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Timing & trends

Fear of a dollar collapse will make the Chinese the biggest buyers of gold this year

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Posted by Peter Cooper - Resource Investor

on Thursday, 14 June 2012 08:52

 

China is widely expected to overtake India as the world’s biggest consumer of gold this year with gold purchases rising by 10 per cent, according to the leading Chinese bank ICBC. Why?

The Chinese are moving out of the dollar and into gold. That is what a seemingly ill-educated gold trader in the Sharjah Gold Souk told us earlier this year.

King for a day

You don’t need to be a genius to see the logic behind this move. The dollar might be king today but only against the faltering euro. But what happens when we are reminded that US debts are running at levels comparable with Greece?

As the largest holder of foreign dollar reserves the Chinese are only too painfully aware of how exposed this leaves their savings in a slump. US treasuries are the biggest bubble in history as legendary investment adviser Dr Marc Faber reminded us recently (click here).

Diversification for protection really means something if you have most of your wealth tied up in US t-bonds. And where do you go for safety? Things have already gotten so bad for the Swiss franc that it has become pegged to the euro to stop further appreciation.

Then again if you are Indian and with your money in gold and not rupees then you are laughing. The massive depreciation of the rupee puts gold at a fresh all-time high in rupees, even while it is several hundred dollars off its dollar-denominated high of last September. This experience is not lost on the Chinese.

There are less and less safe haven assets in the world and more and more financial markets are manipulated by central banks because they have control over the supply of paper money. Gold and silver they can suppress through the collusion of the bullion banks but this will not withstand the pressure of massive demand for precious metals as the global economic system cracks up.

Base rate scenario

Imagine what the US economy would look like with the base rate set to Italian levels of six per cent. Asset values from bonds to stocks to real estate would be decimated. A deflationary depression would set in.

And yet nobody currently looks seriously at what is a very obvious future scenario as the artificial supports used to keep the world economy afloat since the global financial crisis begin to fail. The Chinese in buying gold and silver are just peering a bit further into the future and buying insurance against the worst case scenario.

The problem is that a seriously mishandled eurozone sovereign debt crisis may now make this the base case scenario.

201206085MinGold


About Peter Cooper:

Oxford University educated financial journalist Peter Cooper found himself made redundant by Emap plc in London in the mid-1990s and decided to rebuild his career in Dubai as launch editor of the pioneering magazine Gulf Business. He returned briefly to London in 1999 to complete his first book, a history of the Bovis construction group. 

Then in 2000 he went back to Dubai to become an Internet entrepreneur, just as the dot-com market crashed. But he stumbled across the opportunity to become a partner inwww.ameinfo.com, which later became the Middle East's leading English language business news website. 


Over the course of the next seven years he had a ringside seat as editor-in-chief writing about the remarkable transformation of Dubai into a global business and financial hub city. At the same time www.ameinfo.com prospered and was sold in 2006 to Emap plc for $27 million, completing the career circle back to where it began a decade earlier. 

He remains a lively commentator and columnist as a freelance journalist based in Dubai and travels extensively each summer with his wife Svetlana. His financial blog www.arabianmoney.net is attracting increasing attention with its focus on investment in gold and silver as a means of prospering during a time of great consumer price inflation and asset price deflation. 

Order my book online from this link 



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Timing & trends

Damn The Torpedoes

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Posted by Peter Schiff - Europacific Capital

on Wednesday, 13 June 2012 07:05

Last week in an interview on CBS Network News, Economist Mark Zandi, the chief economist for Moody's, unwittingly revealed a central error of the global economic establishment. Zandi has made a career out of finding the middle ground between republican and democrat economic talking points. As a result of this skill, he has been rewarded with large quantities of airtime from media outlets that want to appear non-partisan, despite the fact that his supposedly neutral analysis often leaves listeners frustrated. 

Last week in an interview on CBS Network News, Economist Mark Zandi, the chief economist for Moody's, unwittingly revealed a central error of the global economic establishment. Zandi has made a career out of finding the middle ground between republican and democrat economic talking points. As a result of this skill, he has been rewarded with large quantities of airtime from media outlets that want to appear non-partisan, despite the fact that his supposedly neutral analysis often leaves listeners frustrated. 

