by Addison Wiggin & Ian Mathias

• Middle East rumors propel gold to record highs... The 5 sorts out hype from reality
• The tipping point for hyperinflations that I.O.U.S.A. has already passed
• Forget the Far East, Chris Mayer reveals one “red-hot economy” doubling China’s growth rate
• How a few Australian bankers changed the world this morning
• Plus, Dan Denning identifies the “real issue” behind the market’s faux recovery

  A rumor, based on conspiracy, wrapped up in presumption… that’s all it takes to get markets moving these days. And it’s why your gold investments just hit a historic high:

A global consortium of European, Middle Eastern and Asian nations are plotting to stop using the U.S. dollar to trade oil, says the U.K.’s The Independent.

The paper -- which has captured the attention of essentially every financial news outlet -- claims that “Gulf Arabs are planning -- along with China, Russia, Japan and France -- to end dollar dealings for oil, moving instead to a basket of currencies including the Japanese yen and Chinese yuan, the euro, gold and a new, unified currency planned for nations in the Gulf Cooperation Council (GCC), including Saudi Arabia, Abu Dhabi, Kuwait and Qatar.”
 
Quite a mouthful, eh? According to the Independent’s “Gulf Arab and Chinese banking sources,” secret meetings between all these nations are already well under way and a potential transition out of the dollar is viable “within nine years.”
 
Of course, every government mentioned has dismissed the report, but some damage has already been done. The dollar index sank almost a point, to 76.2, just above its yearly low. And gold, as we illustrated above, found a new record high. But is this story for real?
 

  “At first sight, such a move looks highly unlikely,” says Peter Cooper, one of our contacts in the UAE, who also just happened to be giving a citywide tour of Dubai to Addison Wiggin and Chris Mayer today. “The Gulf Arab countries are staunch allies of the United States and dependent on the U.S. for military protection in their volatile region… It is far more likely that such rumors, if they are true, are more a question of policymakers mulling over policy options.
 
“The gold price jumped on the publication of this article, but it will need to be better supported by official statements to be treated with credence. On the other hand, it does underline how parlous the state of global confidence has become over the future of the U.S. dollar and highlight a possible solution, although one that risks causing more damage than it cures.”
 

  “These rumors are especially interesting,” adds Addison, “because they presuppose a unified position among GCC nations. Independently of this story, we learned yesterday at a press conference hosted by Standard Chartered Bank of England that these countries don’t necessarily agree with one another.

“The Saudis, Kuwaitis, Qataris and Emeratis have been trying to create a euro-style unified currency in the Gulf region. But they can’t agree on who would be the leading party, how the currency would be weighted or even what to call it. It’s a huge assumption that the GCC could get this currency off the ground in the near future… an even bigger presumption that these nations could agree on a strategy for replacing the dollar pricing of oil.
 
“Of course, it’s possible -- stranger things have happened. But at this point, it’s a long shot. And it’s no strange wonder that the rumor floated on the first day of the IMF meeting in Turkey today. The main subject under discussion at the meeting will be viable alternatives for the trillions in dollar reserves held by the Gulf States and BRIC nations…”
 
Between Brazil’s demands yesterday and this story today, there will be no shortage of material for our inaugural issue of BRIC by BRIC, our new amalgamation of “go teams” in Brazil, Russia, India and China. 
 

  By the way, the title of that Independent article?: “The Demise of the Dollar.” Sounds awfully familiar. 

  “At the press conference here in Dubai yesterday,” Addison adds on a slightly different tangent, “the chief North American strategist for Standard Chartered repeated the oft-heard argument that the recovery is in full swing in the U.S. The bank forecasts 3% GDP growth for North America in the third and fourth quarters this year.

“When we pressed them, they agreed that most of that growth was dependent on government stimulus and monetary easing issued on a borrowed dime. But they stopped short of revealing a risk factor that could lead to rapid inflation, or even the prospect of default, in the U.S. because of such rapid deficit spending.

“Today, we found someone else who’s willing to hazard a guess… and unfortunately, we’ve passed the warning signs already:”

  “In the 12 largest episodes of hyperinflations,” reads the latest quarterly report from money managers Hayman Advisors, citing a study by Peter Bernholz, “the tipping point for hyperinflation occurs when the government’s deficit exceed 40% of its expenditures…

“According to the current Office of Management and Budget projections… the U.S. will run deficits equal to 43.3% and 39.9% of expenditures in 2009 and 2010, respectively. To put it simply, roughly 40% of what our government is spending has to be borrowed. One has to ask whether the U.S. reached the critical tipping point.”

  As Dan Amoss forecast yesterday, the Obama administration has begun “exploring additional options to promote job creation,” which has been billed as an extension of the stimulus package. Look for unemployment benefits to be extended into near infinity, and a possible tax credit for businesses that report new hires. The cost? Billions, we’re sure… but they can worry about that another day.

  “It will take at least 8-12 months before unemployment will decrease,” forecasts IMF leader and expert shoe dodger Dominique Strauss-Kahn.

  The unemployment rate is “going to penetrate the 10% barrier before heading down,” said former Fed Chief Alan Greenspan yesterday. With the current rate at 9.8%, we’d like to thank Mr. Greenspan for by far the weakest forecast of the day. Cheers.

