(CNBC) China sent its clearest signal yet that it was ready to allow yuan appreciation after an 18-month hiatus, saying on Wednesday it would consider major currencies, not just the dollar, in guiding the exchange rate.
In its third-quarter monetary policy report, the People's Bank of China departed from well-worn language on keeping the yuan "basically stable at a reasonable and balanced level." It hinted instead at a shift from an effective dollar peg that has been in place since the middle of last year.
"Following the principles of initiative, controllability and gradualism, with reference to international capital flows and changes in major currencies, we will improve the yuan exchange-rate formation mechanism," the central bank said in a 46-page monetary policy report.
The comments, published just days before a visit to Shanghai and Beijing by U.S. President Barack Obama, set out the possibility of a return to exchange rate appreciation that began with a landmark July 2005 revaluation.
The yuan strengthened by nearly 20 percent against the dollar until concern over the impact of the global financial crisis prompted Beijing to hit the brakes in the middle of last year to protect exporters.
The yuan has been stuck at around 6.83 per dollar ever since, drawing increasing ire from other countries, especially as it has followed the dollar downwards against other currencies.
The dollar has dropped 13 percent against a basket of major currencies including the yen and euro since mid-February.
Back to a Basket?
Some analysts have called for the return to a genuine basket of currencies, which the central bank said in 2005 it would use as a reference for the yuan.
Winterizing Your Portfolio - A CNBC Special Report
"I think the wording change ... shows that it is an irresistible trend for China to resume yuan appreciation," said Xing Ziqiang, an economist at China International Capital Corp (CICC) in Beijing.
"It is not sustainable for the yuan to always be pegged to the U.S. dollar; after all, the repegging since late 2008 was just part of China's measures to address the global financial crisis, and now the impact of the financial crisis is fading, so the yuan should resume appreciation sooner or later."
The central bank's report came just hours after data that showed the world's third-largest economy had firmly put the worst of the global financial crisis behind it. Factory output growth surged to a 19-month high of 16.2 percent in October.
While exports were still down in year-on-year terms, economists pointed to the likelihood that they would start growing again soon.
Some analysts said the statement could have been timed to send a signal ahead of Obama's Nov. 15-18 visit to China.
Obama told Reuters on Monday that he planned to raise the currency issue during his trip.
However, Beijing is increasingly facing complaints about its currency from other emerging economies, which see an undervalued yuan as undercutting them in global markets.
Read Entire Article
Wednesday, November 11, 2009
Tuesday, November 10, 2009
Central Bankers' Fears As They Watch The Plummeting Dollar
(ZeroHedge) Barclays, whose primary goal these days seems to be to enjoin the Fed in ruining the dollar (talk to a gummy bear salesman from Barclays and you will get a "short the dollar" pitch), presumably in order to make even more money on their alleged huge short dollar prop exposure, is out with a new note from currency strategist Steven Englander. His latest perspective is that all of today's conventional wisdom interpretations of IMF data demonstrating a diversification away from the dollar in global reserves is in fact not what it seems. If it were, the dollar would be at most worth zero, and at worst, the Fed would be paying you to take every new batch of brand new Obama-faced $1 trillion bills from its basement.
To wit:
IMF data show a drop in the USD’s share of reserves from a peak of 73% to just below 63% in Q2 09. Most of this is due to valuation effects, rather than any transactions by central banks. Its share has declined because the USD is not worth as much, not because central banks have been able to substitute other currencies for USD. Insofar as there is evidence of a change in central bank behavior, it is very recent (see Central banks walk the ‘not buying USD’ walk, 5 October 2009). If it were not for the changes in the USD’s value, its current share in reserve portfolios would be less than 1pp below the 10-year average and about 2.5pp below the peak.
The IMF COFER line shows a steady decline in the USD’s share in reserve portfolios based on its published headline numbers. These are the numbers most often discussed by journalists and investors (Figure 1). We also calculate what the USD’s share would have been if exchange rates had been stable during 1999-09. This would provide an estimate of how much USD has been actually bought or sold relative to other currencies, and eliminates valuation effects because exchange rates are held fixed. The values of the currency used are arbitrary and change only the level of the share, not its trend. We recalculate the USD’s share using exchange rates at: 1) Q2 01, when the USD’s share in the headline IMF data was at its peak; and 2) Q2 09, when its share hit its trough. Our calculations exclude the small “other currencies” category because there is no way to fix an exchange rate for this category. This omission has almost no effect on the outcomes.
And here is the punchline: basically the only reason reserve portfolios have seen a decline in the dollar is due to the ceaseless pounding the dollar receives only because it is cursed with being the currency of choice of the current batch of madmen in the Federal Lunatic Asylum Reserve.
If the value of the USD had not changed, its share in reserve portfolios would be virtually trendless. It does not matter whether exchange rates are from a strong or weak dollar period. As noted above, whatever FX rate is used, the Q2 level would be less than 1pp below the 10-year average.
In valuation-adjusted terms, the USD’s share hit a local peak at the end of 2004, illustrating that in the past, central banks have been content to buy and largely hold the USD when it was depreciating. When it really came under downward pressure in 2004, its incremental share in reserves rose to almost 80% (Figure 2; the incremental share is the USD’s share in valuation-adjusted reserves accumulation over the prior eight quarters). A similar surge in the USD’s share occurred as it weakened into 2008. By contrast, the 2005 strength led to a much lower USD share in incremental reserves.
