Gold Forecaster
- Global Watch
Investment reasons for
buying gold Part 1
Julian D.W.
Phillips
Gold Forecaster snippet
Oct 26, 2007
Moving away from the
$
1. Vietnam is planning to cut its purchases of US Treasuries
and other dollar bonds, raising fears that Asian central banks
with control over two-thirds of the world's foreign reserves
may soon join the flight from U.S. assets. The State Bank of
Vietnam was abandoning the attempt to hold down the Vietnamese
currency through heavy purchases of dollars. The policy is causing
the economy to overheat, driving up inflation to 8.8%. Vietnam,
which has mid-sized reserves of $40 billion, is seen as weathervane
for the bigger Asian powers. Together they hold $3,575 billion
of foreign reserves, over 65% of the world's total. China leads
with $1,340 billion, but South Korea, Taiwan, Singapore, and
even Thailand all built up massive holdings. Vietnam's central
bank said this week that it would move "gradually"
to a floating currency. Vietnam is a relatively small country
but it is symptomatic of Asia.
Should one of them jump the
$ ship, the others will follow sooner or later.
2. Kuwait has already abandoned
its $ peg, fearing that its economy would overheat if it continued
to import America's loose monetary policies. Separately, the
gas-rich Gulf state of Qatar announced that it had cut the dollar
holdings of its $50 billion sovereign wealth fund from 99% to
40%, switching into investments in China, Japan, and emerging
Asia. The move is intended to increase long-term returns for
future generations, but it can easily be seen as a vote of no
confidence in US currency management. Qatar will not have a significant
impact on the $, but is being watched by the other members of
O.P.E.C. All are concerned by the fact that the U.S.$ is cheapening
by the day. The dependence on the U.S. may hold, but that frustration
will show itself in the rising and holding price of oil. The
U.S. will at some point come to terms with O.P.E.C. and give
it a better deal than it has now. Will that be that they permit
O.P.E.C. to price oil in currencies other than the $?
3. There have been reports
that China is already pulling out of U.S. bonds to fund its new
sovereign wealth fund. Foreign central banks slashed holdings
by $32 billion in the last two weeks of August. We will not know
which country was responsible the Treasury's TIC data is released
in November. This is gold positive in the long-term.
The I.M.F. promoted
the $' fall
I.M.F. Managing Director
Rodrigo Rato, said financial market turmoil had increased downside
risks to global growth. Rato said currency adjustment seen so
far would likely help bring a significant but not substantial
reduction in the U.S. current account deficit. He then stated
that there was still room for depreciation of the $.
The U.S. government needs policies
to increase both official and private savings so as to reduce
its reliance on foreign borrowing, but this is not and is unlikely
to happen yet. There are as yet no signs of any moves to stem
the Trade deficit by the U.S. Authorities, nor are any expected.
What we are seeing already
is proof of just what foreign investors in U.S. Treasuries can
do if they become unhappy [the sharp fall to negative levels
into the U.S. Capital Account]. Were it not for the inflow from
U.S. / British owned liquidity funds [under the direction of
the Fed?] in the Tax haven Islands of the Caymans the U.S. Balance
of Payments would be in disarray now. In that scene we can expect
a more disorderly decline in the value of the $ and possibly
but less likely higher U.S. interest rates. This could not be
more gold positive.
Surplus holders dumping
the $.
After the seizure of
parts of the capital markets over the summer and after the Federal
Reserve's 0.5% rate cut, the U.S. yield advantage over other
countries diminished and will drop further as more rate cuts
are made. This has triggered serious withdrawals of capital from
the U.S. and will keep doing so until growth is safe.
In August, Japan and China
led a record withdrawal of foreign funds from the United States
in August. Data from the U.S. Treasury showed outflows of $163
billion from all forms of U.S. investments. With the market still
affected by the August crises we can expect the outflow to continue
into September's figures and October's.
- Asian investors dumped $52
billion worth of US Treasury bonds alone.
- Japan ($23 billion).
- China ($14.2 billion)
- Taiwan ($5 billion).
Central banks in Singapore,
Korea, Taiwan, and Vietnam have all begun to cut purchases of
U.S. bonds, or signaled their intention to do so. In effect,
they are giving up trying to hold down their currencies because
the policy is starting to set off inflation.
It is the first time since
1998 that foreigners have, on balance, sold Treasuries. And what
an impressive outflow in one month we've seen. It is not just
foreigners who are selling U.S. assets, Americans are turning
their back as well.
America has relied on "hot
money" from abroad to cover 25% to 30% of the U.S. short-term
credit and commercial paper market over the last two years. The
U.S. requires $60 billion a month in capital inflows to cover
its current account deficit alone and this inflow is slowing
down, threatening the U.S. Balance of Payments over a much longer
term period, something that will produce global earthquakes in
exchange rates, major capital flows and see a battery of national
[Exchange Control] walls spring up to protect individual nations.
From what we believed are institutions
under the control of the U.S., based in the Cayman Islands capital
was brought in to the extent of $60 billion from "hedge
funds" based in Britain and the Caymans, which covered U.
S. capital shortfall and positions at the height of the credit
crunch.
Most of us are still of
a mindset to believe that the Fed has full control of U.S. interest
rates. If the move out of the $ is not just a reaction to the
U.S. banking crisis but a long-term trend, then the sales of
Treasuries will of itself lead to higher interest rates, leaving
the $ surplus holders of Asia in control of U.S. interest rates.
The Fed will be left to react but not control.
But is that all that will happen
in the financial markets, a declining $ and potentially higher
interest rates? No, oh no! This makes gold a must in all portfolios.
-Julian D.W. Phillips
email: gold-authenticmoney@iafrica.com
321gold Ltd
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