The dollar strengthened against the euro and major currencies last day amid thin volumes on account of the year end transactions, supported by the easing concerns over financial crisis. Strong CPI data has changed the attitude of the traders and that trimmed expectations for further interest rate cuts by the Federal Reserve.
The dollar rallied against major currencies bolstered by a string of US economic reports showing higher-than-expected growth in consumer spending and higher inflation. The data eased some concern that the credit crisis would pull the US economy into a recession.
In the same time the number of people filing for unemployment benefits increased last week, according to the US Labor Department's report released on Thursday.
Initial claims rose 12,000 to 346,000 for the week ended Dec 15. The four-week moving average was 343,000, an increase of 4,250 from the previous week's unrevised average of 338,750.
Continuing claims advanced by 12 k to 2,646,000 in December the 8th week, from revised 2,634,000 claims on the previous weeks.
US consumer price inflation rose to 4.3 percent for the month of November, while the core rate excluding food and energy prices rose to 2.3 percent for the year.
Both retail sales and producer prices for November beat market expectations and strengthened the view that the US economy is getting strong gradually.
Data from the Commerce Department showed US retail sales rose 1.2% in November, the strongest pace since May.
The Federal Reserve had cut its benchmark interest rate by a quarter of a percentage point last Tuesday, as widely expected is also supported the long tern view in dollar.
The Fed had announced a new plan last week, to increase liquidity and ease the global credit crunch situation by injecting billions of dollars in cash to the financial system in the next few weeks. This would be done in association with the European Central Bank, the Bank of England, the Swiss National Bank and the Bank of Canada.
Medium Term Outlook
1.4841 may act as the major support for the dollar. If dollar sustains below 1.4841 against the euro, more recovery can be expected. Active trading below 1.4530 is the sign of further strengthening of the dollar. Next resistances are 1.4400 and 1.4280. 1.4600 is a support. Continuation of the weakness in dollar can be expected only above 1.4841.
In the spot trading, dollar closed at 1.4318 (1.4377) against the euro, after trading in the range of 1.4391 – 1.4306.
Last day DEUR traded in the range 144.35 – 143.86 and closed at 144.20.
Intra-day trading ranges; supports are 142.53, 142.04. Resistances are 143.79, 144.36.
Tuesday, December 25, 2007
Will US repeg Dollar to Bullion?
Things are bad in mortgage-backed bonds. But they could soon get worse for credit-default swaps... By now pretty much everyone of us can recite how crummy mortgages got packaged into asset-backed securities, and how – after the tastier tranches were sliced off – the meat by-products got sent along to the CDO sausage factory to be made palatable again.
Now the CDO investors are puking up all over town. But there has been another derivatives party going on, where the bubbly is still flowing to a large extent.
This party, as many will relate, is the explosion in credit default swaps (CDS) that has appeared over just the past few years.
Structured finance has been around since the 1980s, but the CDS market is essentially brand new. The CDS was invented in the mid-1990s but it was minor until the last four years. Since 2003, this market has exploded in size by 10 times, to a total notional amount of about $45 trillion.
Yes, that's trillion with a "t".
This market has never been tested in any kind of economic downturn, not even the most recent one of 2001-2002. We might see that test soon, however.
The credit-default swap is insurance against a credit accident. The seller of CDS receives a small monthly payment. If the insured bond fails to perform, the buyer of CDS receives a large one-time payment from the seller. At first, in the 1998-2002 period, this was mostly a way for holders of bonds to insure themselves. However, in recent years, the CDS market has become a way for CDS buyers to wager on credit deterioration, and a way for CDS sellers to act like banks.
Banks are a wonderful business, when everything is working right. They have returns on equity that can range from 15% to as much as 25%. These are the kinds of returns that get hedge funds, and their investors, interested. However, it is difficult to enter the banking business. You need offices, branches, depositors, employees, advertising, and so forth.
Banks traditionally profit on the interest rate difference, or "spread", between the money they borrow, from depositors for example, and the money they lend, to corporations for example. They may lever up ten to one, supporting $100 billion of assets on $10 billion of equity. Thus, if their spread is 2%, and they are levered 10:1, their return on equity is a juicy 20% (actually more like 24% because of the return on the underlying capital).
