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					                   CURRENCY CURRENTS
                                 A free global-macro & market newsletter
Wednesday 15 June 2011

Quotable
“The use of information content has been extended         A FREE Webinar:
to define the complexity of a system as the amount
of energy needed to maintain it. For example, it has
been employed to explain the collapse of societies,
arguing that as societies become more complex,
                                                          Commodities.
they require more of their energy (loosely defined)
to maintain the status quo, and can no longer
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defend themselves against the many inroads toward
decline.”                                                 (An invitation will be emailed later today.)


               Richard Bookstaber

Commentary & Analysis
Gold: Safety versus Liquidity. Which side are you on?

A saw a prediction today stating that gold will reach $5000 an ounce because of a global
supply deficit. Sure there are some industrial applications for gold, but will gold be
consumed (and hoarded) to an extent that future mine supply and production won’t be
able to sate?

Some think so. But this $5000 per ounce prediction assumes growth in demand remains
flat. Dang. But for argument’s sake, could demand growth increase?

Added to the argument for higher gold prices is demand from central banks. True, central
banks have become net buyers of gold rather than sellers over the last decade or so. But it
is the all elusive Chinese central bank that lurks in the shadows, waiting to surprise
everyone by upping its gold reserves to the average 11% of foreign exchange reserves. In
other words: China would buy 6,000 tons of gold to meet that average.

I think I’ve been hearing this argument cited by gold bulls for at least 4 years. Not much
progress has been made.

So I wonder: now that investors are all fiat-phobic, will China finally make a substantial
alteration to its foreign exchanges reserves by bringing in some “real” currency?

I would assume China is scared to buy at a gold market top, whether intermediate- or
long-term. I would also assume China doesn’t want to sell at a US dollar bottom, since
naturally it is the wretched US dollar’s China wishes to dispense.
Of course, if $5000 an ounce is on the way, then China would be wise to buy now.
Likewise, with fiat currency on the imminent path of implosion, why not get out now?
Does China know something we don’t? Perhaps the fact that a lasting slowdown, one that
will exceed all expectations, is in order – what happens if this happens?

They probably assume the US dollar will catch a bid when worse-than-expected Chinese
growth expectations sour the global growth mood. And considering the state of European
periphery nations and the vulnerability of their banking system, perhaps they are worried
that another contagion might spread across the globe and send investors fleeing for
liquidity.

This brings me to the topic of the day: liquidity versus safety.

I devoted the main article of my Commodities Essential publication yesterday to how the
eurozone crisis might influence gold prices. I believe it has the potential to create a rush
to liquidity as it did back in 2008. That’s when we saw the price of “real” currency like gold
and silver tank along with many other foreign currencies and risk assets.

There are some, however, who do not agree with me. They see a flight to safety rather
than a flight to liquidity. And in such a flight investors would flock to gold because they
just can’t trust that dang fiat stuff and the promises of indebted and indeficited of
governments. (Ok, I made up that word.)

From James Turk:

           A lot of people ask if we get another Lehman style collapse, will gold and silver
           fall like they did in 2008? I say no they won’t. The reason is back in 2008 the
           primary driver after Lehman collapsed was a rush by investors, hedge funds and
           everyone else for liquidity. Most people learned a very valuable lesson from that
           event. Consequently, this time around you are not going to see a rush for
           liquidity, you are going to see a rush for safety. The safest haven of them all is
           physical gold and physical silver.

More from Mr. Turk:

           The sharp rally that occurred today off of those support zones suggests to me
           that the correction is over. In other words we are going to see silver back above
           $40 and gold above $1,550 within the next couple of weeks. Everything is all set
           for new record high prices in both metals this summer, which is going to surprise
           a lot of people. I just think that people don’t really understand what can happen
           this summer. We’ve spoken before about the summer of 1982 when the gold
           price rose 50% from June to September, propelled back then by the Mexican debt
           default.

