-- Posted Monday, 19 December 2005 | Digg This Article
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1-2. Market Action / Short-term forecasts across the Board!
2-3. Comex positions / Commercial Shorts Reducing on Pullbacks
3-16. Last week’s gold sales under the CBGA / Gold in Foreign Exchange Reserves – Why? The Different Global Reasons! / Indian Demand this week / Takeover time – why? / The Oil Crisis / $ Index – Breakdown / Prospects for the U.S. $ / Shares we follow/ Gold : Oil Ratio/ Dow Jones / Technical Analysis of the Gold Price: Long / Gold price drivers / Short term in the U.S. $ / Treasury Notes / CRB Index / Natural Gas
16 – 33. International Gold Markets / Silver / Platinum/ Silver & Gold Shares
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Gold in Foreign Exchange Reserves – Why? The different global reasons!
It seems opportune to remind Subscribers of the importance of the reason for having gold reserves. We have seen gold rise in all currencies of late, whereas currencies have barely moved against each other.
The current President of the Bundesbank described gold as a “useful counter to the swings of the Dollar”, however it is clear to all nations that gold is a useful counter to the swings of any currency.
· We saw how the drop in the € against the $ spurred buying interest in gold in Europe.
· We saw the falling Yen spurred Japanese Investor interest in Japan.
Clearly there is substantive evidence that Investors globally are becoming increasingly aware of the dangers to all currencies in this increasingly uncertain world. Individuals, as well as others, are looking to diversify, not only out of the $ but out of any currency that looks wobbly.
Despite a certain almost nationalistic belief that the $ is the global currency, within the States, and in the face of a relatively steady $, which is performing well despite awful fundamentals, almost to a man, financial experts are hyper-aware of the likelihood of a finance accident in the future [particularly after seeing the report of the record Trade deficit, again]. Part of the problem is the belief in the $, which is an almost unreasoning one. [see Prospects for the $ below]
So how should and how do Central Bankers look at their gold and foreign exchange reserves and what purpose do they serve? But on what is this view based. Should gold form 15% of reserves, or 5% or 25% or 50%? Below are several views from different nations. But first we see the view of the body who stands as a holder of some of most nations reserves, and as a backer to nations across the globe.
As a prelude to this piece we re-print comments by GFMS which helps to give some perspective on the situation, “The peak in official sector “anti-gold” sentiment has passed, partly as a result of the huge rise in global foreign exchange reserves and the prospect of dollar weakness.”
q At the end of September 1999, when the first Central Bank Gold Agreement was put in place, total foreign exchange reserves were $2,011 billion, of which gold constituted 15%.
q At the end of June 2005, this total had ballooned to $4,335 billion (an average annual growth rate of 17.6%), with gold constituting only 9%.
Within this distribution (gold valued at market prices):
· The USA holds 64% of its reserves (defined as foreign exchange, gold and other reserves) in gold.
· The CBGA signatories 42%.
· Japan, meanwhile, only holds 1% in gold.
· Reported figures for China imply 1%, but if other Chinese non-monetary reserves were included then this would probably amount to 2%.
· Other countries hold 3% of their reserves in gold.
· Among the top ten gold holders, excluding CGBA-1 and CBGA-2 signatories, there is little likelihood of sales and if anything there may be the potential for some purchases.
· Venezuela is a potential buyer
The I.M.F. attitude to its gold reserves
The I.M.F. considers gold as follows: - “It is an undervalued asset held by the IMF, and provides a fundamental strength to its balance sheet. Gold holdings provide the IMF with operational manoeuvrability both as regards the use of its resources and through adding credibility to its precautionary balances. In these respects, the benefits of the I.M.F.'s gold holdings are passed on to the membership at large, to both creditors and debtors. The IMF should continue to hold a relatively large amount of gold among its assets, not only for prudential reasons, but also to meet unforeseen contingencies.”
This gives us the sound reasoning behind holding reserves of gold.
Gold Reserves 15%?
But then we turn to a view of some observers who have pointed to ‘a currently acceptable level of gold at 15% of national reserves’ as a basis for indicating future levels of reserves. This is the current view of the European Central Bank, but not shared by the individual nations who form part of the Eurozone.
When we ask the question, ‘how do you measure that level in the reserves to understand the percentage in the first place’.
Inevitably a U.S. $ value will be used as a measuring line.
