policy for too long would bring serious harm."

"Mr Fukui was referring to the bank's quantitative easing policy. The Bank wants to end it as soon as it conquers consumer price deflation, expected around next spring. But this week, senior members of the government put public pressure on the central bank not to end quantitative easing too early."

"The end of quantitative easing could make it harder for the government to finance its huge debt burden since it would probably reduce the amount of funds available for banks to purchase Japanese government bonds."

"Mr Fukui further asserted the central bank's independence on Friday by repeating that the possibility was growing for an exit from its ultra-loose monetary policy in the year beginning April 2006."

Bloomberg has a report on golds' new lofty levels. "Gold rose to the highest in almost 18 years in New York. Demand for gold coins, bars and bullion-backed shares rose 56 percent in the third quarter, the producer-funded World Gold Council said today. Gold sold in dollars has rallied 11 percent this year, heading for a fifth-straight annual gain."

"Gold for December delivery rose $7.80, or 1.6 percent, to $486.90 an ounce on the Comex. Investors and jewelers bought $12.5 billion worth in gold, or 838 metric tons in the third quarter, up 7.6 percent from a year earlier, the London-based World Gold Council said. Jewelry demand accounts for 73 percent of gold consumption."

"The Philadelphia Stock Exchange Gold & Silver Index of 13 producers, including Newmont Mining Corp., rose 2.02, or 1.8 percent, to 116.31 at 2:03 p.m.. The index has climbed 17 percent this year."

"Gold may reach $500 an ounce by the end of the year, Paul McLeod said. Some investors may sell for a profit when the metal reaches the $490s, he said. Gold last climbed above $500 an ounce on Dec. 11, 1987. Gold futures surged to $873 an ounce in 1980, when U.S. consumer prices rose more than 12 percent from the previous year."

"The announcement by the U.S. Federal Reserve on Nov. 10 that it would stop reporting data on the broadest measure of the money supply, or M3, triggered gold's rally this week, said James Turk. 'Not reporting M3 is the equivalent of General Motors not reporting how many cars it produces,' Turk said. 'The misstep will only hasten the rush out of dollars into the safety and security of gold.'"

"'The dollar's move up should not delude us into thinking the dollar is actually stronger,' Darda said. 'There seems to be a global move out of paper and into gold, likely the result of the major central banks of the world keep short rates too low for two long.'"

The Financial Times has an update on the credit bubble. "Issuance of asset-backed securities in the US is set to top $1,000bn for the first time this year, according to figures that show ABS issuance is up 23 per cent this year compared with 2004."

"Deals based on home equity loans still dominated the market, up slightly from 2004 and accounting for 40 per cent of the total volume at $329.3bn. But this was down from a 47 per cent share last year as other sectors grew faster."

"Student loan issuance rose 21 per cent to $45.7bn. Sallie Mae, the former government-sponsored entity now turned private, was responsible for 42 per cent of issuance."

"Credit card issuance was worth $41.8bn by the end of September compared with $37.8bn in 2004. This is expected to have slowed in the fourth quarter, however, after changes to bankruptcy rules last month sparked a rush to file for protection ahead of the change."

MarketWatch reports on this mornings metal action. "Gold futures climbed as much as $10 an ounce Wednesday to a one-month high, silver prices rose above $8 an ounce to their loftiest level since December 2004 and platinum futures rallied to a fresh 26-year high."

"Strong physical demand, central-bank buying and concerns about inflation drove the broad rally, analysts said. 'It is physical demand from China and strong buying from India in September [that] really pushed the gold market into this bullish trend,' said Thomas Hartmann."

"December silver climbed as high as $8.025 an ounce, its highest intraday level since December 2004. The contract last traded up 20.8 cents at $7.99 an ounce."

"Foreign-currency weakness helped fuel gains in gold, said John Person. 'European buying has been strong as doubts are increasing over economic stability, [and] inflation expectations are mounting,' he said, pointing out that Bundesbank President Alex Webber believes 'inflation in Germany has a potential to exceed expectations.'"