When asked about the recent deterioration in the global economy, Zandi said that "the worst possible scenario" at present would occur if Greece were to leave the Eurozone. He claimed that the economic gyrations and liquidations of bad debt that would result from such an exit would be sufficient to create a vicious cycle that could drag the global economy back into recession. As a result, he urged policy makers to take whatever steps necessary to maintain the current integrity of the 17 nation Eurozone. 

Given what most economists now know, few would actively argue that Greece's entrance into the Eurozone back in 2001 was a good idea. In fact most concede it was a terrible idea based on bad forecasting and outright fraud. There is little disagreement over the fact that Greece grossly misrepresented its financial position in order to gain initial entry into the monetary union. It is also widely agreed upon that in the ensuing decade Greece exploited its monetary advantages to borrow irresponsibly.

Much has been written about how the fundamental misfit between Greece's economy and currency gave birth to a deeply flawed system that was destined to run off the rails. Most also agree that the countries like Greece and Germany are too economically and culturally disparate to exist under the same monetary umbrella. But despite all this, Zandi wants to maintain the status quo. In his opinion, it is so imperative to prevent the deflationary consequences of an economic restructuring that it is preferable to prop up a failed system, perhaps indefinitely, rather than allow a newer, healthier system to replace it. In the process, the moral hazard created not only assures that Greece will become an even greater burden on Europe, but so too will other nations whose leaders will be emboldened in their profligacy by the anticipation of similar help.

From Zandi's perspective (and he is certainly in the majority on this point) the goal of economic policy is to keep GDP growing. It follows then that he will oppose large-scale debt liquidations which drag down GDP in the short term. But sometimes debt needs to be liquidated. Bad ideas need to be abandoned. Once economies stop throwing good money after bad, capital is freed up to flow into more economically viable purposes. But economists and politicians never look at the long term. Their job seems to be to manage the economy for the next election.

The same "damn the torpedoes" mentality dominates economic thinking with respect to the U.S. economy as well. Years of artificially low interest rates, and government subsidies that direct capital towards certain sectors and away from others, has created an economy with too little savings and production, and too much borrowing and consumption. The ultra-low interest rates currently supplied by the Fed serve to perpetuate this unsustainable artificial economy. Higher rates would work quickly to redirect capital to the more productive sectors. But high rates could bring deflation and liquidation, which few economists are prepared to risk. 

We have too many shopping malls selling stuff, but not enough factories making stuff. We have too many kids in college studying liberal arts, and not enough in the workforce acquiring skills that will actually increase their productivity. Banks are loaning too much money to individuals to buy houses, and not enough money to entrepreneurs to buy equipment. We have too many tax-takers riding in the wagon, and not enough taxpayers pulling it. The list is long, but the solutions are short. 

We need to let interest rates rise to market levels, and allow the economy to restructure without government interference. We need to stop beating a dead horse and hitch our wagon to an animal that can really pull. The process will be painful for many, but like ripping off a band-aid, the pain will be over relatively quickly. However, since a painful restructuring means recession, politicians resist the cure with every fiber of their beings. So instead of a genuine recovery, one that will provide productive jobs and rising living standards, we get a phony recovery that produces neither.

Preserving a broken system merely to avoid the pain necessary to fix it only makes the situation worse. Propping up sectors that should be contracting prevents resources from flowing to other sectors that should be expanding. Keeping workers employed in nonproductive jobs prevents them from gaining productive employment elsewhere. Encouraging activity or behavior the market would otherwise punish discourages alternatives that it would otherwise reward.

Unfortunately, leaders on both sides of the Atlantic put politics above economics, and economists like Mark Zandi provide the cover they need to get away with it.

For in-depth analysis of this and other investment topics, subscribe to Peter Schiff'sGlobal Investor newsletter. Click here for your free subscription.

Greece Mykonos

Click here to buy Peter Schiff's best-selling, latest book, "How an Economy Grows and Why It Crashes."

For a more in depth analysis of our financial problems and the inherent dangers they pose for the US economy and US dollar, you need to read Peter Schiff's 2008 bestseller "The Little Book of Bull Moves in Bear Markets" [buy here] And "Crash Proof 2.0: How to Profit from the Economic Collapse" [buy here]

For a look back at how Peter Schiff predicted the current crisis, read his 2007 bestseller "Crash Proof: How to Profit from the Coming Economic Collapse" [buy here]



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Timing & trends

The Big Picture - A Key Turn.....