Perhaps more interesting, Greenspan expects the government to report 3% GDP growth for the third quarter… right in line with Addison’s anecdote.

  “That’s nothing compared to Qatar’s red-hot economy,” notes Chris Mayer, who made a brief stop there this week on his way to the UAE. “Last year, Qatar grew around 18%, and this year, it ought to grow another 16%. We saw the headlines in the Gulf Times in the lounge while waiting for our transfer to Dubai.

“Qatar’s greatest asset is its natural gas reserves. In fact, the largest gas field in the world is here. Its discoverers were disappointed when they found it in 1971. They were looking for oil.

“The boom Qatar now enjoys is the result of some daring investments in liquefied natural gas (LNG) back when people thought doing such a thing was a little batty. Faisal Al Suwaidi, the head of Qatargas, deserves the props for his wager, which has paid off handsomely. Today, Qatar produces about one-quarter of the world’s natural gas.

“Qatar supplies such faraway customers as Japan, India and China. Qatargas also operates the largest LNG terminal in Europe, at South Hook on the Welsh coast. This facility provides Britain with a fifth of its gas needs.

“Qatar’s dominant position has filled its coffers and changed the country forever. On a per capita basis, it is one of the wealthiest countries in the world. And given the world’s growing energy demands and the appeal of clean-burning (and cheaper) natural gas when compared with oil, Qatar seems in a good position.”

  Another sign of the times: HSBC, Europe’s biggest bank, has decided to move its CEO from London to Hong Kong. "The move further positions the group for the shift in the world's center of economic gravity from West to East,” said the bank’s statement.

  The Reserve Bank of Australia became the first G-20 nation to raise interest rates this morning. The RBA bumped interest rates up 25bps, to 3.25%, a move the Street was convinced wouldn’t come until at least November. Thus, Australia is implicitly declaring the end of its economic downturn, and the Aussie has become the currency du jour. It’s up a full cent versus the dollar, to 88 cents.

“The first hike has opened Pandora's box of interest rate hikes around the world,” says our friend Chuck Butler from his EverBank post. “If the RBA went this soon, then we can expect Norway's Norges Bank to push its rate hike earlier on the calendar, maybe even later this month! And it won't be the only one! Look for New Zealand to hike rates this year, and who knows what other country (Brazil?) will follow after that.”

  Oil has also been a beneficiary of today’s rumor mill. The front-month contact is up a buck and change, to $71 a barrel.

  Oil will be back up to $100 a barrel by 2011, says a Bank of America Merrill Lynch report today. “Supply will not be there, capital expenditure by oil majors and miners has fallen dramatically,” reads the report -- a theme surely familiar to 5 Min. readers. “This will come back to haunt us."

Mother Merrill is also calling for $1,500 gold by 2011.

  Stocks continue to rise today, thanks to a falling dollar and Australia’s well-received rate hike. The S&P opened up 1% after yesterday’s 1% rally. Should this hold, it would wipe out all of last week’s losses.

We’re going to get particularly interested in the big exchanges starting tomorrow, when Alcoa unofficially kicks off the third-quarter earnings season. We’ll keep you up-to-date.

  “There has been no real improvement in the quality of troubled assets in the last year,” notes Dan Denning. “In fact, they are more troubled than ever. The financial system remains troubled, and not much in it has really changed. This is the real heart of the issue behind our mistrust of the stock market rally.

“Highly leveraged banks are in the same precarious position as they were before, albeit with slightly more confidence from a gullible public. But at the balance sheet level, have things really improved? And more importantly, have the trillions in assets in the financial system related to residential and commercial real estate really become more valuable in the last six months? Or is just a Ponzi finance pyramid of junk waiting to go up in flames?

“In our view, the last year has been a policy and regulatory sham to cover the retreat by bankers. The people heavily invested in the old system of debt-based asset appreciation are stalling for time. They hope that the passage of time will improve earnings for a quarter for two.

“And if they are the religious sort, they pray that some other scheme will be established to take the troubled assets off their hands. But time cannot heal troubled asset values. Faith healing doesn't work in financial markets. We'd humbly suggest that the day of reckoning is still out there, hiding somewhere on the calendar, waiting to rise again.”

  “Why is the stock market going up despite such a terrible economy?” a reader asks. “Have you looked at savings deposit rates lately? What alternative does the American public have? Most are not in tax brackets that make bonds interesting, and people don't really know about them anyway. All we can do is add to 401(k)s, mutual funds, IRAs and direct stock investments to try to recover. Let’s all go out and buy a few more lottery tickets the governments encourage us to buy.”

Best of luck,

Ian Mathias
The 5 Min. Forecast

P.S. “One gets the overwhelming sense of being a guest in Dubai,” writes Addison, “without ever meeting one’s host. Apparently, the Emerati nationals are obligated to wear their dishdashas – the traditional white smock and headgear of the region -- but expats and tourists are forbidden to. In the hotel, the mall adjacent to us and in the streets around the Burj and down by the Creek -- the original settlement here -- there are many Indians, Pakistanis, Nepalese, Thai and Indonesian workers. But we’ve seen the Emerati only very rarely. All of our meetings so far have been with Europeans. The city has some 95% expat population…”

More to come from our correspondents abroad…