Even the most avid gold bugs, who've been stockpiling vast quantities of the
barbaric metal for decades, and endured their fair share of panic shakeouts,
were probably in a surreal state of "shock and awe," while watching the price
of the yellow metal soar to within 1% of the psychological $2,000 /oz level
this week. It's as if somebody launched a rocket on the Fourth of July. Since
then, the price of gold has soared $400 /oz, zooming higher in a parabolic
pattern. After all the bullish chatter on the blogosphere over the past decade,
Gold, - the so-called barbaric metal, has triumphed over the stock peddlers
on Wall Street.
Undoubtedly, there will always be snake oil salesmen, - who will tout blue-chip
stocks as an effective hedge against currency debasement, and a hedge against
inflation. Money managers, whose livelihood depends upon selling equities have
been taken aback by Gold's historic surge, and are at a loss to explain to
their clients, why they missed the move. "Gold doesn't have any intrinsic value," a
bewildered money manger declared. "Investing in gold is irrational because,
compared to buying a blue-chip stock whose value rises and falls based on what
the company produces, and the profit that it earns," the equity salesmen says.
Thus, for all the talk of the Gold market being in some type of speculative
bubble, that could burst at a moment's notice, a contrary argument points to
the fact that vast legions of money managers, have yet to participate in Gold's
long-term secular bull market. Furthermore, there seems to be a misunderstanding
about what drives the value of Gold, which essentially is the reciprocal of
the public's trust in the world's central banks, and their paymasters, - the
corrupt and inept politicians, who drive their economies deeper into debt.
Undoubtedly, the skeptics who find comfort in holding paper currency will
soon be writing articles in the media, warning that Gold's latest upward explosion
of $400 /oz in just seven weeks, to $1,900 /oz has all the characteristics
of a classic bubble that's bound to burst. Late comers to the game would be
left holding a bag of "Fool's Gold," and could suffer big losses if purchases
are made now, and losses that might never be recouped, - the skeptics say.
Yet the most recent buyers might not be small retail investors, but rather
the powerful Asian central banks, that control more than $5.5-trillion of foreign
currency reserves. They might be shifting their portfolio holdings, from troublesome
Euros and US-dollars, and into Gold.
On July 28th, Xia Bin, an adviser to the People's Bank of China (PBoC) said Beijing
should speed up reserve diversification away from US-dollars to hedge against
risks of the US currency's long-term decline. Chinese officials have
long pledged to broaden the mix of the country's $3.2-trillion currency stash
-- as much as 70% of which are now in US- dollar assets, but the process
has been gradual. "We will continue to diversify the asset allocation of
our reserve assets and continue to optimize the holdings based on market
conditions," China's Administration of Foreign Exchange said on July 28th.
What many reporters in the Western media, and what many money managers on
Wall Street, who are wedded to equities fail to realize, is that 57% of the
Gold that was sold by miners in the first quarter of 2011, was shipped to anxious
buyers in China and India. Asian giants India and China are the world's two
biggest buyers of the precious metal, because paper money is increasingly worthless
in economies where there is runaway inflation.India imported 959-tons of gold
in 2010, up +72% from a year earlier, while India's wholesale price index is
+9.5% higher than a year ago. China's gold demand is on pace to increase by
+20% this year to around 700-tons, from 570-tons in 2010.
China's M2 money supply has increased +70% over the past three-years, expanding
at an annualized +23%, far exceeding the +9.5% annual growth rate of the Chinese
economy. Consumer inflation is reportedly +6.5% higher from a year ago, but
China's citizens say the true rate of inflation is higher than what the government
is reporting. Beijing has lifted the 1-year bank deposit rate 125-basis points
higher to 3.50%, but that's still -3% less than the so-called official inflation
rate of +6.5%. Therefore, the frenzy for gold has prompted the Chinese central
bank to step up sales of gold Panda Coins,to 500,000 1-ounce gold coins, or
+66% more than its earlier target of 300,000. It also tripled sales targets
for half-ounce, quarter-ounce, 1/10-ounce and 1/20-ounce gold coins to 600,000
each from 200,000 earlier.
