IN the 1970s, with inflation rising, I often described the Federal Reserve as knowing only two speeds: too fast and too slow. At the time, the Fed’s idea was to combat recession by promoting expansion, printing money and making it easier for businesses and households to borrow — and worry only later about the inflation that resulted. That strategy produced a sorry decade of slow productivity growth, rising unemployment and, yes, rising inflation. If President Obama and the Fed continue down their current path, we could see a repeat of those dreadful inflationary years.
Back then, as now, the members of the Fed were well aware of the harmful effects of inflation. In private, they vowed not to let it get out of hand and several times even started to do something about it. But when their anti-inflationary moves caused the unemployment rate to rise to 6.5 percent or 7 percent, they forgot their promises and again began expanding the money supply and reducing interest rates.
By 1979, reported rates of inflation, worsened by the oil shock, had reached double digits. Opinion polls showed that the public now considered inflation to be the main economic problem. President Jimmy Carter’s choice for chairman of the Fed, Paul Volcker, said that he would fight inflation more deliberately than his predecessors. The president agreed with him, as did the chairmen of the Congressional banking committees.
With the public acceptance of the importance of low inflation, support in the administration and in Congress, and a chairman committed to the task, the Fed finally set out to correct what it had too long neglected. Instead of working only to avoid unemployment, the Fed sought to bring inflation back under control. Instead of flooding the market and banks with money, the Fed tightened its reserves. And instead of keeping interest rates in a narrow, relatively low range, Mr. Volcker let the market dictate the interest rate, allowing the prime rate to go as high as 21.5 percent. These disinflation policies continued in earnest with the 1980 election of Ronald Reagan.
Even so, the public, having already seen three or four failed attempts to tame inflation, didn’t really believe that Mr. Volcker and President Reagan would stay the course. In my reading of the evidence, a decisive change in attitudes occurred only in the spring of 1981, when the Federal Reserve raised interest rates even though the unemployment rate was approaching 8 percent. This was new. This was different. People began to expect lower inflation and, in this belief, slowed the increase in wages and prices, contributing to the decline in actual inflation.
Naturally, there were critics. But their criticisms were not strong enough to reverse policy. At the 1982 convention of the National Association of Home Builders, Paul Volcker said that if he were to let up on anti-inflation efforts prematurely, “the pain we have suffered would have been for naught — and we would only be putting off until some later time an even more painful day of reckoning.” As always in periods of high interest rates, home builders had been especially badly hurt, but when the chairman finished his speech, they gave him a standing ovation. Though they disliked his policy, they admired his determination to do what was needed.
The pain did not end. And the anti-inflation policy continued until the unemployment rate rose above 10 percent, many savings and loan institutions faced bankruptcy, and most Latin American countries defaulted on their debt. These were the unavoidable side effects of the public’s gradual adjustment to the new economic environment. This process continued until 1983, when the reported inflation rate fell below 4 percent.
Paul Volcker is now the head of President Obama’s Economic Recovery Advisory Board. Mr. Volcker and the administration’s many economic advisers are all fully aware of the inflationary dangers ahead. So is the current Fed chairman, Ben Bernanake. And yet the interest rate the Fed controls is nearly zero; and the enormous increase in bank reserves — caused by the Fed’s purchases of bonds and mortgages — will surely bring on severe inflation if allowed to remain. Still, they all reassure us that they can reduce reserves enough to prevent inflation and they are committed to doing so.
By Albert Meltzer
Read Entire Article
Tuesday, May 5, 2009
Venezuela Orders Gold Producers to Sell More Locally
By Daniel Cancel and Matthew Walter
May 4 (Bloomberg) -- Venezuela more than doubled the amount of gold that local producers must offer to the central bank in a bid to increase its reserves of the metal and reduce reliance on supporting them with U.S. dollars.
The Finance Ministry said today that 70 percent of gold produced in Venezuela must be sold domestically, and 60 percent must be offered first to the central bank, in a resolution published in the Official Gazette. The remaining 30 percent can be exported. Previously, 20 percent had to be offered to the Central Bank.
The resolution affects Vancouver-based Rusoro Mining Ltd., said Andre Agapov, the company’s chief executive officer. Rusoro will still have the right to sell its gold elsewhere should the central bank refuse to purchase it, he said today in a telephone interview.
“It’s a political decision,” he said. “Why ship it from Brazil when you could buy it from local producers?”
Agapov said that his company always sells to local buyers because the central bank hasn’t ever exercised its right to purchase 20 percent of Rusoro’s production. Buyers of the company’s output pay in local currency, he said.
Rusoro plans to increase production to between 250,000 and 270,000 ounces by next year, as it brings two new mines into production in the first quarter. The company is reviewing investing in more deposits and mines in the South American country, which would be developed through joint ventures with the government, Agapov said.
Rusoro aims to produce between 175,000 ounces and 195,000 ounces of gold in Venezuela this year, he said.
Gold Gain
Gold futures for June delivery jumped $14, or 1.6 percent, to $902.20 an ounce on the Comex division of the New York Mercantile Exchange. That’s the biggest gain for a most-active contract since April 23. The price fell 2.8 percent last week, the most since the first week in April.
