The Daily Reckoning

The central banks of the world are changing tune. Since 1989, the banks have been net sellers of gold reserves, meaning that as a group they have sold more than they have taken in. This is an important point because the large gold sales of central banks tend toward lowering the spot price of gold. The news emerging from a September 2009 GMFS report is that central banks as a whole are once again becoming net buyers, and their purchases have the potential to put upward pressure on the price of gold in the public markets.

According to GFMS, “this represents a remarkable change of direction for a market that has been used to absorbing substantial volumes of gold sold by central banks over the last decade.”

Central bank gold sales may have been initially enlisted in an effort to support the dollar as the world’s reserve currency, especially since 1971 when the US de-linked the dollar from gold. The changing trend may be related to recent renewed interest in the SDR, which has been getting a lot of attention in media as a potential replacement reserve currency. Or, it could reflect an anticipation of a continued increase in the value of gold over time.

Either way, this is an important trend to watch. Central banks are significant players in the gold market and can affect the value of your personal gold holdings.

The full story is available from Jesse’s Cafe Americain which has more details on the official central bank purchases and several insightful charts.

Gold May Have More Price Support now Than at any Time Since 1989 originally appeared in the Daily Reckoning. The Daily Reckoning, a FREE daily e-letter, offers a “uniquely refreshing” perspective on the global economy, investing, and today’s markets.

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“Who goes borrowing, goes sorrowing.”

– Ben Franklin

Today’s reckoning is going to be short. We’re on the road again…this time to Ireland where our Family office is headquartered.

The quote above comes from one of America’s founding fathers. But it was recalled to us neither by America’s president, nor America’s secretary of the Treasury, nor by America’s top banker. Instead, the Telegraph in London reported it from the mouth of Cheng Siwei, a “top member of the Communist hierarchy.”

The Telegraph reports:

“Cheng Siwei, former vice-chairman of the Standing Committee…said Beijing was dismayed by the Fed’s recourse to “credit easing”.

“We hope there will be a change in monetary policy as soon as they have positive growth again,” he said at the Ambrosetti Workshop, a policy gathering on Lake Como.

“If they keep printing money to buy bonds it will lead to inflation, and after a year or two the dollar will fall hard. Most of our foreign reserves are in US bonds and this is very difficult to change, so we will diversify incremental reserves into euros, yen, and other currencies,” he said.

China’s reserves are more than – $2 trillion, the world’s largest.

“Gold is definitely an alternative, but when we buy, the price goes up. We have to do it carefully so as not to stimulate the markets,” he added.

The Chinese now have the wind at their backs. Having done the stupidest things a nation can do – for a period of about half a century – the Chinese are getting smart. They’re discovering the wisdom Americans have forgotten.

“A penny saved is a penny earned,” is another of Franklin’s quips. In China it is practically the national motto. The Chinese save 25% to 40% of their income.

And now, with their $2 trillion in national savings, they’re going on a buying spree. But unlike Americans in the Bubble Epoque, the Chinese aren’t buying cheap consumer goods. They’re buying real assets…raw materials…and key supplies of essential resources, such as rare metals.

Ultimately, gold is money…it’s a way to store wealth over the long term.

Just ask Terry Herbert. The man spent his time with a metal detector, looking for treasure in England’s green and golden fields. He’d been looking for years, but when he finally found something important it “brought tears to my eyes,” he says.

What Mr. Herbert found was perhaps the greatest discovery of buried treasure in English history – 1,500 different artifacts of gold and silver…dagger hilts, crosses, helmet cheek pieces and other items of war booty from the Anglo-Saxon period, about 1,400 years ago.

Had Mr. Herbert stumbled upon some IOUs from a Saxon chieftain, it would have been a remarkable discovery. Its historical value might have been inestimable. But what he found weighed in at 11 pounds of gold. In addition to the value to museums and historians, it has monetary value. Even if you melted it down, erasing all trace of its history and provenance, it would still be worth about $160,000 at today’s price – probably about as much as it was when the Saxons stole it.

Gold’s “price has been remarkably similar for centuries at a time,” wrote Roy W. Jastram in his 1977 book, The Golden Constant. “Its purchasing power in the middle of the twentieth century was very nearly the same as in the midst of the seventeenth century.”

Gold outlives paper money, empires, governments…all of us and all our institutions.

The Chinese have metal detectors too. And they know there’s not much real value behind the dollar.

“The dollar is finished,” says historian Niall Ferguson. The Chinese are dumping it, he says.

Ferguson speaks for the popular intelligentsia. His ideas reflect those of fund managers, hedge fund operators, bankers, politicians and speculators. They’re all convinced that the dollar is doomed.

The Financial Times elaborates:

“The financial crisis vividly taught investors the importance of tail risk, a massive one-off event that can crush the value of portfolios. As the dust settles, fear of another ‘tail’ to sting portfolios is uppermost in the minds of many investors and money managers.”

Oh, Mr. Market…where’s thy sting? It’s inflation, they believe.

It’s the risk “that the huge liquidity injections being made by central banks could spark a surge in either inflation and/or long-term interest rates beyond 2012,” continues the FT.

“Inflation is the single biggest topic for discussion among our clients,” says a private banker.

What’s remarkable about inflation is that there is so little of it. It makes us think this story may have a twist.

Until tomorrow,

Bill Bonner
The Daily Reckoning

The Golden Road Out of Financial Crisis originally appeared in the Daily Reckoning. The Daily Reckoning, a FREE daily e-letter, offers a “uniquely refreshing” perspective on the global economy, investing, and today’s markets.

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The finance ministers of the Eurozone met yesterday and they’ve tried to stem the euro’s (EUR) rise… But they’ll need more than words to get the job done! And so we begin a new day…

Front and center this morning, the currencies – which had given background overnight to the dollar – are back in rally mode, and are taking liberties with the dollar once more. For most of the night, that was not the case, though. The dollar had rallied back and sent the euro, for instance, to the 1.48 handle, after the single unit spent yesterday at 1.49 and change… There seemed to be a move to the dollar, but that didn’t last long, and the currencies are once again rallying versus the dollar this morning, and the euro has pushed to 1.4970 as I write.