Since the near collapse of the Western banking system in 2008, the basic underpinning
of the floating currency rate system has been under severe stress, and is still
in danger of breaking down. Traders no longer trust central banks to keep their
money printing operations running at a slow speed, that's basically in line
with the underlying growth rates of their economies. Instead, central banks
in England, Japan, and the US are all heavily addicted to nuclear QE, and the
European Central Bank has also joined the club, by agreeing to monetize the
debts of five Euro-zone countries, - Greece, Ireland, Italy, Portugal, and
Spain.
Since the Federal Reserve began to telegraph QE-2 a year ago, the US's MZM
money supply has increased by roughly $1-trillion, buoying the price of Gold.
In turn, many central banks in other countries that peg their currencies to
the US-dollar were forced to expand their money supplies, in order to keep
their currency exchange rate on an even keel with the massively inflated US-dollar.
Although the Fed was trying direct most of the high powered money into the
US-stock markets, much of it flowed into Gold, Silver, copper, soybeans, corn,
rubber, iron-ore, and North Sea Brent crude oil, which is trading around $110
/barrel today.
Swiss National Bank Injects 170-Billion Swiss francs into markets
The Swiss franc soared to a once unthinkable $1.40 versus the US-dollar, as
traders clamored for a currency that was untainted by the stench of QE. Yet
the soaring franc threatens to cause enormous damage to the Swiss economy,
which is mostly export oriented, especially sales to the Euro-zone. Upon reaching
near parity with the Euro, the Swiss National Bank (SNB) felt compelled to
set an upper limit on the value of the franc, and injected an extra 170-billion
Swiss francs into the Swiss banking network, thus diluting the value of the
franc in relation to other paper currencies, and especially against the price
of Gold.
Traders soon found out that trying to find the ultimate safe haven from abusive
central bankers is not to be found by hoarding any type of paper currency,
no matter how sterling its long-term reputation. After the SNB unleash its
plan to dilute the value of the Swiss franc, its currency fell by roughly -10%
against the Euro and US-dollar within a matter of a few days. As long as central
banks can print endless amounts of paper currency, it can always enforce a
ceiling for its currency. The risk of doing so however, is flooding the local
economy with a tsunami of paper confetti that could threaten to ignite a new
wave of inflation, and in turn, zaps the disposable income of its citizens,
and lifts the cost of input prices for local producers.
But with the Swiss economy teetering on the precipice of a recession, an outbreak
of inflation is not at the top of the SNB's list of worries. Instead, the Swiss
franc is still perched in a dangerously high territory for the local economy
that can hurt companies in all sectors. Already, Swiss export volumes to the
European Union, its biggest trading partner, dropped by -14.6% in June.According
to a recent study, a 10% appreciation in the franc's trade weighted value,
if sustained, would erode Switzerland's gross domestic product by roughly -3%
after two years.A Swiss Multi-National, with half its earnings in dollars and
half its earnings in Euros would see a -15% drop in earnings linked to the
effects of the stronger currency.
Helping to take the edge off the Swiss franc, the European Central Bank held
an emergency meeting on August 8th, and agreed for the first time to monetize
the debts of Italy and Spain, in its boldest attempt yet to tame the sovereign
debt crisis. Italian and Spanish bond yields plunged as the ECB entered the
market, sending their yields down -1% within a matter of days. That helped
to persuade many speculators to lighten-up on the Swiss franc.
Because the ECB will have to spend hundreds of billion of Euros to have an
impact on the Italian and Spanish bond markets,it would amount to a huge swelling
the Euro money supply, or quantitative easing, which in turn, helped to fuel
Gold's rise to record highs of 1,325 Euro /oz this week. To help cement the
Swiss franc's decline versus the US-dollar and Euro, the SNB said on August
17th, it would inject an extra 80-billion francs into the local banking system,
leaving flush with 200-billion francs of excess liquidity.
