Thursday Morning

More heavy losses on the Asian stock markets overnight point to possible further heavy losses in Europe and the US.

There is an almost total loss of confidence in any asset that you cannot hold in your hand. Gold's continued fall is, therefore, very surprising until you realise that the price is being manipulated down by intervention. Officially, gold is at £454 per ounce but if you want to buy any gold in London you will have to pay between £500 to £550 per ounce - you might have difficulty in finding any stock at £500. The official price of gold has now become meaningless. It will be interesting to see how the large bullion dealers who are members of the LBMA will cope with this...if they don't pay a fair price for bullion that they are storing for clients then their clients will withdraw it and sell it on the open market, themselves. Even more interesting to watch will be those who have unallocated gold holdings in firms such as BullionVault, Kitco, Perth Mint, etc. It looks as though they would be stuck with the official price or 'paper gold' as it has become known. Interesting times ahead! Possibly this situation will disappear once the heavy intervention stops but free markets become very unpredictable when manipulated.

The biggest news item continues to be the continued strength of the US Dollar. It might be showing signs of bottoming but it has a lot of unwinding to do and, as the world's reserve currency, when it does fall it is going to cause yet more stress in already fragile markets.

Commodities continue to lose, on the worldwide economic downturn, though staple foods might have stabilised. Further job losses and factory closures in the industrialised world suggest that wages will either fall, or, at best, not rise.

All of the indicators are screaming "DEFLATION AHEAD!". However, we have, locked up in the banks, the largest cash injection ever seen on the planet, by two orders of magnitude! When that finally unwinds there are going to be enough surplus US Dollars to buy a nice new car for every man, woman and child in the western world. This is clearly crazy and will not happen; what will happen is that all of that money will chase the same goods and services, so prices will rise. The classic cause of inflation; too much new money. Unless central banks can somehow mop-up all of those excess Dollars, I can't see how this can be avoided.

So how might central banks mop-up the inflationary surplus Dollars, when the time comes? The most obvious way is by massive new taxation and seizure but this effectively steals money from citizens and goes completely against the principle which states that free markets can only work when the property rights of individuals are respected and protected. The levels of new tax and seizures by governments required to remove this excess liquidity would need to be vastly higher than any taxes seen before and would cause distortion in the distribution of wealth. Those who had worked and saved diligently would have to be the target as they would be the ones with the money, and others, who had done nothing but borrow and spend would benefit by becoming net recipients in a vast new interventionist state. The way it is going now, I see little alternative other than hyper-stagflation. Stagflation is when you have inflation and an economy in recession; it is a rare thing and causes immense social injustice at the bottom of the ladder particularly the elderly and those on fixed incomes. Think Boomers and the Perfect Storm, which I discussed a few days ago.

Of course this is all fairly easy to predict if you take the time to read the news and put it into the framework of fairly elementary economics (think Adam Smith and free lunches). This is not 'far-out' theory, it is what all of the economic pointers are predicting.

That's what is behind the new gold rush. The biggest driving force behind the massive public buying of physical gold is the fear that governments have now lost control and that the ordinary man in the street is now in a lose-lose situation. I hesitate to recommend to anyone that they should buy gold because the could lose, however, physical gold bars or coins either in hand stored in a safe for you seems worthy of careful consideration. Email me for further information or have a look at www.3r.co.uk/gold