Gold Forecaster
- Global Watch
More Central Banks diversify
away from the $ -
forex crises to follow
Julian D.W.
Phillips
Gold Forecaster snippet
Mar 5, 2007
- Below is a snippet from the
latest weekly issue from www.GoldForecaster.com
For years now we have warned
of tsunami like capital waves crossing the globe bringing financial
drama with it. We have pointed to the structural problems that
could give rise to the damage these waves will cause. We have
warned of the Central Bank's moves away from the U.S.$. We have
also warned of the damage the Trade deficit is doing to the U.S.
We have also warned of global foreign exchange and rates crises.
We coined the expression "Live now, Pay later" syndrome
that has been all-pervasive in the U.S.A. Add this to the "so
far, so good" attitude and what happened this week in global
markets has been long overdue. It signals that globalization
and the free flow of capital across this globe of managed foreign
exchange rates, plus the interdependency of global economies
will undermine all paper currencies to some extent. This
week saw that begin. Probably a group of global funds
thought the time was ripe in many markets to rattle some cages
and down the markets went. That they should have this ability
and power is the frightening thing and the situation can only
worsen as other speculators and fund powerhouses get the scent
of this action.
Many have touted a collapse
in the $, but we say that this is not a necessity for a rise
in the gold and silver prices to take place. A drop in the level
of confidence in the U.S. unit is all that is necessary. Well
we are seeing that in the globe's foremost of financial institutions,
the Central Banks as of now. Whither they go, go us.
Central banks are, across a
broad front, increasingly diversifying their reserves, including
cutting holdings of the U.S. $. Italy, Russia, Sweden and Switzerland
have made "major adjustments" in foreign-exchange holdings
favoring the € and the Pound Sterling between September
and December 2006. Central banks are open to saying they've been
diversifying to improve returns and reduce exposure to any single
currency, which means, selling the $.
And the U.S. is not helping
itself either because last month saw the Capital account fail
to support the Trade deficit in January. If this continues, that
alone could drop the $ like a stone. After all, the U.S. has
become utterly dependent on the Capital account to fund the Trade
deficit as it reaches new record levels every year.
The $ accounted for 65.6% of
the world's currency reserves in the third quarter of 2006, down
from a peak of 76%, according to the International Monetary Fund.
Two Central Bank surveys were
done recently looking at the extent of $ diversification, here
are the conclusions of one [very similar to the other]:
Central Banking
Survey.
- The respondents in this confidential
survey don't include the People's Bank of China or the Bank
of Japan, which together hold the world's largest foreign
exchange reserves [they account for 30% of total reserves held
worldwide, or $1.5 trillion].
a
- Of the 47 central banks that
responded by December to the survey, 21 of them, managing reserves
of $630 billion, said they had increased the share of their reserves
held in the €, and 15 of those said they had done so at
the expense of the $.
a
- The survey showed that seven
central banks said they had cut the share of reserves held in
the €.
a
- Nineteen central banks said
they had cut the share of reserves held in the U.S.$, while only
10 had increased the share of reserves held in the $. Only five
of the latter group, with reserves totaling $70 billion, said
they had done so at the expense of the €.
a
- Nine central banks raised
the pound's allocation, while four cut its share of reserves.
a
- Four central banks reported
cutting their allocations of the Swiss franc, and none reported
increasing its share.
a
- Six central banks said they
had raised their yen allocations, while four cut their allocations
to the Japanese currency.
The shift into the €
on the scale suggested by the survey would still leave the $
as the dominant reserve currency by a large margin. The International
Monetary Fund has said that in the third quarter of 2006 the
$ accounted for 66% of foreign currency reserves, while the €,
accounted for 25%. In the second quarter, the $ accounted for
65% of reserves, and the € 25.5%. [This is a small change
in terms of the risks to the $.]
- Central banks are still investing
in riskier assets as they chase greater returns on yields. 69%
said they were looking for more yield, having been forced to
widen their asset range by a low-yielding environment. More than
half of the respondents said there is scope for central banks
to diversify beyond traditional assets into equities, and around
a third said banks should invest in commodities.
a
- After a long decline as a
reserve asset, the survey indicated that gold may be about to
make a comeback. Some 63% of central banks said gold had become
more attractive following recent price rises and an increase
in market liquidity. But gold's role as a safe haven in the
wake of natural or man-made disasters is also part of its attraction
for central bankers.
Please note that not one of
these banks have stated they no longer want to hold the U.S.$,
because of the risks to its value. We do not believe this is
their major consideration. Why, because all currencies are interdependent
and one currency cannot divorce itself from another, so long
as the pattern of international trade is as it is. They are fused
together. Ideally they only have to target inflation to maintain
price stability. Exchange rates are not an issue in the main
global blocs, such as the U.S. in the eyes of the Central Banks.
Ideally they would want fixed exchange rates to stabilize global
trade.