Read Entire Article
To wit:
IMF data show a drop in the USD’s share of reserves from a peak of 73% to just below 63% in Q2 09. Most of this is due to valuation effects, rather than any transactions by central banks. Its share has declined because the USD is not worth as much, not because central banks have been able to substitute other currencies for USD. Insofar as there is evidence of a change in central bank behavior, it is very recent (see Central banks walk the ‘not buying USD’ walk, 5 October 2009). If it were not for the changes in the USD’s value, its current share in reserve portfolios would be less than 1pp below the 10-year average and about 2.5pp below the peak.
The IMF COFER line shows a steady decline in the USD’s share in reserve portfolios based on its published headline numbers. These are the numbers most often discussed by journalists and investors (Figure 1). We also calculate what the USD’s share would have been if exchange rates had been stable during 1999-09. This would provide an estimate of how much USD has been actually bought or sold relative to other currencies, and eliminates valuation effects because exchange rates are held fixed. The values of the currency used are arbitrary and change only the level of the share, not its trend. We recalculate the USD’s share using exchange rates at: 1) Q2 01, when the USD’s share in the headline IMF data was at its peak; and 2) Q2 09, when its share hit its trough. Our calculations exclude the small “other currencies” category because there is no way to fix an exchange rate for this category. This omission has almost no effect on the outcomes.
And here is the punchline: basically the only reason reserve portfolios have seen a decline in the dollar is due to the ceaseless pounding the dollar receives only because it is cursed with being the currency of choice of the current batch of madmen in the Federal Lunatic Asylum Reserve.
If the value of the USD had not changed, its share in reserve portfolios would be virtually trendless. It does not matter whether exchange rates are from a strong or weak dollar period. As noted above, whatever FX rate is used, the Q2 level would be less than 1pp below the 10-year average.
In valuation-adjusted terms, the USD’s share hit a local peak at the end of 2004, illustrating that in the past, central banks have been content to buy and largely hold the USD when it was depreciating. When it really came under downward pressure in 2004, its incremental share in reserves rose to almost 80% (Figure 2; the incremental share is the USD’s share in valuation-adjusted reserves accumulation over the prior eight quarters). A similar surge in the USD’s share occurred as it weakened into 2008. By contrast, the 2005 strength led to a much lower USD share in incremental reserves.
Read Entire Article
Monday, November 9, 2009
Why the Wisest Minds on WallStreet are Buying Gold
With the inexplicable recent reorientation by a traditionally very erudite, pragmatic and realistic Jim Grant (well, not that inexplicable) into what can only be described as pulling some serious wool over his readers' eyes, we decided to fall back to our other favorite newsletter writer: the inimitable Fred Hickey who writes The High-Tech Strategist. While we can not find enough praise for his work, it bears pointing out that whereas one may accuse Grant of selling out, such an accusation will be impossible of Mr. Hickey, who is a florid, objective and insightful as always, and maybe more so now than ever. His latest letter, Fighting the Fed, is a must read for all, and while we wish we had the copyright latitude to repost it in whole, we would like to at least share Fred's thoughts on gold (among many other things, some of which have made his readers serious money over the years).
Owning Gold Becomes More Respectable
When Paul Volcker employed his tough love solution by driving interest rates skyward nearly three decades ago, he squashed inflation and also squashed the gold bull market of the 70s, banishing the metal into a near 20-year bear market. Gold plunged from a peak of over $800 an ounce to well under $300 an ounce in 2000, right at the top of the 2000 stock market bubble. Gold has been propelled ever higher since by the Fed's extraordinarily easy money policies. At the bottom in 2000 there was absolutely no interest in holding gold (only internet stocks). It was a capitulative moment topped off by UK Treasury Chancellor Gordon Brown's decision to dump half (395 tons) of England's gold reserves at the rock-bottom average price of $275 an ounce. The only people left holding gold at that point were those derisively labeled as "gold bugs."
Thanks to the Fed, gold has been building up a head of steam ever since. Nevertheless, despite nine consecutive years, gold has remained disrespected and and under-owned, both by the public and by the professional money-managers. More recently, that has been changing. This past month I've read speeches from both billionaire John Paulson and David Einhorn, both of whom famously predicted (and capitalized spectacularly from) the collapse of the housing and credit bubbles. Both eloquently explained how they had never been gold bugs, yet both have made hold the core holding in their portfolios. This weekend the Wall Street Journal ran a full-pages story on how Paulson made billions from the recent financial market's crash. At the very end of the story, Paulson explained his new trade- betting against the dollar through billions of dollars of gold investments. Paulson stated: "Three or four years from now, people will ask why they didn't buy gold earlier."
Last week I also read legendary hedge fund manager (and billionaire) Paul Tudor Jones' third quarter letter to his hedge fund clients which included a detailed, 10-page appendix examining gold's current valuation. His conclusion: "In our opinion, the scope for increased investment demand over the coming years is much stronger than the potential from new supply. As a result, incremental new demand must buy gold from current holders. With a macro backdrop that suggests gold is undervalued, we doubt the transfer of gold from current holders to its new owners will occur at, or near, current prices."
These heavyweight endorsements of gold are making the rounds among the investment community. I've read them, and so have a lot of others. If I was a money manager underinvested in this category (that's nearly all of them), I know I'd have to begin to reconsider my stance on the precious metal. This process of discovery takes time, but the wheels are certainly in motion. The smartest of the smart money is now positioned in gold, awaiting sharply higher prices.