The creditworthiness of European banks is still a major concern because of
their heavy exposure to debt in countries such as Spain, Greece and Italy,
which are struggling to double digit jobless rates, and buried in economic
stagnation. German chancellor Angela Merkel and France's president Nicolas
Sarkozy met in Paris on August 16th, but failed to calm the latest bout of
market anxiety. Global equity traders are watching the share prices of European
bank stocks slide to their lowest levels since March 2009, and are becoming
increasingly alarmed that the Euro-zone crisis could trigger another credit
squeeze.
In particular, traders are worried about the exposure of French banks to Greek,
Italian, and Spanish debt. French banks own €410-billion of Italian debt,
making them the most exposed banks in Europe to the debt crisis in southern
Europe. With French banks alone holding more of their debts than the entire €440-billion
European Financial Stabilization Fund (EFSF) originally designed to bailout
Greece, Ireland, and Portugal, a default by either Italy or Spain would likely
bankrupt the French financial system. Under these conditions, French financiers
and politicians are insisting that the ECB print Euros to buy Italian and Spanish
bonds.
The Euro-Stoxx Banking index has tumbled by -38% in the past six months,led
byBritain's Barclays, Germany's Commerzbank, and the top French banks. Overall,
the Euro-Stoxx banking Index is -75% below its peak value in 2007. Société Générale's
share price has lost -45% over the past 2-½ -weeks, BNP's share price
has plunged -29%, and Credit Agricole has lost -38-percent. Seeking a safe
haven from the perceived risk of Euro-zone banks, many Europeans investors
are plowing their safe money into both German Bunds and Gold. In a virtuous
cycle, as the German Bund's yield drops further below the Euro-zone's inflation
rate, it makes Gold an increasingly more attractive alternative.
Over the past seven weeks, the price of Gold has also been tracking the cost
of insuring the subordinated debt of perceived risky banks, such as Société Générale.
The cost of credit default swaps (CDS) to insure €10-billion of SocGen's
debt for the next two-years has soared to €540,000. At the same time,
the value of SocGen's shares has shrunk from €110-billion in April 2007
to just €17.2-billion today, placing it behind companies like cosmetics
maker L'Oreal and dairy producer Danone.
And it's not just the European banks that are in trouble. The cost of insuring
Bank of America's subordinated debt against the odds of default, an indicator
of potential trouble, rose to $436,000. BofA's shares fell to as low as $6
/share on August 23rd, it's lowest since March 2009. More than $32-billion
of the company's market value has been wiped out since August 3rd. President
Barack Obama has never understood that there can be no US-recovery until housing
prices stabilize. Printing more money will not help when 3.5-million foreclosures
are stacked in the pipeline, and continue to depress house prices and create
more bad debts. In turn, consumer confidence has plunged to its lowest since
the Great Depression.
Tokyo Prepares major Money Printing Operation
In Tokyo, Japan's Finance chief Yoshihiko Noda is threatening to take decisive
action if needed in foreign-exchange markets, with the US-dollar pinned at ¥76.50,
a record post-World War II low, where Japan's financial warlords have drawn
a line in the sand. "I have become more concerned about the worsening of the
yen's one-sided movements. I will take bold actions if necessary and won't
rule out any possible options," Noda said. However, massive intervention has
failed to turn the tide against the beleaguered US-dollar, which is hanging
on a thread.
On August 5th, the Bank of Japan injected about ¥4.5-trillion, into the
foreign exchange market, its largest intervention operation on record, which
for just a brief moment, lifted the US-dollar ¥2.5 higher to above ¥80.
However, four days later, the US-dollar tumbled to ¥76.50, after the Fed
pledged to keep the federal funds rate locked near zero-percent for the next
two years. As a result, the yield on the US Treasury's 2-year note fell to
a record low of +4-basis points above Japanese 2-year yield, weakening the
value of the US-dollar.