Daily noise, eh? Yes, you have to wade through it most days, and keep your eyes fixed on the horizon…

OK, I mentioned above that the finance ministers of the Eurozone met yesterday, and tried to stem the dollar’s decline by backing the US administration’s stated preference for a strong dollar… Of course we all know that the US administration’s stated preference for a strong dollar is a bunch of horse dookie! So… What was it that the Eurozone FMs were backing? A false statement by the US? Now, that’s something to hang your hat on, eh? The dolts just continue to mount daily don’t they?

But, you can’t be too hard on the beaver (Eurozone FMs) for they have to sound like they don’t want their euro to get too strong, for if they really said what they wanted to say, the euro would be back to 1.60 with a bullet in a heartbeat! So… In the end, I don’t think currency traders were swayed by the Eurozone FMs, at least not for too long!

Yesterday, I talked about Canada and the Bank of Canada (BOC) and how I thought that the BOC would remove their statement about interest rates remaining on hold until the second half of 2010… I had a few readers question me on this, saying that Canada’s economy is in no shape to withstand a rate hike… OK… Hear me out on this… I’m not saying that the BOC will hike rates now, or even in 2009… But, if Canadian energy prices of oil, natural gas, and coal continue to get stronger, I’m afraid the BOC will have to entertain thoughts of raising rates to fight inflation… But not now… So… I hope you get what I’m saying here.

So… The US fiscal deficit for 2009 was $1.42 trillion… Remember how I used to take the previous administration to the woodshed for posting $450 billion fiscal deficits? How did we go from $450 billion to $1.42 trillion (if that’s really the number)? Well… That’s not a question to really answer, folks, we all know how we got here… But now that we’re here, what happens next?

I came across this when putting the two monthly newsletters together on Sunday; I think it would be appropriate to share it with you here…

Peter Bernholz (Professor Economics in Basel) studied the world’s 12 most important periods of hyperinflation and discovered that the tipping point occurs when deficits amounted to 40% of the expenditures.

For the United States we have arrived at exactly that point. The deficit of $1.5 trillion amounts to 41.7% of the $3.6 trillion in expenses.

You see, that Peter Bernholz rounds some numbers, but for those of you keeping score at home, the real point is that the US deficits are greater than 40% of expenditures… And you know me, I truly believe in this history repeating itself.

The point I’m trying to make here is that according to Mr. Bernholz, we can soon expect a bout of hyperinflation! OH BOY! Where do I sign up for that? Not only do we have a falling dollar causing us to lose purchasing power, but what purchasing power we have left is going to be eaten away with inflation! Like I said, OH BOY! Gee Willikers, that sounds like the cat’s meow! NOT!

So… Here we go again, with me getting on the soapbox and telling you that the only way to protect yourself from a falling dollar and hyperinflation is to diversify with non-dollar currencies and precious metals.

OK… I get emails all the time from readers that say, “OK Chuck, you tell us to diversify, but you don’t tell us what to buy”… Well… To the untrained eye, that would be true… But to long time readers they know better… So, keep reading, and it will hit you right between the eyes one day, and you’ll slap your forehead and say, “I could have had a V-8”!

The boys and girls over at Citigroup have written a letter to their clients telling them “the dollar is weakening because foreign central banks are diversifying their reserves and US investors are buying high-yielding emerging market assets.” They went on to say, “The Australian and Canadian dollars are likely to rise to parity against the US currency.”

So, there’s one more on the roster that believe Aussie dollars (AUD) and loonies (CAD) will go to parity against the dollar… The loonie isn’t exactly the same stretch of a forecast as the Aussie dollar, as loonies are almost 97-cents right now, with Aussie dollars trading near 93-cents…

Doesn’t that make sense given the talk we just had about hyperinflation? What currencies are going to help protect you against hyperinflation? The commodity currencies! Aussie, kiwi (NZD), Canada, Norway (NOK), Brazil (BRL) and you can even throw in the S. African rand (ZAR), for those who like Mr. Toad’s wild ride!

The folks at Citigroup also had this to say about the euro, which I found to be quite interesting… “The euro will extend gains against the US dollar and the British pound, and may reach parity against the UK currency in 6 to 12 months.”

I would think that for the euro to reach parity with the pound, it would involve the pound falling quite a bit from current levels… And that makes sense to me… Did you see the report the other day from the UK where they reported bad bank debt to be twice the forecast amount? YIKES!

You know… The Asian currencies – which never really participated in the first bout of dollar weakness – are still stuck in the mud… Well, they are being manipulated to be stuck in the mud, for the most part… But, something’s got to give here sooner or later. Why do I say that? Well, as I’ve told you for months now, the Chinese economy was the first to exit their slowdown/recession… Shoot Rudy, even Japan is showing signs of economic growth! And then we have India going strong too… And of course you have the “kind of Asian countries” of Australia and New Zealand… Where we already know that Australia has raised rates and New Zealand would love to raise rates… So, this region is leading the world out of the recession… Hmmm… I thought only the US economy was allowed to do that! Uh-Oh… Looks like we have a shift in how the world works!

Hey! Even Big Ben Bernanke sees the Asian countries as leading the world out of the global recession! Big Ben said… “Asia appears to be leading the global economic recovery.” Hmmm… See, even a blind squirrel can find an acorn! HA!

I had to laugh when I read this headline this morning… “Yen rises as Fujii repeats reluctance to stem currency’s rise”… I laugh because the last time Japan’s new finance minister talked about not intervening to stop the yen’s rise, he back-pedaled and said that traders mistook him to say that he was not going to intervene… So this on again/off again love affair with Fujii and intervention, just makes me laugh! I would think that after getting burned on Fujii comments a couple of weeks ago, that Traders would not get too lathered up when he talks about not intervening.

OK… Here in the US while we are still a sovereign nation, the Fed Reserve, is doing some testing of reverse repos as a means of drawing the excess liquidity/stimulus out of the markets… I don’t think we have to put too much into these tests right now. But it will be a method that the Fed uses at some point in the future… The IMF is against removing any stimulus now… So, that may carry some weight.

Gold prices rose yesterday for the first time in a couple of days, pushing back above $1,060… I would think that until we know for sure that the Fed is removing stimulus, that gold would remain well bid… When we do know that stimulus is being removed… Gold might take a step or two back… But then we’ll have to wait-n-see what happens with inflation.

I read where ETF holdings of gold are sluggish… Well, that certainly makes sense to me! With what we’re seeing these days from our government pushing us toward who-knows-what, physical gold is the thing people want right now… And you can’t get physical gold out of an ETF! So… All those people that have long said that the ETF was just as good as holding gold either in your buried coffee cans in the back yard, or in pooled accounts, are wrong, when it comes to physical gold demands.