"Hartmann said the metals also found support from statements made by a few central banks, particularly South Africa and Russia. 'They hinted rather explicitly about scooping up more gold reserves,' he said. 'Early 2005 was filled with reports of central banks selling gold, but we've seen bank reserves in gold fall to about 9%, while historically it's been as high as 15%, meaning there's some room for buying.'"

Reuters reports on support for the US dollar. "The dollar rallied close to a 27-month high against the yen and two-year peaks against the Swiss franc, sterling and the euro on Wednesday after Treasury data showed record net inflows into U.S. assets in September."

"The dollar had already gained in reaction to a report showing U.S. consumer inflation was higher than expected. Consumer prices rose 0.2 percent in October despite a dip in energy prices as housing costs notched the largest increase in nearly five years."

"'The core print was pretty much as expected, while the headline is just a touch firmer than expectations,' said Ronald Simpso. 'It keeps the Fed expectations on track for a hike at their next meeting and the meeting after that.'"

"The Federal Reserve has been tightening credit since June 2004 to ward off inflation, raising short-term interest rates in quarter-percentage-point increments from a four-decade low of 1 percent to the current 4 percent. Further increases are widely expected at policy meetings in December and January."

As the Russian central bank considers stocking gold, another european country plans to sell. "Speaking at a news conference to present the financial aspects of a new coalition agreement between the German conservatives and Steinbrueck's Social Democrats (SPD), he also said he was in talks with the Bundesbank about a sale of gold reserves to finance future investment projects."

"Steinbrueck confirmed reports on Friday that the government wants to sell part of the Bundesbank's roughly 3,433 tonnes of gold reserves and invest the proceeds in interest-bearing assets controlled by the bank."

"The interest would then be used to pay for research and development projects and would not flow into the federal budget. The Bundesbank has signalled in the past it would not accept such transfers to the budget."

The Resource Investor reports on a developement in Russia. "Russia's Head of External Reserves Management, Maria Guegina, said gold reserves as a proportion of all reserves may be doubled. Noting that Russia presently has 5% of its national reserve portfolio invested in gold, Guegina said, '10% of gold in reserves would be appropriate.'"

"Russia presently has 500 tonnes (17.64moz) of gold in reserves which it segregates as monetary gold, allocated gold and term deposits. The envisaged doubling of Russia’s gold reserves as a proportion of all reserves at present values would consume all the country’s annual gold output for around three years."

"The actual tonnage to be added continues to grow as Russia aggressively builds its overall reserves thanks to a windfall profits from oil and gas, a good deal of which is now flowing directly to the state. At recent oil prices Russia was raking in $500 million a day from its oil exports."

"Guegina’s indication of Russian gold buying chimes with comments yesterday by Professor Kenneth Rogoff. He told delegates that he expects gold sales to be reversed in the medium term as central banks seek to offset rising risks and because of the need for diversification away from the American dollar."

The Fed chief made a surprising comparison this morning. "(Alan) Greenspan said the United States has benefited from being considered the world's reserve currency, the currency foreigners turn to first when they want to hold investments outside of their country."

"'Although I doubt that the U.S. dollar will lose its status as the world's reserve currency any time soon, there are in my judgment lessons to be learned from the experience of (Britain's currency) as it faded as the world's dominant currency,' Greenspan said."

"Britain made the mistake of trying to impose extensive regulations to try and support its currency's position on the world's stage, which made Britain's economy too rigid in times of financial crisis, he said."

"Greenspan suggested that constraints on financing of the U.S. trade deficit are likely to come from 'foreign investors' fears' of holding too large a share of their investment portfolios in U.S. stocks and bonds."

"He suggested that this change could already be under way. He noted that of the more than $30 trillion in foreign investment tracked by the Bank for International Settlements in the first three months of 2005, 42.5 percent were in dollars and 39.3 percent were in euros."

"The dollar's share was down by 4 percentage points from around three years earlier, while the euro's share was up by 5 percentage points, Greenspan said."

This editorial suggests the Fed is in a trap. "The Fed has a major problem on its hands. In order to prevent soaring energy prices from creeping into the general economy it must continue to raise the fed funds rate until it hurts. A number of corporations have already begun tacking surcharges onto their prices in the hope that consumers will perceive them as temporary, while others are attempting to hike prices directly."