Alas, the Central Banks have
no option but to switch to other currencies to improve their
reserves, because of the sheer volume of their holdings of the
$. Gold or silver or other commodities just could not accommodate
their demand, unless the metal prices had an additional nought
at least, on the end of them. [Huge stockpiles of oil could be
a way to go, but storage facilities have to be built to accommodate
this.]
But with such diversification
added to the efforts of China in moving away from the $, the
present levels of exchange rate values will just not hold in
a $ crisis and it is naïve to think they will. But then
again where else can they go? It is only fair to say that Central
Bankers ignore exchange rate moves in their decision-making regarding
currency holdings. Yes, they differentiate between 'soft' and
'hard' currencies, but yield has to be the main criteria.
So the vulnerability of the
$ grows by the day.
The bottom line is this,
there is no true haven from the $ in other currencies. In a crisis
they will try to cling to each other, with some being forced
to lower or raise their exchange rates with important trading
partners. But essentially they are all in the same boat together.
But where a national economy's
health is dictated by exports, Central Bank will intervene to
ensure trade competitiveness is ensured [e.g. Japan or India].
As we watch many Central Banks intervene in their exchange rates
in this way in the future, we will see many currencies falling
with the $ encouraging capital flows to grow even larger
as they used to in the days of fixed rates in the foreign exchanges.
As we point out weekly, currencies relate to one of the main
three trading blocs of the world and attempt to keep their exchange
rate in line with that one. For instance South Africa's main
trading partner is Europe, Australia's is China, hence the exchange
rates moves we are seeing now. So the world's most important
exchange rate is the $:€.
So Central Banks want stable
exchange rates and do intervene. This is like a red rag to a
bull to speculators. With Central Banks holding together the
foreign exchanges of the world, Capital flows will find little
to prevent them from going where they want to. Another feature
of global markets that we have been highlighting is the concept
of, "He who sows the wind reaps the whirlwind." As
Central Banks try to hold the system of exchange rates together
with as little rupture as possible [as we have seen in the last
few years], so they will fall foul of the Capital flows flooding
across borders to greener pastures, pressing Central Banks as
in the past, but with greater power than ever before.
We have heard it said that
switching out of major currency holdings is easy, for Central
Banks, they just enter the foreign exchange markets and sell
what they receive. To say that is naïve, because like any
market, if supply is heavier than demand, prices will fall. With
so many diversifying from the $, the growing overhang is finding
nowhere to go, except home. The continuous outflow of the $ is
gradually oversupplying an unwilling market. It takes little
to understand the interest rates alongside the $ exchange rate
has to go down, not in a controllable way, but in the face of
a future tide of U.S. $'s coming home. We have in the past mentioned
Capital Controls are a possibility at some stage in the States,
to hold back this flood from damaging the internal economy through
inflation, against a backdrop of deflation in many areas of the
economy [but not all].
But a consequential collateral
damage will be to the nations holding onto their exchange rates
with the $. They will have to revalue, or let their exchange
rates rise, if their economies are dependent on the U.S. This
will weaken them internationally. Those dependent on the Eurozone
or on Asia for their international trade will however, rise out
the $ storm.
But, 'hot money' now called
the 'carry trade' will look, along with the hedge funds and the
newly born George Soros', will be there to push exchange rates
the way they should go and maximize their impact and profit from
any resistance in their way. The result will be to drive all
types of solid Investors to safe havens, including gold silver
and whatever else holds value in these days.
The development of the Internet,
the knowledge revolution, as well as other aspects of the information
and communication revolutions will add "moments of force"
[weight added to momentum] to the capital flows that will shake
weakened economies, prompting protective action like exchange
controls or Capital controls from wreaking havoc with these Central
Banks. The memory of George Soros, breaking the Bank of England
and making one billion pounds profit overnight, is well remembered
amongst Central Banks.
At Gold & Silver
Forecaster we expect the world's currency system to move
closer to a series of major crises, quicker than before and accelerating
as it goes. We will continue to focus on the external developments
that influence gold and silver prices as well as the simple gold
and silver market factors. We see investment demand growing as
a price influence as we progress down this road. We are led to
believe that we are the only such letter with this perspective
and who cover the monetary aspect in this way. Therefore we have
to emphasize that it is this influence on gold that will drive
the gold and silver prices to new heights, as investment demand
grows. Keep in touch with us closely, so we can help you really
benefit from these markets. We are a "must have"
newsletter alongside others.
Last week's global markets
pullback was merely a taste of what is to come. The flow of money
was not just market driven, it was driven by funds large enough
to rock global markets. And let's be clear about one fact in
these markets, it does not take a collapse of the $ or any other
currency to make gold and silver an attractive investment, just
the fear of one. This fear and uncertainty will grow in the
months and years to come making the flow of investment funds
into gold a steady feature until its price will inspire confidence
and consequently the currency of the holders.
Please subscribe to www.GoldForecaster.com
for the entire report.
Mar 2, 2007
-Julian
D.W. Phillips
email: gold-authenticmoney@iafrica.com
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