And I don’t know about you, but I filled my gas tank the other day, and the price of gas has really shot up recently, eh? And a quick look at oil prices tells it all… Oil prices have risen to $79, while trading at $69 just a month ago! Is oil the proxy for rising inflation?

OK… To recap… The dollar rebounded a bit overnight, but has given back to a currency rally this morning. Citigroup believes Aussie and Canadian dollars will reach parity to the US dollar. The Bank of Canada meets today. Our fiscal deficit reached 40% of our expenditures, which historically is a harbinger to hyperinflation, and gold is back above $1,060 this morning…

US Hyperinflation? originally appeared in the Daily Reckoning. The Daily Reckoning, a FREE daily e-letter, offers a “uniquely refreshing” perspective on the global economy, investing, and today’s markets.

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1p ET Sunday, October 18, 2009

Dear Friend of GATA and Gold (and Silver):

In reply to Thunder Road Report editor Paul Mylchreest’s new study of the gold market (http://www.gata.org/node/7906), which concluded that the market is either terribly short real metal or is laundering fantastic amounts of improperly obtained gold, perhaps the fabled “Yamashita’s gold” of Japanese plunder from World War II, our friend B.B. writes:

“Given that the silver market has similar characteristics to the gold market in terms of lopsided shorting and daily trading charts that are often nearly identical, should we conclude that there is also a huge stash of ‘Yamashita’s silver’? Also, since it has been reported that a recent call for delivery of a significant tonnage of gold resulted in some bizarre shenanigans to cover the delivery, does it not seem likely that maybe the ‘Yamashita’s gold’ story is being trotted out to replace the threadbare story of the sale of International Monetary Fund gold?”

Actually, the “Yamashita’s gold” story has been around as long as the threat of IMF gold sales, and even in the paranoid atmosphere of the gold universe it may be a little hard to believe that this story has been underwritten by increasingly desperate central banks.

The evidence is that even if some hoard of plundered gold was secretly seized from the Japanese military at the end of the war, it already has been liquidated one way or another and has left official hands. Otherwise the gold price would not have quadrupled in 10 years, and Western central banks would still be selling gold in large amounts with public flourishes and not just threatening over and over to sell gold that the IMF probably doesn’t have. Further, those central banks would not have resorted so irresponsibly to derivatives, swaps, and other mechanisms of fractional reserve gold banking for price suppression. They’d just be dumping gold all over the place in pursuit of their greatest desire: to make it worthless.

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The Daily Reckoning

Two important items in the news today:

First, Bloomberg reports that retails sales fell 2.1% in September – the biggest decrease this year.

Know what that means? It means the “Age of Thrift” is here…and that consumers really are cutting back – just like we said they would.

And it means that the consumer economy is not going to return to robust growth anytime soon. And it means, too, that people will find it hard to find jobs for a very long time.

Another thing it means is that housing prices are not likely to recover – not in our lifetimes. That was a once-a-century bubble and it has blown up.

Mortgage lenders say they expect the peak in foreclosures to come about a year from now. As for the bottom of price declines, you can expect that in 2013 or beyond. A housing bubble typically takes prices down for six years, says a study by professors Reinhart and Rogoff. But this was not a typical bubble; it was an extraordinary bubble. Seems logical that the correction will be extraordinarily deep and long too.

And it also means that this stock market rally is very vulnerable. The stock market and the economy seem to be reading different newspapers!

The Dow fell 14 points yesterday. It could begin a major drop any day. That’s why our ‘Crash Alert’ flag is flying from our London headquarters.

Yesterday, we reported the curious fact that consumer spending as a percentage of the GDP had increased. But it only increased because the other parts of the GDP – notably business spending and investment – fell off even faster.

With output falling…sales falling…and investment (in new plant and equipment) falling even faster…who’s going to hire new workers? Not many companies. And which companies are going to invest in young workers…who will have to be trained – sometimes over a period of many years – before they are really productive? Not many.

It’s the “Lost Generation,” says BusinessWeek. Unemployment nationwide is officially 9.8%. But for young people the rate is nearly twice that level – at 18%.

Their elders aren’t doing so well either.

“Baby boomers working longer hours, for less,” says a Financial Times headline. What do you expect? Their currency is going down in value. Their customers are disappearing. Their retirement savings disappeared with housing prices. They can’t even borrow money anymore.

David Rosenberg:

“Now that lenders have started to respond to their record-high delinquency rates by rationing credit, a mad scramble for cash is occurring to replace the loans – food stamp usage is up 22% year-over-year, pawn shop business is up nearly 40%, and there is a tidal wave of applications for Social Security disability benefits that are not explained alone by workplace mishaps.”

Boomers have no choice. They need money. So they work harder, and longer. And they get paid less. Why? Because prices are falling. Even the price of labor. It’s a deflationary world.

Meanwhile, The New York Times reports, “China consolidates its lead in global trade.”

This headline is a little like the announcement that consumer spending is a bigger part of the economy. It might lead you to think that global trade is growing – or, at least that the Chinese part of global trade is growing. Not at all! Global trade is still shrinking. Chinese exports too. It’s just that China’s part of the global marketplace is increasing…because America and Europe are losing market share. China is gaining market share because it competes on price. And price competition is what is driving this market.

No discount? No sale!

Power and wealth are shifting east. No doubt about it. The Chinese took over the Hummer this week. And they are even building a ‘big plane’ – the C919 – to compete against Boeing and Airbus.

Is there any business they can’t compete in? We don’t know…but we’re counting on them to stay out of financial publishing at least until we retire!

The other big news is that gold has reached a new high. It rose yesterday to $1065 yesterday – an increase of $7.

“Why so high…so fast?” That was the question in our Daily Reckoning analyst meeting this morning.

“In the last big boom in gold – in the late ’70s – gold followed inflation…and the central bank. Investors saw inflation increasing. And they saw the central bank failing to react fast enough. They bought gold to protect themselves.

“But now…there is no inflation. And central banks are alert to the problem. They haven’t raised rates…but they don’t need to. There’s no need to protect against a problem that doesn’t exist. So what are investors trying to protect against?”

No one at the table had a good answer.