"In the meantime, Wall Street is assuming that core prices will remain under control and that the Fed is near the end of its tightening cycle, seemingly without realizing that these potential outcomes are contradictory."

"As long as the rate hikes have no effect and consumers continue spending, the Fed cannot stop tightening. They realize that if they stop tightening too soon, and inflation takes off, it will eventually be that much harder to bring it back down. The only way to stop higher prices from spreading to core prices is to keep raising the funds rate until consumer demand softens to the point where business finds that they can no longer pass along the increased cost of energy."

"The problem is that the Fed will only know that their policy has worked when it sees the actual signs of the slowdown, and by that time they will have instituted two or three more rate hikes than they needed. The result, as usual, is likely to be a recession."

"With household debt at record highs; consumer savings at record lows; housing prices at the top of a bubble; the trade imbalance at record levels; and the federal budget already in serious deficit, a recession could easily feed on itself and become a damaging deflationary downturn at a time when the market is highly overvalued."

"The Fed is therefore facing the difficult problem of both a near-term inflationary threat and an eventual undesirable deflationary outcome at the same time that it is undergoing a change in leadership. We believe the current complacency and downright optimism in the stock market will prove to be yet another example of the majority being wrong at the turning point."

BBc reports on a recent high for platinum. "Platinum prices have hit highs not seen for more than 25 years, driven by growing demand for the metal in cleaning car exhausts. Prices have risen nearly 130% over the past four years and now stand at more than $950 per troy ounce."

"It is a key component for catalytic converters in diesel engines, which are growing more popular as petrol prices rise and pollution rules are toughened. Russia and South Africa are the two main producers of platinum."

"Demand for a similar precious metal, palladium, is also rising because it is being used as a cheaper alternative for jewellery, particularly in China. Prices for palladium, which can also be used to clean car engine exhausts, now stand at about $240 per troy ounce."

Correct me if I'm wrong, but I believe that most platinum is mined as a by-product of other metals operations and therefore it is more difficult for producers to ramp up supply.

This Axcess News site has some thoughts on short versus long term returns. "Currently, the Consumer Price Index is 4.7%, which against the yield of the 10-year Treasury, offers a negative return."

"This negative yield curve stands out even more when you consider the return on short term securities. For instance, according to the latest data available at Bank Rate, a one-year certificate of deposit will net you around 4.59%. When an investor is asked to take on long term risk when the short term provides the same relative yield for the risk, the Fed worries."

"The investor does have options. Moving long term money into short term securities is one. Floating rate bonds tied to adjustable rate mortgages, a risk that requires close monitoring of the mortgage interest rate, have netted the savvy investor an average of 7.2%. A word of caution: In the next eighteen months, over $1 trillion in ARMs are slated to be reset and of those newly adjusted mortgages, almost half are being held by subprime borrowers. So buyer beware!"

"We are in for an economic slowdown, the possibility of a bear market on both bonds and equities, and rising gold prices as some investors loss faith in the strength of the dollar, and the uncertainty of what Mr. Bernanke might do with the Fed Chair he inherits. All of which makes a compelling argument for diversification."

The always interesting William F. Hauge has an editorial on the current economy. "Recently, Alan 'Mr. Bubbles' Greenspan and his band of merry men raised interest rates yet again for the 12th consecutive time. We should also realize that the current string of rate increases began back in June of 2004. Here we are, a full 18 months later, and we still haven't 'tamed the beast.'"

"I think the real observation here is that we are not seeing any type of slowdown in any way, shape or fashion. If the past few weeks on Marco Island are any indication, we may continue to see rates rise for quite some time. The constant barrage of incoming visitors is certainly a welcome sign to the business community, only not so much to the economist."

"With all of this uncertainty, educated investors have designed and implemented a plan to combat this syndrome. It is not just the conservative investors anymore, either. Investors of all types are beginning to re-position their assets into insured and fixed portfolios. This allows them to ride-out any market gyrations, capitalize and lock-in the small upswings while avoiding loss."

