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Foreign Currency Wars fuel Gold’s Rally to $1,300/ozGary Dorsch With the price of gold zeroing in on yet another major milestone, - $1,300 /oz, some heavy hitters in the marketplace are beginning to wonder if the yellow metal’s rally, is getting a bit too frothy, or even worse, whether a speculative bubble is brewing, that might ultimately deflate under its own weight, and lead to a sharp correction. On Sept 15th, famed hedge fund trader George Soros said that gold prices might continue to rise, but warned that that gold is the “ultimate bubble.” “Gold is the only actual bull market currently. It just made a new high yesterday. In the present circumstances that may continue. I call gold the ultimate bubble, which means it might go higher. But it’s certainly not safe and it’s not going to last forever,” he warned. Soros has been bullish on gold in a big way, and as of June 30th, the Soros fund held 5.24-million shares of the SPDR Gold Trust GLD, a stake worth about $650-million today. Soros’s fund also held equity holdings in miners of gold and other minerals worth almost $250-million.
Over the past two months, there’s been a global stampede into precious metals, with investors of many different stripes, and from many countries, scurrying to buy gold and silver, in both the physical market and through exchange traded funds. The World Gold Council reported that the demand for gold worldwide surged 36% in the second quarter of 2010, to 1,050-tons. The Greek debt crisis, instability in Irish and Portuguese bonds, and expectations the Fed would unleash “Quantitative Easing, (QE-2), - flooding the world with a new tidal wave of freshly printed US-dollars, has supported the historic bull-run. Europe accounted for more than 35% of the retail purchases of gold coins during the second quarter. The latest surge in gold and silver prices was sparked in July, following comments from Fed officials, signaling that QE-2 could be around the corner. On July 22nd, Fed chief Ben “Bubbles” Bernanke reassured congressional lawmakers the central bank is prepared to print more dollars, if the US-jobless rate continues to hover around 10-percent. “We are ready and will act if the economy does not continue to improve, if we don’t see the kind of improvements in the labor market that we are hoping for and expecting. Unemployment is the most important problem that we have right now. What we can do is make financial conditions as supportive of growth as we can and we certainly are doing that,” Bernanke said. On August 19th, St Louis Fed chief James Bullard was more explicit, signaling his backing for further monetization of the US-government’s debt. “Should economic developments suggest increased disinflation risk, purchases of Treasury securities in excess of those required to keep the size of the balance sheet constant may be warranted. Any additional Treasury buying should be undertaken in a measured, deliberate manner, commensurate with the magnitude of the deflation threat.”
The Fed’s propaganda artists are operating behind a veil of “smoke-and mirrors,” trying to instill the fear of deflation in the bond market, in order to justify another big round of stealth monetization of the US-government’s debt. The Fed’s first go-around with QE, totaling $1.75-trillion, combined with the Bank of England’s 200-billion pound QE-scheme, and the Bank of Japan’s 21-trillion yen QE-scheme, fueled a powerful rally in key commodity markets last year, lifting the Dow Jones Commodity Index, (DJCI) from deep in negative territory, and onto the positive side, thus warding off the threat of deflation in the global economy. However, since the Fed completed its 12-month buying spree in Treasury bonds, and mortgage backed bonds, in March 2010, the year-over-year rate of increases in the DJCI and the US-Producer Price Index have petered-out. Last November, the DJCI was hanging around the 135-level, just a shade below the 138.40-level that prevails today. If the DJCI stays stagnant or turns lower in the months ahead, it could knock the US-PPI into negative territory by year’s end, signaling the onset of another bout of deflationary pressures, and triggering a second round of the Fed’s QE. Sept 1st, Philadelphia Fed chief Charles Plosser, said the Fed would embark upon further monetary easing, if faced with a dangerous downward price spiral. “If we do need to act, if fears of deflation were to become real, then we would need every ounce of credibility we can muster to convince markets we are not going to let deflation happen.” Plosser said he would be open to further bond purchases if he saw deflation as a real risk. “I would certainly entertain the solution if I feared deflation, and if I feared that expectations were coming unglued in that direction, - then we would have to take actions,” he warned. Interestingly enough, amid all this gloomy talk by Fed officials about the bogeyman of deflation, the demand for precious metals, - traditional hedges against inflation and currency devaluations, - is booming. Traders realize that the Fed’s magic elixir for fighting the scourge of deflation is more money printing, - otherwise known as nuclear QE-scheme. US-bond dealers, who trade directly with the Fed, aren’t questioning whether QE-2 is on the table, but rather, are taking bets on the size of QE-2, with estimates ranging between $300-billion and $1-trillion. Competitive Currency Devaluations Speculation that the Fed would unleash QE-2 has already spearheaded a new round of currency wars across the globe. Central bankers in Brazil, China, Chile, Japan, Russia, South Korea, and Thailand, have all stepped up their interventions, by injecting large sums of paper into the currency markets, while trying to prevent a precipitous decline in the value of the US-dollar versus their own currencies. The amount of foreign currency reserves stashed away in the coffers of the Bank of Korea, (BoK) have climbed by $76-billion since April 2009, to a record high of $286-billion, - to become the world’s sixth-largest after China, Japan, Russia, Taiwan and India. The BoK’s currency reserves are an indicator of the approximate size of its interventions in the foreign-exchange market, utilized to artificially hold down the value of the Korean won vs the US-dollar.
The value of the US-dollar is critical to Seoul, since Beijing pegs the Chinese yuan to the US-dollar, and China is the biggest customer for Korean exporters. Thus, the BoK aims to protect its exporters in both the Chinese and US-markets. However, the BoK hasn’t been able to turn the bearish tide against the US-dollar. It’s been overwhelmed by ideas the Fed would unleash nuclear QE-2. Instead, the BoK can only try to stem the bleeding, - engineering an orderly retreat for the greenback. The BoK would be much wealthier, if it had judged the gold market more correctly. The BoK holds only 14-tons of gold, equivalent to only 0.03% of its total reserves. In December, 2009, the BoK’s FX-chief, Lee Eung Baek argued: “There’s an illusion in gold. We follow the big trend. Gold isn't the trend. Out of more than 200 nations, how many countries have bought bullion? ...Like other central banks, we have been increasing the types of currencies consisting of the reserves outside the dollar. Gold 'offers little value,' with 'no cash returns.' ...Since India and Russia with large reserves bought gold, there’s speculation that Korea might buy it too. But we are not classified in the same category. There’s a slim chance that we will buy gold from the IMF,” Lee said. [Gold for immediate delivery had just touched an all-time high of $1,226.56/oz on 3 Dec, 2009] To read the rest of this article, please click on the hyper-link below, ### Sep 22, 2010 321gold Ltd |