Ironically, foreign investors bought a record ¥3-trillion of Japanese
short-term bills, during the week ending August 16th, negating 2/3's of the
BoJ's intervention, while their net selling in Japanese equities hit the highest
in more than a year. Japan's economy is buried deep in a recession, contracting
for a third straight quarter, at an annualized -1.3% rate. To offset lackluster
demand at home Japanese Multi-Nationals have increasingly relied on exports
to drive growth. But exports dropped -5% during the latest quarter, the sharpest
decline in more than two years, due to a strong yen, and slowing overseas economies.
Another round of QE-3 would be devastating for Japan, and America's #2 financier
will argue strenuously against it at the upcoming festival at Jackson Hole,
Wyoming. "We must steer the economy very carefully, because we still have downside
risks including the problem of the rising yen," Noda warned. With the Fed pegging
the fed funds rate at zero-percent for the next two years, the BoJ would probably
have to dump ¥25-trillion into the money markets in order to prevent the
US-dollar from falling below 76-yen. Most likely, the intervention won't be
sterilized, and would help to support the price of Tokyo Gold. Japan's ministry
of finance is expected to recycle its intervention stash into US Treasuries,
to help finance America's budget deficit, yet is might start to surprise the
markets, by shifting some funds into Gold.
Is Gold in a Bubble that's Ready to Burst?
Nowadays, there's an overload of information that floods into the marketplace
each day, - via the internet and other news channels, and it's easy to become
distracted. The average memory span of a S&P-500 trader lasts about 24-hours.
Emotions are headline driven, and buying and selling is based on the flavor
of the day, with little long-term conviction about anything. But before listening
to the naysayers that say the Gold market is a bubble that's ready to burst,
- take a quick look back at history.
It was 12-years ago, when the Dow Jones Industrials first crossed the 11,000-level,
roughly where it resides today. During the Dow's "Lost Decade of Growth," its
been trapped within the confines of a secular bear market, - that is to say,
gyrating violently within a sideways trading range, yet ending up, going nowhere.
Twelve-years ago, 1-Dow Industrial share could purchase the equivalent of 42-ounces
of Gold. Today, 1-Dow Industrial share can only fetch 5.7-oz's of Gold. When
seen through the prism of Gold, the Dow Jones Industrials have failed to act
as an effective hedge against monetary debasement by the Federal Reserve, contrary
to the traditional sales script on Wall Street.
The historic rise of gold towards $1,900 /oz this month occurred on the 40th
anniversary of President Richard Nixon's decision to end the decades-long fixed
relationship between the value of the US-dollar and the price of gold, - at
$35 /ounce. When Nixon closed the gold window, the US-dollar was essentially
backed by the US Treasury's willingness to defend the purchasing power of the
greenback. Gold began to rise and fall freely, and a system of floating exchange
rates tied to the US-dollar was ushered in, - an arrangement that gave the
US-dollar a privileged position, due to its economic super power status.
Since then, the US-dollar has lost more than 98% of its purchasing power compared
to Gold. Furthermore, global confidence in the US-dollar has progressively
eroded as the US has gone from being the world's biggest creditor nation to
its biggest debtor. The recent downgrading of the US Treasury's debt to A+
by China's rating agency is a watershed event signaling the inexorable decline
of the US-dollar as the world's reserve currency. America's industrial base
has withered away, and the US is now a food stamp nation - with almost 46-million
of its citizens receiving food stamps, equaling 15% of the US-population.
A US-family of four can receive $668 /month for food stamps that cost US-taxpayers
about $68-billion /year. The alternative, without food stamps, would be riots
in the streets across America, similar to what we've seen in Cairo and London
this year. Furthermore, one in four Americans receives a check from the US-government
each month, and half of its citizens pay no federal income tax at all, while
the US's national debt is scheduled to increase by $2-trillion over the next
18-months to $16.3-trillion, equaling about 110% of its GDP.
