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Li Lianzhong, head of the Chinese Communist Party’s policy research office, voiced his opinion today about what China should do to reduce its exposure to the greenback. The article offers some clues about what China’s strategy may be, which likely includes a larger role for gold and other hard assets instead of worthless paper.

Li claims the US dollar is poised for a fall, and adds that China should buy more gold to support the greater international role envisaged for the yuan. Furthermore, Li stated that China should use more of its $1.95 trillion in foreign reserves to buy energy and natural resource assets, a strategy the country has already been following a lot lately.

Speaking at a foreign exchange and gold forum, Li also said that buying land in the United States was a better option for China than buying U.S. Treasury securities.

‘Should we buy gold or U.S. Treasuries?’ Li asked. ‘The U.S. is printing dollars on a massive scale, and in view of that trend, according to the laws of economics, there is no doubt that the dollar will fall. So gold should be a better choice.’

There is no suggestion that Li, even though he is a senior researcher, was enunciating an agreed party line.

I’ve been reading a lot lately, and one of the interesting sites I’d like to share is the brief history of money from Garmarley. It’s a compilation of some of the monetary follies of the past, starting in 700 BC in Greece and ending with the episode of hyperinflation in the Weimar Republic.

Another interesting read is this article about episodes of hyperinflation, the site isn’t well structured but the information is pretty good.

The Japanese Nikkei 225 stock index made headlines today as the index had crossed the 10,000 barrier. The Nikkei index has climbed around 45 percent since its March low and is now at its highest level in eight months.

There’s little reason to celebrate though, a quick peep at the chart below reveals that even at 10,000 the Nikkei is still down almost 75 percent since its peak in 1989. Since the Japanese bubble busted the Nikkei continued to seek lower lows, investors who followed a buy and hold approach for the last quarter century received a return of virtually zero percent. Three times hooray for massive government intervention, the same trick that’s now tried in the West.

Nikkei chart

I haven’t been posting a lot on my blog lately, because I didn’t really know what to write about. This may change as I’m planning to post some more about economic related news, not the typical mainstream stories but the more juicy bits and fascinating contrarian views.

One of the interviews I enjoyed reading today was one with Jim Rogers over at The Economic Times. He predicts a lot of inflation is ahead of us and believes it’s dangerous to short stocks right now because of the risk of hyperinflation. Rogers claims quantitative easing (the printing of money) could cause huge nominal increases in stock markets, the S&P 500 could triple and in the case of a US dollar collapse you could see the S&P 500 at 50,000 and the Dow Jones at 1,000,000 due to Weimar-like hyperinflation.

What kind of a market are you witnessing now?

It’s a bear market rally. I was going to say I don’t think S&P 500 will see new highs. But I have to quickly temper that by saying against the dollar because the S&P 500 could triple from here if they print enough money and the value of the US dollar collapses, then S&P could go to 50,000, Dow Jones can go to 1,00,000.

Which is one reason why I am not shorting stocks right now. Because there is a possibility of this sort of a thing. There is a possibility that stocks could go through unheard of levels, but would be in worthless currency.

He also offers advice on investments in commodities and predicts agriculture awaits a bright future. Ten years from now, it may be the farmers who will drive the Lamborghinis, he says. Funnily enough, Lamborghini used to be a prominent tractor maker.

Demand for gold, silver and other precious metals is high these days and yesterday it was reported that the Royal Canadian Mint is missing a significant amount of its gold, silver and palladium inventory. At present it’s unknown whether thieves or sloppy accounting are to blame for the unaccounted metal.

Geithner was in China this week, telling Chinese university students that the country’s dollar assets are safe. However, it seems he wasn’t really convincing as his statement drew loud laughter.

“Chinese assets are very safe,” Geithner said in response to a question after a speech at Peking University, where he studied Chinese as a student in the 1980s.

His answer drew loud laughter from his student audience, reflecting scepticism in China about the wisdom of a developing country accumulating a vast stockpile of foreign reserves instead of spending the money to raise living standards at home.

More criticism was outed by Yu Yongding, a former Chinese central bank adviser, he would like to see some figures on how the US government plans to achieve its objective of cutting the fiscal deficit to “just” 3 percent from a projected 12.9 percent this year. Yu wondered how the US plans to withdraw all the money it created out of thin air and questioned whether there would be enough demand to meet US debt issuance this year.

Referring to the Federal Reserve “as the world’s biggest junk investor,” and to Chairman Ben S. Bernanke as “helicopter Ben,” Yu said the Fed has dropped “tons of money from the sky since the subprime crisis.”

“The balance sheet of the Federal Reserve not only has expanded like mad but is also ridden with ‘rubbish’ assets,” he said.

Further criticism about the monetary policy of Western central banks was outed by German chancellor Angela Merkel. She warned the central banks that aggressive moves may be laying the groundwork for the next financial blowup.

“I view with great skepticism the powers of the Fed, for example, and also how, within Europe, the Bank of England has carved out its own small line,” Ms. Merkel said in a speech in Berlin. “We must return together to an independent central-bank policy and to a policy of reason, otherwise we will be in exactly the same situation in 10 years’ time.” (Read excerpts of the speech.)

Another interesting thing I just came across is a recent report by Thomas Chaize about the oil market, he has taken a look at the evolution of oil prices over the last 150 years. His inflation-adjusted chart reveals the price of oil has hit $100 a barrel three times in history, the first time was in 1864 when old technology was unable to meet the high demand for oil. The second time oil (almost) hit $100 was 116 years later with the conflict in the Middle-East and the last time was in 2008, but that’s still fresh in everyone’s memory.

About seven weeks ago frogs laid eggs in our pond, the last time I wrote about them they were still in their tadpole stage and by now most of them have developed legs. Some develop much quicker than others though, there are some tadpoles in our pond that don’t have legs yet, while at least three have already transformed into tiny froglets. It’s pretty amusing to see them swimming and jumping around on leaves of the water lilies.

Small froglet

A German company named TG-Gold-Super-Markt.de plans to set up 500 gold-dispensing ATMs in Germany, Austria and Switzerland. Each of these machines will dispense 1g, 5g and 10g gold bars made by Belgian precious metal recycling company Umicore as well as the popular South African 1 oz Krugerrand gold coin.

“In absolute numbers, the demand for physical gold is still tiny in Germany,” Geissler said. “But in relative terms, the growth is explosive, inquiries have been doubling every six weeks,” Geissler said of the trend in recent months.

TG-Gold-Super-Mark.de’s main precious metals business idea is based on online commerce.

The gold ATMs to be set up at central locations such as airports, railway stations and shopping malls are intended to gradually accustom people to the idea of investing in physical gold, Geissler said.

It’s a pretty interesting concept as it gives people an accessible way to acquire a bit of non-fiat money but the costs seem pretty very high.Last week one of the gold ATMs was on display at Frankfurt’s main railway station for a one-day marketing test, the Reuters article says one gram pieces of gold were sold for 31 euros. Priced in troy ounces that’s about 964EUR, a premium of more than 40 percent over the spot price which was around 680EUR that day.

The article doesn’t mention the prices of the larger gold pieces but unless they are a lot cheaper I don’t think these gold ATMs will be successful. It’s very normal to pay a premium when buying physical gold, but 40 percent is way too much. For comparison, the price of a Krugerrand or Maple Leaf coin is around 730EUR in Brussel, that’s a premium of 7.14 percent and the premium on bars and less popular coins is significantly lower than that.

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