The CDS contract allowed hedge funds to act like banks. The monthly premium on the CDS is a spread between the equivalent Treasury yield and the implied yield on the underlying bond. This can be considered payment for the risk of default, which the Treasury bond presumably does not have. Imagine you're a fund with $1 billion in capital.
You could try to borrow $9 billion – from whom? – and then buy $10 billion in bonds, and enjoy the spread, like a bank. However, that $9 billion would probably have a higher interest rate than a Treasury bond, because the fund also has risk. And, the maturity of the borrowed money would likely be very short, while the bond has a long maturity, introducing duration risk (this didn't seem to scare the SIVs however).
The CDS solves these problems. You just sell CDS on $10 billion of bonds. This doesn't cost any money. You don't have to put up any collateral. You don't have to hire a single bank teller or loan officer. You just call your broker, put in the order, and start getting your monthly payments, just as if you had borrowed $9 billion (at the same rate as the Federal government) and lent $10 billion.
And the fund manager who made this one single phone call? If we assume a 20% return, and $1 billion of capital, he collects about $60 million per year. Which explains the explosive growth of the CDS market in the last four years.
Ah, there's something. You "call your broker." Actually, you call your dealer. It's not so easy to just find a buyer for your $10 billion notional of CDS. This is an over-the-counter market. This is where the big broker-dealers, like J.P.Morgan, Bank of America, and Citibank step in.
Over-the-counter markets are lovely for dealers because of the fat spreads – there's that magic word again that pricks up bankers' ears – between bid and asked in this market. So, what happens is you sell the CDS to your dealer, such as J.P.Morgan? J.P.Morgan then sells CDS – of its own issuance – to its customers that want to buy CDS.
So, you see that J.P.Morgan now sits in the middle, like a banker should. J.P.Morgan is "long" the CDS you sold to them, and also "short" the CDS it sold to someone else, and is thus theoretically hedged from risk while collecting the spread between the prices it bought and sold at. This is a lot like bankers' traditional business of pocketing the spread between the rate it borrows and the rate it lends.
It should be no surprise that the big broker/dealer banks (JP, BofA, Citi) account for 40% of the CDS outstanding. Hedge funds account for 32%. This reflects banks' monkey-in-the-middle dealer strategy for CDS. The remainder is likely insurance companies, synthetic CDOs, CPDOs, and other weird fauna that will soon become extinct. (Thanks go to Ted Seides of Protégé Partners for aggregating this information.)
Now, that 32% of CDS sold by hedge funds has a notional value of $14.5 trillion. This means that, if all those bonds underlying the CDS were a total loss, the funds would have to pay $14.5 trillion. Not very likely. However, if there were only a 5% loss – not so impossible these days – the CDS-selling hedge funds would still be on the hook for $725 billion.
Hedge funds, all together, have estimated assets of around $2.5 trillion. However, only a small fraction of those are CDS-sellers. Let's take a guess at 10%, or $250 billion of capital. (It's probably less than that.) How do you pay a $725 billion bill with $250 billion of capital?
There's an easy answer to that: you don't. So, who pays? The banks, remember, are in the middle. If the CDS-selling hedge fund doesn't pay up on its $725 billion, then the bank is unhedged regarding the CDS that it sold. In this case, the banks would be liable for $475 billion. This is known as counterparty risk.
That's four-seventy-five billion. More than four times the entire capital of Citigroup – capital which has already come under pressure from losses elsewhere.
So what happens if there is a CDS counterparty-risk event? Do the big banks go bankrupt? Probably not, although there would be much wailing and gnashing of teeth. Instead, they would probably get a nod and a wink from the government to simply ignore their own CDS obligations. The counterparty risk shifts to CDS-buyers.
The CDS buyers can take the hit, because they aren't really out any money. They paid their monthly insurance bills, but never got a payout after the credit market car crash. So, in a sense, this drama would likely end in more of a whimper than a bang. In fact, everyone got off OK: the CDS-selling hedge fund manager made a killing in management fees, before the fund went bust; the bank made a killing in dealer income, before kissing their obligations goodbye, and the CDS-buying hedge fund manager raked in the fees on the enormous mark-to-market profits of his CDS portfolio (20% of the aforementioned $725 billion), before these profits were eventually shown to be uncollectible.
