INFLATION INOCULATION

INFLATION INOCULATION
Six steps of wealth preservation, Chinese-style
By David M. Bradshaw
May 7, 2009

2009 is the Chinese "Year of the Ox" which is looking more like the Year of the Bull. China's Shanghai stock market has been on a tear this year, surging 29%. China is now the world's bank of last resort while gold becomes their asset of first choice. Why?

This collection of recent Real Money Perspective news stories that underscores what China, the #1 dollar holder, is doing to protect wealth from a dollar decline and rapid rise in the cost of living. If you have your wealth denominated in dollars take heed. As the ancient Chinese proverb says; “Dig the well before you are thirsty.”

1) BUY PHYSICAL GOLD NOW:
China bets on bullion: "China is expected to keep buying gold to diversify its vast foreign reserves after it recently revealed it had been secretively buying bullion. Hou Huimin of the China Gold Association, forecast that China’s gold reserves could rise in the long term to as much as 5,000 tons. One potential source of gold for China is the IMF’s expected sale of about 400 tons of bullion. Analysts said Beijing could try to purchase a block of that sale in an off-market agreement," reports Financial Times.

China's building gold reserves - now over 1,000 tons: "A Chinese official has confirmed that the country has quietly built up its gold reserves by 75% since 2003. It is now the world`s fifth biggest holder of gold with more than 1,000 tons held," reports Mineweb. GATA.org reports that China is in the process of buying 4,000 tons of gold.

"Gold has been one of the few assets that has genuinely provided investors with diversification throughout the financial crisis. For the first quarter of 2009, the gold price ended at $916.50/oz. representing an increase of 4% against a 12% decline in U.S. stock prices during the period," The World Gold Council reports to Mineweb.

"The Chinese move to place the gold in its official reserves indicates the extent to which gold is being rehabilitated as a monetary reserve asset, not only by the Chinese monetary authorities but by Central Bankers around the world and suggests that monetary authorities are looking at gold as a monetary asset with greater interest than at any time since the 1960s," reports IBtimes.

"Physical demand for gold remains at a historically high level from India and China, and SPDR, while it recently shed some 20 tons, supported by long-term investors," said Shuji Sugata, a manager at Mitsubishi Corp Futures & Securities to Reuters.

2) MAINTAIN STRONG BALANCE SHEET:
"Western analysts fail to recognize that the Chinese banking system is now the strongest in the world. Beijing now has almost $2 trillion in cash on hand and hardly any foreign debt. There is no doubt in my mind that China is going to turn back to the upside, before the U.S," reports Money&Markets.

Is China trying to buy out the Americas? "While the US is floundering economically, China is muscling its way in to American businesses via joint ventures and worldwide claims to natural resources. China is pushing toward a new Reserve Currency, moving the world away from a dollar-centric economy. Even if China does not dump the dollar, in favor of some sort of new IMF currency, we’re still in deep trouble but in a different way than in 1929 when the Fed CONTRACTED the money supply, resulting in deflation. This recipe for inflation does not make the dollar look like a very good investment to China," says Swiss America CEO Craig R. Smith.

Don't 'Invest' in Gold - Save It: "Gold is money, not an investment. How can gold achieve double-digit rates of appreciation this decade against the world’s major currencies but still buy an unchanged amount of crude oil since 1950? The answer: gold is not really appreciating. Instead, the US dollar and eight other currencies are depreciating. Back in 1802 Henry Thornton wrote, "We assume that the currency in all our hands is fixed, and that the price of bullion moves; whereas in truth, it is the currency of each nation that moves, and it is bullion which is the more fixed," reports James Turk.

3) OWN NATURAL RESOURCES:
"China has been negotiating deals to double a development fund in Venezuela to $12 billion, lend Ecuador at least $1 billion to build a hydroelectric plant, provide Argentina with access to more than $10 billion in Chinese currency and lend Brazil’s national oil company $10 billion. The deals largely focus on China locking in natural resources like oil for years to come. "This is how the balance of power shifts quietly during times of crisis," reports NY Times.

"U.S. and Chinese companies will sign more than 30 contracts on April 27, 2009 worth billions of dollars to American businesses, the U.S. Chamber of Commerce said. Companies attending the signing ceremony include FedEx Corp, Dell Inc, Lenovo, and China Telecom," reports Reuters.

Gold demand set to rise and shine: "Gold remains the safest way to secure savings. Even amid the equity market crash, gold has given more than 28% returns in the recent period, which makes it the best investment option," according to World Gold Council vice-president K. Shivaram," reports Hindu.