The Venezuelan resolution may be a first step in a regional trend to rebuild government gold reserves on expectations that the U.S. dollar will weaken, said Philip Gotthelf, the president of Equidex Brokerage Group Inc. in Closter, New Jersey.
“Venezuela has decided to take a lead in rebuilding government gold reserves,” Gotthelf said today in a telephone interview. “If we see this as a catalyst for other emerging economies we will probably see the value of gold rise.”
Read Entire Article
May 4 (Bloomberg) -- Venezuela more than doubled the amount of gold that local producers must offer to the central bank in a bid to increase its reserves of the metal and reduce reliance on supporting them with U.S. dollars.
The Finance Ministry said today that 70 percent of gold produced in Venezuela must be sold domestically, and 60 percent must be offered first to the central bank, in a resolution published in the Official Gazette. The remaining 30 percent can be exported. Previously, 20 percent had to be offered to the Central Bank.
The resolution affects Vancouver-based Rusoro Mining Ltd., said Andre Agapov, the company’s chief executive officer. Rusoro will still have the right to sell its gold elsewhere should the central bank refuse to purchase it, he said today in a telephone interview.
“It’s a political decision,” he said. “Why ship it from Brazil when you could buy it from local producers?”
Agapov said that his company always sells to local buyers because the central bank hasn’t ever exercised its right to purchase 20 percent of Rusoro’s production. Buyers of the company’s output pay in local currency, he said.
Rusoro plans to increase production to between 250,000 and 270,000 ounces by next year, as it brings two new mines into production in the first quarter. The company is reviewing investing in more deposits and mines in the South American country, which would be developed through joint ventures with the government, Agapov said.
Rusoro aims to produce between 175,000 ounces and 195,000 ounces of gold in Venezuela this year, he said.
Gold Gain
Gold futures for June delivery jumped $14, or 1.6 percent, to $902.20 an ounce on the Comex division of the New York Mercantile Exchange. That’s the biggest gain for a most-active contract since April 23. The price fell 2.8 percent last week, the most since the first week in April.
The Venezuelan resolution may be a first step in a regional trend to rebuild government gold reserves on expectations that the U.S. dollar will weaken, said Philip Gotthelf, the president of Equidex Brokerage Group Inc. in Closter, New Jersey.
“Venezuela has decided to take a lead in rebuilding government gold reserves,” Gotthelf said today in a telephone interview. “If we see this as a catalyst for other emerging economies we will probably see the value of gold rise.”
Read Entire Article
Monday, May 4, 2009
Buffett's good news for gold
Alec Hogg reports from Omaha on a developing scenario ripe for another bullion boom
OMAHA -
In the 44 years he's been building a reputation as the world's savviest investor, Warren Buffett has rarely offered any good news on gold. Until now.
The two key messages he delivered to 35,000 shareholders at Berkshire Hathaway's AGM in Omaha over the weekend were inflation is coming back; and the US Dollar is headed lower. Both predictions, if fulfilled, are powerfully positive for gold.
Buffett, who has delivered compounded returns exceeding 20% a year to shareholders for more than four decades, did not mention gold by name. But that will matter little to the yellow metal's continuously growing group of supporters. They are sure to interpret this as further evidence that gold's best days lie ahead.
After dabbling in precious metals in the 1960s, Buffett ignored them until a well publicized (but poor) trade in silver between mid-1997 and early 1998. The decision to accumulate 130m ounces was based on factors specific to silver's supply and demand at the time.
Once he'd closed out the position, Buffett jokingly describing it as "the perfect trade - except that we bought too early and sold too late." Since then he has publicly and consistently shunned precious metals, mainly because he prefers assets which generate dividends.
Despite his gloomy forecasts for inflation, Buffett hasn't exactly signed up to gold-supporting groups like GATA. Rather, he suggested to Berkshire shareholders their best protection was "invest in yourself; and as a second option, buy stock in a well run company."
Buffett explained that in the wake of the global financial sector meltdown, State officials have been forced to take the world into uncharted territory. Nobody knows the exact impact of unprecedented bailout and stimulation packages.
But he is convinced of one definite consequence: "You can bet on inflation." History suggests that higher inflation is an important trigger for a rise in the gold price.
During Saturday's six hour question and answer marathon, Buffett (78) and Berkshire Hathaway's vice chairman Charlie Munger (85) once again belied their advanced years through sharp wit and focused minds. They also referred often to their view that the US Dollar is headed south - another bull factor for gold.
Buffett believes US Government Bonds are one of the poorest choices for investors today, especially non-Americans. As he put it: "Anybody who holds (US) Dollar obligations from outside this country is going to get back less in purchasing power in future."
In his view the US is following policies that are bound to have inflationary consequences. Heading these is the heavy borrowing from, especially, the Chinese to fund the bailout and stimulus packages.
Says Buffett: "It's wrong for politicians and others to keep saying they're using (US) taxpayers money. My taxes haven't gone up and neither have yours. What we are doing is borrowing from the rest of the world and building up Government debt. The classic way of reducing the impact and cost of foreign debt is by reducing the value of the dollars you're going to repay them with."
He added: "The people who are really going to pay (for the bailouts) are those who are buying fixed interest (US) Government bonds that will be worth less when they redeem them. The AIG bonuses," he quipped, "were actually paid by the Chinese."
