The foreign exchange reserve diversification bug could soon catch up with US best ally, Japan. Japan, should invest $700 billion of its currency reserves in higher-yielding assets such as stocks and corporate bonds, said Takatoshi Ito, an adviser to the prime minister. Japan is the largest holder of US treasuries. The reserves should be managed by a special fund that will gradually diversify into euros, Australian dollars and emerging market currencies, he said in an interview in Tokyo. Ito said that the Ministry of Finance, which expanded its currency reserves by selling yen in 2003 and 2004, has essentially borrowed the funds from the Japanese people. ``Foreign currency reserves are assets that belong to our citizens,'' Ito said. ``The government has borrowed the money from the people and it is engaged in a kind of carry trade. So it has to show some higher return on the investment.'' This has come as a shot in the arm for US dollar bears and gold and silver bulls. I believe that part of the diversification will into Sovereign Wealth Fund (SWF) and also in precious metals. But do not expect Japan to diversify tomorrow. It will be at a pace slower than snail and will need to overcome huge political bottlenecks to be successful.
The US dollar is already at record lows against the euro, sterling and the loonie Central banks in South Korea, China and Taiwan have announced plans to buy assets with higher returns than U.S. debt.China's planned state investment fund has already agreed to take a stake in U.S. private-equity fund Blackstone Group LP. The US dollars share in global trade in falling slowly and steadily. In India, more and more exporters are switching their receivables from US dollar to Euro and sterling to tide over sharp rupee appreciation. If it’s is happening in India, it must be happening in other emerging markets. Another reason to bullish on gold and bearish on US dollar.
The net receivable value of proceeds from sale of crude oil by Opec and other crude oil producing nations is falling even though crude oil prices are rising. The culprit is the depreciating US dollar. Most of the crude oil is being billed in US dollar. Iraq under Saddam Hussein tried to bill crude oil in other currencies and Mr.Bush attacked his country and hanged him. What will happen to Iran which is trying to do the same thing and how many countries will suffer the Iraq fate. Under Mr.Bush, the anti – American sentiment is at a historical high globally. Mr.Bush has remaining eighteen month as US president, which though is a short time is still a long time to attack any country under some pretext or another. Gold and silver will be the biggest beneficiary due to these uncertainties.
I have a hundred reasons why one should remain invested in gold for the long term. In the short term there will be corrections, technical breakdowns, which will not alter the long term bullish trend. Indians are not investing in gold exchange traded funds (GETF’s) in a big way as stocks are giving them quick returns. They are keeping all eggs in one basket. Only whenthey make losses in stocks that they will realize the need to diversify into GETF.
Copper and other base metals fell on profit taking. Zinc and Nickel once again the biggest losers. Natural gas hit upper circuit in MCX and has bottomed out. Crude oil, markets will be looking forward to the weekly US inventory numbers for direction. Gold and silver, the above reasons are good enough to remain invested.
COPPER – SEPTEMBER
Copper fell on profit taking and failure to break $368 will result in retest of $351.40 and $346.30. A consolidated break of $368 will result in $373.10 and $377.25.
NYMEX CRUDE OIL -- JULY FUTURE
Crude oil needs to break $73.48 for $75.69 and $77.55. On the lower side $72.27 is the initial support with $70.35 and $69.70 as the key supports.
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