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Posted by Victor Adair

on Monday, 11 June 2012 09:46

Financial markets around the globe are struggling to figure out how to price in the European political response to the European debt/financial crisis. One minute it looks like there is a serious risk of contagion, bank runs and a death spiral that will set off a true global depression...the next minute it seems that there is hope that the authorities will finally "come together" and "fix" the problem

It reminds me of an observation made by Robert Prechter (www.elliottwave.com) many years ago, "Markets reflect the social mood, not the other way round...when the social mood changes the markets change.

On Friday June 1 stock markets ended hard on their lows (and gold rallied $60) as the European mood was grim and the American employment data added to the picture of a very weak global economy. On Monday June 4 there was additional downside pressure in the stock markets early in the day...but then markets felt "sold out"...and went sideways to better through Tuesday.Wednesday through Friday saw a huge change in mood with the DJI rallying over 500 points from Monday's lows to Friday's close...with some violent intraday price swings across asset classes (stocks, currencies, interest rates and commodities.)

I'm wondering if we may have seen another KEY TURN date on June 1/June 4...or just a s/t change in psychology. Market sentiment was extremely negative June 1/June 4, yet prices reversed sharply across asset classes this past week...see charts below.

Short Term Trading: I bought gold May 25 (after holding a short position from early Feb to early May) and I liked the $60 surge on June 1...but I liquidated my position Tuesday June 5 when I sensed a change in psychology across markets (less reason to "want" to hold gold?) and noticed on the charts that gold had rallied into serious resistance levels around $1625. I felt some seller's remorse Wednesday when prices went higher but I was happy to be out of the position when gold fell on Thursday and Friday. This week I also liquidated the S+P contracts I bought May 24 at around breakeven. I probably should have liquidated the trade for a loss when the market broke to new lows on June 1...but "trader's instinct" told me the market was s/t oversold and might bounce off the support levels around 1275 created last October, November and December. In truth, I didn't manage the S+P trade very well...I justified hanging onto a losing trade by changing the time frame of my analysis...usually a really dumb idea...and I was lucky to get out around breakeven. I ended the week with no positions and felt fortunate to have made some money in very choppy markets. Now I can start next week with a clear mind and look for trading opportunities without the emotional baggage of holding a position!  

Charts: To say that we have had very choppy markets with manic depressive mood swings would be an understatement. Last week I pointed out Weekly Key Reversals Up in gold, silver and platinum and Weekly Key reversals Down in the S+P…this week we have a Weekly Key Reversal Up in the S+P and Ross Clark points out a three day Island Reversal Up on the S+P day session chart  for June 1,2 and 3. NoteOn the weekly chart the S+P may have found support around the 1250/1275 levels from last fall.

In terms of “did we just see a Key Turn Date June 1/June4?” here are some charts from the commodity, currency, and interest rate markets that show reversals around those dates:

Here’s a very interesting Weekly Island Reversal Up for Banco Santander...one of Spain’s biggest banks:

 

:

 

 

 

Politics and the Social Mood: The Republican win in Wisconsin's recall election may be seen as a turning point in US politics, and that turn may herald a loss for Obama in the Presidential elections. Governor Walker represents a mood in America that says, "We've got to cut back on the expensive promises we've made to government employees." The fact that the people of the state returned him to office may be a sign that enough people across the country know that Big Expensive Government has to be cut back. There seems to be little sign of that kind of mood in Europe where the welfare state remains entrenched...(Hollande election) and at the margin capital will flow away from Europe and towards America if it becomes increasingly clear that America is prone to (relatively!) less government and Europe is prone to more. The Supreme Court ruling on Obamacare...due before the end of June...may be another signal of a changing social mood...a ruling against Obamacare will be bullish for US stocks and USD.

My Big Picture View: Deflationary pressures remain unrelenting across global financial markets...with the potential for a "deflationary shock" if the European crisis ramps up. The first interest rate cut in China in 4 years is not "reflation bullish"...but is a sign that the economy there is slowing and the authorities are trying to counter deflationary pressures. My "rolling thunder" thesis for the sequence of deflationary pressures showing up first in America, now in Europe and next in Asia is based on a crude assessment of cultural willingness to "come clean" on problems...in other words...the Americans wash their laundry in public, the Europeans don't and the Asians definitely don't!