A perfect Wall Street happy ending!
However, the kind of situation in which large banks ignore multi-hundred billions of legal obligations is very extreme. The last time something like that happened was in the early 1930s. At that time, they called it a "bank holiday", which has a nice festive ring. The celebration included a devaluation of the Dollar, the first permanent devaluation in US history.
At least President Roosevelt had the good sense to repeg the Dollar to bullion at a Gold Price of $35 per ounce, a parity it maintained vs. the Gold Market until 1971.
Feel free to make your own guesses as to what Paulson and Bernanke might try.
Formerly a chief economist providing advice to institutional investors, Nathan Lewis is now part of the investing team at an asset-management company. A writer for the Financial Times, Asian Wall Street Journal, Daily Yomiuri, The Daily Reckoning, Pravda, Dow Jones Newswires and other publications, he is also the author – with Addison Wiggin – of Gold: The Once and Future Money, published by John Wiley & Sons in May 2007, as well as the essays and thoughts at New World Economics.
Now the CDO investors are puking up all over town. But there has been another derivatives party going on, where the bubbly is still flowing to a large extent.
This party, as many will relate, is the explosion in credit default swaps (CDS) that has appeared over just the past few years.
Structured finance has been around since the 1980s, but the CDS market is essentially brand new. The CDS was invented in the mid-1990s but it was minor until the last four years. Since 2003, this market has exploded in size by 10 times, to a total notional amount of about $45 trillion.
Yes, that's trillion with a "t".
This market has never been tested in any kind of economic downturn, not even the most recent one of 2001-2002. We might see that test soon, however.
The credit-default swap is insurance against a credit accident. The seller of CDS receives a small monthly payment. If the insured bond fails to perform, the buyer of CDS receives a large one-time payment from the seller. At first, in the 1998-2002 period, this was mostly a way for holders of bonds to insure themselves. However, in recent years, the CDS market has become a way for CDS buyers to wager on credit deterioration, and a way for CDS sellers to act like banks.
Banks are a wonderful business, when everything is working right. They have returns on equity that can range from 15% to as much as 25%. These are the kinds of returns that get hedge funds, and their investors, interested. However, it is difficult to enter the banking business. You need offices, branches, depositors, employees, advertising, and so forth.
Banks traditionally profit on the interest rate difference, or "spread", between the money they borrow, from depositors for example, and the money they lend, to corporations for example. They may lever up ten to one, supporting $100 billion of assets on $10 billion of equity. Thus, if their spread is 2%, and they are levered 10:1, their return on equity is a juicy 20% (actually more like 24% because of the return on the underlying capital).
The CDS contract allowed hedge funds to act like banks. The monthly premium on the CDS is a spread between the equivalent Treasury yield and the implied yield on the underlying bond. This can be considered payment for the risk of default, which the Treasury bond presumably does not have. Imagine you're a fund with $1 billion in capital.
You could try to borrow $9 billion – from whom? – and then buy $10 billion in bonds, and enjoy the spread, like a bank. However, that $9 billion would probably have a higher interest rate than a Treasury bond, because the fund also has risk. And, the maturity of the borrowed money would likely be very short, while the bond has a long maturity, introducing duration risk (this didn't seem to scare the SIVs however).
The CDS solves these problems. You just sell CDS on $10 billion of bonds. This doesn't cost any money. You don't have to put up any collateral. You don't have to hire a single bank teller or loan officer. You just call your broker, put in the order, and start getting your monthly payments, just as if you had borrowed $9 billion (at the same rate as the Federal government) and lent $10 billion.
And the fund manager who made this one single phone call? If we assume a 20% return, and $1 billion of capital, he collects about $60 million per year. Which explains the explosive growth of the CDS market in the last four years.
Ah, there's something. You "call your broker." Actually, you call your dealer. It's not so easy to just find a buyer for your $10 billion notional of CDS. This is an over-the-counter market. This is where the big broker-dealers, like J.P.Morgan, Bank of America, and Citibank step in.