“They’re just looking ahead to when all that money the feds put in the system finally shows up in inflation. If you believe there’s a real recovery you might think it is coming soon…” said one analyst.

“They’re worried about a crash of the dollar…they’re just buying gold because it’s the anti-dollar…” said another.

“Maybe the Chinese are switching their reserves to gold…just like they said they would. And maybe instead of buying at below $1,000 they’re buying quietly below $1,100…” offered another.

“Gold is being re-monetized,” says MoneyWeek editor Simone Wapler. “All the world’s paper monies are losing value – and credibility. There’s a race to the bottom as they try to devalue their currencies.”

All countries are fighting for market share. In a price-sensitive world, they increase exports by cutting prices. And the fastest – sometimes, the only – way to do that is by devaluing the currency. But when one nation devalues – say, by printing extra money – other nations must devalue too in order to stay competitive.

What can they all devalue against?

“Gold is rediscovering its old role,” says Simone. “Once again, it is the way we preserve wealth and keep track of what things are worth.”

Your editor had his say too.

“Most people are buying gold only because gold is going up. Maybe they realize that the world’s financial system is in a period of crisis. They see the central banks are being derelict in their duty. Instead of protecting the value of their paper money the bankers are intentionally undermining it. They figure that if the central banks aren’t doing their jobs – that is, if they aren’t maintaining a reserve of real money – they’ll have to do it themselves. Each person now needs to be his own central bank, with his own reserve of real wealth – gold.

“Or maybe investors don’t see that all. Maybe they just see the price going up and they want to hitch a ride. What else can they buy that has been going up for the last 10 years? Gold is up $150 – about 17% – in the last 6 months. It’s up 27% in the last year. It’s up 300% since 1999.”

Gold is in a bull market. How far it will go and how long it takes it to get where it is going, no one knows. No one knows, either, how many scrapes and setbacks it will suffer before it finally reaches its destination.

But it is a bull market. And you don’t ask questions in a bull market. You get on board and ride it to the end.

Then, you wished you had asked some questions.

Until tomorrow,

Bill Bonner
The Daily Reckoning

This article originally appeared in the Daily Reckoning. The Daily Reckoning, a FREE daily e-letter, offers a “uniquely refreshing” perspective on the global economy, investing, and today’s markets. Follow the Daily Reckoning on Twitter.

Boomers Have Their Backs Against the Wall

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What’s happening to the dollar? That’s the question dominating the world’s
financial markets. Last week the US currency fell, on a trade-weighted
basis, to a fresh 14-month low. The dollar’s decline is now gaining momentum.

By Liam Halligan

Published: 7:22PM BST 10 Oct 2009

Many American economists say the greenback is falling because the global
economy is recovering – so investors no longer need the dollar as a “safe
haven”.

That’s nonsense. The reality is that “safe haven” status has shifted
away from the dollar and towards tangible assets that the US government
can’t debauch by printing more of them. That’s why gold just hit a fresh all-time high of well over $1,000 per ounce.
That’s why commodity-backed currencies like the Australian dollar are now
soaring – causing howls of protest from Aussie exporters. Meanwhile, global
investors are quitting the US currency because they’re worried it’s a
sinking ship.

It’s hard to disagree. America is still running a current account deficit
equal to almost 3pc of national income. In a single month over the summer,
the gap between America’s imports and exports widened no less than 16pc.

America’s external imbalance remains sizeable in part because the country is
the world’s biggest oil importer. When crude prices rise, Uncle Sam’s trade
deficit increases, which, in turn, pushes down on the dollar.

As every financial analyst knows, a falling dollar means rising oil as the
black stuff is priced in US currency. But the relationship also operates in
reverse. When oil strengthens, the dollar tends to weaken as America’s trade
deficit suffers. Crude is now more than 50pc above its mid-February low –
ergo, a weaker dollar.

The dollar is also falling because that’s what the White House wants. “It’s
important America continues to have a strong currency,” said US
Treasury Secretary Timothy Geithner last week. “We’ve made clear our
commitment to a strong dollar,” added Larry Summers, the Head of
President Obama’s National Economic Council.

These men insult our intelligence. The US government desperately wants a
weaker dollar – so boosting exports while lowering the value of America’s
massive foreign debt. The currency markets will keep betting against the
greenback as they know the Federal Reserve will do nothing to stop a weaker
dollar coming true. “Benign currency neglect” is the cornerstone
of Obama’s recovery strategy.

The danger is, though, that “the rope slips” and steady decline
turns into nosedive. If the dollar did tip into free fall, US inflation
would soar and interest rates would skyrocket – whatever the Fed now says.
The world’s largest economy would then face “stagflation” – the
nightmare combination of recession and high inflation.

This danger is very real, not least because the rest of the world is seriously
concerned at America’s wildly expansionary fiscal and monetary policy.
That’s the fundamental reason the dollar is falling.

Just over a year ago, America’s monetary base was equal to 6pc of national
income. Now, after a year of money printing, it’s 12pc. The US has expanded
its basic money supply by a staggering 108pc in 12 months. No wonder the
currency markets are alarmed about future US inflation. No wonder there is a
widespread assumption so-called “quantitative easing” – or QE –
will continue, funding yet more bank bailouts and other forms of wasteful
government spending.

On top of all this, we must now add “carry trade” pressures. As this
column pointed out last month, investors are using low Fed rates to take out
inexpensive dollar loans, then converting the money into higher-yielding
currencies. “Carrying” credit in this way is flooding the world
with cheap dollars – pushing the greenback down even more.

There are broader reasons for the dollar’s demise – not least that the sun is
now setting on its reserve currency status, as the world’s commercial centre
of gravity shifts towards the emerging giants of the East. That’s a much
longer-term trend, though. In the here and now, the dollar is tumbling due
to America’s ultra-low interest rates, monetary incontinence and fiscal
irresponsibility.

The decline became so steep last week that central banks in Asia – including
China – spent their own reserves propping up the US currency, so worried
were they about the impact of the falling dollar on their all-important
exports. Future historians will shake their heads in disbelief.

Keep in mind, though, that the arguments pointing to a weaker dollar also
apply to the pound – but even more so. Last week sterling hit a
trade-weighted five-month low. Over the last year, the pound has, well, been
pounded – losing significant ground against the yen and euro, as well as the
ailing dollar.