While warning that shareholders should expect to see "plenty of inflation", Buffett said there was no need to despair: "The best protection against inflation is your own earning power. If you are the best at what you do, you will get your share of the national pie no matter what inflation does. The second best protection is owning a wonderful business that does not need capital. With these guidelines, I'd say invest in yourself. It's always been the best investment you could make." - alec@moneyweb.co.za
Read Entire Article
OMAHA -
In the 44 years he's been building a reputation as the world's savviest investor, Warren Buffett has rarely offered any good news on gold. Until now.
The two key messages he delivered to 35,000 shareholders at Berkshire Hathaway's AGM in Omaha over the weekend were inflation is coming back; and the US Dollar is headed lower. Both predictions, if fulfilled, are powerfully positive for gold.
Buffett, who has delivered compounded returns exceeding 20% a year to shareholders for more than four decades, did not mention gold by name. But that will matter little to the yellow metal's continuously growing group of supporters. They are sure to interpret this as further evidence that gold's best days lie ahead.
After dabbling in precious metals in the 1960s, Buffett ignored them until a well publicized (but poor) trade in silver between mid-1997 and early 1998. The decision to accumulate 130m ounces was based on factors specific to silver's supply and demand at the time.
Once he'd closed out the position, Buffett jokingly describing it as "the perfect trade - except that we bought too early and sold too late." Since then he has publicly and consistently shunned precious metals, mainly because he prefers assets which generate dividends.
Despite his gloomy forecasts for inflation, Buffett hasn't exactly signed up to gold-supporting groups like GATA. Rather, he suggested to Berkshire shareholders their best protection was "invest in yourself; and as a second option, buy stock in a well run company."
Buffett explained that in the wake of the global financial sector meltdown, State officials have been forced to take the world into uncharted territory. Nobody knows the exact impact of unprecedented bailout and stimulation packages.
But he is convinced of one definite consequence: "You can bet on inflation." History suggests that higher inflation is an important trigger for a rise in the gold price.
During Saturday's six hour question and answer marathon, Buffett (78) and Berkshire Hathaway's vice chairman Charlie Munger (85) once again belied their advanced years through sharp wit and focused minds. They also referred often to their view that the US Dollar is headed south - another bull factor for gold.
Buffett believes US Government Bonds are one of the poorest choices for investors today, especially non-Americans. As he put it: "Anybody who holds (US) Dollar obligations from outside this country is going to get back less in purchasing power in future."
In his view the US is following policies that are bound to have inflationary consequences. Heading these is the heavy borrowing from, especially, the Chinese to fund the bailout and stimulus packages.
Says Buffett: "It's wrong for politicians and others to keep saying they're using (US) taxpayers money. My taxes haven't gone up and neither have yours. What we are doing is borrowing from the rest of the world and building up Government debt. The classic way of reducing the impact and cost of foreign debt is by reducing the value of the dollars you're going to repay them with."
He added: "The people who are really going to pay (for the bailouts) are those who are buying fixed interest (US) Government bonds that will be worth less when they redeem them. The AIG bonuses," he quipped, "were actually paid by the Chinese."
While warning that shareholders should expect to see "plenty of inflation", Buffett said there was no need to despair: "The best protection against inflation is your own earning power. If you are the best at what you do, you will get your share of the national pie no matter what inflation does. The second best protection is owning a wonderful business that does not need capital. With these guidelines, I'd say invest in yourself. It's always been the best investment you could make." - alec@moneyweb.co.za
Read Entire Article
Friday, May 1, 2009
How Does $9,000 Gold Sound?
Seeking Alpha
In recent days the Canadian and Swedish central banks have joined the majority of other G10 central banks by indicating that they too may engage in quantitative easing now that the interest rates have been reduced to 25 and 50 basis points respectively. The ECB is wrestling with ways to extend its own form of quantitative easing and an announcement is likely at its next meeting on May 7th.
While some observers have focused on the potential debasement of the US dollar by the aggressive monetary and fiscal policies of both the Bush and Obama Administrations, many investors are worried about the viability of the whole universe of paper money.
Gillian Tett, award-winning journalist at the Financial Times, put it earlier this month, there has been a four-decade long experiment with fiat currencies not backed by gold or silver. This crisis is so profound that increasingly it appears to have shaken confidence in the experiment. At the same time, the crisis looks to have widened the range of possibilities.
The Special Drawing Rights that the Chinese and others have suggested to eventually replace the dollar does not get beyond paper money. The SDR is a basket of fiat currencies. It is not and cannot be a serious alternative to the US dollar.
Consider that 44% of an SDR is the dollar. The IMF’s figures show that roughly two-thirds of the world’s reserves are in dollars. If countries' reserves were allocated according to the SDR, the dollar’s share of reserves would fall by about a third. While the euro would pick up some slack the big winners would be the yen and sterling, whose share of the SDR is 11% a piece, two to three times larger than their reserve allocation.
If there has been a shift in reserve allocation over recent years, it is not away from the dollar, as so many wrongly claim, but rather away from the yen and toward sterling. And even this shift has been marginal at best. Reserve managers generally want, in order of importance: Security, liquidity, and yield. Japanese bonds are often seen as deficient in both liquidity and yield.