On August 8th, Beijing has lashed out at the US's "addiction to debt," in
a stinging English-language commentary carried by the official Xinhua news
agency that it had "every right to demand Washington address its structural
debt problems and safeguard China's dollar assets. Washington needs to come
to terms with the painful fact that the good old days when it could just borrow
its way out of messes of its own making are finally gone. To cure its addiction
to debts, the US has to re-establish the common sense principle that one should
live within one's means," Xinhua said. The fear that China might no longer
finance America's burgeoning debt, prompted US vice president Joe Biden to
meet with Chinese leaders this week.
If Beijing balks at financing the US-government's debt, it would put great
pressure on the Fed to begin monetizing more of the US-Treasury's debt, with
several more rounds of QE. "Printing more money to play politics at this particular
time in American history is almost treasonous in my opinion. Because we've
already tried this, and all that it's doing is devaluing the dollar in your
pocket. And we cannot afford that. We have to learn the lessons of the past
three years," said the governor of Texas, Rick Perry on August 16th.
Some traders might view the unleashing of QE-3 as a "Bernanke Put," or the
idea that the Fed will always print more money after a big stock-market decline.On
August 17th, Richard Fisher, the Dallas Fed chief, warned the Fed "should never
enact such asymmetric policies to protect stock market traders and investors.
The policy won't help spur growth," he said. Philadelphia Fed chief Charles
Plosser said unleashing QE-3 after the S&P-500 tumbled -18%, would "signal
that we are in the business of supporting the stock market."
Wall Street money managers are betting that Bernanke begins to print money
again, to help bail them out of risky bets that went sour. Yet if this wish
comes true, it could send the price of North Sea Brent crude oil soaring to
$150 /barrel, which in turn, could push the world economy into a sharp downturn.
In that case, would you rather own Gold or the Dow Jones Industrials? Yet it
might be the case that Gold is technically overbought after a parabolic increase
to $1,900 /oz, and a sizeable pullback would wipe-out the speculative froth.
Long-term Gold bugs have seen that movie before.
Fed chief Bernanke could throw a curve ball, by not hinting at QE-3 at Jackson
Hole, Wyoming, causing a shake-out in Gold, but also knocking the S&P-500
into bear market territory. However, looking at the bigger picture, Asian central
banks are just beginning to swap out of US-dollars and Euros, and shifting
more of their portfolios into Gold. Undoubtedly, the Fed, the Bank of England,
the Bank of Japan, and the ECB, will find ways to keep printing money to monetize
debts of bankrupt governments, and lock short-term interest rates at near zero-percent,
and pegged far below the inflation rate. Thus, Gold is probably still in the
midst of a long-term secular bull markets that can last for several more years.
"You have to choose between trusting the natural stability of Gold and the
honesty and intelligence of members of the government. With due respect for
these gentlemen, I advise you, as long as the capitalist system lasts, to vote
for Gold," George Bernard Shaw, 1928.
This article is just the Tip of the Iceberg of what's
available in the Global Money Trends newsletter. Subscribe to the Global
Money Trends newsletter, for insightful analysis and future predictions
about the (1) top stock markets around the world, (2) Commodities such as crude
oil, Gold, copper and base metals, (3) Foreign currencies, such as the Australian
and Canadian dollars, Brazil real, the Euro and Japanese yen, (4) Central bank
interest rates and global bond markets, (5) Central bank Intervention techniques
(6) and key Credit Default Swap markets.
GMT filters important news and information into (1) bullet-point,
easy to understand reports, (2) featuring "Inter-Market Technical Analysis," with
lots of charts displaying the dynamic inter-relationships between foreign currencies,
commodities, interest rates, and the stock markets from a dozen key countries
around the world, (3) charts of key economic statistics of foreign countries
that move markets.
Subscribers can also listen to bi-weekly Audio Broadcasts,
posted Monday and Wednesday evenings, with the latest news and analysis on
global markets. To order a subscription to Global Money Trends, click
on the hyperlink below,
http://www.sirchartsalot.com/newsletters.php
or call toll free to order, Sunday thru Thursday, 8-am
to 9-pm EST, and on Friday 8-am to 5-pm, at 888-808-7978. Outside the US
call 561-391-8008.