Like the US, Britain has indulged in grotesque money-printing antics. The two
countries might be dubbed the QE2. But the Bank of England’s printing
presses really have been in overdrive, with the UK’s monetary base now equal
to almost a fifth of GDP, up a head-spinning 169pc in a single year.

Capital Gold Group, gold group, gold, gold prices, gold news, gold coins, gold bullion, gold IRA, IRA
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By Pham-Duy Nguyen and Nicholas Larkin

Oct. 13 (Bloomberg) — Gold futures rose to a record as the
slumping dollar spurred demand for the precious metal as an
alternative asset.

The metal is on course for a ninth straight annual gain.
This year, gold has gained 20 percent. Today, the price reached
a record $1,069.70 an ounce in New York, surpassing the previous
high on Oct. 8. The dollar has dropped 6.6 percent in 2009
against a basket of six major currencies, touching a 14-month
low.

“There’s lots of concern about the weakness in the dollar,
and this has been driving gold,” said Peter Fertig, the owner
of Quantitative Commodity Research Ltd. in Hainburg, Germany.

Gold futures for December delivery gained $3.50, or 0.3
percent, to $1,061 at 11:05 a.m. on the Comex division of the
New York Mercantile Exchange.

The metal may benefit as central banks worldwide diversify
away from the dollar, analysts said. Nations reporting currency
holdings put 63 percent of the new cash into euros and yen in
April, May and June, Barclays Capital data show. China in April
said it purchased 454 metric tons of gold from 2003 to 2009,
according to data from the producer-funded World Gold Council.

China has the sixth-largest gold holdings, after the U.S.,
Germany, the International Monetary Fund, Italy and France. Only
1.9 percent of China’s foreign-currency reserves are in gold.

“The tremendous perception that the dollar will continue
to weaken is going to drive gold higher,” said Frank McGhee,
the head dealer at Integrated Brokerage Services LLC in Chicago.
“China is nervous and continues to be nervous about the
dollar.”

Record U.S. Debt

President Barack Obama has increased U.S. marketable debt
to a record as he borrows to reignite economic growth. That has
boosted speculation that increased money supply will debase the
currency and spur inflation.

The Federal Reserve has cut its main interest rate almost
to zero and backed asset purchases and credit programs to combat
the recession. Chairman Ben S. Bernanke is leading plans to buy
mortgage-backed securities, federal agency debt and Treasuries.

“The fear that central bank exit strategies will come too
late to prevent inflation is giving support to gold,” Fertig of
Quantitative Commodity Research said.

U.S. consumer prices will increase 1 percent this quarter
and 1.9 percent and 1.8 percent in the following two quarters,
respectively, according to the median estimate of 66 economists
surveyed by Bloomberg.

Crude-oil futures, used by some investors as an inflation
guide, rose today to the highest in seven weeks. The price has
jumped 65 percent this year.

Gold will trade at $1,025 an ounce in the next three
months, up from a previous forecast of $950, Citigroup Inc. said
in a report, citing increased demand and the sliding dollar. The
bank raised its estimate for the coming six to 12 months to
$1,050, from $975.

“There is less obvious support for the current price from
the fundamentals of supply and demand, excluding investment,”
Citigroup said. “Mine supply has recently been sufficient to
meet all fabrication demand. Excess demand for gold must
therefore be supported by investors.”

Read more….

Oct. 12 (Bloomberg) — Central banks flush with record reserves are
increasingly snubbing dollars in favor of euros and yen, further
pressuring the greenback after its biggest two- quarter rout in almost
two decades.

Policy makers boosted foreign currency holdings
by $413 billion last quarter, the most since at least 2003, to $7.3
trillion, according to data compiled by Bloomberg. Nations reporting
currency breakdowns put 63 percent of the new cash into euros and yen
in April, May and June, the latest Barclays Capital data show. That’s
the highest percentage in any quarter with more than an $80 billion
increase.

World leaders are acting on threats to dump the
dollar while the Obama administration shows a willingness to tolerate a
weaker currency in an effort to boost exports and the economy as long
as it doesn’t drive away the nation’s creditors. The diversification
signals that the currency won’t rebound anytime soon after losing 10.3
percent on a trade-weighted basis the past six months, the biggest drop
since 1991.

“Global central banks are getting more serious
about diversification, whereas in the past they used to just talk about
it,” said Steven Englander, a former Federal Reserve researcher who is
now the chief U.S. currency strategist at Barclays in New York. “It
looks like they are really backing away from the dollar.”

Sliding Share

The dollar’s 37 percent share of new reserves fell from about a 63
percent average since 1999. Englander concluded in a report that the
trend “accelerated” in the third quarter. He said in an interview that
“for the next couple of months, the forces are still in place” for
continued diversification.

America’s currency has been under
siege as the Treasury sells a record amount of debt to finance a budget
deficit that totaled $1.4 trillion in fiscal 2009 ended Sept. 30.

Intercontinental Exchange Inc.’s Dollar Index, which tracks the
currency’s performance against the euro, yen, pound, Canadian dollar,
Swiss franc and Swedish krona, fell to 75.77 last week, the lowest
level since August 2008 and down from the high this year of 89.624 on
March 4. The index, at 76.104 today, is within six points of its record
low reached in March 2008.

Foreign companies and officials
are starting to say their economies are getting hurt because of the
dollar’s weakness.

Toyota’s ‘Pain’

Yukitoshi Funo, executive vice president of Toyota City, Japan-based
Toyota Motor Corp., the nation’s biggest automaker, called the yen’s
strength “painful.” Fabrice Bregier, chief operating officer of
Toulouse, France-based Airbus SAS, the world’s largest commercial
planemaker, said on Oct. 8 the euro’s 11 percent rise since April was
“challenging.”

The economies of both Japan and Europe depend
on exports that get more expensive whenever the greenback slumps.
European Central Bank President Jean-Claude Trichet said in Venice on
Oct. 8 that U.S. policy makers’ preference for a strong dollar is
“extremely important in the present circumstances.”

“Major
reserve-currency issuing countries should take into account and balance
the implications of their monetary policies for both their own
economies and the world economy with a view to upholding stability of
international financial markets,” China President Hu Jintao told the
Group of 20 leaders in Pittsburgh on Sept. 25, according to an English
translation of his prepared remarks. China is America’s largest
creditor.

Dollar’s Weighting

Developing countries have likely sold about $30 billion for euros, yen
and other currencies each month since March, according to strategists
at Bank of America-Merrill Lynch.