Over-the-counter markets are lovely for dealers because of the fat spreads – there's that magic word again that pricks up bankers' ears – between bid and asked in this market. So, what happens is you sell the CDS to your dealer, such as J.P.Morgan? J.P.Morgan then sells CDS – of its own issuance – to its customers that want to buy CDS.
So, you see that J.P.Morgan now sits in the middle, like a banker should. J.P.Morgan is "long" the CDS you sold to them, and also "short" the CDS it sold to someone else, and is thus theoretically hedged from risk while collecting the spread between the prices it bought and sold at. This is a lot like bankers' traditional business of pocketing the spread between the rate it borrows and the rate it lends.
It should be no surprise that the big broker/dealer banks (JP, BofA, Citi) account for 40% of the CDS outstanding. Hedge funds account for 32%. This reflects banks' monkey-in-the-middle dealer strategy for CDS. The remainder is likely insurance companies, synthetic CDOs, CPDOs, and other weird fauna that will soon become extinct. (Thanks go to Ted Seides of Protégé Partners for aggregating this information.)
Now, that 32% of CDS sold by hedge funds has a notional value of $14.5 trillion. This means that, if all those bonds underlying the CDS were a total loss, the funds would have to pay $14.5 trillion. Not very likely. However, if there were only a 5% loss – not so impossible these days – the CDS-selling hedge funds would still be on the hook for $725 billion.
Hedge funds, all together, have estimated assets of around $2.5 trillion. However, only a small fraction of those are CDS-sellers. Let's take a guess at 10%, or $250 billion of capital. (It's probably less than that.) How do you pay a $725 billion bill with $250 billion of capital?
There's an easy answer to that: you don't. So, who pays? The banks, remember, are in the middle. If the CDS-selling hedge fund doesn't pay up on its $725 billion, then the bank is unhedged regarding the CDS that it sold. In this case, the banks would be liable for $475 billion. This is known as counterparty risk.
That's four-seventy-five billion. More than four times the entire capital of Citigroup – capital which has already come under pressure from losses elsewhere.
So what happens if there is a CDS counterparty-risk event? Do the big banks go bankrupt? Probably not, although there would be much wailing and gnashing of teeth. Instead, they would probably get a nod and a wink from the government to simply ignore their own CDS obligations. The counterparty risk shifts to CDS-buyers.
The CDS buyers can take the hit, because they aren't really out any money. They paid their monthly insurance bills, but never got a payout after the credit market car crash. So, in a sense, this drama would likely end in more of a whimper than a bang. In fact, everyone got off OK: the CDS-selling hedge fund manager made a killing in management fees, before the fund went bust; the bank made a killing in dealer income, before kissing their obligations goodbye, and the CDS-buying hedge fund manager raked in the fees on the enormous mark-to-market profits of his CDS portfolio (20% of the aforementioned $725 billion), before these profits were eventually shown to be uncollectible.
A perfect Wall Street happy ending!
However, the kind of situation in which large banks ignore multi-hundred billions of legal obligations is very extreme. The last time something like that happened was in the early 1930s. At that time, they called it a "bank holiday", which has a nice festive ring. The celebration included a devaluation of the Dollar, the first permanent devaluation in US history.
At least President Roosevelt had the good sense to repeg the Dollar to bullion at a Gold Price of $35 per ounce, a parity it maintained vs. the Gold Market until 1971.
Feel free to make your own guesses as to what Paulson and Bernanke might try.
Formerly a chief economist providing advice to institutional investors, Nathan Lewis is now part of the investing team at an asset-management company. A writer for the Financial Times, Asian Wall Street Journal, Daily Yomiuri, The Daily Reckoning, Pravda, Dow Jones Newswires and other publications, he is also the author – with Addison Wiggin – of Gold: The Once and Future Money, published by John Wiley & Sons in May 2007, as well as the essays and thoughts at New World Economics.
How to Make a Million Dollars
Many years ago, a successful commodities trader told a story I’ll never forget. It was the tale of how he made his first million in the cotton market.
