Agora Financial’s Rude Awakening

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Ouzilly, France

• Global wheat at an absolute bargain…priced in real money, that is,
• Why the world’s hunger for food will stoke the appetite for its gold,
• Stark naked at a mink coat parade and plenty more…

Joel Bowman, reporting from Dubai in the Persian Gulf…

For the past couple of days, your editor has been wandering around the 6th Dubai City of Gold conference. Never have we seen so many sparkly adornments and expensive watches in a single room. With no jewelry of our own to sport, we must have stuck out like a naked man in a mink coat parade.

Leading up to the conference, there was talk about the town of Dubai, the City of gold itself, that the new bull market in gold will dampen sales and kill off retail demand for the precious metal.

Not wishing to remain over-exposed amidst the crowd for too long, we decided to go straight to the man with his finger on the pulse for some answers.

“I saw this exact same thing when gold was edging towards $500,” Ian McDonald, executive director of the Dubai Multi-Commodities Center’s Gold and Precious Metals division told your editor.

“People would say to me, ‘nobody will want to buy jewelry when it goes over five-hundred bucks,’ but here we are, close to a thousand.”

“So do you think this is our last chance to get in under a thousand?” your editor inquired.

“That’s the question everyone wants to know, isn’t it? In my view, we won’t see an end to this rally until governments quit meddling with their absurd currency policies…until they realize that deficits DO matter,” Ian affirmed.

“But I thought Dick Cheney said that…” we began, about to make a silly joke but thinking better of it.

In the column below, Bill Bonner revisits that question on everyone’s lips and explains why increased hunger for the world’s food will likely pique the collective appetite for its gold. Read on for details…

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Sowing the Wind, We Reap the Whirlwind
By Bill Bonner

Never did God give man such a sunny day that the authorities couldn’t make it rain.

As near as we can tell, nature favored Argentina as she did few other places. She caused the Andes to rise up, and then over millions of years, let their hillsides wash downriver to be deposited in a vast, flat, well-watered, plain, with topsoil so thick farmers can abuse it for generations.

On the edge of this fertile farmland, and in the middle of one of the biggest booms in farm prices in history, the politicians in Buenos Aires have achieved what might have seemed nearly impossible; they have created a crisis in the agricultural sector.

“Day 20. The strike continues: farmers reject government’s 9 new initiatives” says the headline on La Nacion .

But farm problems are not limited to the pampas. Thanks to globalization, they’re sprouting everywhere. “Fears grow over rice crisis,” is the front-page story at the Financial Times. “Silent famine sweeps the globe,” reports WorldNet Daily. Thirty-three nations face “unrest” because of food shortages, says the IMF.

All over the world, food fights are breaking out. Not because there is too much food or too little, but because it has gone way up in price. Of course, you could put that another way: the paper money in which food is priced is going down faster than usual. There’s no less food than there was five years ago. But there is a lot more paper money. Modern central banking was invented so that we should have paper money – and have it in abundance. Now, we have so much that it is causing food prices to soar. But food is hardly in a class
by itself. When one bubble pops, the authorities immediately begin pumping up another one. After the dot.com bubble deflated in 2000-2001, for example, up came even bigger bubbles in residential housing and the financial industry. Now, both housing and finance are losing air. But the central banks are still pumping hard. Where’s the air going? Apparently into commodities. In other words, worldwide inflation of food prices is a monetary phenomenon, as Milton Friedman might put it, not an agricultural phenomenon.

To show you the scope of the phenomenon, we pull out a copy of The New York Times from October 19th, 1896. There, it is recorded in black and white that the average wheat price was about $1 a bushel – in gold – during the previous 20 years. An ounce of gold would buy you 20 bushels of wheat. Today, you can buy a bushel of wheat for about $12 which means, an ounce of gold will buy about 75 bushels of wheat. In terms of real money – gold – the price of wheat has gone down for more than 100 years. However fast farmers have added to the world’s wheat output, in other words, central banks have outdone them, planting far more acreage in paper money.

And now that governments have caused a crisis, they are hard at work making it worse. In Argentina, the farmers are few; city dwellers are many. Argentina’s peronistas can do the math. They make out the farmers – historically patrician landowners with large holdings – to be greedy and insensitive. The politicians imposed a 49% windfall tax on foreign sales. The measure should lower prices for Argentine consumers and raise money for the government, they reasoned. It seemed like a no-brainer. That is, until the gauchos blocked the roads into Buenos Aires and threatened to starve the city.

In America, the math is different…but the result is equally imbecilic. There aren’t many farmers out on the prairie, but in Washington, there are more farm-state U.S. Senators than pigs. They push and shove up to the taxpayers’ trough to get huge subsidies for their hometown campaign donors – lately, in the form of bio-fuels. Corn-fed ethanol may make no sense in environmental terms or energy terms, but it lubricates the big wheels of
national politics. In the event, it takes a third of the U.S. corn crop out of the food chain and puts it to use in the drive train – further driving up grain prices.

With bread prices on the rise, politicians feel compelled to intervene. And every intervention falls upon the crops like a cloud of locusts.

Last Friday’s 10% spike in rice prices came as governments moved to corner the market. Three billion people, many of them with very marginal incomes, eat rice every day. The price of rice rose 50% in the last two weeks, causing Thai farmers to sleep in their fields to protect their harvests…while the Philippines posts armed guards at its graneries. Vietnam, India, Kazahkstan and China have all restricted foreign sales. The exporters are coming under pressure to export less – in order to lower prices at home. The importers,
meanwhile, have no choice but to try to get as much of it as possible, as soon as possible, in order to head off shortages. Result: a run on rice.

India’s trade minister warned hoarders: “We will not hesitate to take strong measures…”

Of course, hoarding is exactly what a smart family should do. Most likely, there will be runs on other commodities too…and then a run on gold itself. People will want something real…something sure…something with which they can buy rice, without having to worry about it doubling in price two weeks later. That something, traditionally, is gold.

[Joel's Note: Bill Bonner is the founder and editor of The Daily Reckoning newsletter. He is also the author, with Addison Wiggin, of the national best sellers Financial Reckoning Day: Surviving the Soft Depression of the 21st Century and Empire of Debt: The Rise of an Epic Financial Crisis .

Bill’s latest book, Mobs, Messiahs and Markets: Surviving the Public Spectacle in Finance and Politics, written with co-author Lila Rajiva, is available now by clicking here: Mobs, Messiahs and Markets  

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[Joel's Note: As we go to press with today’s issue, gold is hovering at around $927 per ounce…the is an export ban on rice in India…the Maoist rebel party looks to have taken control of elections in Nepal…and a new form of cloning that could make it easier to replicate humans has got people dusting off their notes on the man-playing-God debate.

Yes folks, there is much going on in the world today and we want to hear your take on it. Specifically, is this really our last chance to buy gold for under a thousand bucks?

We’ll be back tomorrow with more Rude thoughts but, until then…

Cheers,

Joel Bowman
Rude Awakening