"The gold market has entered a once-in-a-lifetime period of OPPORTUNITY! Gold is now embarking on what may be a 20 year advance which will likely carry it to as yet unforeseen levels. The debasement of currencies (fiat money) by central governments, the accumulation of physical gold and silver by 'smart money', and the fact that Gold is time-tested as a long-standing store of value will be just some of the many forces driving this market. Will $1,500 be the top or are we headed in the direction of $3,000 or higher?" says Mark Leibovit at VrGold.

4) REDUCE PAPER HOLDINGS:
China Slows Purchases of U.S. Bonds: "Reversing its role as the world’s fastest-growing buyer of U.S. Treasuries and other foreign bonds, the Chinese government actually sold bonds heavily in January and February before resuming purchases in March," reports NY Times.

"China's recent call to replace the US dollar with a new global currency is gaining traction within the international community. A reserve currency system based on an IMF unit instead of the US dollar could be phased in within a year, said Joseph Stiglitz, a Columbia University economics professor who heads a United Nations expert panel," reports China Daily.

"The aggressive monetary policy of central banks around the world is playing havoc with the structure of the bullion market, creating a chronic shortage of gold that may soon push the metal to fresh records above $1,500 an ounce," reports Telegraph.

"There's a time to be in stocks and there's a time to be in gold. This is a time to be in gold. We're only really at the beginnings of this massive collapse of the debt structure. Much as the central banks are trying to feed money into the system, the collapse basically takes money out faster than they can put it in. In this kind of environment, the only thing that has ever made sense is gold, because people will be so scared of anything else," says Ian Gordon, a Vancouver-based investment adviser and market historian to Globe & Mail.

"In an environment where the reserve currency of the world could become shunned, gold could do extraordinarily well," said John Reade, UBS metals strategist to Bloomberg. Gold is heading for a second straight quarterly gain, on speculation that a weaker dollar will boost the metal’s appeal as an alternative asset.

5) INFLATION PREPARATION:
Fed Historian sees 1970s-Style Inflation: "Fed Chairman Ben Bernanke is siding with John Maynard Keynes against Milton Friedman by flooding the financial system with money. If history is any guide, says Fed historian and professor of political economy at Carnegie Mellon University Allan Meltzer, the effort will end in tears. Inflation "will get higher than it was in the 1970s," says Meltzer. "We’ve got at least nine innings of reflation ahead of us, ultimately ending with probably double-digit inflation," said John Brynjolfsson, CIO at Armored Wolf, reports Bloomberg.

"Zimbabwe's rate of inflation touched a sixteen-digit number in 2009 before the currency became worthless, despite introduction of bigger notes, including a ten trillion dollar bill. Zimbabwe will now be using foreign currencies for its transactions... until the new government rebuilds the economy," reports RTT News.

"Cash will be the worst performing asset class over the next 10 years, believes Don Williams, portfolio manager at Platypus Asset Management," reports CNBC.

Tipping Point for U.S. Treasuries? "At what point will the U.S. government run out of debt capacity? What are the factors that tell us when this is likely to occur? What is the chain reaction that follows? Understanding the economic, political and other forces impacting the foreign Treasury buyers decision (in particular the Chinese) to continue to hold and buy Treasuries seems to be the most critical part of determining where the tipping point may occur," reports Seeking Alpha.

6) GLOBAL CURRENCY PROTECTION:
G20 moves the world a step closer to a global currency: "SDRs are Special Drawing Rights, a synthetic paper currency issued by the International Monetary Fund that has lain dormant for half a century. There is now a world currency in waiting. In effect, the G20 leaders have activated the IMF's power to create money and begin global "quantitative easing". In doing so, they are putting a de facto world currency into play," reports Evans Pritchard Ambrose at Telegraph.

"China called for reform of the global currency system, dominated by the dollar, which it said is the root cause of the global financial crisis. A "flawed international monetary system is the institutional root cause of the crisis and a major defect in the current international economic governance structure," Chinese Vice Finance Minister Li Yong told the spring IMF/World Bank Development Committee meeting in Washington, reports AFP.

"The Chinese will successfully serve as the spearhead for dethroning the U.S. Dollar from its primary global reserve currency position. Beijing leaders plan to establish the yuan currency as a global reserve currency. The process will be made more complete after issuance of a large volume of Chinese Govt debt securities," reports GoldSeek.

SUMMARY:
Americans must now brace for double-digit inflation as a result of a global divestment of dollar holdings fueled by new trillions in unbridled government spending and Fed bailouts. The Chinese are buying businesses, natural resources and gold to protect their future buying power and preserve wealth from the rising cost of living. Americans dollar holders should consider a similar strategy.

Our latest Special The Inflation Solution! explains the root causes of inflation and offers investors time-tested steps to protect and grow wealth, despite rising inflation and broken government promises! Money is the builder or destroyer of society. An honest money system brings prosperity to all citizens - willing to work. A dishonest one enriches a few at the expense of everyone else - regardless of how hard they work.