The details are a little fuzzy now -- as I said, this was many years ago -- but the moral of the story is what stuck with me. I’ll give you the Reader’s Digest version here.
At one point in time, this now-wealthy trader was a scrappy young guy with nothing to lose. He had little more than a passion for markets, a modest trading stake and really big dreams.
Our hero didn’t have enough money to be active in multiple markets. His account was just too small to handle big swings like the big boys. So he chose to focus on one market: the cotton market.
He didn’t pick cotton because it was exciting at the time. It was just the opposite, in fact. He went with cotton because it was dull and sleepy, virtually ignored by other traders. Our hero knew that, eventually, cotton would rise and run like so many other commodities had. It was just a matter of time.
After a long stretch of dullness, cotton finally began showing signs of life. Cotton futures broke out to the upside from a choppy sideways pattern that had seemed to last for years. He bought as many contracts as he thought was prudent.
There were a handful of false starts and disappointments before the trade really got going. He was stopped out a few times, and had a few frightening moments where his precious capital reserves seemed to be at risk. But eventually, his patience and persistence paid off. By the time cotton really began to move -- and the big boys finally took notice -- our hero had a strong base position.
From there it was a matter of pyramiding, the discipline of carefully adding to a winning trade. It was also a matter of hanging tough -- not taking profits too early, not losing nerve when the inevitable shakeouts occurred.
Over many months, cotton kept rising, and our hero kept adding contracts at the right time. Never in a rush… never getting too greedy… always picking his spots. Soon enough, he had his first million, and he never looked back.
The moral of the story, the thing that stuck with me, wasn’t to keep an eye on cotton (although interesting things are certainly happening in the cotton market these days). Nor was the big lesson that sleepy markets can turn into massively trending markets over time (although that is certainly true, too).
No, the thing I’ll never forget was how he ended the story.
“You can’t save a million dollars,” he said. “You have to make it.”
Mediocre Is as Mediocre Does
The traditional advice says anyone can be a millionaire; that they can, in fact, save a million… if they’re willing to just chip away for 30 or 40 years or so. (Very little is said about the fact that a million bucks might not be worth a hill of beans by then, thanks to the ravages of inflation.)
The traditional advice says, “Don’t do anything controversial. Forget about being bold or unconventional. It’s safer in the middle of the herd.”
For many investors this is decent advice. But that’s precisely why most investors will never be happy with what the markets hand them. You can’t get above-average performance doing what everyone else is doing.
Find the Biggest Waves and Ride Them
Fortunately, not everyone is satisfied with mediocrity. (If they were, there wouldn’t be a newsletter business.)
Those of us who want more from markets -- and from life -- are challenged to find the big waves and ride them. The most profitable trends aren’t the little blips and squiggles that quickly get lost in the fray. They are the epic monsters, the sweeping waves of change you can see from a distance. (If it doesn’t make its mark on a monthly or even a weekly chart, it’s probably not a major trend.)
There are certain challenges to mastering this task, this odd mix of art and science known as trading and investing. You have to stay cognizant of the big picture and not get bogged down in details, but you also have to pay close attention to what’s happening in real time.
Picking one’s spots is critical… but while trying to do that, it’s all too easy to get distracted. The trick is not losing perspective.
Tying It All Together
I’ve been passionate about markets for nearly 15 years now. In fact, I’ll probably love markets until the day I die. (I know I’ll be writing till that day, too.) It’s even easier to be passionate now, with everything that’s happening.
One of the greatest benefits of this new position I’ve taken on, editorial director for Taipan Publishing, is the chance to coordinate such a powerful stream of investing and trading ideas. I’m very excited about working closely with the Taipan team and communicating those ideas to you more clearly than ever before.
I see a significant part of my job as helping you, the reader, keep track of the big picture. (I am a “macro” guy at heart; the big picture is what I live and breathe.) One of the things Taipan will do in 2008 is focus more on the idea of “themes,” sorting all these trading and investing ideas into various baskets, making them easier to connect and understand.
Some of the themes we see dominating the markets now have been building up for years (and many of us have been writing about them for years). Other themes are just now taking hold. They are all sources of fascination -- and danger -- and potentially great wealth.