All that Glitters
Can gold return to its role as the anchor for currencies? The advocates of gold are a passionate and vocal minority which appear to be second only to Ayn Rand devotees in terms of intensity. Of course there is a large overlap as Alan Greenspan’s 1966 essay “Gold and Economic Freedom” illustrates.
Top Gold Holders:
US..................8,133.5
Germany........3,412.6
IMF.................3,217.3
France...........2,508.8
Italy.................2,451.8
China.............1,054.0
Switzerland...1,040.0
Japan...............765.2
Netherlands.....621.4
ECB.................553.0
Data from World Gold Council and China
Figures in Metric Tonnes
To appreciate though why gold is ill-suited today to once again back paper money, we need to consider why the gold standard ended in the first place. Simply put, the gold standard provided an economic barrier to the political agenda. That political agenda called for rapid growth to resist the spread of communism. It called for “guns and butter” in the US with the Great Society and the war in Vietnam. The European political agenda included the expansion of the welfare state—from cradle to grave.
Jettisoning gold not only allowed for the pursuit of the political agenda, it helped create the conditions for the rapid and dramatic expansion of trade, capital flows and globalization. What is all too often lost amid the despair and cynicism that the crisis has wrought is the amazing success of that regime. Since 1980, for example, the world economy has grown by 145%. Taking into account the increase in the world’s population, roughly 1.6% per annum, there has been a nearly 40% increase in per capita income.
How such wealth is distributed is an important issue beyond the scope of this discussion. Yet it is interesting to note that longevity, a measure that subsumes numerous other metrics, has risen sharply in both developing and developed countries and that gap between the two has narrowed.
Not Enough
The same problem exists with a new gold standard that existed with the old. There is simply an insufficient amount of gold. Or to say the same thing, the price of gold necessary to put the international monetary regime back on a gold standard is so astronomical as to make it unworkable.
There are different ways to go about conceptualizing the magnitude of the challenge. As the table above indicates, the US has more gold than Germany, France, and Switzerland combined. Given that foreign investors own about $2.5 trillion more of US assets than Americans own of foreign assets, what price of gold is necessary for the US to no longer be a debtor? Answer: More than $8,500 an ounce.
Another approach, suggested by a Swiss investment bank, is to relate the price of gold needed to cover some measure of money supply. By its reckoning, the US would need gold to be worth about $6,000 an ounce to reintroduce a gold standard. However, it may not be sufficient to simply have the US adopt a gold standard. For the US, China, and Japan, the three largest economies as measured by purchasing power parity, to back their money with gold would require a price closer to $9,000 an ounce.
The current price of gold is just above $900 an ounce. Peaking in March 2008 near $1,032, it has averaged $638 over the past five years and $473 over the past ten years. For the yellow metal to reach the kind of levels necessary to make a gold standard mathematically feasible in the present day, the protracted period of deflation necessary would not be politically acceptable.
Where Does that Leave Us?
There is no realistic alternative to the dollar. Not SDRs. Not gold. Not the euro. Not the yuan. That might not be deducible from macro-economic first principles, but it is proven by what central banks are actually doing.
This does not mean that there is no role for gold in individual portfolios, though often people seem to confuse a paper claim on gold for the actual bullion. Also, the touts for bullion often do not include the costs of storage and insurance for gold which has gone decades without appreciating and, of course, generates no income stream.
Central banks that have accumulated large holdings of foreign currencies, like those in Asian and Middle Eastern countries, tend to have relatively little gold. European central banks, which could not get enough gold during the late 1960s and early 1970s, have turned into sellers over recent years. Paradoxically, as they sold off their gold in an orderly way, the price of gold trended higher. Yet many seem to believe that it is a given that the dollar will fall if these same or other central banks sell dollars. Huh?
On April 24th China revealed it has dramatically increased its gold holdings since 2003. In 2001, China said it had roughly 500 tonnes of gold. By 2003, it had risen to a little over 600 tonnes. Now it says it has 1,054 tonnes of gold, more than a 75% increase. Still this means that gold accounts for only about 1.6% of China’s reserves.
China is the world’s largest producer of gold, but it also refines scrap gold. As part of the standard arguments, gold advocates assert that all the gold that has ever been mined is still here. That is true up to a point and it is at that point that it gets interesting. China is exploiting the fact that a ton of computers and cell phones contain several times more gold than a ton of gold ore has.
Central banks in Asia and the Middle East may buy more gold going forward and European sales seem set to slow (though the IMF sales will reportedly go ahead), but it will be barely noticeable in terms of the international monetary regime and the role of the dollar.
Read Entire Article
In recent days the Canadian and Swedish central banks have joined the majority of other G10 central banks by indicating that they too may engage in quantitative easing now that the interest rates have been reduced to 25 and 50 basis points respectively. The ECB is wrestling with ways to extend its own form of quantitative easing and an announcement is likely at its next meeting on May 7th.
While some observers have focused on the potential debasement of the US dollar by the aggressive monetary and fiscal policies of both the Bush and Obama Administrations, many investors are worried about the viability of the whole universe of paper money.
Gillian Tett, award-winning journalist at the Financial Times, put it earlier this month, there has been a four-decade long experiment with fiat currencies not backed by gold or silver. This crisis is so profound that increasingly it appears to have shaken confidence in the experiment. At the same time, the crisis looks to have widened the range of possibilities.