And some more:
When gold went over $1,000 recently a lot of gold owners expected a sell-off similar to what occurred in March 2008 and earlier this year. They moved to the sidelines expecting to buy back at lower prices. There were a litany of reasons the sellers used as excuses to lower their positions, including this one that I wrote about in last month's letter: "The last excuse to sell gold (and the bears have been flogging this for over a year now) was last month's formal endorsement by the IMF to sell 403.3 tons of gold. However, the gold is expected to be sold within the limits of the new Central Banks Gold Agreement which caps central banks' gold sales through September 2014. That assumes that the Chinese don't buy the whole 403 ton lot all at once, as I've heard they've offered to do."
As I write this it was just announced this morning that India had beat China to the punch, buying 200 metric tons in one fell swoop from the IMF. Bloomberg quoted Suresh Hundia, president of the Bombay Bullion Association today: The purchase is "not so much about India betting gold prices will increase but that the dollar will fall. They are looking to diversify their foreign exchange reserves."
The psychological barrier of $1,000 gold has been broken. That $1,000 number might as well be $100. There is no longer a limit to the upside. As you know, I've been waiting for the "crazy phase" part of the long, secular bull market to being. That's how secular bull markets work - eventually momentum takes over and there's a parabolic run to the top. It happened at the end of the last gold bull market. After rallying from about $250 an ounce to over $400 in September 1979, gold had some indigestion problems at that level and entered into a several week consolidation. Around Thanksgiving of 1979, gold was still trading at about $400 an ounce. By January 21, 1980 the price of gold had doubled to $850 an ounce. This was the blow-off top. The action was not unlike what we saw in tech stocks in 1999-early 2000.
I doubt that what we're seeing is the final blow off. I have no idea when it may come. It could be months or years from now. I just know that it hasn't yet occurred. In the meantime, prepare yourself for a lot more company (besides the smartest of the hedge fund managers) and more head-fakes. In the end, the public will come in en masse. They'll also be buying gold stocks with abandon. That is clearly not the case today.
October is typically a seasonally weak month for gold (November-February are usually very strong months) and the bears were out in force, expecting a selloff. Commodities "expert" Dennis Gartman harrumphed that requests for interviews from him about gold had reached "unprecedented levels." He warned "The public's and the media's attention to things such as gold always reaches a fever pitch and then falters... or collapses." Gartman has been consistently on the wrong side of this trade.
And in case it is not evident, here is the simple conclusion:
Gold is no longer being driven by jewelry demand, as in the recent past. It is investment demand that's wagging the yellow dog's tail. It's a loss of confidence in the U.S. dollar and U.S. government policies around the world that's driving gold to record levels. As it has been for thousands of years, gold is the safest store of wealth, not so much something to be fashioned into a necklace.
Not surprisingly, Fred, as increasingly more people, is long many, many gold stocks.
Read Entire Article
Owning Gold Becomes More Respectable
When Paul Volcker employed his tough love solution by driving interest rates skyward nearly three decades ago, he squashed inflation and also squashed the gold bull market of the 70s, banishing the metal into a near 20-year bear market. Gold plunged from a peak of over $800 an ounce to well under $300 an ounce in 2000, right at the top of the 2000 stock market bubble. Gold has been propelled ever higher since by the Fed's extraordinarily easy money policies. At the bottom in 2000 there was absolutely no interest in holding gold (only internet stocks). It was a capitulative moment topped off by UK Treasury Chancellor Gordon Brown's decision to dump half (395 tons) of England's gold reserves at the rock-bottom average price of $275 an ounce. The only people left holding gold at that point were those derisively labeled as "gold bugs."
Thanks to the Fed, gold has been building up a head of steam ever since. Nevertheless, despite nine consecutive years, gold has remained disrespected and and under-owned, both by the public and by the professional money-managers. More recently, that has been changing. This past month I've read speeches from both billionaire John Paulson and David Einhorn, both of whom famously predicted (and capitalized spectacularly from) the collapse of the housing and credit bubbles. Both eloquently explained how they had never been gold bugs, yet both have made hold the core holding in their portfolios. This weekend the Wall Street Journal ran a full-pages story on how Paulson made billions from the recent financial market's crash. At the very end of the story, Paulson explained his new trade- betting against the dollar through billions of dollars of gold investments. Paulson stated: "Three or four years from now, people will ask why they didn't buy gold earlier."
Last week I also read legendary hedge fund manager (and billionaire) Paul Tudor Jones' third quarter letter to his hedge fund clients which included a detailed, 10-page appendix examining gold's current valuation. His conclusion: "In our opinion, the scope for increased investment demand over the coming years is much stronger than the potential from new supply. As a result, incremental new demand must buy gold from current holders. With a macro backdrop that suggests gold is undervalued, we doubt the transfer of gold from current holders to its new owners will occur at, or near, current prices."
These heavyweight endorsements of gold are making the rounds among the investment community. I've read them, and so have a lot of others. If I was a money manager underinvested in this category (that's nearly all of them), I know I'd have to begin to reconsider my stance on the precious metal. This process of discovery takes time, but the wheels are certainly in motion. The smartest of the smart money is now positioned in gold, awaiting sharply higher prices.