Article from http://www.victoradair.com/

 



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Timing & trends

MARKET BUZZ – Unemployment Rate Flat in Canada - Europe Screwed

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Posted by Ryan Irvine: Keystocks

on Saturday, 09 June 2012 09:40

Unemployment Rate in Canada Stays Flat in May; Europe Continues to Add to Global Uncertainty

The S&P TSX Composite closed at 11,500.63, up 1.23% for the week, but down 3.8% since the start of the year and uncomfortably close to 2012 lows.

Canadian employment numbers came in on Friday slightly above expectation with 7,700 new jobs being created during the month of May. Consensus estimates for the month were for 5,000 new jobs. The numbers, while a little higher than expected, essentially put an end to the strong month-over-month momentum we have seen March. Collectively, March and April brought with them 140,000 new jobs; a 30 year record for Canada’s economy. Although the prudent minded knew to look at the numbers with caution, there were, not surprisingly, many optimists that hoped the performance was the start of a new trend. Clearly they were disappointed by the May numbers. Overall the Canadian unemployment rate remained flat at 7.3%.

While we continue to see mixed data in North America, the situation in Europe is nothing less than clear. The continent continues to struggle with an unyielding debt problem which many fear is spilling over into the global marketplace. After rallying at the start of the year, nearly all major global stock markets are now either down or flat. Although Greece remains firmly in the spotlight, Spain has moved a few steps up the ladder to release its financial woes upon the world. Spanish banks have come under serious pressure which has caused economists and analysts to predict that the country will formerly request an EU bailout on Saturday, making it the fourth nation in Europe to do so. The International Monetary Fund is currently in the process of conducting an audit on how much money Spain would require (due out Monday) with preliminary estimates at €50 to €60 billion and potentially higher. Not surprisingly, ratings agency Fitch announced on Thursday that it was reducing Spain's credit rating by three notches on from A to BBB. This rating is now only one notch above junk status.

The situation with the PIGS (Portugal, Italy, Greece, and Spain) is analogous to what happens to an individual person that takes on too much debt. As an individual’s debt continues to grow, and their ability to pay that debt declines, naturally creditors will require a higher interest rate to compensate them for the additional risk. But at some point, creditors will just stop lending the money regardless of the rate that the debtor is willing to pay. This is true unless of course someone with a better credit rating and balance sheet agrees to co-sign the loans. In the case of Europe, this reluctantly generous co-signer is of course Germany. But Germany’s graciousness is not without a self-serving purpose as they stand to benefit more than anyone by the preservation of the Euro.

In the pre-Euro area, each of the debtor nations would simply allow their currency to de-value which would have the natural effect of lowering their respective debt burdens in real purchasing power terms. Although this is quite painful in the short term, it has historically been the only way to sort these issues out, as was the case with Argentina’s debt crisis in 1999 – 2002. The short-term pain was intense, but Argentina did recover and now enjoys one of the highest economic growth rates in Latin America.

100217-unemployment-line




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Timing & trends

Bernanke Strikes Again! - Big fall for gold as the Fed chairman appears before Congress…

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Posted by The Bullion Vault

on Friday, 08 June 2012 07:35

SIX DAYS after they climbed back above $1600 an ounce, gold prices dropped back below that level on Thursday, as Federal Reserve chairman Ben Bernanke appeared before Congress at the Joint Economic Committee. (more below -Ed)

Picture 1

This is not the first time we’ve seen this. Back on February 29, gold fell $100 an ounce while Bernanke was testifying before the House Financial Services Committee. What on earth is the man saying to have such an adverse impact on gold prices?

Well, on the two occasions cited above, it wasn’t what he said, but what he failed to say that did the damage. In short, Bernanke failed to make any explicit promises of further Fed quantitative easing.

Last Friday, gold shot up 5% in Dollar terms, following disappointing US jobs and manufacturing data. Clearly, some traders were betting that the Fed would respond by announcing further stimulus, a bet that failed to pay off. Bernanke’s reticence in this regard is hardly surprising, though. It’s what central bankers do: they say as little as they can get away with to keep as many options open as they can.

They also talk to each other, and it seems the major central bankers have agreed a common script, one which has as its central theme a focus on the failings of fiscal policymakers (i.e. politicians). Here is European Central Bank president Mario Draghi speaking on Wednesday:

“Some of these problems in the Euro area have nothing to do with monetary policy. That is what we have to be aware of and I do not think it would be right for monetary policy to compensate for other institutions’ lack of action.”