"In this uncertain time, there are simple, stable and predictable options for the educated investor. Get a plan together now. While everyone else worries about what is going on around them, the smart investors can go about their lives and continue to be SWAN's. They can Sleep Well At Night."

A writer tries to understand what happened to Refco. "The recent collapse of Refco, a large US-based broker in the commodities and derivatives market, has some very interesting features for students of behavioural finance. In parallel with Enron, WorldCom and umpteen other companies, it is the top executives, whose compensations run into tens of millions of dollars, who seem to be perpetrating the biggest frauds."

"What is the motivation? Surely, by almost any yardstick, the fraudulent behaviour should be considered as irrational? Do the risks taken justify the rewards, which, in any case, are not required for any conceivable need of the perpetrator? While one can surely understand why hundreds of people looted shops during the flooding of New Orleans, it is much more difficult to make sense of the misdeeds of top executives."

And, if man is not rational, what happens to the massive body of economic theory based on the assumption of rational behaviour?

Bloomberg reports on the currency situation. "The dollar may fall for the first day in a week against the euro on speculation its rally yesterday to a two-year high was excessive given signs inflation is under control."

"The U.S. currency has climbed 15 percent versus the euro this year as the Federal Reserve raised interest rates to quell inflation. A government report tomorrow will probably show import prices dropped for the first month in five in October on declining oil prices."
"'Concern about a pick-up in inflation is easing as oil declines, meaning there is less need for the Fed to raise rates and less support for the dollar,' said Minoru Shioiri. 'The dollar gained too far, too fast.'"

"The dollar also may drop on speculation rising interest rates are making mortgages more costly, curbing home sales and threatening to slow economic growth. 'Some investors are worrying about the slowdown in the housing market, a key driver of the U.S. economy,' said Toru Umemoto. 'The abrupt slowdown in the housing market could lead to a loss of consumer confidence and a decline in assets, which makes investors cautious about buying the dollar.'"

"The dollar yesterday gained versus the euro on concern about rioting in France. Speculation social disorder will damp growth and deter investment in euro-denominated assets pushed Europe's common currency lower versus 11 other major counterparts."

"'The rioting is a cause for concern over the euro,' said Koichiro Amaya. 'It will harm the credibility of the euro-zone economy if the riots are prolonged, as the issue is deeply connected with policies toward immigrants.'"

The Japan Times has this editorial on interest rates. "In March 2001, the Bank of Japan set short-term interest rates at near zero, declaring that the nation's economy had entered a period of deflation. That extra-loose monetary policy, which is said to have had few parallels in the world, is likely to change next spring, because an upturn in consumer prices, an essential condition for lifting the 'zero-interest-rate' policy, is considered almost certain."

"The 'quantitative monetary easing' now in place can be described as an 'abnormal policy designed to deal with an abnormal situation,' namely, deflation. The test for the central bank is to get the economy out of this anomaly without disruptions. The present policy was introduced as an 'emergency measure' to save troubled financial institutions even if individual deposit-interest rates were sacrificed."

"Another lesson is that the BOJ could miss the opportunity to raise interest rates if it pays too much attention to consumer-price trends and overlooks vital signs in other key areas. That's what happened on the eve of the bubble. The bank failed to grasp the gravity of the situation: Inflation in asset prices was creeping up amid soaring prices for real estate, stocks, paintings and so on."

"Now there is talk of a 'minibubble' as surplus money flows again into stock markets and urban real estate. Although a full-blown bubble is unlikely, the central bank needs to stay on guard. Making a policy change at the right time is always a big challenge for the central bank. Making it too soon, or too late, could make things worse."

Bloomberg reports on the dollar rally. "Canada's dollar fell for a fifth straight day and joined 10 other major currencies in sliding against a rallying U.S. dollar. Prices of commodities such as oil declined, contributing to the Canadian dollar's longest slump since April."

"Falling prices for energy and other commodities, which account for 35 percent of Canada's exports, may decrease demand for the Canadian currency by damping the outlook for the nation's economic growth. The U.S. dollar, the currency of Canada's largest trading partner, advanced against 10 of the 16 most actively traded currencies on the prospect the U.S. central bank will extend its interest-rate increases."