The Special Drawing Rights that the Chinese and others have suggested to eventually replace the dollar does not get beyond paper money. The SDR is a basket of fiat currencies. It is not and cannot be a serious alternative to the US dollar.
Consider that 44% of an SDR is the dollar. The IMF’s figures show that roughly two-thirds of the world’s reserves are in dollars. If countries' reserves were allocated according to the SDR, the dollar’s share of reserves would fall by about a third. While the euro would pick up some slack the big winners would be the yen and sterling, whose share of the SDR is 11% a piece, two to three times larger than their reserve allocation.
If there has been a shift in reserve allocation over recent years, it is not away from the dollar, as so many wrongly claim, but rather away from the yen and toward sterling. And even this shift has been marginal at best. Reserve managers generally want, in order of importance: Security, liquidity, and yield. Japanese bonds are often seen as deficient in both liquidity and yield.
All that Glitters
Can gold return to its role as the anchor for currencies? The advocates of gold are a passionate and vocal minority which appear to be second only to Ayn Rand devotees in terms of intensity. Of course there is a large overlap as Alan Greenspan’s 1966 essay “Gold and Economic Freedom” illustrates.
Top Gold Holders:
US..................8,133.5
Germany........3,412.6
IMF.................3,217.3
France...........2,508.8
Italy.................2,451.8
China.............1,054.0
Switzerland...1,040.0
Japan...............765.2
Netherlands.....621.4
ECB.................553.0
Data from World Gold Council and China
Figures in Metric Tonnes
To appreciate though why gold is ill-suited today to once again back paper money, we need to consider why the gold standard ended in the first place. Simply put, the gold standard provided an economic barrier to the political agenda. That political agenda called for rapid growth to resist the spread of communism. It called for “guns and butter” in the US with the Great Society and the war in Vietnam. The European political agenda included the expansion of the welfare state—from cradle to grave.
Jettisoning gold not only allowed for the pursuit of the political agenda, it helped create the conditions for the rapid and dramatic expansion of trade, capital flows and globalization. What is all too often lost amid the despair and cynicism that the crisis has wrought is the amazing success of that regime. Since 1980, for example, the world economy has grown by 145%. Taking into account the increase in the world’s population, roughly 1.6% per annum, there has been a nearly 40% increase in per capita income.
How such wealth is distributed is an important issue beyond the scope of this discussion. Yet it is interesting to note that longevity, a measure that subsumes numerous other metrics, has risen sharply in both developing and developed countries and that gap between the two has narrowed.
Not Enough
The same problem exists with a new gold standard that existed with the old. There is simply an insufficient amount of gold. Or to say the same thing, the price of gold necessary to put the international monetary regime back on a gold standard is so astronomical as to make it unworkable.
There are different ways to go about conceptualizing the magnitude of the challenge. As the table above indicates, the US has more gold than Germany, France, and Switzerland combined. Given that foreign investors own about $2.5 trillion more of US assets than Americans own of foreign assets, what price of gold is necessary for the US to no longer be a debtor? Answer: More than $8,500 an ounce.
Another approach, suggested by a Swiss investment bank, is to relate the price of gold needed to cover some measure of money supply. By its reckoning, the US would need gold to be worth about $6,000 an ounce to reintroduce a gold standard. However, it may not be sufficient to simply have the US adopt a gold standard. For the US, China, and Japan, the three largest economies as measured by purchasing power parity, to back their money with gold would require a price closer to $9,000 an ounce.
The current price of gold is just above $900 an ounce. Peaking in March 2008 near $1,032, it has averaged $638 over the past five years and $473 over the past ten years. For the yellow metal to reach the kind of levels necessary to make a gold standard mathematically feasible in the present day, the protracted period of deflation necessary would not be politically acceptable.
Where Does that Leave Us?
There is no realistic alternative to the dollar. Not SDRs. Not gold. Not the euro. Not the yuan. That might not be deducible from macro-economic first principles, but it is proven by what central banks are actually doing.
This does not mean that there is no role for gold in individual portfolios, though often people seem to confuse a paper claim on gold for the actual bullion. Also, the touts for bullion often do not include the costs of storage and insurance for gold which has gone decades without appreciating and, of course, generates no income stream.
Central banks that have accumulated large holdings of foreign currencies, like those in Asian and Middle Eastern countries, tend to have relatively little gold. European central banks, which could not get enough gold during the late 1960s and early 1970s, have turned into sellers over recent years. Paradoxically, as they sold off their gold in an orderly way, the price of gold trended higher. Yet many seem to believe that it is a given that the dollar will fall if these same or other central banks sell dollars. Huh?
On April 24th China revealed it has dramatically increased its gold holdings since 2003. In 2001, China said it had roughly 500 tonnes of gold. By 2003, it had risen to a little over 600 tonnes. Now it says it has 1,054 tonnes of gold, more than a 75% increase. Still this means that gold accounts for only about 1.6% of China’s reserves.
China is the world’s largest producer of gold, but it also refines scrap gold. As part of the standard arguments, gold advocates assert that all the gold that has ever been mined is still here. That is true up to a point and it is at that point that it gets interesting. China is exploiting the fact that a ton of computers and cell phones contain several times more gold than a ton of gold ore has.