Back in 1982 gold was trading at an historic low, after a steady and deep decline from its
peak when Paul Volcker freed up interest rates to move higher. Right now gold is trading
Black Swan Capital’s Currency Currents is strictly an informational publication and does not provide personalized or individualized
investment or trading advice. Commodity futures and forex trading involves substantial risk of loss and may not be suitable for you.
The money you allocate to futures or forex trading should be money that you can afford to lose. Please carefully read Black Swan’s full
disclaimer, which is available at http://www.blackswantrading.com/disclaimer
near an all-time high. Market sentiment is obviously quite different at major highs and
major lows. And considering the financialization of the economy and the QE-driven
support for financial assets, might we see a liquidity-flight again, Mr. Turk? Sure – many
people have learned a very valuable lesson; I’m just not sure it’s those that matter in this
case.

I’ll allude to Mr. Bookstaber, author of A Demon of Our Own Design, as I often do; this is
from his blog:

           Complexity can be either an annoyance or a boon, depending on one's enthusiasm
           for tricky problems. We all know intuitively that complexity makes accidents both
           more likely and more severe. After all, any machine with many parts has more risk
           of having something go wrong, and with more interconnected mechanisms there is
           more risk that a single failure will propagate to cause the entire machine to fail.
           For markets, the accidents are market crises. I pointed to complexity and tight
           coupling as key components in the origin of market crises in my book, A Demon of
           Our Own Design.

The global financial system is complex – that is a lesson we learned after the 2008
financial crisis. But what has been done to sufficiently prevent the same (or similar)
mistakes that sent markets reeling a few years ago? Tight coupling is an ugly, and often
invisible, thing until you put your hindsight goggles on.

Are investors going to be seeking safety from a fiat currency implosion sparked by a
eurozone periphery default(s)? Or are investors going to be seeking liquidity from a
financial market meltdown sparked by a eurozone periphery default(s)?

You know where my money is ... and I don’t think gold can escape a rush to liquidity
unscathed.


JR Crooks
Editor, Commodities Essential
www.blackswantrading.com
Currency Currents Blog http://currencycurrents.tumblr.com/




A FREE Webinar to Discuss the Markets and
Commodities Essential!
This special event will take place in 7 days ...
on Wednesday, June 22nd.
Black Swan Capital’s Currency Currents is strictly an informational publication and does not provide personalized or individualized
investment or trading advice. Commodity futures and forex trading involves substantial risk of loss and may not be suitable for you.
The money you allocate to futures or forex trading should be money that you can afford to lose. Please carefully read Black Swan’s full
disclaimer, which is available at http://www.blackswantrading.com/disclaimer
I want to make you aware of this free upcoming webinar hosted by JR Crooks, our editor
of Commodities Essential.

JR plans to discuss his top investment themes in global and commodities markets.
Additionally, he plans to explain his strategy and approach to investing in commodities
using exchange-traded products -- ETFs and ETNs.

In addition to a special attendee discount, JR will provide a few specific investment ideas.
He will also hold a Q&A once he wraps up his presentation. And for all those who decide
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recommendations to act on immediately.

A REGISTRATION EMAIL WILL BE SENT AROUND LATER TODAY WHERE YOU WILL HAVE
THE OPPORTUNITY TO SIGN UP FOR THIS WEBINAR.

Stay tuned.

And please let me know if you have any questions about subscribing.


Sincerely,

David Newman
dnewman@blackswantrading.com
www.blackswantrading.com


P.S. JR publishes Commodities Essential every Tuesday. And he issues trading alerts as
necessary. So, if you're interested in signing up already so as not to miss the next
publication and potential trade alerts, you can do so below at the special promotional,
pre-webinar price of $395 per year:


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Black Swan Capital’s Currency Currents is strictly an informational publication and does not provide personalized or individualized
investment or trading advice. Commodity futures and forex trading involves substantial risk of loss and may not be suitable for you.
The money you allocate to futures or forex trading should be money that you can afford to lose. Please carefully read Black Swan’s full
disclaimer, which is available at http://www.blackswantrading.com/disclaimer