For instance, if we take that 15% based on a $300 valuation of gold, then when gold hits $500 this level has increased to 25%. Does that mean the Central Bank should now sell its gold to bring it back down to 15%? Surely not? Surely it is fulfilling the function for which it was chosen, namely to protect against the falling value of the $.
It appears that this percentage is a level established in the days when currencies were strong. If currencies fail to perform the gold price will increase and provide a growing and sufficient basis for a nation to continue to function financially in times when its currency is dubious. Then if gold reserves are rapidly climbing to a much higher percentage they can act as collateral for international financial loans, such as India sought and gained many years ago. So we cannot take the view that gold reserves should be at a certain level without stipulating under what circumstances! Certainly too, we cannot take the view that they should be held at a certain level irrespective of circumstances as that would imply they should be sold as currencies weaken and their proportion of reserves rises! Whilst this is common sense it is usually overlooked.
More for subscribers:
· Gold Reserves in case of financial accidents?
· Reserves to earn a Yield?
· The Asian view of reserves.
· Dominant or subordinate currencies?
Prospects for the U.S. economy & the $.
“Live now pay later”, “so far so good” – worn clichés that are so applicable to the situation the $ finds itself in at present. With the U.S. trade deficit widening unexpectedly in October to a record $68.9 billion despite a drop in the cost of imported oil, as the deficits with China, Canada, the European Union, Mexico and OPEC all hit records. Will fourth-quarter economic growth be even weaker than first thought?
Bear in mind that Europe assisted with oil supplies from strategic reserves, but nevertheless we should remember that a continuation of oil prices at +$60 [the average was $56.29 a barrel] will keep oil imports at record levels. The volume of crude imports surged 9.3%, driving the value to $17.1 billion, the second highest on record. Imports of energy-related petroleum products, a wider category that includes propane and butane, hit a record $26.2 billion. In 2006 we will see a repeat of this type of report!
As to trade with China we also expect more of the same as we see now. A steadily rising trade deficit with China grew 2.1% to a record $20.5 billion as imports from that country rose 4.8% to $24.4 billion. [The increase in the deficit with China came despite a 10.9% drop in textile imports in October. Washington and Beijing reached a deal last month to rein in China's surging clothing and textile exports to the United States through 2008]. Textile imports from China are up 47.6% so far in 2005 compared to 2004.
The inflation beating cheaper imports extended beyond Asia to Canada, Mexico, the European Union and OPEC countries with whom the deficit also widened to record levels.
To date the overall trade deficit reached $598.3 billion. Earlier this year Global Watch – The Gold Forecaster” forecast that the Trade deficit for the year would be $720 billion, a figure ridiculed at the time. But with two more months to go to complete the year, this forecast could be less than the reality?
So where to the $? We continue to expect the Capital account to reflect rising levels of investment in the U.S. $, greater than the Trade deficit, so we do not expect a heavy fall in the $ relative to the Euro.
As we have highlighted in previous issues, the $ has two roles, the internal and the external. It is the external value placed on it in its reserve currency role that is keeping it up its exchange rate value.
Its internal role is heading to heavy-duty inflation. This can continue as we have already seen for some considerable time. It can be bolstered to some extent by rising interest rates [as we saw this week interest rate rises are not lifting the $, but the prospect of these rates rising no more [and the deficit] saw the $ fall]. We do expect the Fed to keep raising rates for as long as the growth in the economy will permit. Many believe the Fed may finally be nearing an end to its campaign of raising interest rates. We see further raise but let’s see!
But of deep significance is the path the two dollars are travelling, one the global currency and one the borrowing to finance the continuing boom. The external Trade deficit joins the internal budget deficit to undermine the credibility of the foreign value of the Dollar.
When the two eventually meet, the fall will be quick and destructive. So our view is that the $ will continue along this road until it falls off a cliff. But so long as the $ can pay bills, buy capital goods, buy oil and hold relatively steady on the foreign exchanges it will be bought and held. The moment its external buying power is seen to totter, as a result if internal profligacy, then the breakdown will be swift!
It is this uncertainty ahead of the fall that is helping to raise gold to new heights.
Dollar Index: Breakdown
Strong support around 90.5 failed with this violation looking to bring the 88 level to return as the next downside target. We see very strong TA support on this pullback at the 87.50-88 area, where from which a bounce will occur. There is growing consensus that the US Dollar could have reached a long-term bear market rally peak at the 92.39 level, which remains upside resistance. With news of record trade deficits, the US Dollar is looking vulnerable to the underlying fiscal structures facing it.
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-- Posted Monday, 19 December 2005 | Digg This Article