That helped reduce the
dollar’s weight at central banks that report currency holdings to 62.8
percent as of June 30, the lowest on record, the latest International
Monetary Fund data show. The quarter’s 2.2 percentage point decline was
the biggest since falling 2.5 percentage points to 69.1 percent in the
period ended June 30, 2002.

“The diversification out of the
dollar will accelerate,” said Fabrizio Fiorini, a money manager who
helps oversee $12 billion at Aletti Gestielle SGR SpA in Milan. “People
are buying the euro not because they want that currency, but because
they want to get rid of the dollar. In the long run, the U.S. will not
be the same powerful country that it once was.”

Central
banks’ moves away from the dollar are a temporary trend that will
reverse once the Fed starts raising interest rates from near zero,
according to Christoph Kind, who helps manage $20 billion as head of
asset allocation at Frankfurt Trust in Germany.

‘Flush’ With Dollars

“The world is currently flush with the U.S. dollar, which is available
at no cost,” Kind said. “If there’s a turnaround in U.S. monetary
policy, there will be a change of perception about the dollar as a
reserve currency. The diversification has more to do with reduction of
concentration risks rather than a dim view of the U.S. or its
currency.”

The median forecast in a Bloomberg survey of 54
economists is for the Fed to lift its target rate for overnight loans
between banks to 1.25 percent by the end of 2010. The European Central
Bank will boost its benchmark a half percentage point to 1.5 percent, a
separate poll shows.

America’s economy will grow 2.4 percent
in 2010, compared with 0.95 percent in the euro-zone, and 1 percent in
Japan, median predictions show. Japan is seen keeping its rate at 0.1
percent through 2010.

Central bank diversification is helping
push the relative worth of the euro and the yen above what differences
in interest rates, cost of living and other data indicate they should
be. The euro is 16 percent more expensive than its fair value of $1.22,
according to economic models used by Credit Suisse Group AG. Morgan
Stanley says the yen is 10 percent overvalued.

Reminders of 1995

Sentiment toward the dollar reminds John Taylor, chairman of New
York-based FX Concepts Inc., the world’s largest currency hedge fund,
of the mid-1990s. That’s when the greenback tumbled to a post-World War
II low of 79.75 against the yen on April 19, 1995, on concern that the
Fed wasn’t raising rates fast enough to contain inflation. Like now,
speculation about central bank diversification and the demise of the
dollar’s primacy rose.

The currency then gained 26 percent
versus the yen and 25 percent against the deutsche mark in the
following two years as technology innovation increased U.S.
productivity and attracted foreign capital.

“People didn’t
like the dollar in 1995,” said Taylor, whose firm has $9 billion under
management. “That was very stupid and turned out to be wrong. Now, we
are getting to the point that people’s attitude toward the dollar
becomes ridiculously negative.”

Dollar Forecasts

The median estimate of more than 40 economists and strategists is for
the dollar to end the year little changed at $1.47 per euro, and
appreciate to 92 yen, from 89.97 today.

Englander at
London-based Barclays, the world’s third- largest foreign-exchange
trader, predicts the U.S. currency will weaken 3.3 percent against the
euro to $1.52 in three months. He advised in March, when the dollar
peaked this year, to sell the currency. Standard Chartered, the most
accurate dollar-euro forecaster in Bloomberg surveys for the six
quarters that ended June 30, sees the greenback declining to $1.55 by
year-end.

The dollar’s reduced share of new reserves is also
a reflection of U.S. assets’ lagging performance as the country
struggles to recover from the worst recession since World War II.

Lagging Behind

Since Jan. 1, 61 of 82 country equity indexes tracked by Bloomberg have
outperformed the Standard & Poor’s 500 Index of U.S. stocks, which
has gained 18.6 percent. That compares with 70.6 percent for Brazil’s
Bovespa Stock Index and 49.4 percent for Hong Kong’s Hang Seng Index.

Treasuries have lost 2.4 percent, after reinvested interest, versus a
return of 27.4 percent in emerging economies’ dollar- denominated
bonds, Merrill Lynch & Co. indexes show.

The growth of
global reserves is accelerating, with Taiwan’s and South Korea’s, the
fifth- and sixth-largest in the world, rising 2.1 percent to $332.2
billion and 3.6 percent to $254.3 billion in September, the fastest
since May. The four biggest pools of reserves are held by China, Japan,
Russia and India.

China, which controlled $2.1 trillion in
foreign reserves as of June 30 and owns $800 billion of U.S. debt, is
among the countries that don’t report allocations.

“Unless
you think China does things significantly differently from others,” the
anti-dollar trend is unmistakable, Englander said.

Follow the Money

Englander’s conclusions are based on IMF data from central banks that
report their currency allocations, which account for 63 percent of
total global reserves. Barclays adjusted the IMF data for changes in
exchange rates after the reserves were amassed to get an accurate
snapshot of allocations at the time they were acquired.

Investors can make money by following central banks’ moves, according
to Barclays, which created a trading model that flashes signals to buy
or sell the dollar based on global reserve shifts and other variables.
Each trade triggered by the system has average returns of more than 1
percent.

Bill Gross, who runs the $186 billion Pimco Total
Return Fund, the world’s largest bond fund, said in June that dollar
investors should diversify before central banks do the same on concern
that the U.S.’s budget deficit will deepen.

“The world is
changing, and the dollar is losing its status,” said Aletti Gestielle’s
Fiorini. “If you have a 5- year or 10-year view about the dollar, it
should be for a weaker currency.”

Read more….

The Daily Reckoning

As predicted, both the European Central Bank and the Bank of England kept their benchmark interest rates at record lows in an effort to keep stimulating their economies. Trichet signaled that the ECB has no plans to raise rates in the near future, stating that the current level is ‘appropriate’ for the current economic environment. “The recovery is expected to be rather uneven,” Trichet said. “It will be supported in the short term by temporary factors but will be hampered in the medium term by balance sheet issues at financial and non-financial institutions.”

When asked about the recent fall of the US dollar, and the possibility of currency intervention, Trichet repeated the standard line saying, “excess volatility and disorderly movements” hurt growth; and policy makers “will continue to monitor the exchange markets closely and cooperate as appropriate”. Trichet also stated that he trusts his US counterparts (big mistake!) as to their statement on the strong-dollar policy. “When the Secretary of the Treasury and our friend Ben Bernanke say that a strong dollar is in the interests of the US economy and that they are pushing a strong dollar policy, this is a judgment that is obviously very important for us and the global economy.” NOTE TO TRICHET: YOU CAN’T TRUST A CHEATER!!