And some more:
When gold went over $1,000 recently a lot of gold owners expected a sell-off similar to what occurred in March 2008 and earlier this year. They moved to the sidelines expecting to buy back at lower prices. There were a litany of reasons the sellers used as excuses to lower their positions, including this one that I wrote about in last month's letter: "The last excuse to sell gold (and the bears have been flogging this for over a year now) was last month's formal endorsement by the IMF to sell 403.3 tons of gold. However, the gold is expected to be sold within the limits of the new Central Banks Gold Agreement which caps central banks' gold sales through September 2014. That assumes that the Chinese don't buy the whole 403 ton lot all at once, as I've heard they've offered to do."
As I write this it was just announced this morning that India had beat China to the punch, buying 200 metric tons in one fell swoop from the IMF. Bloomberg quoted Suresh Hundia, president of the Bombay Bullion Association today: The purchase is "not so much about India betting gold prices will increase but that the dollar will fall. They are looking to diversify their foreign exchange reserves."
The psychological barrier of $1,000 gold has been broken. That $1,000 number might as well be $100. There is no longer a limit to the upside. As you know, I've been waiting for the "crazy phase" part of the long, secular bull market to being. That's how secular bull markets work - eventually momentum takes over and there's a parabolic run to the top. It happened at the end of the last gold bull market. After rallying from about $250 an ounce to over $400 in September 1979, gold had some indigestion problems at that level and entered into a several week consolidation. Around Thanksgiving of 1979, gold was still trading at about $400 an ounce. By January 21, 1980 the price of gold had doubled to $850 an ounce. This was the blow-off top. The action was not unlike what we saw in tech stocks in 1999-early 2000.
I doubt that what we're seeing is the final blow off. I have no idea when it may come. It could be months or years from now. I just know that it hasn't yet occurred. In the meantime, prepare yourself for a lot more company (besides the smartest of the hedge fund managers) and more head-fakes. In the end, the public will come in en masse. They'll also be buying gold stocks with abandon. That is clearly not the case today.
October is typically a seasonally weak month for gold (November-February are usually very strong months) and the bears were out in force, expecting a selloff. Commodities "expert" Dennis Gartman harrumphed that requests for interviews from him about gold had reached "unprecedented levels." He warned "The public's and the media's attention to things such as gold always reaches a fever pitch and then falters... or collapses." Gartman has been consistently on the wrong side of this trade.
And in case it is not evident, here is the simple conclusion:
Gold is no longer being driven by jewelry demand, as in the recent past. It is investment demand that's wagging the yellow dog's tail. It's a loss of confidence in the U.S. dollar and U.S. government policies around the world that's driving gold to record levels. As it has been for thousands of years, gold is the safest store of wealth, not so much something to be fashioned into a necklace.
Not surprisingly, Fred, as increasingly more people, is long many, many gold stocks.
Read Entire Article
David Rosenberg: This Is How We Get To $2,750 Gold
(Zero Hedge)
• If India were to lift is gold share of FX reserves from 6% to 20%, where it was during the strong U.S. dollar policy days of 15 years ago, we estimate that gold would go to $1300/ounce.
• If China were merely to copy what India just did and raise its share to 6%, then gold would go to $1,400/ounce, based on our in-house analysis.
• If the USA were to go back to a 40% ratio of gold reserves to money supply (using the monetary base), where it was a century ago when the Fed was first created, from 17% currently, that would equate to three years’ supply of bullion, and alone take the gold price up to $2,750/ounce, based again on our research on price sensitivities to central bank buying activity.
Another reason to be bullish on gold is the recurring trade spats. Indeed, this is good news for the commodity complex as security of supply resurfaces — see China Attacks U.S. in Fresh Trade Spat” on page 2 of the weekend FT. If it’s not Chinese-made tires fingered by an increasingly protectionist U.S.A. one day, it’s steel pipe the next. This latest anti-dumping measure by the United States is facing a severe rebuke, as per the press reports, in China.
In addition to these trade protectionist actions, there is also the matter of more stimulus measures being undertaken in a mid-term election year at a time when the Treasury is expanding its debt issuance to new records right across the maturity spectrum. All anyone needs to do is have a look at the article Congress’s Blank Check For Housing in the weekend WSJ — to see this happening at a time of 10% budget deficit-to-GDP ratios, had indeed become a bottom-less fiscal pit.
Since the USA will not default, not raise taxes nor cut spending, the only logical recourse will be to print vast sums of U.S. dollars to fund this surreal foray into deficit finance. In other words, reflate. As we keep on saying, under Dr. Bernanke’s tenure, the monetary base has risen twice as much as nominal GDP has and the two lines continue to diverge. At the same time, gold production peaked a decade ago. It’s all about scarcity of supply, and as Sri Lanka’s central bank just reminded us, and India before that, there are buyers with deep pockets lining up to diversify into bullion. Here are the ‘what if’ realities stack up:
• If India were to lift is gold share of FX reserves from 6% to 20%, where it was during the strong U.S. dollar policy days of 15 years ago, we estimate that gold would go to $1300/ounce.
• If China were merely to copy what India just did and raise its share to 6%, then gold would go to $1,400/ounce, based on our in-house analysis.
• If the USA were to go back to a 40% ratio of gold reserves to money supply (using the monetary base), where it was a century ago when the Fed was first created, from 17% currently, that would equate to three years’ supply of bullion, and alone take the gold price up to $2,750/ounce, based again on our research on price sensitivities to central bank buying activity.
