Another Fund Falters, Gold and Silver Forecasts, China’s Next Boom, A New Global Currency, and More!

by Addison Wiggin & Ian Mathias

  • Another one bites the dust… billions at stake in the latest hedge fund fallout
  • Mayer on the next commodity that China should send sky-high
  • Ready for the next metals breakout? The numbers that show silver could lead the way
  • Doug Casey paints a bullish picture for Canadian junior resource stocks
  • Richard Branson takes space flight private, spurs the creation of the first intergalactic currency… we wish we were joking
  • Plus… Eric Fry on the paper industry that’s been as good as gold

Many traders on Wall Street took the day off yesterday
to celebrate Chris Columbus getting shipwrecked on the island of Hispaniola while searching for spice routes to India 515 years ago, or something along those lines.

Either way, domestic markets were BORING…no major index registered a gain or loss worth noting. So we won’t note them, today.

Instead, we begin today with a sign of the times. A reader sent this picture to us. It’s apparently on the LA Times site with the caption, “Thanks, Mozilo”:

Two comments: shouldn’t this joker be thanking Mozilo for the job in the first place? And…it’s not like he can’t get a job somewhere else. At least not yet, anyway.

Ellington Capital Management, a hedge fund firm that focuses on mortgage securities, has halted redemptions on nearly $2 billion in funding.
Like countless funds before them, Ellington is unable to value assets in two of its funds and is unwilling to refund investors until it can mathematically prove that subprime-backed securities are nearly worthless.

The two funds in question, New Ellington Credit Overseas and New Ellington Credit Partners, contain $1.9 billion in assets. Bear Stearns, a fund manager quite familiar with this dilemma, recently estimated that the average subprime security with the lowest investment-grade rating should be worth around 32 cents on the dollar.

If so…poof!…$600 million of Ellington’s investor capital it about to vanish.

“China’s got a massive plan to build many more nuclear power plants — $50 billion and 32 plants by 2020,”
notes Capital & Crisis’ Chris Mayer. “The ‘whisper’ number of 300 more by the middle of the century is even more mind-blowing.”

Despite China’s rapidly growing appetite for oil (now second only to the U.S., as we reported yesterday), the red nation is far behind on a nuclear scale. Only 2.3% of the country’s electricity is derived from nuclear power. Compared with 20% here in the U.S. or an incredible 80% in France…China’s got a long way to go.

“Given what China’s demand for other commodities has done for the prices of those commodities, we should take note of its new surge into nuclear power. It would seem to bode well for the price of uranium and the profits of those who sell it.

“Even if uranium prices doubled over the next few years, nuclear energy would remain an extremely competitive energy source. Eventually, of course, new uranium mines will come online. And eventually, of course, the price of uranium might retreat. But so what; the price might soar in the meantime, especially because demand seems certain to increase sharply.”

Gold continued its slow retreat overnight.
The precious metal dropped a few bucks in American trading, and then a few more in Asia…and ounce will currently set you back $730 for immediate delivery.

Much like gold, “silver has risen five of the last seven weeks,”
reports James Turk. “But the gold/silver ratio has not changed much since August. It took 56.5 grams of silver to buy one gram of gold on Aug. 28, and it now takes 55.4 grams to do the same. This ratio will continue to fall as the precious metals move higher, meaning that silver will outperform gold.”

“The big move is still ahead for junior resource stocks,”
write David Galland and Doug Casey of Casey Research. “These stocks have several attributes that give them explosive upside. Such attributes include a thinly traded market, an industry full of ‘perma-skeptics,’ and strong seasonal price swings.

Casey loves the junior miners now more than ever, thanks mostly to a recent 27% correction.

Junior resource stocks, many of which are traded on Toronto’s Venture Exchange, fell off a cliff after August’s global flight to liquidity.

“You can see they are starting to also track gold, clawing slowly back,” Doug writes. “They still have a long way to go to get back to the step-off point in July/August… the seeds of an opportunity, if you ask us.” And if you’d like to ask them, you can do so here.

The dollar maintained its recent rebound in yesterday’s trading.
The euro trades for $1.40. The pound is $2.03 and the yen 117. While $1.40 euro seems outrageously high in the context of 2007, the current price is actually at two-week lows.