The current administration may say they support a strong dollar, but their actions sure don’t show it. Quantitative easing efforts have pumped a record amount of liquidity into the markets, and Washington has the printing presses working overtime. Unless the laws of supply and demand have changed, all of these US dollars that have been created will cause the value of the dollar to drop. We have seen a 15% drop in the value of the dollar index in the past six months. The current administration has no reason to support a strong dollar, and realize there is no way they are going to be able to protect the value of the dollar while pursuing their ‘quantitative easing’ policies. In order to protect the dollar, Geithner and Bernanke would need to shut off the printing presses, and actually put them in reverse, pulling liquidity out of the markets. There is absolutely no way this will occur anytime soon.

The Bank of England also left rates unchanged and announced that they would continue to push money directly into the economy through purchases of government and corporate bonds. At least one of the policy makers in England seems to understand what is going on. Conservative leader David Cameron stated today that the policy will lead to inflation, signaling to his party’s annual conference that it would stop the government’s main economic stimulus program if it wins the next election. “Sometime soon that will have to stop because in the end printing money leads to inflation”, Cameron said. But others remain trapped in their own twisted reality with former BOE officials calling Cameron’s remarks ‘dangerous’.

The dollar moved up a bit versus the euro (EUR) and pound (GBP) after the announcement, but fell again overnight. Overall, the greenback is up compared with yesterday morning, with the biggest moves coming against the New Zealand dollar (NZD) and Japanese yen (JPY). Asian central banks intervened heavily in the currency markets on Thursday to help support the US dollar. With China keeping the renminbi (CNY) stable versus the US dollar, other Asian currencies not pegged to the falling dollar have risen. Governments in Japan, Thailand, Hong Kong, and Singapore were big buyers of US dollar yesterday and continued with their purchases overnight. And while their efforts may work to slow the dollar’s decent, it won’t change the direction. These central banks just don’t have the financial power to change the inevitable fall of the US dollar.

Data released yesterday showed that initial jobless claims in the US fell slightly to 521K, and that continuing claims also drifted lower. Both are still near historic levels, and don’t support the claims that the US economy is pulling itself out of the recession/depression.

In other news, chain store sales managed to eke out a small increase in September. While the news caused a rally on Wall Street, the YOY increase was mainly because the stores had absolutely abysmal sales one year ago. The largest industry group is cautioning against reading too much into the increase, and to continue to predict a decline in sales for November and December.

In another report, the Commerce Department said wholesale inventories fell 1.3% in August, worse than the 1% drop economists had expected. This follows a 1.6% drop in July, as businesses continue to reduce inventories.

Today we only have one piece of data, the trade balance, which is expected to show a deficit of $33 billion for August. This deficit comes in spite of a falling US dollar, which should eventually make our exports more competitive, and force a narrowing of this balance. The continued deficit forces the US to have to attract foreign capital as imports continue to outpace exports.

Canada got a good piece of news yesterday as Canadian employers added jobs for the second straight month in September. The unemployment rate fell to 8.4% as employment rose by 30,600. The report will increase pressure on the Bank of Canada to raise interest rates from record lows, and could lead to strength in the Canadian dollar (CAD). We have been supporters of commodity based currencies, and Canada certainly has an abundance of raw materials. Their proximity to the US has caused some concern, as the US is still their largest trading partner, but Canada has worked to strengthen ties to China and is now enjoying an increase in exports to Asia as the recovery takes hold in the Far East.

An associate from headquarters down in Jacksonville emailed me last night to ask my opinion on recent events in Latvia. Now I certainly try to stay informed on all of the countries around the globe, but had to be honest and tell him I haven’t really ever looked at what is going on in Latvia. But after doing a bit of research, I realized what had sparked the question. Economic troubles in the Baltic state led to concern over the future health of Swedish banks. Plunging property values in Latvia have left borrowers ‘upside down’ on their mortgage loans, which are mainly provided by Swedish banks. The Latvian government had announced a plan to protect homeowners from foreclosure, angering Sweden. But overnight, Latvia has announced it is pulling away from its earlier plan, and would come to an agreement with its international lenders. It looks as if the ‘Latvian’ crisis will be resolved, and Swedish banks will avoid the possible losses that could have occurred. The Swedish krona (SEK) is unchanged on the month, and has increased over 12% in the past three months. With the Latvian crisis avoided, the krona will likely resume its move higher versus the US dollar.

After hitting an all-time high yesterday, gold slipped back slightly overnight. This was the first drop in the gold price this week, after the biggest weekly advance since April. We had expected a pause in the rapid ascent for gold, and a small move higher by the US dollar has pushed gold lower. Many traders are now calling for a near-term correction in the price as investors take profits from the rapid move. According to an analyst at HSBC: “The likelihood that long-term dollar weakness will support gold does not obviate the fact that the near-relentless increase in bullion prices recently has raised the possibility that gold is due for a pullback,” HSBC Securities analyst James Steel said in a report emailed today. “A dollar rally, even if only temporary, could provide a reason for gold longs to take profits.”

This article originally appeared in the Daily Reckoning. The Daily Reckoning, a FREE daily e-letter, offers a “uniquely refreshing” perspective on the global economy, investing, and today’s markets. Follow the Daily Reckoning on Twitter.

Don’t Trust the Dollar Strength

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The Daily Reckoning

OK, front and center this morning, gold has soared to another all-time high! When I turned on the screen this morning, gold was flashing a great big $1,055 figure… WOW! But wait! Gold – and silver for that matter – aren’t the only risk assets moving higher… All 16 of the countries that are deemed to be the biggest US trading partners have currencies that are taking liberties versus the dollar, this morning.

It’s like this, folks… We keep seeing signs that a global recovery is taking place, I mean, the Reserve Bank of Australia (RBA) even hiked rates this week, for crying out loud! And… With those signs of recovery come the feelings that global rates will be rising, as witnessed by the RBA this week, and with global rates rising, the yield differential to the dollar becomes even greater in favor of the non-dollar currencies.

This is quite evident, when you look out on the currency landscape and see that Aussie dollars (AUD) are trading with a 90-cent handle… Brazilian reals (BRL) are trading 36% higher versus the dollar since March 1st!