Now gold is in a secular bull market and by no means are we suggesting that everyone line up at the vaults right this second — for the time being, it is too much front page news and a crowded trade, so it won’t hurt to wait for a pullback and get in at better prices (as an example, see Inside the Global Gold Frenzy on the front page of the Sunday NYT business section).
You see, when Bob Farrell wrote “The 10 Market Rules to Remember” he made sure that they were interesting reading and in doing so, some people get a laugh out of Rule Number 9 (“When all the experts and forecasts agree, something else is going to happen”) and Rule Number 10 “Bull markets are more fun than bear markets”). Nevertheless, they are just as important as the other eight rules. The obvious reason why Rule 5 is important (“The public buys most at the top and least at the bottom”) is that it also captures the inverse relationship between sentiment and the position of the market (ie, bullish sentiment peaks when the market tops and turns down and bearish sentiment peaks when the market bottoms and turns up). All that “agreement” adds enormous credibility to conventional opinion, just when it is most important to envision and prepare for the contrary. Lately, (you) have been experiencing shock at the policy responses by the U.S. government relative to the credit crisis and economic slowdown. Policies that encourage increased indebtedness by households and businesses are combined with massive deficit spending and Federal Reserve balance sheet expansion and the latter particularly, has enormous inflationary implications while exerting downward pressure on the value of the U.S. dollar. The problem with this understanding is that most everyone agrees.
To wit: According to Consensus Inc., bulls on the U.S. dollar are currently at 28%. Bulls on Treasury bonds are currently at 59% after hitting a low of 21% in early June when rates peaked in this cycle. Bulls on gold are at 78%. Bulls on the stock market are at 74% and they haven’t been that high since October 2007. It has become a crowded trade, and something very contrary to the expected outcome is likely to occur, at least over the near term.
Walter Murphy, our favorite technical analyst, expects a substantial rally in the U.S. dollar and a decline in gold over the medium term, even if those moves are counter-trend. He thinks that the war is on inflation, but the battle is deflation and this is a bear market rally in stocks. We have said repeatedly that it seems too early to call for an economic expansion with so much unfinished business in the process of household balance sheet repair. And, keep in mind that the deflationary forces emanating from the household are much greater than the inflationary forces associated with government stimulus, at least so
Read Entire Article
• If India were to lift is gold share of FX reserves from 6% to 20%, where it was during the strong U.S. dollar policy days of 15 years ago, we estimate that gold would go to $1300/ounce.
• If China were merely to copy what India just did and raise its share to 6%, then gold would go to $1,400/ounce, based on our in-house analysis.
• If the USA were to go back to a 40% ratio of gold reserves to money supply (using the monetary base), where it was a century ago when the Fed was first created, from 17% currently, that would equate to three years’ supply of bullion, and alone take the gold price up to $2,750/ounce, based again on our research on price sensitivities to central bank buying activity.
Another reason to be bullish on gold is the recurring trade spats. Indeed, this is good news for the commodity complex as security of supply resurfaces — see China Attacks U.S. in Fresh Trade Spat” on page 2 of the weekend FT. If it’s not Chinese-made tires fingered by an increasingly protectionist U.S.A. one day, it’s steel pipe the next. This latest anti-dumping measure by the United States is facing a severe rebuke, as per the press reports, in China.
In addition to these trade protectionist actions, there is also the matter of more stimulus measures being undertaken in a mid-term election year at a time when the Treasury is expanding its debt issuance to new records right across the maturity spectrum. All anyone needs to do is have a look at the article Congress’s Blank Check For Housing in the weekend WSJ — to see this happening at a time of 10% budget deficit-to-GDP ratios, had indeed become a bottom-less fiscal pit.
Since the USA will not default, not raise taxes nor cut spending, the only logical recourse will be to print vast sums of U.S. dollars to fund this surreal foray into deficit finance. In other words, reflate. As we keep on saying, under Dr. Bernanke’s tenure, the monetary base has risen twice as much as nominal GDP has and the two lines continue to diverge. At the same time, gold production peaked a decade ago. It’s all about scarcity of supply, and as Sri Lanka’s central bank just reminded us, and India before that, there are buyers with deep pockets lining up to diversify into bullion. Here are the ‘what if’ realities stack up:
• If India were to lift is gold share of FX reserves from 6% to 20%, where it was during the strong U.S. dollar policy days of 15 years ago, we estimate that gold would go to $1300/ounce.
• If China were merely to copy what India just did and raise its share to 6%, then gold would go to $1,400/ounce, based on our in-house analysis.
• If the USA were to go back to a 40% ratio of gold reserves to money supply (using the monetary base), where it was a century ago when the Fed was first created, from 17% currently, that would equate to three years’ supply of bullion, and alone take the gold price up to $2,750/ounce, based again on our research on price sensitivities to central bank buying activity.
Now gold is in a secular bull market and by no means are we suggesting that everyone line up at the vaults right this second — for the time being, it is too much front page news and a crowded trade, so it won’t hurt to wait for a pullback and get in at better prices (as an example, see Inside the Global Gold Frenzy on the front page of the Sunday NYT business section).