Notes From a Friend
To that end, I’ll be writing you on a regular basis for Taipan Daily. That is what we’re calling this e-letter now. You’ll still be receiving the same great content from the Taipan team, of course. My focus will be on connecting the dots. The general idea is that I will write a bit, and then introduce the essay for the day.
Usually my contribution will be shorter. Sometimes I’ll write you a little more, sometimes a little less. But it will always be with a focus on markets -- or investing and trading -- in the casual tone of notes from a friend. My hope is that Taipan Daily will earn an honored spot in your daily routine, like the morning paper or that first cup of coffee.
Let Us Know What You Think
I’m really looking forward to writing you. But I hope you can write to me too on occasion (and not just me, of course, but all of us).
We want to know what you’re thinking -- your questions, your comments, your requests. What topics would you like to hear more about? Are there any specific questions you have? Any market-related concerns? Just curious about something? Now you can let it fly.
We can’t dispense any type of individual advice, of course. But other than that, the reader mailbag is open. I look forward to opening it from time to time and responding to your thoughts.
The details are a little fuzzy now -- as I said, this was many years ago -- but the moral of the story is what stuck with me. I’ll give you the Reader’s Digest version here.
At one point in time, this now-wealthy trader was a scrappy young guy with nothing to lose. He had little more than a passion for markets, a modest trading stake and really big dreams.
Our hero didn’t have enough money to be active in multiple markets. His account was just too small to handle big swings like the big boys. So he chose to focus on one market: the cotton market.
He didn’t pick cotton because it was exciting at the time. It was just the opposite, in fact. He went with cotton because it was dull and sleepy, virtually ignored by other traders. Our hero knew that, eventually, cotton would rise and run like so many other commodities had. It was just a matter of time.
After a long stretch of dullness, cotton finally began showing signs of life. Cotton futures broke out to the upside from a choppy sideways pattern that had seemed to last for years. He bought as many contracts as he thought was prudent.
There were a handful of false starts and disappointments before the trade really got going. He was stopped out a few times, and had a few frightening moments where his precious capital reserves seemed to be at risk. But eventually, his patience and persistence paid off. By the time cotton really began to move -- and the big boys finally took notice -- our hero had a strong base position.
From there it was a matter of pyramiding, the discipline of carefully adding to a winning trade. It was also a matter of hanging tough -- not taking profits too early, not losing nerve when the inevitable shakeouts occurred.
Over many months, cotton kept rising, and our hero kept adding contracts at the right time. Never in a rush… never getting too greedy… always picking his spots. Soon enough, he had his first million, and he never looked back.
The moral of the story, the thing that stuck with me, wasn’t to keep an eye on cotton (although interesting things are certainly happening in the cotton market these days). Nor was the big lesson that sleepy markets can turn into massively trending markets over time (although that is certainly true, too).
No, the thing I’ll never forget was how he ended the story.
“You can’t save a million dollars,” he said. “You have to make it.”
Mediocre Is as Mediocre Does
The traditional advice says anyone can be a millionaire; that they can, in fact, save a million… if they’re willing to just chip away for 30 or 40 years or so. (Very little is said about the fact that a million bucks might not be worth a hill of beans by then, thanks to the ravages of inflation.)
The traditional advice says, “Don’t do anything controversial. Forget about being bold or unconventional. It’s safer in the middle of the herd.”
For many investors this is decent advice. But that’s precisely why most investors will never be happy with what the markets hand them. You can’t get above-average performance doing what everyone else is doing.
Find the Biggest Waves and Ride Them
Fortunately, not everyone is satisfied with mediocrity. (If they were, there wouldn’t be a newsletter business.)
Those of us who want more from markets -- and from life -- are challenged to find the big waves and ride them. The most profitable trends aren’t the little blips and squiggles that quickly get lost in the fray. They are the epic monsters, the sweeping waves of change you can see from a distance. (If it doesn’t make its mark on a monthly or even a weekly chart, it’s probably not a major trend.)
There are certain challenges to mastering this task, this odd mix of art and science known as trading and investing. You have to stay cognizant of the big picture and not get bogged down in details, but you also have to pay close attention to what’s happening in real time.