"Canada's dollar fell to 83.75 U.S. cents as of 9:08 a.m. in Toronto from 84.27 U.S. cents late yesterday, dropping to the weakest since August. It was the currency's first five-day slump since April."

"Canadian housing starts fell to a 206,700 unit pace in October from a revised a 229,600 unit pace in September. Economists expected starts of 225,000."

Bloomberg has the surprising results of a Wall Street poll. "Gold prices, up 4.4 percent so far this year, may rise on speculation the Federal Reserve will fail to slow inflation, boosting the appeal of bullion as a hedge, a Bloomberg survey shows."

"Seventeen of 28 traders, investors and analysts surveyed from Sydney to Chicago Nov. 3 and Nov. 4 advised buying gold this week. Eight recommended selling the metal and three were neutral."

"'The Fed is committed to gradualism and inflation is likely to rise faster than interest rates,' said Stephen Leeb, who oversees $140 million in New York. Leeb Capital holds 4 percent of its assets in gold stocks. 'It's a bull market for gold,' he said."

"The precious metal is heading for a fifth consecutive year of gains and is a better gauge of future inflation than crude oil or the consumer-price index, Boston-based H. C. Wainwright & Co. said in a Nov. 4 research reported commissioned by the World Gold Council."

"U.S. consumer prices in September rose the most since 1980 as a surge in crude-oil and gasoline prices filtered through the economy, the Labor Department said Oct. 14. Prices paid by consumers jumped 1.2 percent, the biggest increase since March 1980."

"'The Fed is behind the inflation curve,' said Thomas Winmill, who invests in gold stocks for the $60 million Midas Fund in New York. Ben Bernanke, nominated by U.S. President George W. Bush to succeed Fed Chairman Alan Greenspan, is 'going to be stimulating the economy and let the inflation creep higher,' which will be positive for gold, he said."

Market Watch reports that gold didn't hold the $460 level. "After closing out last week with a loss of nearly $17 an ounce, gold futures traded little changed Monday morning, holding ground near $458 an ounce. 'Scaled-down buying from the physical sector will slow the metal's progress,' said James Moore. 'There is potential for gold to dip to $445 in the short-term before recovering towards year-end,' he said in a note to clients."

"Silver and copper futures were among the other losers in the metals market Monday. December copper fell to $1.841 a pound, down 0.5 cent after tapping a lifetime high of $1.854 a pound on Friday. December silver fell 9.8 cents to trade at $7.48 an ounce."

"'With gold still vulnerable to further pressure in the coming sessions silver will remain in a volatile mood,' said Moore, adding that 'support should continue to be found at $7.40.'"

"Other metals on the exchanged headed higher. The January contract for platinum was up 70 cents at $935.50 an ounce and December palladium traded at $229 an ounce, up $2.65. Tacking a look at the bigger picture, the stronger dollar may add some downward pressure to the metals, said William Adams."

"Merrill Lynch & Co.'s Chief North American Economist David Rosenberg said gold may offer an alternative to investors as U.S. capital markets head for a 'year of heightened volatility.'

"'In the year of dollar weakness, gold will be a good place to be as it stabilizes your portfolio,' Rosenberg told investors in Singapore today. 'There is a 30 percent chance for a recession. If growth gets weak enough to get the employment up, then it's going to feel like a classic recession.' "

"A cooling housing market and regulatory moves to curtail a credit boom may curb growth in consumer spending, leading to slowdown in the U.S. economy, Rosenberg said. 'Credit excesses have gone out of control,' Rosenberg said. 'We are going to be seeing much different consumers, not just next year, but next four to five years.'"

"The U.S. savings rate has shrunk as households are spending their wage-based income on expectations that house prices will continue to increase, he said. 'Forty percent of growth in consumer spending in the past year has come from a drawdown in savings rate to negative territory,' he said. 'If you think that consumer spending is predicated on organic income and employment gains, forget it.'"

This Daytona Beach article has some info on investing and inflation. "'The single thing that affects the market the most is inflation,' said Michael Walsh, in Daytona Beach. 'It's not earnings; it's not terrorism; it's inflation.'"