The dollar index — a measure of the U.S. dollar’s strength versus the six most actively traded currencies — remains at 78, barely above all-time lows set last month.

Meanwhile, down under, the Australian dollar quietly rose to 90 cents on Monday — a 23-year high.

Consider the two bullish bits of news we’ve included in today’s forecast — the coming rise of uranium prices and junior resource stocks — and Aussie/U.S. dollar parity seems very probable. This wouldn’t be the Aussie’s first trip to $1, either. In the early 1970s, the Australian currency was worth up to $1.50.

“Virgin Galactic is now taking reservations for seats on its SpaceShip II,” reports Joel Bowman in yesterday’s Rude Awakening. Indeed, Richard Branson’s bizarre project to fly the uber rich into space is officially under way.

For $200,000, Sir Richard will strap you into the world’s first private space jet, hurdle you 55,000 feet into the air at three times the speed of sound, float you in space, and come back down about just as fast…or so the Web site says. Flights begin in 2009.

A planeload full of candidates for the next Darwin awards, if you ask us.

And geeks around the globe are preparing…researchers from the University of Leicester and the U.K. National Space Center have introduced the Quid — the world’s first intergalactic space currency.

“None of the existing payment systems we use on earth — like cash, credit or debit cards — could be used in space, for a variety of different reasons. Anything with sharp edges, like coins, would be a risk to astronauts, while the chips and magnetic strips used in our cards on Earth would be damaged beyond repair by cosmic radiation,” says professor George Fraser from the U of L.

Our first impression was that this is the weirdest currency news we’ve heard in a long time. But really…is it any stranger than printing pictures of dead presidents on pieces of paper, adding a few watermarks and holograms and calling it currency?

Currently, the Quid (Quasi Universal Intergalactic Denomination) isn’t traded…but it does have a price…a whopping 6.25 pounds… or $12.68. Space won’t be cheap.

“Moneymaking, it seems, is a very good business…especially for gold,” writes Eric Fry. Eric’s being especially literal today. One of the world’s most significant printers of paper money is in lock step with gold:

“Yes, dear investor, paper money is easy to produce. Gold is not. Paper money is so easy to produce, in fact, that money-printing companies cannot seem to make the stuff fast enough. A little-known company in England, De La Rue plc, is in the moneymaking business…literally.” According to Eric’s sources, De La Rue’s operations are printing at near capacity.

“Reflecting this boom in moneymaking, De La Rue’s share price flirts with all-time highs. The gold price also flirts with all-time highs. A mere coincidence?”

For more Rude commentary, click here.

“Methinks you have a wonderful grasp of the economic motives,” writes a reader in response to recent meanderings about China’s desire for U.S. dollars, “but wonder if you might be missing the long-term, strategic, political dimension.

“China, for example is interested in making money, but not only that… they have a long-term aim to undermine American political, economic and military power… while building up China to catch up, overtake and replace America as the dominant world power. By holding vast amounts of dollar reserves, U.S. Treasury bonds, stocks and shares, China is, in effect, holding the American currency and economy hostage. Hence, no American president is going to be willing to seriously confront China on any issue, whether it is trade, Taiwan, Iran, Chinese military and economic espionage in America, etc.

“The Americans are terrified that China will dump their dollar reserves and buy euros instead… Bye-bye dollar… Yes, economic motives generally control individual financial and investment decisions… but remember that states like China and Russia have more important considerations and agendas than just making a fast (or slow) buck…

“For now, China is happy to keep going, since the trade surplus with America is financing China’s economic and military boom. Put simply, Wal-Mart is financing the People’s Liberation Army. It is one of the biggest wealth-transfer operations in history. China sells Americans cheap junk and in return takes America’s wealth to build up real assets (economic and military) in China.

“When will the Party stop the party? When they judge it is in the best interests of China.

When they no longer need the political leverage their dollar holdings and investments give them now. When China is strong enough to pull the plug on America.”

The 5 Responds:
Don’t you love the Internet? It gives everyone who has it a chance to express his opinion. Even if they have no idea what they’re talking about.

We note with satisfaction that the two gentleman who pioneered the technology making it possible for computers to store and retrieve massive amounts of information won the Nobel Prize in physics today. They are French and German, by origin, and made the discovery working independently.


Addison Wiggin
The 5 Min. Forecast


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