Central banks in Asia and the Middle East may buy more gold going forward and European sales seem set to slow (though the IMF sales will reportedly go ahead), but it will be barely noticeable in terms of the international monetary regime and the role of the dollar.
Read Entire Article
U.S. Dollar Can and Will Drop
Seeking Alpha
Recently there's been a wave of blogosphere opinion that USD is a win-win bet. It goes like this: if the world economy gets worse or stays in the dumps, then USD will remain strong, as demonstrated by its performance since Sept 08; if the world economy rebounds, then USD will of course be strong.
It is the "of course" part that I have a problem with. There're two scenarios under which USD will drop, and only one under which USD will remain strong in the intermediate term (a year or two). But even under the last scenario, USD is likely to drop in the longer term.
The world economy stabilizes. Make no mistake, we're not there yet. It won't happen until at least the clouds of CEE debt/currency crisis, US/European banking and credit crisis, housing price, unemployment, and consumer demand start to dissipate. But when that happens, the world will be shifting away from USD assets. Furthermore, it is very unlikely that the Fed has enough political will to siphon the massive amount of USD cash it will have printed off the system early enough and fast enough to pre-empt the surge of inflation once the economy stablizes and credit starts to flow again.
The world economy stays sickly for years. Under this scenario, the Fed would likely continue printing massive amounts of money for awhile. This would put other countries at a disadvantage since nobody else has this kind of monetary leverage. Therefore, they would be increasingly determined to seek alternative reserve currencies. True, right now there is no alternative. But I don't think it's wise to underestimate the world's determination and creativity when defending their own economic and strategic interests. When such alternatives emerge, a big part of the world would not feel sorry to abandon USD, a once safe asset abused and discredited by the Fed and US government.
As I mentioned above, there're still numerous cloud overhangs. We are quite likely yet to encounter a few more trigger events. Under this scenario, USD would strengthen. But there's a limit to how long the perception of USD being the safe harbor can last. If the crisis mode continues for another year or two, the world would increasingly re-examine the assumption and seek alternatives.
In particular, I find the assumption that China will remain content sitting in the USD trap laughably arrogant, short-sighted, and lacking imagination. It may happen in the end. But don't take it for granted. It'd take a fundamental shift in US's China policy for China to stop trying to get out of the trap. So far they've talked about SDR, arranged a slew of bilateral currency swaps, and piled up on gold. None of the approaches is the end solution. But it'd be foolish not to take their effort seriously.
I've been long USD (against EUR and JPY), gold and TIPS (TIP) since the beginning of the year. I remain comfortable with all three right now. I trade the intermediate time horizon, from weeks to months. But I'll be ready to flip USD in short order going forward. Against what I don't know yet. We'll find out. But with the wave of opinion of USD win-win bet, I suspect we'll find out soon.
Read Entire Article
Recently there's been a wave of blogosphere opinion that USD is a win-win bet. It goes like this: if the world economy gets worse or stays in the dumps, then USD will remain strong, as demonstrated by its performance since Sept 08; if the world economy rebounds, then USD will of course be strong.
It is the "of course" part that I have a problem with. There're two scenarios under which USD will drop, and only one under which USD will remain strong in the intermediate term (a year or two). But even under the last scenario, USD is likely to drop in the longer term.
The world economy stabilizes. Make no mistake, we're not there yet. It won't happen until at least the clouds of CEE debt/currency crisis, US/European banking and credit crisis, housing price, unemployment, and consumer demand start to dissipate. But when that happens, the world will be shifting away from USD assets. Furthermore, it is very unlikely that the Fed has enough political will to siphon the massive amount of USD cash it will have printed off the system early enough and fast enough to pre-empt the surge of inflation once the economy stablizes and credit starts to flow again.
The world economy stays sickly for years. Under this scenario, the Fed would likely continue printing massive amounts of money for awhile. This would put other countries at a disadvantage since nobody else has this kind of monetary leverage. Therefore, they would be increasingly determined to seek alternative reserve currencies. True, right now there is no alternative. But I don't think it's wise to underestimate the world's determination and creativity when defending their own economic and strategic interests. When such alternatives emerge, a big part of the world would not feel sorry to abandon USD, a once safe asset abused and discredited by the Fed and US government.
As I mentioned above, there're still numerous cloud overhangs. We are quite likely yet to encounter a few more trigger events. Under this scenario, USD would strengthen. But there's a limit to how long the perception of USD being the safe harbor can last. If the crisis mode continues for another year or two, the world would increasingly re-examine the assumption and seek alternatives.
In particular, I find the assumption that China will remain content sitting in the USD trap laughably arrogant, short-sighted, and lacking imagination. It may happen in the end. But don't take it for granted. It'd take a fundamental shift in US's China policy for China to stop trying to get out of the trap. So far they've talked about SDR, arranged a slew of bilateral currency swaps, and piled up on gold. None of the approaches is the end solution. But it'd be foolish not to take their effort seriously.
I've been long USD (against EUR and JPY), gold and TIPS (TIP) since the beginning of the year. I remain comfortable with all three right now. I trade the intermediate time horizon, from weeks to months. But I'll be ready to flip USD in short order going forward. Against what I don't know yet. We'll find out. But with the wave of opinion of USD win-win bet, I suspect we'll find out soon.