"Two weeks ago, some people were startled when federal officials announced the Consumer Price Index had jumped 1.2 percent in September, the biggest monthly increase in 25 years. That pushed the cumulative inflation rate for the past 12 months to 4.7 percent. While that's still far below the double-digit rates that socked the economy in the late 1970s, it still leaves wage earners with 2.7 percent less purchasing power than they had a year ago."

"An inflation-resistant security sold by the Treasury Department received a hefty boost Tuesday. The 30-year adjustable-rate I-bond, previously sold at 4.8 percent, was raised to 6.73 percent. The bond's interest rate will be revised again next May to reflect any additional changes in the CPI."

The Daily FX has the latest on the US dollar. "Non-farm payrolls have not failed us yet; it delivered a nice dose of volatility to the market once again today. The dollar first took a nosedive on the back of the report but then managed to recuperate its losses and even hit a new 1.5 year high against the Euro by the day’s end. Non-farm payrolls were reported at 56k vs. expectations of 120k."

"It seems that the most important thing at this point is that the market is focusing on income growth, suggesting that the Fed has further leeway to raise rates. However we still caution that weak labor growth and the prospect of high heating bills still poses a risk for the US consumer, especially going into the usually critical Christmas shopping season."

As Business Week shows, the prospects for the Christmas season looks dim. "'Here we are, officially celebrating the fourth anniversary of this economic expansion, and the wage income share of the national income pie is south of 46 percent,' fumed a research note by Merrill Lynch North American economist David A. Rosenberg. 'At no point in the past 50 years has this ratio been so low so far into a business cycle." Historically, the ratio has been 3.5 percentage points higher.'"

"The ratio is important because it looks at wages, your paycheck, instead of other sources of income, like the stellar Wall Street bonuses we saw last year and are almost certain to see again this year. Wage gains haven't kept pace with inflation, but total income continues to look good, thanks to those hefty bonuses."

"October auto sales were the weakest for any month since mid-1998. Your interest in home buying has hit its lowest level since 1991."

"Outstanding balances on credit cards have risen to more than $800 billion, or $7,200 per U.S. household. The United States debt-to-income ratio rose as much in the past five years as it did in the previous 15 years, according to Merrill Lynch."

"Jumps in gasoline and heating prices make getting anywhere and staying warm at home more challenging. Increases in interest rates and higher minimum credit card payments have chipped away at checking accounts. If you've been renting and want to buy a home, good luck: Affordability for first-time home buyers is the worst it has been in 16 years."

This New York Times editorial reveals that many at the don't even know what inflation is anymore. "Early in his tenure as chairman of the Federal Reserve, Alan Greenspan declared that the risk of too much inflation was so considerable that he would 'err more on the side of restrictiveness than of stimulus.' Mr. Bernanke faces a fundamentally different set of circumstances than those that Mr. Greenspan confronted 18 years ago."

"'Inflation is clearly not right around the corner like it used to be,' said Edward M. Gramlich, until recently a Fed governor. 'The relationships are different, and Mr. Bernanke is going to have to figure them out.'"

"Perhaps the biggest differences are the rise of global production, as well as much easier access to capital, particularly from abroad. Adding to the change is labor's weaker bargaining power. These factors have combined to greatly diminish the force of old-style inflation."

"Instead, a new style of inflation has emerged as one of the principal threats to the economy. It is evident in the stock market bubble of the late 1990's and in surging home prices in this decade. This asset price spiral, as it is called, has proved much more resistant to the Fed's standard interest rate tool than traditional inflation."

"What lifts asset prices, Mr. Bernanke and others argue, is the willingness of lenders to offer riskier types of loans, which 'juice up the housing market and are not very responsive to interest rates,' as (economist) Mark Zandi put it."

"Lenders can engage in riskier loans because they have developed techniques in recent years that make it far easier for them to shed their vulnerability to risk, doing so mainly by shifting the risk of default to others. The lenders operate in sophisticated markets that allow thousands of individual investors to purchase a slice of the original loan, and a slice of the risk."

"Mr. Bernanke, in response to the risk shifting, has raised the possibility of limiting the dangers through the use of regulations, microregulatory policy, he calls it. 'There are two ways to approach bubbles: one is interest rate policy, the other is microregulatory policy,' he said in a little noted interview published last year. 'Microregulatory policy is the much better approach, in my view,' Mr. Bernanke said."

