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"...Those who oppose reform may get
revolution..."
- John F. Kennedy, speaking of Latin America
in 1962
THE EURO HIT fresh all-time
highs versus the Dollar already this month - and we're only one trading day
in.
So might US investors want to switch out
of gold bullion ahead of Easter this year and move into the single currency
instead?
After all, the Euro still pays 4.0%
interest per year - a feat that dumb gold could never promise or achieve -
and with Eurozone inflation holding at a record 3.2% year-on-year in
February, the European Central Bank (ECB) is clearly in no mood to start
slashing rates now.
"Inflation will not slow as
markedly as supposed," warned the ECB's Axel
Weber last week. Colleague Juergen Stark added that
he was "highly dissatisfied" with the current surge in the cost of
living.
Tight money to come then, right? Well,
the Gold Market
doesn't buy it. Not at $1.52 to the Dollar - with European manufacturing
squeaking and Mediterranean house prices slipping.
 
The Gold Price for
French, German and Italian savers just keeps on rising, gaining for six of
the last seven months.
And yet luxury car-maker BMW says it
can't bear a further "sustained rise" in the Euro above $1.50 to
the Dollar. Last week it cut 5,600 jobs.
Dassault
Aviation in France
says it can't compete at this kind of exchange-rate either. "The natural
step is to shift to the Dollar zone [incl. most of Asia,
remember] or low-cost areas as they have done in the car industry," said
CEO and chairman Charles Edelstenne to Le Monde last week.
"This could include parts of our
factory plant and some research tasks."
Put another way, Europe
has got the worst of both worlds right now - a high-value currency that's
crimping exports, and yet surging inflation at the very same time. So the
European Central Bank needs to talk tough while doing nothing, hoping the
inflationary and currency pressures don't squash the economy both at once.
Good job the old economies retain such
political importance as well. Right?
"To have an increase in the
[voting] quotas of emerging countries - China, India, Brazil - is very
difficult because the sum has to add up to 100%," noted Dominique
Strauss-Kahn, head of the International Monetary Fund (IMF) in late February,
"so some others must lose.
"The ones who are going to lose are
mainly the European countries and that is the reason why they may be
reluctant [to vote for change]."
The debate goes far beyond the IMF,
however, that brave remnant of post-war global planning. All top-level
political groupings now face the problem of too many powers, with too much at
stake, all wanting to be members of the top few spots in the
"oh-so-crucial" club.
The G-7 group of industrialized nations,
for instance, currently invites three Eurozone nations to the party - Germany, France and Italy
- as well as Canada, Japan and the United States.
The United Kingdom gets to tag along
too, not least because it's still vying with China for the No.4 slot in world
GDP behind the US, Japan and Germany. It also prints the world's No.3 reserve
currency, the British Pound. And my, but how it
prints it!
Growing by 12.9% in January from a year
earlier, the broad supply of Pounds Sterling has now been expanding at a two-decade
record since March 2005.
No wonder the Gold Price in British Pounds is
surging alongside the UK's
trade & government deficits. But "when are we gonna
get the real players, with the money, in the middle of these [G-7]
debates?" asks Jack Welch, former head of General Electric. He was
talking to Larry Summers, US Treasury secretary at the tail-end of the last Clinton presidency, on
CNBC last week.
"It seems like some of our
government institutions are living the last war, for example the G-7. Four
European economies, Canada,
Japan
and you guys [the US Treasury] all meet...but the money's somewhere
else."
"Oh, you know how these things go,
Jack," replied Summers, former president of Harvard
University and now a part-time hedge
fund consultant in New York.
"It's much easier to get people in than it is to get other people out...
"You want to have a reasonably
small group. We worked with the Canadians to set up the G-20 for exactly the
reasons you give. And I think [US Treasury] secretary Paulson is to be
commended for the effort he has put into having a regular financial dialogue
with China
on a bilateral basis.
"I think you're gonna
see this kind of evolution. Look, if we wanna
address this issue of sovereign wealth funds - which I think is a concern,
though it's a concern that has to be kept in perspective - the way we're gonna do it is by having dialogue with the countries
that, just as you say, the countries that have the money. Some of them are China, some of them are in the Middle East, and I think we do need to recognize more
than we probably have before that the distribution of financial power and
influence and capacity is pretty different from the distribution of sort of
political congeniality with US interests across the board.
"That means we may need to have a
somewhat different grouping for the foreign ministers and the finance
ministers."
Can political and financial power really
be split into two different groups...with the United States at the head of
both, choosing its allies here but inviting a different clique of friends
there?
Perhaps with Europe gnashing its teeth
about the high Euro, it's actually time for the Dollar itself to bounce,
rallying from new all-time record lows on its trade-weighted index and
forcing US Gold Prices
lower.
Sure - it might require higher interest
rates from the Federal Reserve, rather than the campaign of monetary
destruction begun by Ben Bernanke back in August. Or
conversely, those new record lows in the world value of the US Dollar might
help stoke US
export sales so fast, it revives the major Wall Street stock indices and
erases the last five months of losses.
No...?
Should the Dollar and Wall Street's
collapse continue, meantime, some kind of new monetary world order will only
continue to look ever more likely. Russia is preparing to price and
sell crude oil in Roubles, for example, rather than the Dollar. The Rouble
might also be used as one means of payment on a forthcoming Iranian oil
exchange in Tehran, according to Iran's ambassador to Moscow last month.
But whatever comes, and no matter what
happens to the price of Gold, don't expect the chocolate bunnies of
today's monetary order to vote for either Easter or
a heatwave...let alone both at the same time.
By : Adrian Ash
Head of Research
Bullionvault.com
City
correspondent for The Daily Reckoning in London,
Adrian Ash
is head of research at www.BullionVault.com
– giving you direct access to investment gold, vaulted
in Zurich, on
$3 spreads and 0.8% dealing fees.
Current gold price, no delay | FAQ | Detailed outlook for 2007
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Note: This
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