By Zhou Xin and Simon Rabinovitch, Reuters

BEIJING — Any speculation that China might stop supporting the dollar in the next few years is absolute nonsense, a top state banker said.

Li Ruogu, chairman of Export-Import Bank of China, a lender tasked with supporting the country’s foreign investments, said in a group interview that a collapse in the dollar’s value would damage Chinese interests.

China should focus instead on trying to stabilize the dollar and on preserving its status as the leading global currency, said Li, a former deputy central bank governor.

Asked whether China should continue to back the dollar, he said: “I believe that, for now, supporting the dollar’s stability and its international currency status is good for China.”

He added: “As China has a huge sum of foreign exchange reserves, a dollar collapse would bring nothing good to China.”

China has $2.4 trillion in official reserves, the largest stockpile in the world, and bankers believe about two-thirds of the total is invested in dollar assets.

Li said the Special Drawing Right (SDR), the International Monetary Fund’s unit of account, presented a viable super-sovereign alternative to the dollar in the long term as a global reserve currency.

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By Darryl Robert Schoon, GoldSeek

The ability to wage war on credit gave the West an insurmountable advantage over the East. The West’s credit, however, has now turned to debt and the West has lost its advantage. But the return to parity will not be easy.

The three hundred year economic expansion fueled by debt-based capital markets is coming to an end and with it, the hegemony of the West over the East. During that period, debt-based paper money propelled first England then the US to world dominion because of the ability to wage war on credit and to print money ad infinitum.

That era is now ending because the critical balance between credit-driven expansion and debt-driven contraction has now shifted significantly in favor of the latter; and in 2010, both East and West now find themselves on the edge of a growing deflationary sinkhole created by the sequential collapse of two large US bubbles, the dot.com and US real estate bubbles.

The US caused the 1930s deflationary depression and is again cause of the current contraction; and although similarities exist between the two, the differences between them insure a far more consequential outcome today than in the 1930s.

Global demand is again falling as credit contracts, a sign that debt-driven deflation is back but, today, there is an additional danger as well. Since 1971, because of the USdefault on its gold obligations, money no longer possesses intrinsic value and the consequences will soon become apparent. Deflationary depressions and a collapse in the value of fiat money have happened before but never simultaneously. Soon, they will.

We are in what Stephen Roach, Chairman of Morgan Stanley Asia, calls the end-game, the resolution of past monetary excesses and imbalances, excesses and imbalances that reached never-before-seen heights in the last decade. The long awaited day of reckoning has arrived.

Read more….

South Korean Central Bank: Dollar Status May Fade over Time

From Reuters

SEOUL, South Korea — The U.S. dollar will likely remain the world’s leading reserve currency for the next five to 10 years but may lose its edge over a longer period, a South Korean central bank report published on Sunday said.

The world could see multiple reserve currencies sharing the leading status 20 to 30 years from now, due to weakening confidence towards the dollar and the rising influence of other currencies such as the euro and yuan, it said.

“The global monetary order is expected to enter into a multi-currency system with currencies such as the dollar, euro, and yuan competing to become the leading reserve currency,” the Bank of Korea report said.

It said the weight of dollar assets in global foreign reserves had already fallen to 61.6 percent by the end of September 2009 from more than 80 percent in 1977, whereas the euro has risen to 27.7 percent from 17.9 percent in 1999.

It is rare for the Bank of Korea, which manages the world’s sixth-biggest foreign reserves, to publish a report commenting on such a sensitive topic, although the authors said the paper did not necessarily represent the central bank’s stance.

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By James Turk, GoldMoney

The US Dollar Index jumped 1.7% on Friday, from 74.63 to 75.91. It was the largest one day gain for this index since February 9th, when it jumped 1.8%. That in turn was the biggest one day rally since the month before. On January 20th the Dollar Index jumped 2.4%, so this year there have been three rallies greater than 1.7%.

In 2008 the Dollar Index rallied more than 1.7% four times. Interestingly, looking back to the peak of the Dollar Index in July 2001, the Dollar Index has rallied 1.7% on only two other occasions. So clearly these large one-day rallies are rare, but they are now happening more frequently. Why the greater volatility?

It could be that the dollar is approaching its death throes, and these huge erratic swings are like the wobbles of a spinning top just before running out of energy and toppling over. Given all the ‘hot money’ being moved around the globe at the speed of light, these tidal waves of paper wealth no doubt also move into and out of the dollar. But the occasional bounce does not by itself improve the outlook for the dollar. That would require a change in policy, and there is no indication any corrective change is happening at all. Consequently, we can expect the dollar to remain within the long-term downtrend clearly seen on the following chart.