You see, when Bob Farrell wrote “The 10 Market Rules to Remember” he made sure that they were interesting reading and in doing so, some people get a laugh out of Rule Number 9 (“When all the experts and forecasts agree, something else is going to happen”) and Rule Number 10 “Bull markets are more fun than bear markets”). Nevertheless, they are just as important as the other eight rules. The obvious reason why Rule 5 is important (“The public buys most at the top and least at the bottom”) is that it also captures the inverse relationship between sentiment and the position of the market (ie, bullish sentiment peaks when the market tops and turns down and bearish sentiment peaks when the market bottoms and turns up). All that “agreement” adds enormous credibility to conventional opinion, just when it is most important to envision and prepare for the contrary. Lately, (you) have been experiencing shock at the policy responses by the U.S. government relative to the credit crisis and economic slowdown. Policies that encourage increased indebtedness by households and businesses are combined with massive deficit spending and Federal Reserve balance sheet expansion and the latter particularly, has enormous inflationary implications while exerting downward pressure on the value of the U.S. dollar. The problem with this understanding is that most everyone agrees.
To wit: According to Consensus Inc., bulls on the U.S. dollar are currently at 28%. Bulls on Treasury bonds are currently at 59% after hitting a low of 21% in early June when rates peaked in this cycle. Bulls on gold are at 78%. Bulls on the stock market are at 74% and they haven’t been that high since October 2007. It has become a crowded trade, and something very contrary to the expected outcome is likely to occur, at least over the near term.
Walter Murphy, our favorite technical analyst, expects a substantial rally in the U.S. dollar and a decline in gold over the medium term, even if those moves are counter-trend. He thinks that the war is on inflation, but the battle is deflation and this is a bear market rally in stocks. We have said repeatedly that it seems too early to call for an economic expansion with so much unfinished business in the process of household balance sheet repair. And, keep in mind that the deflationary forces emanating from the household are much greater than the inflationary forces associated with government stimulus, at least so
Read Entire Article
Friday, November 6, 2009
Gold Jumps to Record Above $1,100 on U.S. Interest-Rate Outlook
(Bloomberg) -- Gold futures jumped to a record, topping $1,100 an ounce, on mounting speculation that low U.S. borrowing costs will drive down the dollar, boosting the appeal of the precious metal as an alternative investment.
The metal reached $1,101.90 in New York, heading for a ninth straight annual gain. The dollar is down 6.8 percent this year against a basket of six major currencies as the Federal Reserve keeps its benchmark interest rate at zero to 0.25 percent to revive economic growth.
“Until Washington stops exploding the deficit, the dollar will continue to weaken, and gold is going higher,” said Tom Pawlicki, an analyst at MF Global Ltd. in Chicago.
Gold futures for December delivery rose $6.40, or 0.6 percent, to $1,095.70 on the Comex division of the New York Mercantile Exchange, climbing for the fifth straight day. The price has gained 24 percent this year.
The jobless rate and low inflation will keep the Fed from raising rates until 2011, John Brynjolfsson, the chief investment officer at hedge fund Armored Wolf LLC in Aliso Viejo, California, said in an interview on Bloomberg Television.
The unemployment rate in the U.S. reached a 26-year high of 10.2 percent in October, the Labor Department said today. Consumer costs rose 0.3 percent last month, according to the median forecast of economists surveyed by Bloomberg News.
President Barack Obama has increased the nation’s marketable debt to an unprecedented $7 trillion as the government borrows to fund spending programs intended to bolster the economy.
‘Massive Demand’
“There’s massive investment demand for gold,” said Christoph Eibl, a co-founder of Zug, Switzerland-based Tiberius Group, which manages $1.8 billion. “I see more liquidity pumped in to lift the economies from bad news.”
Seventeen of 23 traders, investors and analysts surveyed by Bloomberg, or 74 percent, said bullion will rise next week. Four forecast lower prices, and two were neutral.
This week, gold gained 5.3 percent, the most since April, after India said it purchased 200 metric tons of gold from the International Monetary Fund last month.
Other central banks may follow in a shift away from the dollar, analysts said.
Sri Lanka’s central bank, which has been purchasing gold for the past seven months, will continue buying the metal as a hedge against volatility in currency markets, Ajith Nivard Cabraal, the bank’s governor, said today. Cabraal, speaking in Colombo, declined to say how much had been bought.
Sri Lanka held 5.3 metric tons of gold as of September, according to World Gold Council data.
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The metal reached $1,101.90 in New York, heading for a ninth straight annual gain. The dollar is down 6.8 percent this year against a basket of six major currencies as the Federal Reserve keeps its benchmark interest rate at zero to 0.25 percent to revive economic growth.
“Until Washington stops exploding the deficit, the dollar will continue to weaken, and gold is going higher,” said Tom Pawlicki, an analyst at MF Global Ltd. in Chicago.
Gold futures for December delivery rose $6.40, or 0.6 percent, to $1,095.70 on the Comex division of the New York Mercantile Exchange, climbing for the fifth straight day. The price has gained 24 percent this year.
The jobless rate and low inflation will keep the Fed from raising rates until 2011, John Brynjolfsson, the chief investment officer at hedge fund Armored Wolf LLC in Aliso Viejo, California, said in an interview on Bloomberg Television.
The unemployment rate in the U.S. reached a 26-year high of 10.2 percent in October, the Labor Department said today. Consumer costs rose 0.3 percent last month, according to the median forecast of economists surveyed by Bloomberg News.
President Barack Obama has increased the nation’s marketable debt to an unprecedented $7 trillion as the government borrows to fund spending programs intended to bolster the economy.
‘Massive Demand’
“There’s massive investment demand for gold,” said Christoph Eibl, a co-founder of Zug, Switzerland-based Tiberius Group, which manages $1.8 billion. “I see more liquidity pumped in to lift the economies from bad news.”
