by Addison Wiggin & Ian Mathias

• Central bank shoots gold past $1,090… Byron King's deep-insider story behind India's big buy
• So is it time to sell? One chart guides your short-term gold trading
• Buffett fails to inspire investors… Alan Knuckman and The 5 document the return of uncertainty
• “Audit the Fed” legislation “gutted,” cries Ron Paul… the highly suspicions circumstances, below

  We saw it coming and got it wrong at the same time. But at this price, it’s hard to complain… $1,092 an ounce this morning, another record high for gold.

  Back in September, the IMF announced it was selling a boatload of its gold reserves in order to finance its global interventions. We thought China might be a big (if not the only) buyer of the 400 tons for sale, and that any leakage of the transaction could make a big wave in the dollar and gold markets. We were right about the market… wrong about China (for now).

India, it turns out, ended up being gold’s white knight. The world learned yesterday that India had bought 200 tons of the IMF’s gold over a two-week period in October, at an average price of $1,045 an ounce. That’s a 57% increase in Indian gold reserves… quite a statement.

  “The Indian transaction may be the largest single central bank purchase of gold ever,” notes Byron King. “The only comparable event was the U.S. government seizure of gold from circulation within the nation back in 1933, along with steady U.S. government purchases in the 1930s and 1940s.

“I e-mailed an acquaintance of mine who works in the ‘financial’ side of the U.S. government -- I cannot say what Cabinet department, but his office has a view of the White House. I asked why the IMF sold the gold to India, and not China.

“My acquaintance replied, ‘It's all about balance. India holds a lot of U.S. Treasuries and needs gold to diversify its assets. We can't let all the IMF gold go to China and leave India in the dust. China is already building up its gold reserves due to being the No. 1 gold producer in the world and still a net importer. Besides, if the news hit the wires that China just bought all the IMF gold, it would crush the dollar. So the deal was that India could buy 200 tons.’”

(By the way, have you checked out Byron’s latest report on precious metals investing? Lots of gold notes in there, for sure, plus one shiny metal he thinks is “even better than gold.”)

  Also of note, India bought the IMF gold with SDRs -- special drawing rights currency that is a combination of dollars, euros, yen and pounds.

Perhaps the IMF didn’t want to take on the burden of 7.4 billion U.S. dollars. Or maybe it was a political favor from India to the U.S., as this note from BNP Paribas portends: “By using SDRs, the Reserve Bank of India left the impression that it does not like paper currencies in general, suggesting that other major Western currencies were not seen as any better than the USD."

If you recall Addison Wiggin’s and Chris Mayer’s recent trip to the Indian gold markets, this should all make sense. The  majority of Indians have little faith in their own financial system, so when they have money sitting around they wish to save, Indians buy gold jewlrey. The Reserve Bank of India probably feels the same way about the worlds biggest banker -- the Federal Reserve.

We’ll ask our Indian colleagues Ajit and Rahul for their thoughts -- stay tuned.

  Gold gained yet another powerful ally yesterday -- hedge fund icon Paul Tudor Jones. The man who famously called Black Monday in 1987 and the Nikkei crash a few years later now thinks “gold appears to be cheap.” In a note to his investors, Tudor said, “I have never been a gold bug. It is just an asset that, like everything else in life, has its time and place. And now is that time… gold’s value should increase as its scarcity relative to printed currencies increases.”

  So gold is now publicly loved by armchair investors, famous hedge fund managers and central banks… even as we write, Erin Burnett is “squawking” about it on CNBC. Are your contrarian senses tingling yet?

“So many hedge fund managers and pundits are singing the same tune: long gold and short U.S. Treasuries,” our friend Dan Denning wrote to his investors -- Aussie readers of The Daily Reckoning. “The bond bubble could go on much longer than anyone expects. And when so many people agree on something, none of them are usually right. As a contrarian, you'd be worried about becoming a victim right about now.

“But yes, in the long term, the end of the Super Cycle in fiat money results in the remonetization of gold. That is what you're seeing now. And it's probably what you'll see for a few more years. It also ought to benefit other precious metals, and, of course, precious metals shares.”
 
In the meantime, if you’re the charting type, this might help:

From our overly simplistic trading point of view, gold has sustained a well-defined range during its latest record rise. If it breaks outside this range, especially to the downside, traders might be quick to take profits.

If you seek a more thorough trading evaluation -- advice from a real commodity professional -- check out Alan Knuckman and Resource Trader Alert. His readers cashed out on their gold call spreads yesterday for an 89% profit in less than three months. Plus, Alan gave them a brand-new call spread for $1,100 gold and beyond. It’s not too late to get in on that trade yourself… details here.