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By Liam Halligan, The Telegraph

The US government is shouldering a vast $12 trillion debt pile – that’s 12, followed by 12 zeros.

The trade deficit of the world’s biggest economy also remains huge. How much longer can the dollar defy gravity?

Last week, America’s currency fell to a 15-month low against the euro, cutting through $1.5050. Against a trade-weighted currency basket, the dollar was also at its weakest since July 2008. The greenback plunged to parity with the rock-solid Swiss franc, then hit a 14-year low against the yen.

The dollar’s weakness is based on fundamentals — not least America’s jaw-dropping debt. It’s a long-term trend. From the start of 2002 until the middle of last year, the dollar lost 30pc on a trade-weighted basis.

It was during the summer and autumn of 2008, though, that the sub-prime debacle entered its most vicious phase (so far). The rescue of Fannie Mae and Freddie Mac, America’s quasi-state mortgage-lenders, followed by the Lehman collapse, sent shock waves around the world. For six months or so, Western investors piled into what they knew, liquidating complex positions and buying plain dollars. The greenback became stronger, spiralling upward during the so-called “safe haven rally.”

All that has now changed. The trade-weighted dollar has lost 22 percent since March. One reason is that, since the spring, the Federal Reserve has been printing money like crazy — both to bail out Wall Street and service America’s rapidly growing debt.

Sophisticated investors have also been exploiting America’s ultra-low 0.25 percent interest rate to borrow cheaply in dollars, switch these borrowings in currencies where returns are higher, then pocket the difference. This so-called “carry trade” has flooded foreign exchange markets with US currency.

The dollar fell particularly sharply last week, though, as traders were reminded of the patently obvious — that the White House actually wants the dollar to fall. US Treasury officials have lately taken to staring into the TV cameras, puffing out their chests, then stating: “We are committed to a strong dollar.” That’s nonsense, of course, because a weaker currency boosts US exports and lowers the value of America’s external debt.

When the minutes of the Fed’s latest policy meeting were published on Tuesday, describing the dollar’s decline as “orderly,” the markets rightly took that as confirmation of America’s “benign neglect” approach — with intervention to support the dollar unlikely. The minutes also showed the Fed’s key committee members voted “unanimously” to keep interest rates at rock-bottom for “an extended period” — another reason to sell.

In addition, the Federal Deposit Insurance Corp., the fund that safeguards US bank deposits, warned that the number of “problem” banks grew in the third quarter, leading to speculation it could seek a credit line from the US Treasury. That would mean more borrowing and money-printing, concerns which sent the dollar even lower.

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By Andrew Torchia, Reuters

LONDON — The U.S. dollar may come under renewed pressure from emerging market currencies and the euro after a meeting of the world’s top finance officials failed to take concrete action on rebalancing global money flows.

Finance ministers and central bank governors of the Group of 20 major countries, meeting in Scotland at the weekend, launched a “framework” in which they will discuss how to reduce trade and savings imbalances between nations.

But their communique talked only in general terms about rebalancing economies, and implied they might not agree on specific policies for individual countries to adopt before the end of next year at the earliest.

The result may be a continuation of heavy fund flows into emerging markets, boosting currencies there. And central banks intervening to slow currency appreciation may keep investing much of the money they obtain in the euro, pushing up that currency too.

“We’re probably looking at fresh dollar weakness in the short term” in the wake of the G20 meeting, said Kenneth Broux, senior markets economist at Lloyds TSB.

At the center of the currency issue is China’s reluctance to permit appreciation of its tightly controlled yuan, which it has kept flat against the dollar since mid-2008.

That has prompted additional fund flows into emerging market currencies that do trade freely, such as the Brazilian real, which has soared over 30 percent this year. Last month Brazil slapped a 2 percent tax on foreign investments in fixed income and stocks in an effort to slow the real’s rise.

Last week Brazilian officials said they would discuss this problem at the G20 meeting. But the G20 communique made no reference to the issue, and Brazil appeared to get little sympathy from a senior official of the International Monetary Fund, which is a key player in the global rebalancing campaign.

Youssef Boutros-Ghali, who chairs the International Monetary and Financial Committee, the IMF’s policy steering committee, told Reuters that Brazil’s tax was unlikely to work and that “we should not be fixated on currencies.”

Officials from several countries, including Brazil, Japan, and Indonesia, urged China on the sidelines of the meeting to let the yuan move more flexibly.