"He added: 'Research on historical episodes suggests that large asset price increases are sometimes preceded by credit booms. In many cases, this pattern results from the fact that the country in question deregulated its banking system, giving banks extra powers, but did not enhance the supervisory structure adequately at the same time.'"

"'Whereas in 1987, it was clear that the way to combat inflation was to raise interest rates," said Brian Sack, who once wrote a research paper with Mr. Bernanke, 'today the Fed's policy makers have to be cognizant that the higher energy prices are slowing the economy' on their own."

"To be sure, the gradual shift to a more global economy and the vast expansion of global capital markets have not left the central bank with no inflation to fight. But the dynamics have changed."

The Financial Times interviewed Treasury Secretary John Snow and the Chinese currency came up. "FT: You policy has been..steady pressure but relatively gentle on issues like the currency and intellectual property rights. They’ve made commitments but no great evidence that things are improving on the ground."

"JS: The action they took in July was a historic step. They surprised most people with that announcement on July 21. What they did of course was to do the de-linking of the modest, I agree, revaluation of 2.1 per cent. But they reaffirmed the commitment to where they want to go and I’ve never seen any wavering of backtracking from that...It was interesting to see the front-page article [in the November 3 Asia edition of the FT, in which a Chinese central banker calls for a wider band]. We think a wider band would be helpful and desirable and in their interest."

"What else is going on over there, it’s important to keep in mind, is the continuing effort..to put in place through this CFTs the China foreign exchange trading system, a branch of the People’s Bank of China. To put in place the platforms to conduct foreign exchange trading and we forget that if you’re pegged you’ve got to learn how to trade, how to let the currency..They’re also putting a lot effort on the hedging devices, the futures and the puts and the calls on the currency to allow the forward market to work, the derivative market, the hedge market to work. That’s all consistent with their being committed to this objective of flexibility and to being on a path to get there."

"FT: Then it seems the other thing is there’s a difference between the China timetable and the political timetable of Congress here and that just seems to be the problem, not the substance but the timetable."

"JS: Yes..The folks in the Congress and the leadership on it are genuine in their concern. A misaligned currency contributes to global imbalances. They’re sincere and right in wanting to see movement. You’re right the fundamental issue here I think with us and the Chinese is the pace at which they move. We all recognise you’ve got to put in place, you’ve got to walk before you run. I think that they can move more without serious risks. With this move they’re creating around the move there’s been no disruption; there’s been no financial crisis. They’ve weathered it well. They’ve absorbed the changed valuation well. The system is accommodating to it without disruption of any kind, and that suggests to me that you can do a little more."

"You should do more. Our view is, yes we understand there are risks of moving too fast, there are also big risks of moving too slow and getting that balance right. As we look it at the margin there are more risks in going too slow than there are in going faster. That’s sort of the nature, the essence of this, that’s the nature of this give and take."

"FT: One quick last one. People outside and some people here have said you’re keen to get back to the private sector. Are people right when they say that?"

"JS: Some day I could certainly see myself back in the private sector, some day."

"FT: Soon?"

"JS: It’s like the Chinese currency...you know the direction, it’s a question of the timing."

One gold trader had a report this morning. "India's gold import was reported to have risen 52 per cent to $5.5 billion during April-August this year from $3.6 billion recorded in the same period last year. Gold's share of total imports has gone up to 10.2% from 9.3%."

The country's gold consumption—including jewelery, investment and industrial demand—logged in at 508 tons in the first half of the current financial year compared with about 400 tons last year, according to World Gold Council Managing Director Sanjiv Agarwal."

"Gold stabilized, rising slightly in New York trading on Wednesday, while holding solidly all day above the $460 mark, which seems to represent a floor for now..Most analysts saw gold in consolidation mode, with little in the way of major developments to either ignite a resumption of the bull market, or to pressure the metal below current support levels."