  Interestingly, the dollar isn’t in any worse shape than usual. In fact, gold managed its record rise yesterday in the midst of a dollar rally. As we write today, the dollar index is 76 on the dot, about a point above its 2009 low and six points higher than its record low from 2008.

  Not even Warren Buffett’s “all-in wager” on the U.S. economy could rouse the stock market yesterday. The railroad sector got a nice shot in the arm, but the S&P 500 managed to gain only 2 points. Surprisingly optimistic news, it would appear, no longer tickles the market’s pickle. Time for the resurgence of real profits… or profit taking.

This coming turning point is embodied in the Volatility Index. Roll the videotape:

The VIX has done a fine job making lower highs and lower lows for the last 12 months… until this week. It popped above 31 yesterday, its highest level since July.

“Volatility is back!” exclaims Alan Knuckman. “The down and up (and down again) action last week was a not-so-gentle reminder of wild price movements from last fall. The VIX had recently dropped to yearly lows at 20, demonstrating real complacency among investors. As crazy as it sounds, that lack of worry is now a concern for the bullish trend to remain in force.”

  Plenty of economic data to digest today. Here’s the roundup:

• The U.S. private sector lost 203,000 jobs in October, payroll giant ADP guessed this morning. That’s the smallest monthly job loss projection from ADP in over a year, but still fell short of Wall Street expectations. If you’re trading this news and Friday’s jobs report, consider this: Over the last five months, ADP has overstated the government jobs report by an average 103,000. The Street currently expects the BLS to report 175,000 lost jobs and a 9.9% unemployment rate
• The American service sector grew at a slower pace in October, just a hair from returning to contraction. The ISM’s non-manufacturing index printed at 50.6 this morning, down from 50.9 in September and a breath away from 50 -- the contraction/growth turning point
• World Bank raised its 2009 growth forecast for China from 7.2% to 8.4%. The Bank also expects China to grow 8.7% in 2010.

  "There's nothing left, it's been gutted," Ron Paul laments, offering our last bit today. Unfortunately, he’s referring to HR1207, the “Audit the Fed” bill he’s been championing this year. According to Paul, Mel Watt (chairman of the House Subcommittee on Domestic Monetary Policy and Technology) took out “just about everything” when preparing the bill for House vote. According to Bloomberg, Paul believes the bill “has been stripped of provisions that would remove Fed exemptions from audits of transactions with foreign central banks, monetary policy deliberations, transactions made under the direction of the Federal Open Market Committee and communications between the Board, the reserve banks and staff.”

Paul says he plans on drafting an amendment to the bill that would restore the original language… but until further notice, the “Audit the Fed” outlook isn’t pretty.

In what can only be a cosmic coincidence, we note that Mel Watt is a North Carolina representative. Specifically, he represents District 12… which just so happens to be the HQ for Bank of America, the biggest beneficiary of opaque Federal Reserve lending practices. Hey just for kicks, lets look at the top donors for Watt’s 2008 re-election, as listed on his own Web site:

1 Wachovia Corp.
2 American Bankers Assn.
3 Bank of America
4 American Express

What are the odds?

Heh, and now that we’ve inched our 5 Min. toes outside the boundary of political correctness, why not cross the line altogether… Is this the most disgustingly gerrymandered district you’ve ever seen?

All right… we’ll stop noting all these bizarre coincidences. You might get the wrong idea.

  “In the debate about financial innovation,” a reader writes, referring to yesterday’s reader mail, “we seem to be failing to distinguish between innovation regarding banking services (such as ATMs) and innovation in risk taking. One common innovative risk procedure we found banks taking during the last (and still ongoing) crisis was to make a bet with another financial institution that some other third-party entity, in which neither had any financial connection, would default on its debt. For a premium (the ‘bet’), they got to roll the dice in hopes some corporation would go belly up. This is just a variation on horse betting or a sports bet that your unfavored team will lose. We can applaud the first type of innovation, but will rue the day we continue to allow the latter.
 
“So much betting occurred (and is still on the books) that it is only a matter of time that someone will win their bet big-time, innumerable others will be unable to pay off the bet, thus going belly up, this causing others to win their default bets, causing others to be unable to pay off, etc. This is the house of cards to which former President Bush alluded. This clever innovation still has an excellent opportunity to bring chaos to the global financial community. It is this innovation we might wish to stringently control -- but have yet to do so, at the risk of our financial survival.”

The 5: What’s wrong with bad bets going belly up? Failure is a fine antidote for lousy speculation. Maybe there is some merit in limiting position sizes, but even the phrase “stringent control” makes us uneasy. Let ’em rise, and let ’em fail.

If we desire to regulate any bank purchases, it’s their wanton buy-up of politicians (ahem, Mel Watt).

Best regards,

Ian Mathias
The 5 Min. Forecast