But as a group, the G20 did not press China on the sensitive issue, G20 sources said. British finance minister Alistair Darling told reporters: “We didn’t discuss the renminbi. I think that’s a question for China rather than us.”

In fact, China appeared in a combative mood. Finance Minister Xie Xuren and central bank governor Zhou Xiaochuan, speaking to the official Xinhua news agency after the meeting, made no mention of the yuan and instead warned developed countries to focus on the quality of their own policies.

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By Axel G. Merk, GoldSeek

Who cares about the dollar? It turns out quite a few do, except for those who could put it on a course to long-term recovery. First of all, you should care, as the purchasing power of your dollar savings is at risk when the dollar plunges versus other currencies. Let’s examine a couple of groups, what they have at stake and how influential they may be.

Those who care
Savers. That may well be you and me. Though we hear praise about the “recovery” in the equity markets, the dollar index is down more over the past year than the Dow Jones is up. That’s not a recovery, that’s an illusion. Oil is trading at around $80 a barrel – that’s not a reflection of economic strength, it’s a reflection of dollar weakness – and we have to pay for it, at the pump.

India. Why India? Because actions speak louder than words. While numerous governments have discussed diversifying out of the dollar, India has put its money where its mouth is – buying gold, the ultimate hard currency. India’s finance minister exchanged US$6.7 billion with 200 tons of gold (a lot! – about 8% of global gold production) because, in the finance minister’s words, “Europe collapsed and North America collapsed.” You can’t get much clearer than that. The gold India bought came from the International Monetary Fund (IMF) which recently authorized the sale of 400 tons. China had been rumored to be the likely buyer, but wanted to absorb the gold at a discount. The fact that India stepped up to the plate and swooped up half the amount within just a few weeks at market rates shows the very real interest some central banks have in diversifying out of the U.S. dollar.

China. While China has not (yet) purchased IMF gold, China has been increasing its gold reserves, while deploying more of its newly acquired reserves in euro and yen. China is very sensitive to not rocking the markets; as a result, Chinahas increased its gold reserves mostly by buying up domestic production as large-scale open market purchases may cause gold prices to spike. However, because the gold market is much smaller than the currency market, China’s gold reserves as a percentage of total reserves has actually been going down. Chinacontinues to be a contender for the remaining gold the IMF considers selling.

The reason China is concerned about the U.S. dollar is simple: in their own assessment, they may hold too much of the greenback. Why? Because Chinahas on the one hand tried to keep a quasi-currency peg versus the U.S. dollar: when China exports goods, they receive dollars; to keep their own currency from rising, they keep the dollars rather than sell them to buy Chinese yuan. And, on the other hand, China has been hamstrung by the lack of liquidity, not just in the gold market, but also in the money markets outside of the U.S. dollar. While the currency market is the most liquid in the world (more liquid than the equity or bond markets), the U.S. continues to be the place of choice to deploy large amounts of cash. The eurozone’s liquidity is a distant second; and indeed, the eurozone is a primary beneficiary of China’s diversification strategy into a basket of currencies. The Chinese, too, have moved from talk to action; aside from the euro, the Japanese yen has been another beneficiary ofChina’s managed basket approach to its reserves.

Soon, China may no longer be able to prop up the dollar; it’s not so much that its massive reserves are beyond the point most would have dreamed possible, but their domestic money supply has been going through the roof as a result of a successful domestic stimulus package and the implicit stimulus created by subsidizing exports through a weak currency; the resulting inflationary pressures may be best tamed by allowing the yuan to float higher.

Europeans. Europeans care about the strong dollar. While European firms have extensive experience with volatile exchange rates and have learned to hedge their currency exposure, the strong euro is hindering a recovery – especially inGermany, an economy heavily dependent on exports. However, Europeans remember hyperinflation and stoically resist the temptations U.S. policy makers have fallen victim to. The European Central Bank (ECB) is foremost critical of exchange rate volatility while giving thinly veiled criticisms of U.S. policies, urging the U.S. to – and that is our interpretation – return to a path of sound monetary policy. While the ECB would not outright criticize U.S. policies, the ECB openly talks about how its support programs are inherently more flexible; the ECB also urges the U.S. to pursue a strong dollar policy.

