Fear not gold bugs: the song remains the same

“If you think she’ll accept a 1932 scenario, you’re out of your mind.”

So says famed gold trader Jim Sinclair, in his latest King World News interview, discussing German chancellor Angela Merkel’s response to Europe’s debt crisis. Jim also discusses the realities of American political life at the moment, noting that the surest way for Obama to lose the election next year is for the Fed to move away from an inflationary monetary policy. Such is the perilous state of western finances at the moment.

James Turk’s recent interview with Mr Sinclair can be seen at this link. Fears over the health of the European banking sector – and by extension, the global banking system – are contributing to demand for the US dollar. The gold lease rate – the rate charged for lending gold in exchange for dollars – is at its lowest rate since January 1998.

Moreover, hedge funds and banks are “squaring their books” for the end of the year, meaning taking profits on winning trades and reducing their leverage in order to report favourable end-of-year numbers to their clients. This has exerted further downward pressure on gold futures – accentuated by declining volumes as we head into the Christmas break and an exodus of small speculators in the wake of the MF Global failure.

Longer-term, Silver Wheaton founder Frank Giustra recently summed up the situation well:

“The bottom line is that the money needed to bail out Europe and to fund America’s spiraling debt and future unfunded obligations is in the ten of trillions. IT DOES NOT EXIST. It has to be created by printing money in massive quantities, and despite all the rhetoric you will hear against such policies, in the end it’s the path of least resistance. Printing money is an invisible tax on savings, much easier to initiate, than, say, raising taxes or cutting back on services and entitlements.”

Meanwhile, problems continue to mount in China, with the Communist Party now facing open insurrection from angry villagers in the southern village of Wakun. Elsewhere in the Telegraph, Ambrose Evans-Pritchard warns that the country could be faced with an epic hangover – following a decade of binging on cheap money. The Shanghai stock index has fallen by 30% since May, and is now 60% of its 2008 peak.

In the words of Albert Edwards from SocGen: "Investors are massively underestimating the risk of a hard-landing in China, and indeed other BRICS (Brazil, Russia, India, China)... a 'Bloody Ridiculous Investment Concept' in my view."