Seventeen of 23 traders, investors and analysts surveyed by Bloomberg, or 74 percent, said bullion will rise next week. Four forecast lower prices, and two were neutral.
This week, gold gained 5.3 percent, the most since April, after India said it purchased 200 metric tons of gold from the International Monetary Fund last month.
Other central banks may follow in a shift away from the dollar, analysts said.
Sri Lanka’s central bank, which has been purchasing gold for the past seven months, will continue buying the metal as a hedge against volatility in currency markets, Ajith Nivard Cabraal, the bank’s governor, said today. Cabraal, speaking in Colombo, declined to say how much had been bought.
Sri Lanka held 5.3 metric tons of gold as of September, according to World Gold Council data.
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Thursday, November 5, 2009
Sri Lanka Central Bank Buying Gold to Diversify Reserves
(Reuters) - Sri Lanka's central bank has been buying gold for the past five or six months as it diversifies its reserves amid volatile markets, the bank's governor said in an interview on Thursday.
'We have been fairly strong accumulators of gold reserves over the past few months,' Sri Lanka Central Bank Governor Ajith Nivard Cabraal told Reuters in a telephone interview from the southern Indian city of Chennai.
'We haven't stopped yet,' he added, declining to quantify how much gold the central bank had bought or how much of the more than $4.8 billion of the country's reserves were in gold.
'Many countries are today diversifying. They are also looking at intrinsic value of their reserves, so gold would be a natural candidate for that kind of reserve accumulation,' he said.
(Reporting by Tony Munroe; Editing by Alistair Scrutton)
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'We have been fairly strong accumulators of gold reserves over the past few months,' Sri Lanka Central Bank Governor Ajith Nivard Cabraal told Reuters in a telephone interview from the southern Indian city of Chennai.
'We haven't stopped yet,' he added, declining to quantify how much gold the central bank had bought or how much of the more than $4.8 billion of the country's reserves were in gold.
'Many countries are today diversifying. They are also looking at intrinsic value of their reserves, so gold would be a natural candidate for that kind of reserve accumulation,' he said.
(Reporting by Tony Munroe; Editing by Alistair Scrutton)
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Tuesday, November 3, 2009
India Buys IMF Gold to Boost Reserves as Dollar Drops
(Bloomberg) India, the world’s biggest gold consumer, bought 200 metric tons from the International Monetary Fund for $6.7 billion as central banks show increased interest in diversifying their holdings to protect against a slumping dollar.
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The transaction, equivalent to 8 percent of world annual mine production, was the IMF’s first such sale in nine years and propels India to the ninth-biggest government owner globally, according to figures from London-based research company GFMS Ltd. The country previously held 358 tons, the data show. The news was a “surprise because everybody was talking about China being the buyer,” said James Moore, an analyst at TheBullionDesk.com.
“The fall in the U.S. dollar seems to be pushing all the central banks to strengthen their portfolio with gold,” said N.R. Bhanumurthy, professor at the National Institute of Public Finance and Policy in New Delhi. “Gold is a safe store of value compared to the U.S. dollar.”
Gold for immediate delivery rose 0.2 percent to $1,061.48 an ounce at 1:20 p.m. in London and was less than 1 percent below its record $1,070.80 an ounce reached Oct. 14. India purchased the gold at an average price of about $1,045 an ounce, according to an IMF official on a conference call.
IMF Finances
The IMF sale accounts for almost half the 403.3 tons that the Washington-based lender in September agreed to sell as part of a plan to shore up its finances and lend at reduced rates to low-income countries. Asian nations, which have amassed stockpiles of foreign currency reserves since the 1998 financial crisis, have shown increased interest in diversifying out of U.S. assets as the dollar loses value against other currencies.
“The most important thing is that people want gold even at these prices,” said Ghee Peh, head of mining research, with UBS AG in Hong Kong. “There’s good support for prices for now” from the IMF’s disposal of bullion, he said.
The transaction involved daily sales from Oct. 19 to Oct. 30 at market prices and is in the process of being settled, the IMF said in a statement yesterday.
The purchase didn’t signify any loss of confidence in the dollar, nor did it show that the metal’s appeal was increasing, India’s Finance Minister Pranab Mukherjee said.
Loans to Poor
Proceeds from the sales and other IMF resources as well as individual contributors would help pay for discounted interest rates on loans to low-income countries, the IMF said in July. It plans to grant as much as $17 billion in extra loans to poor nations through 2014. The 403.3 tons the IMF agreed to sell amount to 1/8 of its stockpile.
Suresh Tendulkar, an economic adviser to Indian Prime Minister Manmohan Singh, said in an interview in July that he was urging the government to diversify its foreign-exchange reserves and hold fewer dollars. China and Russia have also stepped up calls for a rethink of how global currency reserves are composed and managed.
“There seems to be consensus among the central banks that it’s better to cut down on currency holdings and diversify into assets like gold, which has upside potential,” Krishna Reddy, a precious metal analyst at Way2Wealth Commodities Pvt., said in Mumbai. “The Reserve Bank of India gold purchase is a clear reflection of this belief.”
More Sales
Russia, China or Brazil may buy the rest of the IMF gold for sale, said Moore from the TheBullionDesk.com.
