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With the price of
gold zeroing in on yet another major milestone, - $1,300 /oz, some heavy
hitters in the marketplace are beginning to wonder if the yellow
metal’s rally, is getting a bit too frothy, or even worse, whether a
speculative bubble is brewing, that might ultimately deflate under its own
weight, and lead to a sharp correction. On Sept 15th, famed hedge
fund trader George Soros said that gold prices might continue to rise, but
warned that that gold is the “ultimate bubble.”
“Gold is
the only actual bull market currently. It just made a new high yesterday. In
the present circumstances that may continue. I call gold the ultimate bubble,
which means it might go higher. But it’s certainly not safe and
it’s not going to last forever,” he warned. Soros has been
bullish on gold in a big way, and as of June 30th, the Soros fund
held 5.24-million shares of the SPDR Gold Trust GLD, a stake worth about
$650-million today. Soros’s fund also held equity holdings in miners of
gold and other minerals worth almost $250-million.
Over the past two
months, there’s been a global stampede into precious metals, with
investors of many different stripes, and from many countries, scurrying to
buy gold and silver, in both the physical market and through exchange traded
funds. The World Gold Council reported that the demand for gold worldwide
surged 36% in the second quarter of 2010, to 1,050-tons. The Greek debt
crisis, instability in Irish and Portuguese bonds, and expectations the Fed
would unleash “Quantitative Easing, (QE-2), - flooding the world with a
new tidal wave of freshly printed US-dollars, has supported the historic
bull-run. Europe accounted for more than
35% of the retail purchases of gold coins during the second quarter.
The latest surge
in gold and silver prices was sparked in July, following comments from Fed
officials, signaling that QE-2 could be around the corner. On July 22nd,
Fed chief Ben “Bubbles” Bernanke reassured congressional
lawmakers the central bank is prepared to print more dollars, if the
US-jobless rate continues to hover around 10-percent. “We are ready
and will act if the economy does not continue to improve, if we don’t
see the kind of improvements in the labor market that we are hoping for and
expecting. Unemployment is the most important problem
that we have right now. What we can do is make financial conditions as
supportive of growth as we can and we certainly are doing that,”
Bernanke said.
On August 19th,
St Louis Fed chief James Bullard was more explicit, signaling his backing for
further monetization of the US-government’s debt. “Should
economic developments suggest increased disinflation risk, purchases of
Treasury securities in excess of those required to keep the size of the balance
sheet constant may be warranted. Any additional Treasury buying should be
undertaken in a measured, deliberate manner, commensurate with the magnitude
of the deflation threat.”
The Fed’s
propaganda artists are operating behind a veil of “smoke-and
mirrors,” trying to instill the fear of deflation in the bond market,
in order to justify another big round of stealth monetization of the
US-government’s debt. The Fed’s first go-around with QE, totaling
$1.75-trillion, combined with the Bank of England’s 200-billion pound
QE-scheme, and the Bank of Japan’s 21-trillion yen QE-scheme, fueled a
powerful rally in key commodity markets last year, lifting the Dow Jones
Commodity Index, (DJCI) from deep in negative territory, and onto the
positive side, thus warding off the threat of deflation in the global
economy.
However, since
the Fed completed its 12-month buying spree in Treasury bonds, and mortgage
backed bonds, in March 2010, the year-over-year rate of increases in the DJCI
and the US-Producer Price Index have petered-out. Last November, the DJCI was
hanging around the 135-level, just a shade below the 138.40-level that
prevails today. If the DJCI stays stagnant or turns lower in the months
ahead, it could knock the US-PPI into negative territory by year’s end,
signaling the onset of another bout of deflationary pressures, and triggering
a second round of the Fed’s QE.
Sept 1st,
Philadelphia Fed chief Charles Plosser, said the Fed would embark upon
further monetary easing, if faced with a dangerous downward price spiral.