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Instead of Deleveraging, Companies are Increasing Leverage, Putting the Economy at Higher Risk
George Washington Blog
As I have repeatedly tried to point out, the problem is too much leverage, and what is needed to fix the economy is for the financial players to deleverage.
But instead of encouraging orderly deleveraging, the government has done everything it can to prop up and even increase leverage.
The Wall Street Journal has confirmed the problem in a new article:
Deleveraging? What deleveraging? Since the start of the credit crunch, corporate leverage has risen at a faster rate than it did at the peak of the boom, even as firms work hard to reduce borrowings. Companies that once embraced leverage in the name of shareholder value now find their debt piles balanced precariously on shrinking earnings. Absent a swift recovery, leverage is likely to rise even higher...
The picture is more worrying for companies where deleveraging should be the top priority: those bought by private-equity firms. For example, look at chip maker Freescale Semiconductor. When taken private in December 2006, it had leverage of just over 5 times, but relentless earnings pressure has pushed that figure ever higher. Analysts now forecast leverage will peak at more than 10 times earnings before interest, tax, depreciation and amortization, despite an exchange offer that cut debt by $1.9 billion.
Meanwhile, among the most aggressive European LBOs, leverage is standing still or rising, according to Fitch Ratings...
None of this bodes well for credit ratings. Even if total debt outstanding is stabilizing or falling in some cases, the ratings agencies focus on metrics such as asset-backing and interest cover. In the first quarter, Standard & Poor's downgraded 523 companies and upgraded just 38, giving a record downgrade ratio of 93%. That will make it harder for companies to refinance at attractive rates, leaving many running hard just to stand still.
Way to go Geithner, Bernanke and Summers. Instead of insisting that a couple of levels be taken off the top of the house of cards, you've encouraged the gamblers to add new, ever-flimsier layers.
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As I have repeatedly tried to point out, the problem is too much leverage, and what is needed to fix the economy is for the financial players to deleverage.
But instead of encouraging orderly deleveraging, the government has done everything it can to prop up and even increase leverage.
The Wall Street Journal has confirmed the problem in a new article:
Deleveraging? What deleveraging? Since the start of the credit crunch, corporate leverage has risen at a faster rate than it did at the peak of the boom, even as firms work hard to reduce borrowings. Companies that once embraced leverage in the name of shareholder value now find their debt piles balanced precariously on shrinking earnings. Absent a swift recovery, leverage is likely to rise even higher...
The picture is more worrying for companies where deleveraging should be the top priority: those bought by private-equity firms. For example, look at chip maker Freescale Semiconductor. When taken private in December 2006, it had leverage of just over 5 times, but relentless earnings pressure has pushed that figure ever higher. Analysts now forecast leverage will peak at more than 10 times earnings before interest, tax, depreciation and amortization, despite an exchange offer that cut debt by $1.9 billion.
Meanwhile, among the most aggressive European LBOs, leverage is standing still or rising, according to Fitch Ratings...
None of this bodes well for credit ratings. Even if total debt outstanding is stabilizing or falling in some cases, the ratings agencies focus on metrics such as asset-backing and interest cover. In the first quarter, Standard & Poor's downgraded 523 companies and upgraded just 38, giving a record downgrade ratio of 93%. That will make it harder for companies to refinance at attractive rates, leaving many running hard just to stand still.
Way to go Geithner, Bernanke and Summers. Instead of insisting that a couple of levels be taken off the top of the house of cards, you've encouraged the gamblers to add new, ever-flimsier layers.
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China's gold buy raises eyebrows for all the right reasons
TOKYO (MarketWatch) -- The precious-metals market took notice for all the right -- but not-so-obvious -- reasons when China announced last week that it ramped up its gold reserves by 76% in the last six years.
After all, the world's largest producer of gold, which also happens to be the world's most populous nation and third-largest economy, must have a good reason for its purchases -- and quite a few experts said the move solidifies gold's place as a monetary asset, and shows that it's destined for a brighter future.
"The important take-away is that China itself is absorbing the bulk (if not all) of the production of the world's largest producer of gold (also China) with the now confirmed intent of building reserve holdings," said Peter Grant, a senior metals analyst at USAGOLD-Centennial Precious Metals.
"That is very favorable for the longer-term outlook for gold," he said.
Last week, China announced that the amount of gold in its reserves has climbed to 1,054 tons from 600 tons in 2003. See Metals Stocks column.
"China ... has taken the golden path and now they want the world to know about it.'
— Michael Kosares, Centennial Precious Metals
"China, true to its reputation for patience and steady, long-term progress toward its goals, has taken the golden path and now they want the world to know about it," said Michael Kosares, president of Centennial Precious Metals.
The nation has become the fifth-largest individual-country holder of the precious metal.
And it didn't just announce its gold accumulation last week. It also asked the International Monetary Fund to sell its entire 3,217 tons reserve, Kosares points out.
And why would China encourage sales that could potentially depress the price of the gold it just bought a lot of? So it can buy more, said Peter Grandich, a metals writer at Agoracom, an online marketplace for small-cap investors.