China, the world’s biggest gold producer, has increased reserves of the metal by 76 percent to 1,054 tons since 2003 and has the fifth-biggest holdings by country, Hu Xiaolian, head of the State Administration of Foreign Exchange, said in April.
The nation may purchase some of the 403.3 tons of gold being offered by the IMF, Market News International reported in September, citing two unidentified government officials.
“It’s more or less certain that government of India expects the U.S. dollar to weaken,” said Suresh Hundia, president of the Bombay Bullion Association Ltd., in an interview today. The purchase is “not so much about India betting gold prices will increase but that the dollar will fall. They are looking to diversify their foreign exchange reserves.”
India’s foreign-exchange reserves advanced $684 million to $285.5 billion in the week ended Oct. 23, the central bank said Oct. 30. That included foreign-currency assets of $268.3 billion, gold reserves of $10.3 billion and the special drawing rights with the IMF.
Off-Market Transactions
The lender has said it is ready to sell directly to central banks and later make transactions on the open market if necessary. The IMF official declined to say yesterday whether other central banks have expressed interest in purchases.
Given the “well-publicized concerns of many central banks over the level of their exposure to the U.S. dollar, further off-market transactions must be a clear possibility,” Aram Shishmanian, chief executive of the World Gold Council in London, said in a statement.
By: Thomas Kutty Abraham and Kim Kyoungwha
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Enter Remainder of Article Here
The transaction, equivalent to 8 percent of world annual mine production, was the IMF’s first such sale in nine years and propels India to the ninth-biggest government owner globally, according to figures from London-based research company GFMS Ltd. The country previously held 358 tons, the data show. The news was a “surprise because everybody was talking about China being the buyer,” said James Moore, an analyst at TheBullionDesk.com.
“The fall in the U.S. dollar seems to be pushing all the central banks to strengthen their portfolio with gold,” said N.R. Bhanumurthy, professor at the National Institute of Public Finance and Policy in New Delhi. “Gold is a safe store of value compared to the U.S. dollar.”
Gold for immediate delivery rose 0.2 percent to $1,061.48 an ounce at 1:20 p.m. in London and was less than 1 percent below its record $1,070.80 an ounce reached Oct. 14. India purchased the gold at an average price of about $1,045 an ounce, according to an IMF official on a conference call.
IMF Finances
The IMF sale accounts for almost half the 403.3 tons that the Washington-based lender in September agreed to sell as part of a plan to shore up its finances and lend at reduced rates to low-income countries. Asian nations, which have amassed stockpiles of foreign currency reserves since the 1998 financial crisis, have shown increased interest in diversifying out of U.S. assets as the dollar loses value against other currencies.
“The most important thing is that people want gold even at these prices,” said Ghee Peh, head of mining research, with UBS AG in Hong Kong. “There’s good support for prices for now” from the IMF’s disposal of bullion, he said.
The transaction involved daily sales from Oct. 19 to Oct. 30 at market prices and is in the process of being settled, the IMF said in a statement yesterday.
The purchase didn’t signify any loss of confidence in the dollar, nor did it show that the metal’s appeal was increasing, India’s Finance Minister Pranab Mukherjee said.
Loans to Poor
Proceeds from the sales and other IMF resources as well as individual contributors would help pay for discounted interest rates on loans to low-income countries, the IMF said in July. It plans to grant as much as $17 billion in extra loans to poor nations through 2014. The 403.3 tons the IMF agreed to sell amount to 1/8 of its stockpile.
Suresh Tendulkar, an economic adviser to Indian Prime Minister Manmohan Singh, said in an interview in July that he was urging the government to diversify its foreign-exchange reserves and hold fewer dollars. China and Russia have also stepped up calls for a rethink of how global currency reserves are composed and managed.
“There seems to be consensus among the central banks that it’s better to cut down on currency holdings and diversify into assets like gold, which has upside potential,” Krishna Reddy, a precious metal analyst at Way2Wealth Commodities Pvt., said in Mumbai. “The Reserve Bank of India gold purchase is a clear reflection of this belief.”
More Sales
Russia, China or Brazil may buy the rest of the IMF gold for sale, said Moore from the TheBullionDesk.com.
China, the world’s biggest gold producer, has increased reserves of the metal by 76 percent to 1,054 tons since 2003 and has the fifth-biggest holdings by country, Hu Xiaolian, head of the State Administration of Foreign Exchange, said in April.
The nation may purchase some of the 403.3 tons of gold being offered by the IMF, Market News International reported in September, citing two unidentified government officials.
“It’s more or less certain that government of India expects the U.S. dollar to weaken,” said Suresh Hundia, president of the Bombay Bullion Association Ltd., in an interview today. The purchase is “not so much about India betting gold prices will increase but that the dollar will fall. They are looking to diversify their foreign exchange reserves.”
India’s foreign-exchange reserves advanced $684 million to $285.5 billion in the week ended Oct. 23, the central bank said Oct. 30. That included foreign-currency assets of $268.3 billion, gold reserves of $10.3 billion and the special drawing rights with the IMF.
Off-Market Transactions
The lender has said it is ready to sell directly to central banks and later make transactions on the open market if necessary. The IMF official declined to say yesterday whether other central banks have expressed interest in purchases.
Given the “well-publicized concerns of many central banks over the level of their exposure to the U.S. dollar, further off-market transactions must be a clear possibility,” Aram Shishmanian, chief executive of the World Gold Council in London, said in a statement.
By: Thomas Kutty Abraham and Kim Kyoungwha
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