In the U.S., the federal government can launch a trillion dollar stimulus package; similarly, the Treasury can inject hundreds of billions into ailing banks. Not so in Europe: fiscal stimuli have to come from regional governments; the same with bank bailouts: the money comes from regional pockets. As a result, the Eurozone cannot ramp up spending as quickly as the U.S. Similarly, in our assessment, the ECB’s support programs to the markets carry fewer inflationary risks than those of the Fed; the ECB programs keep banks alive (by providing liquidity on an unlimited basis), although they are slower to recapitalize. As a result, we may see lackluster growth, if any, in Europe, but it may well be with the backdrop of a much stronger currency. It’s a fallacy to assume that one always needs economic growth to support a strong currency – that’s only the case when financing from abroad is required to support a current account deficit.

Corporate America. We are told a weak dollar is good for exports and, thus, corporate America favors a weaker dollar. Not exactly. No country has ever depreciated itself into prosperity and corporate America is well aware of that: it is highly unlikely that the U.S. will thrive exporting sneakers to Vietnam. A weaker dollar may indeed help out corporate America for the next quarter’s earnings in making foreign income look more attractive. However, with a weaker currency, corporations lack an important incentive to invest in quality. The Europeans have long learned that they cannot compete on price, but must produce value added products such as luxury cars or complex machinery; incidentally, producers and service providers at the higher end of the value chain have more pricing power. China’s industry has also recognized this, allowing its low-end industries (e.g. toy industry) to fail and move to lower cost countries.

Corporations that have their share prices valued in a strong currency may go on an acquisition spree; those that are based in countries with weak currencies get acquired (e.g. Cadbury, the British chocolate maker, is under siege because the British Pound is even weaker than the U.S. dollar). But possibly most telling is the sad fact that an increasing number of U.S. corporations are looking for ways to hedge their domestic currency risk. That’s something traditionally reserved for corporations in developing countries.

Those who seem not to care
Your elected official. A weak dollar is really in no one’s interest. The reason why the U.S. dollar has gained reserve currency status is because the U.S., over many decades, has pursued reasonably sound policies. But such privilege must not be taken for granted; at some point, policy makers may be getting more than they are bargaining for; at that point, it may be very costly to try to stem a disorderly decline of the dollar.

Policy makers in the U.S. only peripherally care about the dollar: up-and-down moves in the dollar are a side effect of their policy agendas. For many policy makers, that may simply be a reflection of their lack of understanding of basic economic principles. But for others, such Federal Reserve (Fed) Chairman Bernanke, it’s more than that. Having worked to prevent a financial meltdown, Bernanke wants to jump-start the economy. He has testified in Congress that during the Great Depression, moving away from the gold standard was the way to do it: you “allow the price level to rise.” In our assessment, the dollar is a means, not an end for Bernanke. That’s little consolation for savers whose purchasing power may be destroyed in the process. Think about it this way: when someone takes away half of your purchasing power, you have a greater incentive to work – top line economic growth may go up. Bernanke’s policies are squarely designed at pushing home prices higher, which may be an effective way to bail out those who are ‘underwater’ in their mortgages. To achieve this goal, low interest rates are being touted; but the way low interest rates are achieve, through the purchases of mortgage backed securities (MBS) and government bonds, these securities are now intentionally overpriced. As a result, rational investors – both domestic and foreign – may be looking overseas for securities with a less manipulated risk/return profile. A weaker dollar may also prove inflationary as the cost of imports may rise. Bernanke seems not to be concerned as he has stated that, historically, a weaker dollar has not necessarily been inflationary. Here, we strongly disagree: in the spring of 2008, import prices soared as Asian producers could no longer absorb the higher cost of doing business with the U.S. – it wasn’t simply the high price of oil, but global inflationary pressures that could no longer be contained; the credit bust “saved” the world at the time from what may have been inflationary nightmare. And guess what: Asian exporters had pricing power and were able to raise prices.

Inflation, of course, may also drive up home prices; although it is difficult to direct where inflation may show its ugly head. Many policy makers believe we cannot have inflation when there is no wage pressure. But that’s wrong: think of a room with 10 people, 8 poor and 2 rich; the 2 rich people can drive up prices even if the other 8 cannot afford the item. The wealth gap in the U.S. has been widening – in our assessment as a result of too loose a monetary policy allowing those who understand credit to move ahead whereas many more fall through the cracks; look at Latin America – the type of society our policies drives us towards – to see that inflation is possible even when a great part of the population earns low wages.

But it’s not just Fed officials that have a “neglect” of the dollar. When Congress spends too much money, it’s a negative for the dollar – again, the focus may not be the dollar, but it’s the valve of excessive policies. Or think of entitlement programs: in the absence of reform, an erosion in purchasing power (through a weaker dollar and inflation – especially inflation that is not fully reflected in government inflation statistics) appears to be the politically most convenient solution to nominally deliver on promises, even though in real terms, less is delivered.