A letter to the editor at the Washington Post has a comparison to the inflationary 1970's. "In his Oct. 26 column, Robert Samuelson said a 1970s-era inflation breakout 'ain't gonna happen this time,' in part because "the Federal Reserve won't let it happen."

"In fact, the Fed under Alan Greenspan has held interest rates below the inflation rate for the past several years. But negative real interest rates probably were the key policy mistake that ignited inflationary pressures in the 1970s."


"Today, as in the '70s, we also have a huge demographic bulge; the 'echo boom' of the baby boomers' children, this time combined with millions of immigrants, entering the housing market and bidding up prices. And we obviously have another oil price shock akin to those of the '70s."

"Other parallels include a weak dollar, a huge trade deficit, an enormous structural deficit in the federal budget, and an expensive and seemingly endless war. One factor worsening inflation today that was not present in the 1970s is the rapid growth of the Chinese and Indian economies, which is pushing up prices of industrial and agricultural materials. Copper prices, for instance, recently reached a record high before retreating."

Forex News has an update on the changing nature of government and business in Japan. "The USD/JPY is at the gates of 117, with all other major Yen pairs (notably EUR/JPY and GBP/JPY) telling a similar story. The Nikkei, too, is approaching the unexpected level of 14,000, a full 1000 points higher than analyst consensus, which has pegged the index to close the year at 13,000."

"It seems that senior policy-makers in Japan are sending mixed messages related to monetary policy. Within the newly appointed cabinet, it appears that Economy Minister Yosano is taking a more hands-off attitude to BoJ policy, while Finance Minister Tanigaki prefers a closer relationship between the government and the bank. While such a disagreement would hardly be newsworthy in other countries, this rift highlights a major structural concern within Japan."

"For those advocating a moving-away from the 'Japanese model' of government business 'cooperation,' this ministerial tussle is seen as a healthy shift towards unwinding the monolithic government/business marriage and a step towards greater central bank independence. Others fear the new Economy Minister's hands-off approach to the BoJ is potentially reckless as the economy attempts to break from its 7-year battle with deflation. More cautious statesmen are worried about abandoning the 'massive liquidity policy' prematurely."

Market Watch has the gold markets reaction to the Fed hike. "Gold futures held their ground above the $460-an-ounce level in electronic trading Tuesday after the Federal Reserve once more raised U.S. interest rates by a quarter of a percentage point."

"'All the changes coming for the Fed leave for a lot of uncertainties and that is something that gold often rallies on the back of, this time around it could be an exponential increase,' said veteran commodities trader Kevin Kerr."

"At the same time, gold is testing the $460 level and may fall a bit further, he said. 'The yellow metal seems to snap back just as quick as it sees profit taking though, so the short side of the market needs to be cautious,' he said, adding that 'traders need to see gold at these levels as a gift that we may not see for some time again.'"

"So far, 'after proving to be tough resistance on several different occasions, the $455-$460 area [for gold] is now being tested to see if it has become key support,' said Peter Grandich."

"Grandich said the level will likely hold 'as all the fundamentals that led gold to its most recent highs remain in force, strong physical and investment demand, increasing geopolitical concerns abroad and within the U.S., and as an alternative asset class versus stocks and the bubble-breaking real estate market,, he said."

"December silver closed down 11 cents at $7.47 an ounce while December copper added 0.5 cent to finish at $1.816 a pound. The January contract for platinum closed down $14.80 at $928.40 an ounce after ending October with a gain of nearly $8. December palladium finished the session at $223.40 an ounce, down $3.75."

The Financial Times has the latest on the currency front. "The dollar hit a fresh two-year high against the yen at Y116.75 ahead of an expected quarter point interest rate rise by the US Federal Reserve later on Tuesday. The Fed is seen raising interest rates for a 12th consecutive month to 4 per cent. Economists are now seeing the rate cycle peak at 4.5 per cent or even 5 per cent next year following the recent flood of hawkish comments from Fed officials on containing inflation."

"The yen has suffered from Japanese investors’ easing risk aversion. Signs of sustained economic recovery has meant more confident investors are buying foreign assets. The Bank of Japan may be moving toward dumping its ultra easy monetary policy but no move away from near zero interest rates is expected for some months. This means the yield remains much better overseas."