The request, combined with the announcement on reserves, "is intended to deliver a message to the financial markets [that China] sees gold as an important part of the overall international monetary scheme -- a scheme that may evolve to a system in time," said Kosares.
Impressive?
On a stand-alone basis, the value of China's gold reserves is impressive, but not really so given the size of the nation's foreign-exchange reserve.
China's gold reserves are worth almost $31 billion -- about 1.6% of its total foreign- exchange reserve holdings, and gold as a percent of the country's total reserves has actually declined since 2003, according to Sam Subramanian, editor of AlphaProfit Sector Investors' Newsletter.
To put that into better perspective, if China was to purchase the IMF's reserves of 3,217 tons at a price of $1,000 per ounce, the price would be $103 billion, according to Kosares.
China's current foreign reserves stand at about $1.95 trillion, so the purchase price of all the IMF gold would amount to a "paltry" 5.25% of China's total reserves, he said.
So the total figures aren't so impressive and the gold market overall probably saw the purchase as a really small amount compared to China's resources, said Mark Leibovit, chief market strategist for VRTrader.com.
"If China was serious, their demand could drive gold through the highs and keep it there," he said.
Gold futures prices touched a record level above $1,030 an ounce in mid-March of 2008. They've pulled back from the all-time high to currently trade above $900.
But consider this: Even after the large increase in gold holdings, China's holdings of gold as a share of total foreign-exchange reserves are well below the world average of over 10%, according to Mark O'Byrne, executive director at Gold and Silver Investments Ltd.
Given that, "it seems very likely that China will continue buying gold, which would in large measure offset sales by European central banks and expected IMF disposal," he said.
He also pointed out that Hou Huimin of the China Gold Association said China may want to hold a total of 5,000 tons of gold so "it seems likely that they will at least seek to replicate the average international gold holding of some 10% [and] even longer term, there is no reason to doubt that they may hope to join the U.S. as one of the largest holders of gold in the world," said O'Byrne.
By Myra P. Saefong, MarketWatch
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After all, the world's largest producer of gold, which also happens to be the world's most populous nation and third-largest economy, must have a good reason for its purchases -- and quite a few experts said the move solidifies gold's place as a monetary asset, and shows that it's destined for a brighter future.
"The important take-away is that China itself is absorbing the bulk (if not all) of the production of the world's largest producer of gold (also China) with the now confirmed intent of building reserve holdings," said Peter Grant, a senior metals analyst at USAGOLD-Centennial Precious Metals.
"That is very favorable for the longer-term outlook for gold," he said.
Last week, China announced that the amount of gold in its reserves has climbed to 1,054 tons from 600 tons in 2003. See Metals Stocks column.
"China ... has taken the golden path and now they want the world to know about it.'
— Michael Kosares, Centennial Precious Metals
"China, true to its reputation for patience and steady, long-term progress toward its goals, has taken the golden path and now they want the world to know about it," said Michael Kosares, president of Centennial Precious Metals.
The nation has become the fifth-largest individual-country holder of the precious metal.
And it didn't just announce its gold accumulation last week. It also asked the International Monetary Fund to sell its entire 3,217 tons reserve, Kosares points out.
And why would China encourage sales that could potentially depress the price of the gold it just bought a lot of? So it can buy more, said Peter Grandich, a metals writer at Agoracom, an online marketplace for small-cap investors.
The request, combined with the announcement on reserves, "is intended to deliver a message to the financial markets [that China] sees gold as an important part of the overall international monetary scheme -- a scheme that may evolve to a system in time," said Kosares.
Impressive?
On a stand-alone basis, the value of China's gold reserves is impressive, but not really so given the size of the nation's foreign-exchange reserve.
China's gold reserves are worth almost $31 billion -- about 1.6% of its total foreign- exchange reserve holdings, and gold as a percent of the country's total reserves has actually declined since 2003, according to Sam Subramanian, editor of AlphaProfit Sector Investors' Newsletter.
To put that into better perspective, if China was to purchase the IMF's reserves of 3,217 tons at a price of $1,000 per ounce, the price would be $103 billion, according to Kosares.
China's current foreign reserves stand at about $1.95 trillion, so the purchase price of all the IMF gold would amount to a "paltry" 5.25% of China's total reserves, he said.
So the total figures aren't so impressive and the gold market overall probably saw the purchase as a really small amount compared to China's resources, said Mark Leibovit, chief market strategist for VRTrader.com.
"If China was serious, their demand could drive gold through the highs and keep it there," he said.
Gold futures prices touched a record level above $1,030 an ounce in mid-March of 2008. They've pulled back from the all-time high to currently trade above $900.
But consider this: Even after the large increase in gold holdings, China's holdings of gold as a share of total foreign-exchange reserves are well below the world average of over 10%, according to Mark O'Byrne, executive director at Gold and Silver Investments Ltd.
Given that, "it seems very likely that China will continue buying gold, which would in large measure offset sales by European central banks and expected IMF disposal," he said.
He also pointed out that Hou Huimin of the China Gold Association said China may want to hold a total of 5,000 tons of gold so "it seems likely that they will at least seek to replicate the average international gold holding of some 10% [and] even longer term, there is no reason to doubt that they may hope to join the U.S. as one of the largest holders of gold in the world," said O'Byrne.
By Myra P. Saefong, MarketWatch
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