“If we do need to act, if fears of deflation were to become real, then
we would need every ounce of credibility we can muster to convince markets we
are not going to let deflation happen.” Plosser said he would be open
to further bond purchases if he saw deflation as a real risk. “I would
certainly entertain the solution if I feared deflation, and if I feared that
expectations were coming unglued in that direction, - then we would have to
take actions,” he warned.
Interestingly
enough, amid all this gloomy talk by Fed officials about the bogeyman of
deflation, the demand for precious metals, - traditional hedges against
inflation and currency devaluations, - is booming. Traders realize that the
Fed’s magic elixir for fighting the scourge of deflation is more money
printing, - otherwise known as nuclear QE-scheme. US-bond dealers, who trade
directly with the Fed, aren’t questioning whether QE-2 is on the table,
but rather, are taking bets on the size of QE-2, with estimates ranging
between $300-billion and $1-trillion.
Competitive
Currency Devaluations
Speculation that
the Fed would unleash QE-2 has already spearheaded a new round of currency
wars across the globe. Central bankers in Brazil,
China, Chile,
Japan, Russia,
South Korea, and Thailand,
have all stepped up their interventions, by injecting large sums of paper
into the currency markets, while trying to prevent a precipitous decline in
the value of the US-dollar versus their own currencies.
The amount of
foreign currency reserves stashed away in the coffers of the Bank of Korea,
(BoK) have climbed by $76-billion since April 2009, to a record high of
$286-billion, - to become the world’s sixth-largest after China, Japan,
Russia, Taiwan and India. The BoK’s currency reserves are an indicator
of the approximate size of its interventions in the foreign-exchange market,
utilized to artificially hold down the value of the Korean won vs the
US-dollar.
The value of the
US-dollar is critical to Seoul, since Beijing
pegs the Chinese yuan to the US-dollar, and China
is the biggest customer for Korean exporters. Thus, the BoK aims to protect
its exporters in both the Chinese and US-markets. However, the BoK hasn’t
been able to turn the bearish tide against the US-dollar. It’s been
overwhelmed by ideas the Fed would unleash nuclear QE-2. Instead, the BoK can
only try to stem the bleeding, - engineering an orderly retreat for the
greenback.
The
BoK would be much wealthier, if it had judged the gold market more correctly.
The BoK holds only 14-tons of gold, equivalent to only 0.03% of its total
reserves. On Dec 9th, 2009, the BoK’s FX-chief, Lee Eung Baek argued, “There’s an
illusion in gold. Out of more than 200-nations, how many have bought bullion?
Like other central banks, we have been increasing the types of currency
reserves outside the dollar. Gold offers little value, with no cash returns.
Since India and Russia
with large reserves bought gold, there’s speculation that Korea
might buy it too. But we are not classified in the same category.
There’s a slim chance that we will buy gold from the IMF,” Lee
said, when the yellow metal was changing hands at $1,226 /oz.
On
Sept 16th, Tokyo’s
financial warlords intervened in world currency markets to drive down the
exchange rate of the yen by selling an estimated 2-trillion yen
($23-billion). The first such intervention by Japan
in more than six years was also the biggest ever one-day currency action, and
breached a tacit agreement among the Group-of-Seven industrial powers to
avoid unilateral currency interventions.
Japan
had threatened such action for more than six-weeks, after the value of the
US-dollar had declined by 10% since May to a 15-year low of 83-yen. The
Japanese yen also climbed sharply in relation to the Euro and the Chinese
yuan. Japan’s
multinationals, listed on the Nikkei-225 index, are heavily dependent on
exports, and the dollar’s value had declined far below their average
break-even point of 93-yen, and threatens their ability to sell goods abroad.
Japan’s
foray into the currency markets triggered a short squeeze on over-zealous
US-dollar bears, and lifted the dollar to as high as 86-yen. However, the
dollar’s one-day rally quickly stalled out, as speculators began to bet
that the size of the Fed’s QE-2 would exceed the size of the
BoJ’s devaluation schemes. Earlier, the BoJ boosted the size of excess
yen sitting in deposits held by Japanese bans to 30-trillion yen,
($350-billion), in an effort to put a floor under the dollar at 84-yen.