Worst for the dollar may be when trade disputes flare up. One great feature of the U.S. economy is that it is flexible. Over the years, the economy has shifted towards one that is focused on trade. When protectionist sentiment flares up, those who have learned to adjust are the ones who get punished the most. That’s part of the reason why the dollar tends to take a nosedive when politicians heat up their rhetoric on trade issues.

What To Do?
The world is what it is. There are different ways to address what we believe may be a continued threat to the dollar.

Warren Buffett. As one of the more famous dollar bears, Warren Buffett, has in the past exclusively bet against the dollar; more recently, he has emphasized that he would not bet against America. That may well be, but his Berkshire Hathaway is selling dollars to engage in his largest purchase yet: Buffett believes an additional $26 billion investment in railroads is preferable to holding U.S. dollar cash.

Read more….

GDP: Great Day to Play

Good Day,

Friday’s market sessions in precious metals started off on a tamer note, following the best gains in gold in three weeks. Explanations follow. The recapture of the $1045 area is noteworthy, although analysts we polled during the wee hours overseas are trying to define the move as everything from a ‘one-hit wonder’ to the ‘re-ignition of what we saw during most of October.’

The Bloomberg weekly survey foresees weaker gold prices come next week - not by a large margin (57% bearish)- but still focusing on a potential comeback by the US currency, the early signs of which became visible this past Monday. Demand for the yellow metal once again slipped away in India, following signs of life during the earlier part of the week when values came close to $1025 per ounce. The country recorded its sixth straight month of declining gold imports, despite a decent gain during September – in anticipation of festival-related sales.

New York spot dealings opened with a $2.60 loss in gold bullion, which was quoted at $1043.20 bid, as against a euro-dollar seen at $1.4798 and the USD index steady-to-higher, at 76.05, with little in the way of fresh news thus far this morning. Oil prices gave back about 50 cents of their whopper-sized Thursday gains, slipping to $79.32 per barrel. Risk traders took a latte break this morning, and this gave the dollar a moment to try to re-group.

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Read the rest of Gold, Silver, Metal Prices: Commentary – 10/30/2009 (2,324 words)

President Obama on Thursday signed the Girl Scout Commemorative Coin Act into law, authorizing the Untied States Mint to strike up to 350,000 silver dollar coins to honor the 100th anniversary of the establishment of the Girl Scouts of the United States of America (GSUSA).

The coins will be minted and sold in 2013, marking the end of Girl Scouts’ yearlong centennial celebration and kicking off a new century of leadership and service to girls.

The bill, H.R. 621, was introduced by Rep. Jack Kingston and easily passed by a voice vote on Oct. 13. Sen. Susan Collins sponsored a companion bill, S. 451. Instead of moving that forward, the Senate simply passed the House version on Oct. 19 by Unanimous Consent.

President Obama signed the bill at 3:15 p.m. ET during a ceremony at the White House that included Connie L. Lindsey, GSUSA National Board Chair, Laurie Westley, Senior Vice President, Public Policy, Advocacy & the Research Institute, and girls from the Girl Scout Council of the Nation’s Capital.

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Read the rest of Girl Scout Commemorative Coin Act is Law (313 words)

The World Wide Fund for Nature (WWF) was started nearly 50 years ago in Europe with a mission to conserve nature. Over the years, the organization has grown world-wide and now directs millions of dollars annually toward nature preservation.

To help draw attention to the work of the WWF, The Royal Mint of the United Kingdom has created the WWF Silver Medal Set. The collection is limited to only 2,000 sets worldwide and comes housed in a beautiful presentation case with an illustrated booklet and a certificate of authenticity.

Each of the six medals features a different species protected by the WWF as well as an extract of a quotation from one of the organizations founders, Max Nicholson:

‘WWF is not just about saving whales and tigers and rainforests,and preventing pollution and waste, but is inescapably concerned with the future conduct, welfare and happiness and indeed survival of mankind on this planet.’

The medals are struck to proof condition from .925 sterling silver with a weight of 28.28 grams and a diameter of 38.45 mm. The Royal Mint Engraving Team designed the collection to showcase the following creatures:

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Read the rest of WWF Silver Medal Set Issued by The Royal Mint (333 words)

© Darrin Lee Unser for Silver Coins Today, 2009. |
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