Picking one’s spots is critical… but while trying to do that, it’s all too easy to get distracted. The trick is not losing perspective.
Tying It All Together
I’ve been passionate about markets for nearly 15 years now. In fact, I’ll probably love markets until the day I die. (I know I’ll be writing till that day, too.) It’s even easier to be passionate now, with everything that’s happening.
One of the greatest benefits of this new position I’ve taken on, editorial director for Taipan Publishing, is the chance to coordinate such a powerful stream of investing and trading ideas. I’m very excited about working closely with the Taipan team and communicating those ideas to you more clearly than ever before.
I see a significant part of my job as helping you, the reader, keep track of the big picture. (I am a “macro” guy at heart; the big picture is what I live and breathe.) One of the things Taipan will do in 2008 is focus more on the idea of “themes,” sorting all these trading and investing ideas into various baskets, making them easier to connect and understand.
Some of the themes we see dominating the markets now have been building up for years (and many of us have been writing about them for years). Other themes are just now taking hold. They are all sources of fascination -- and danger -- and potentially great wealth.
Notes From a Friend
To that end, I’ll be writing you on a regular basis for Taipan Daily. That is what we’re calling this e-letter now. You’ll still be receiving the same great content from the Taipan team, of course. My focus will be on connecting the dots. The general idea is that I will write a bit, and then introduce the essay for the day.
Usually my contribution will be shorter. Sometimes I’ll write you a little more, sometimes a little less. But it will always be with a focus on markets -- or investing and trading -- in the casual tone of notes from a friend. My hope is that Taipan Daily will earn an honored spot in your daily routine, like the morning paper or that first cup of coffee.
Let Us Know What You Think
I’m really looking forward to writing you. But I hope you can write to me too on occasion (and not just me, of course, but all of us).
We want to know what you’re thinking -- your questions, your comments, your requests. What topics would you like to hear more about? Are there any specific questions you have? Any market-related concerns? Just curious about something? Now you can let it fly.
We can’t dispense any type of individual advice, of course. But other than that, the reader mailbag is open. I look forward to opening it from time to time and responding to your thoughts.
Currencies are vulnerable, but Gold is valuable
JOHANNESBURG (Business Day) -- A swinging oil price together with currency vulnerability equals a surge in the gold price. Depending on the direction of the economic air currents, currencies float against each other, which is why many wise investors are exchanging fiat money (banknotes, etc.) for gold.
As gold is bought and sold in dollars, the gold price rises when the dollar and currencies linked to it lose ground. Gold's present longer-term climb began in August 1999 when it stood at $253. It has since put on 211%. From August 1999 to November 2005, the gold price rose 79%. The channel was then broken and a new channel formed. From November 2005 to date, the gold price rose 70%. The latest short-term rise from its August low is 31%. A strong buy signal, when the moving average convergence/divergence plotting crossed its own moving average, came in September.
If gold keeps rising at its present rate, its price could reach $1,100 before the end of next year. At the current rate, by year-end the equilibrium will be $900 and the support $750.
Gold is only slightly higher than its equilibrium and so not currently overbought. There are several counts well into the $800s but the latest count is to $1,104.
As currencies prove vulnerable, calls have been made for an intrinsic commodity, for example gold, against which currencies are valued, rather than each other. But gold was linked to U.S. dollars between 1946 and 1971 when the gold standard was reintroduced with The Bretton Woods System. It pegged gold at $35/oz. Former U.S. president Richard Nixon released it, but then the price remained below $100/oz until 1973. Rising to a high of $184 in 1974, it flopped back to $110 in August 1976, when the massive 673% climb to its record $850 in January 1980 began. As the 87% surge took place over the holiday season, many investors were caught napping.
Former U.S. Federal Reserve chairman Alan Greenspan said that "under the gold standard, a free banking system stands as the protector of an economy's stability and balanced growth".
Abandoning the gold standard made it possible for welfare statists to use the banking system "as a means of unlimited expansion of credit". Without the gold standard, there is no way to protect savings from inflation.