And here’s Bernanke a day later:

“…under current policies and reasonable economic assumptions, the [Congressional Budget Office] projects that the structural budget gap and the ratio of federal debt to GDP will trend upward thereafter, in large part reflecting rapidly escalating health expenditures and the aging of the population. This dynamic is clearly unsustainable…fiscal policy must be placed on a sustainable path that eventually results in a stable or declining ratio of federal debt to GDP.”

Translation: don’t look at us.

Central bankers are trying to put pressure on their political masters to deal with problems that are beyond the scope of monetary policy. It is these problems, they argue, that are at the root of the current crisis.

It was put to Bernanke by JEC vice chairman Kevin Brady that the Fed itself is encouraging political inaction by keeping QE3, a potential third round of quantitative easing, on the table.
In other words, the belief that the Fed is on standby to combat any crisis makes a crisis more likely, reducing as it does the incentive to take difficult preventative action.

The trouble is, the Fed and other central banks daren’t row too far back from talk of stimulus for fear that this will provoke a crisis. This is why Bernanke made it clear the option was on the table, while also saying “Look over there” and pointing at the so-called fiscal cliff – the combination of tax cut expiries and mandated spending cuts that await the US should lawmakers fail to reach agreements to prevent them (a genuine risk in an election year).

So we are at an impasse, meaning gold prices are susceptible to marginal sentiment and bets on what monetary policymakers will do next. This has been the case all year. For example, gold prices rallied in January after the Fed published projections showing its policymakers expected near-zero interest rates until late 2014. Gold also saw a jump in March as Bernanke reiterated the need for accommodative policies.

The truth is, though, that there has been little rhyme or reason to these moves. If you look at what Bernanke actually said on each occasion, it is pretty much a rehash of what he’s said before. Fed statements since the start of the year have all broadly said this: “We’re not out of the woods, we’ll keep an eye on things, and we’ll do as we see fit.”

Details have changed, depending on the newsflow, but that’s all. Here’s an extract from Thursday’s testimony:

“…the situation in Europe poses significant risks to the US financial system and economy and must be monitored closely. As always, the Federal Reserve remains prepared to take action as needed to protect the US financial system and economy in the event that financial stresses escalate.”

Later on, Bernanke said there is “no justification” for fears that QE could spark inflation. Taking these comments together, one could make a case that the Fed are about to push the button marked ‘More Stimulus’. But of course, traders had already jumped to that conclusion last Friday, and so were forced to ‘unjump’.

The truth is, we don’t know when or if we will see more QE, and we doubt anyone at the Fed does either. QE is not about economic stimulus. Not really. It may be packaged as a way of boosting growth, but in our view its real aim is to fight crises in the banking sector.

This is where it gets difficult for gold investors. It may be that the Fed, along with other central banks, are holding fire until the banking stresses in Europe become really acute. As we saw last November and December, a banking crisis can be accompanied by sharp falls in gold prices, as gold is sold or leased to raise Dollars, increasing its immediate supply and putting downward pressure on prices.

Indeed, along with the disappointment that Bernanke was note more dovish following last week’s economic news, another possible explanation for gold’s fall this week is that uncertainty over QE raises the risk of a sudden funding crunch.

Another factor to bear in mind is inflation expectations. Bernanke said on Thursday that these are “quite well anchored”. But some argue that they are still too high to make QE an immediate prospect, with 5-Year breakeven rates – the difference in yield between inflation-linked and nominal debt – still too high:
There remains a significant chance we will yet see more Fed QE. But things may need to get quite a bit worse first. In the meantime, the only clues we are likely to get are those we can glean from the Orwellian radio static of central banker doublespeak.

Or, if you’re a long run investor, you could just ignore the noise being made by gold prices and crack open a beer…

Ben Traynor
BullionVault

Gold value calculator   |   Buy gold online at live prices

Editor of Gold News, the analysis and investment research site from world-leading gold ownership service BullionVault, Ben Traynor was formerly editor of the Fleet Street Letter, the UK’s longest-running investment letter. A Cambridge economics graduate, he is a professional writer and editor with a specialist interest in monetary economics.

(c) BullionVault 2011

Please Note: This article is to inform your thinking, not lead it. Only you can decide the best place for your money, and any decision you make will put your money at risk. Information or data included here may have already been overtaken by events – and must be verified elsewhere – should you choose to act on it.




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