Why did I highlight those two currencies? Well, as it has been well documented, the RBA already hiked rates and increased their rate differential to the dollar this week, with the thought that they would come back again in November for another rate hike… And Brazil? Yesterday, I saw a story flash across the screen that the Brazilian central bank Governor is mentioning at least 200 BPS of rate hikes before he leaves office next year! Talk about increasing the rate/yield differential!

Yesterday, I talked to you about the euro (EUR), and explained why it had not participated with the other currencies’ assault on the dollar… Well, the Big Dog/euro got off the porch to stretch its legs and chased the dollar down the street a bit, last night… It’s now trading with an eye toward 1.48…

Well, in keeping with the theme that a global recovery is taking place, German Industrial Production rose in August 1.7% from a decline in July. As reported here about a month ago, Germany exited their recession in the second quarter, posting a positive, albeit negligible, GDP… I expect their third quarter to be a bit stronger, as they build on this nascent recovery.

The European Central Bank (ECB) meets this morning, and I don’t expect them to move rates, announce any quantitative easing, or anything like that… What I’m half expecting though is for ECB President, Trichet, to attempt to put a tourniquet around the dollar, to stop the bleeding… Hey! Nobody in the US is fighting to keep the dollar strong, so somebody has to!

The ECB and Trichet know all too well that the US has painted itself into a corner, and the dollar is getting punished for their actions… They also understand that all they’d have to do would be to talk glowingly about the euro, and it would deep six the dollar in a heartbeat! But what good would that do? It’s far better to just keep the lips zipped shut, and watch a general, slow, depreciation of the dollar… So… The euro’s run to the high 1.47 handle this morning could be at risk to what Trichet has to say… But remember, folks, he’s just wrapping a tourniquet around the dollar; it’s not like he’s in love with the dollar and the fundamentals behind it!

Last night, I was doing some research and came across a story that really piqued my interest… Here’s a snippet from the Bloomberg…

“Central banks are diversifying away from the dollar ‘more aggressively,’ according to Barclays Plc, the world’s third-largest currency trader.

“The dollar accounted for 37 percent of the $115 billion foreign reserves central banks amassed in the second quarter, after adjustment for exchange-rate changes during the period, compared with 52 percent in the euro, according to a Barclays analysis of data that the International Monetary Fund released on Sept. 30. That was the first time that the dollar’s share fell below 40 percent in the new accumulated foreign reserves of $100 billion or more since the euro’s 1999 debut.”

Remember, about a week or so ago, when I told you that the IMF’s currency report basically showed a move away from the dollar, too…

HEY! IF CENTRAL BANKS ARE DIVERSIFYING, SHOULDN’T YOU BE DOING IT TOO?

OH! And then there was this quote from Canada’s Finance Minister, Flaherty… “We are all concerned about the US dollar”.

And then there was US Treasury Secretary, Tim Geithner… The man who was in charge of the NY Fed, and who oversaw the banks in that region – of which, most of them needed TARP money… Anyway… The thing I want to talk about is his latest statement about the dollar… “Officials recognize that the dollar’s important role in the system conveys special burdens and responsibilities on us, and we are going to do everything necessary to make sure we sustain confidence.”

Yeah, sure you are… How many Treasuries have you auctioned off this year? Something like $1.6 trillion? Now, that will give everyone in the world a warm and fuzzy about the dollar’s future, won’t it? NOT!

OK, I had better go on to something else before I get too wound up!

The Bank of England (BOE) is also meeting this morning… And after an awful set of economic reports in the past month, the BOE members are scratching their heads and wondering what to do next. They cut rates to the bone; they bought toxic assets from financial institutions; they nationalized a few companies that were about to go under; they spent money on stimulus packages… And they implemented quantitative easing…

Sounds like the US, doesn’t it? I’ll tell you whom else it sounds like… It sounds like Japan in the last decade… I hate to be the one to have to tell these dolts that none of this works! It just makes a laughing stock out of your central bank, and puts your currency on the slippery slope downward…

Oh, but not to worry, Tim Geithner is maintaining the confidence in the dollar… (I guess no one told Canada’s Finance Minister, eh?)

Well… Earlier in the Pfennig this morning, I told you about the rise in the Aussie dollar… I didn’t tell you that it was trading at a 14-month high, as it was reported that Australian employment surged 40,600 in September! With a print like this, I think that it’s almost a given now that the RBA comes back in November and hikes rates again!

Another currency at a 14-month high is the New Zealand dollar/kiwi (NZD)… Remember how I’ve told you about the Reserve Bank of New Zealand (RBNZ) Governor Bollard, and his penchant for jawboning kiwi lower? I despise him for these things… As a central banker, your job is to protect the value of your currency, not to diss it!

Well, now Bollard has company… New Zealand Finance Minister, Bill English, has this to say… “We’re uncomfortable with it [kiwi] at this stage in the economic cycle.” You see… Mr. English is concerned that the economic recovery will be stamped out with a strong kiwi. Well, I’ve got a cure for you Mr. English… Tell Bollard and the boys over at the RBNZ not to raise interest rates, and that will do the trick! It’ll stop the speculation in its tracks! However, if the RBNZ does raise rates next month, then you have no one to blame but yourselves!

OK… Let’s get back to gold before we head to the recap!

I did a video yesterday on gold, and I talked about how you can go about your life without an inflation hedge in your back pocket and suffer the consequences of not only having your purchasing power reduced by the falling dollar, but having what dollars you have left eaten away by inflation… OR… you can get that inflation hedge… And put it away for a rainy day… Or pull out to play it like a “Get Out of Jail Free Card” when inflation hits…

To recap… Gold has soared to another all-time high of $1,055 overnight. And the non-dollar currencies are all gaining versus the dollar on the thoughts that a global recovery will result in wider yield differentials in those currencies versus the dollar. Aussie dollar and kiwi have both traded at 14-month highs overnight… And… We could see some downside risk to the euro if ECB President Trichet decides to defend the dollar today after the ECB meeting, this morning.

This article originally appeared in the Daily Reckoning. The Daily Reckoning, a FREE daily e-letter, offers a “uniquely refreshing” perspective on the global economy, investing, and today’s markets. Follow the Daily Reckoning on Twitter.

US Dollar in Need of a Tourniquet

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