Despite
the massive size of the BoJ’s injections of yen into the local banking
system, it hasn’t been able to turn the US-dollar’s bearish tide
against the yen. That’s because currency traders expect the Fed’s
next round of QE-2 would trump the size of the BoJ’s interventions.
Also, US-Treasury yields could resume falling further than comparable
Japanese bond yields, thus narrowing the US-dollar’s interest rate
advantage over the yen. In the current round of competitive currency
devaluations, the Fed holds the trump card over the BoJ.
Most
interesting, Japanese 10-year bond yields are flirting with the psychological
1% level, despite the ballooning of the size of Japan’s public debt,
now at 909-trillion yen, or ($10.5-trillion). Japan’s
bond yields are falling, even though its debt-to-GDP ratio is about 180%,
which on the surface, is worse than 115% for Greece.
Yet although public attention tends to focus on Japan’s
gross debt, which has soared to ¥909-trillion, the government
also owns about ¥700-trillion in assets.
The
¥700 trillion in assets includes roughly ¥180-trillion in real
assets, such as public office buildings, and ¥520-trillion in financial
assets, including stakes in special corporations. The
government can sell these assets and use the proceeds to pay down debt. Thus,
Japan's
net debt is about ¥200-trillion, or about 40% % of its nominal GDP, which
is over ¥500 trillion. Perhaps, this is why Beijing
hasn’t been afraid to buy 1.7-trillion yen of JGB’s in the first
seven months of 2010.
Still,
at yields of 1% or less for 10-year Japanese bonds, the only buyers would be
short-term gamblers, or those who are convinced that Japan’s
economy would be snared in the deflation trap for year’s to come.
Buying JGB’s at yields of 1% or less could lead to large losses over
the longer-term. Thus, the more sensible investment for Japanese investors is
to buy Tokyo
gold, which has more than doubled over the past five-years, and served as a
good hedge against the BoJ’s printing schemes.
Already,
the BoJ is monetizing half of Tokyo’s
annual budget deficit of 44-trillion yen this fiscal year, and there’s
pressure on the central bank to buy more JGB’s to weaken the yen.
Although some traders might view the BoJ’s bond buying operations as a
buy signal for JGB’s, investors in Tokyo
gold have profited more handsomely. Tokyo
gold has been tracking the size of Japan’s
outstanding debt, since Tokyo’s
ruling elite prefer to pressure the central bank to monetize its debts,
rather than sell-off state owned assets to finance budget shortfalls.
Bank
Rossii, Russia’s
central bank, manages the rouble against a basket of dollars and Euros to
limit currency swings that may hurt it exporters. In August, Bank Rossii
bought $1.1-billion and 136-million Euros, while trying to keep the rouble
within a floating range against the Euro-dollar’s basket. The worst
drought in decades this summer has already shrunk Russia’s trade
surplus to $8.3-billion in August, or 29% less than a year ago, and has
slowed its economy’s growth rate to +2.4%, with 60% of the fall
attributed to the agricultural sector. Thus, Bank Rossi is liable to start
increasing the supply of roubles in the money markets, to limit further
damage from adverse exchange rates moves to its economy.
The
Kremlin earns most of its foreign currency from the sale of Urals blend crude
oil, natural gas, and other natural resources, such as timber, platinum, and
nickel. Along with rebounding energy and metals markets, Russia’s
FX reserves have been replenished to around $478-billion today, from as low
as $380-billion in March 2009. Moscow
is keen to diversify some of its FX stash into gold, and last May, added
1.1-million ounces equaling 16% of monthly global mining output.
Overall,
the Russian central bank bought gold at an average rate of 250,000-ounces
/month for the past three-years, and now holds an estimated 23.6-million
ounces. As of the first quarter of 2010, Saudi Arabia said it had more than
doubled its gold holdings from 143-tons in Q’1, 2008 to 323-tons, for
an average increase of 241,000 ounces a month, or about the same as
Russia’s purchases. Thus, gold traders will keep a close eye on the FX
reserves of these two key oil producers.
