Fed Buying T-Bonds, China Buying Gold

Chinese gold buying overtakes India's, just as the Fed overtakes China's Treasury bond buying...

SO SUGAR FUTURES have hit a new 30-year high, writes Dan Denning in his Daily Reckoning Australia.

Crop damage in Australia and India is crimping supply. Raw sugar for March delivery was up 4% to about 35 cents per pound in New York Futures trading. Wheat was up again and according to the Chicago Board of Trade is up 77% in the last year.

How much of soaring agriculture prices can you attribute to supply-side issues and how much to the weak US Dollar? We ask the question to raise the possibility that maybe we're over-reacting to these prices. Maybe they're just normal in the cyclical life of commodities. Maybe they aren't telling us what we think they are telling us. Or maybe they are!

The biggest supply-side factor in commodity prices is the supply of cheap US Dollars and cheap credit to speculators on Wall Street. Dollar weakness translates directly into rising prices for real "stuff". The trouble now is that Dollar weakness is causing other things (like Egypt's political arrangement) to break.

This is problematic because it makes bets on higher commodity prices: bets! The best bet now, according to the research we're set to publish later today in Australian Wealth Gameplan, is that oil will get a bid as the most strategically valuable commodity in the world. Not only does oil react to the weakness in the Dollar, but it also becomes more attractive/valuable as the geopolitical scene becomes less stable.

Expect more instability as the global Dollar standard unravels and leads to higher inflation. Egypt is a case in point. It looked like the army had played its role perfectly in keeping law and order while arranging for Hosni Mubarak to save face and, more importantly, arrange for an orderly transition of political power.

But overnight that arrangement seems to have unravelled too. People don't always do what they're told. And one thing we're finding out from Egypt is that political legitimacy can vanish more quickly than the elites in power think possible from their entrenched view points. That's worth keeping in mind when looking at Europe in America.

Speaking of America, it's becoming clearer by the day that America has a date with debt default and/or hyperinflation. With trillion-Dollar annual budget deficits as far as the eye can see, the bankers who run America's borrowing program are getting desperate. They are even floating the idea of 100-year 'ultra-long' bonds.

What kind of jack ass would ever loan the American government money for 100 years? Only a brain dead jack ass, of course.  Or, if not  brain dead, perhaps a company with long-lived, long-term liabilities might try and match those liabilities with long-term Treasuries. But frankly, the whole exercise seems like the sign of an establishment that's running out of ways to make its debt attractive to investors.

People notice. "China's gold imports are estimated to have more than doubled from a year ago in the run-up to Chinese new year, putting the country on track to overtake India as the world's largest consumer of the precious metal," reports the Financial Times.

The FT also reports the Federal Reserve has surpassed China as the leading holder of US Treasury Securities. So let's see now...

The Fed is set to replace China as the top buyer of US bonds. China is set to become the top buyer of gold. Ships passing in the geopolitical night?

The big danger for Aussie investors right now is that this is the beginning of another massive speculative bubble in commodity prices. The race out of the Dollar has driven up precious metals, base metals, grains, and most of the commodity complex. Oil could be next.

Buying Gold today...?