Brazil
has ramped-up its intervention efforts in the foreign currency markets,
buying US-dollars twice each day, in order to prevent the greenback from
falling below its latest defense line at 1.70-reals. Largely due to its super
strong currency, Brazil’s trade surplus fell 44% to $7.9-billion in the
first half of 2010, down from $13.9-billion a year ago, as imports grew
nearly twice as fast as its exports.
Four-years
ago, the Bank of Brazil (BoB) tried to prevent the US-dollar from falling
below 2.10-reals, but failed in its $100-billion intervention effort.
Currently, the BoB is trying to draw a red-line in the sand for the US-dollar
at 1.70-reals, but Brazil’s high short term interest rates, offered at
10.75%, are simply too irresistible to yield hungry investors from around the
globe. Foreign inflows of cash into Brazil
in the first ten-days of September alone, was $2.14-billion. As a result of
its relentless intervention efforts, trade surpluses, and foreign direct
investment, Brazil’s
FX stash has grown to $250-billion, and it’s the fifth largest lender
to the US-Treasury.
On
Sept 15th, Brazil’s
Finance chief Guido Mantega vowed to defend the country’s exporters,
joining other governments worldwide that seek to weaken their currencies as a
way of speeding up an economic recovery. “We will not sit on the
sidelines watching the game, while other countries weaken their currencies at
the expense of Brazil.
We’re going to take appropriate measures to stop the real from
appreciating,” he declared in Rio
de Janeiro.
Under
conditions of slowing growth in the US-economy, there’s been an
eruption of currency wars, with an increasing number of governments around
the world seeking to secure their share of export markets, through outright
intervention in the currency markets. Last week, Senate Banking Committee
chairman Christopher Dodd declared China
a currency manipulator and said its “economic and trade policies
present roadblocks to our recovery.” He accused Beijing
of stealing intellectual property, violating international trade agreements
and dumping goods. Since then, the US-dollar tumbled 1.2% to 6.7035-yuan.
The US-Treasury
chief suggested that China
should raise the yuan’s exchange rate by at least 20% and issued a
thinly veiled threat, noting that “China
has a very substantial economic stake in access to the US
market.” The biggest beneficiary of the growing currency trade wars is
the precious metals- gold and silver, basking in the growing supply of
freshly printed paper currency worldwide.
The
prospect of QE-2 by the Fed is prompting other central bankers to counter
with currency devaluations of their own. Some central banks such as Banco de
Chile, the Bank of Australia, and the Bank of India, are going the opposite
way, - lifting their interest rates, and their currencies have become magnets
for foreign capital. But the Fed has concluded that the only expedient weapon
in its arsenal to speed-up the US-economy is to inject another tidal wave of
US-dollars into the banking system, while aiming to artificially inflate the
US-stock market higher, and thus, create the illusion of greater wealth and
better times ahead.
However,
when seen through the lens of gold, or in “hard money” terms, the
Dow-to-Gold ratio is still trapped near its lows of Q’2, 2009,
highlighting the notion that the US-economic recovery has been mostly limited
to Wall Street, and US-multinationals. Meanwhile, the divide between rich and
poor in the US
is getting wider. The Dow Industrials’ 3,800-point rally from the low
of March 2009 was a monetary illusion, and Gold is still best way to preserve
wealth.
Gary Dorsch
Editor, Global Money Trends
www.sirchartsalot.com
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Mr Dorsch worked on the trading
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Financial Futures Analyst for three clearing firms, Oppenheimer Rouse Futures
Inc, GH Miller and Company, and a commodity fund at the LNS Financial Group.
As a transactional broker for
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thousands of customer trades in 45 stock exchanges around the world,
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Toronto, South Africa, Mexico, and New Zealand, and Canadian oil trusts, ADR's
and Exchange Traded Funds.
He wrote a weekly newsletter from
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