With gold flirting above $800/oz and the dollar still looking frail, despite the latest rate cut, it seems Greenspan hit the nail on the head. The nearest currency measuring tool (purchasing power parity) we have today that could vaguely be called a standard is The Economist's Big Mac rating, which compares prices of Big Macs in various countries. But as food prices are spiralling around the world, and while U.S., asset prices (houses) are deflating, Big Mac is a poor currency measuring tool.
The rand gold price reached a record high last month, but the strengthening of the rand pushed it lower. While no sell signal has materialised, it looks vulnerable in the short term, but longer term has a count to R6,563. Newgold is at a triple top, which if broken, will give a count to R7,078.
The gold share index is fast heading for an oversold position, and its Cycle Trends future plotting points further down in the short term, but after setting for a while at a cycle bottom it is likely to head strongly upwards.
Among mining shares, Witsgold [JSE:WGR] has fulfilled all three of its down-counts, and is now heading better. While Witsgold's plotting suggests a further rise, volumes appear too low to keep momentum. Recovering Wesizwe [JSE:WEZ] is trying to confirm a new bull trend, and if its reaches R10 we can make a count to R12.30. Urone is signalling a recovery and has pushed up through its stochastic moving average but volume confirmation is needed.
As gold is bought and sold in dollars, the gold price rises when the dollar and currencies linked to it lose ground. Gold's present longer-term climb began in August 1999 when it stood at $253. It has since put on 211%. From August 1999 to November 2005, the gold price rose 79%. The channel was then broken and a new channel formed. From November 2005 to date, the gold price rose 70%. The latest short-term rise from its August low is 31%. A strong buy signal, when the moving average convergence/divergence plotting crossed its own moving average, came in September.
If gold keeps rising at its present rate, its price could reach $1,100 before the end of next year. At the current rate, by year-end the equilibrium will be $900 and the support $750.
Gold is only slightly higher than its equilibrium and so not currently overbought. There are several counts well into the $800s but the latest count is to $1,104.
As currencies prove vulnerable, calls have been made for an intrinsic commodity, for example gold, against which currencies are valued, rather than each other. But gold was linked to U.S. dollars between 1946 and 1971 when the gold standard was reintroduced with The Bretton Woods System. It pegged gold at $35/oz. Former U.S. president Richard Nixon released it, but then the price remained below $100/oz until 1973. Rising to a high of $184 in 1974, it flopped back to $110 in August 1976, when the massive 673% climb to its record $850 in January 1980 began. As the 87% surge took place over the holiday season, many investors were caught napping.
Former U.S. Federal Reserve chairman Alan Greenspan said that "under the gold standard, a free banking system stands as the protector of an economy's stability and balanced growth".
Abandoning the gold standard made it possible for welfare statists to use the banking system "as a means of unlimited expansion of credit". Without the gold standard, there is no way to protect savings from inflation.
With gold flirting above $800/oz and the dollar still looking frail, despite the latest rate cut, it seems Greenspan hit the nail on the head. The nearest currency measuring tool (purchasing power parity) we have today that could vaguely be called a standard is The Economist's Big Mac rating, which compares prices of Big Macs in various countries. But as food prices are spiralling around the world, and while U.S., asset prices (houses) are deflating, Big Mac is a poor currency measuring tool.
The rand gold price reached a record high last month, but the strengthening of the rand pushed it lower. While no sell signal has materialised, it looks vulnerable in the short term, but longer term has a count to R6,563. Newgold is at a triple top, which if broken, will give a count to R7,078.
The gold share index is fast heading for an oversold position, and its Cycle Trends future plotting points further down in the short term, but after setting for a while at a cycle bottom it is likely to head strongly upwards.
Among mining shares, Witsgold [JSE:WGR] has fulfilled all three of its down-counts, and is now heading better. While Witsgold's plotting suggests a further rise, volumes appear too low to keep momentum. Recovering Wesizwe [JSE:WEZ] is trying to confirm a new bull trend, and if its reaches R10 we can make a count to R12.30. Urone is signalling a recovery and has pushed up through its stochastic moving average but volume confirmation is needed.
Gold merry to go through Christmas season
NEW DELHI : The yellow metal continues to attract investors zest globally as the commodity market gains more strength thanks to price performance of select commodities setting new record on reaching multi year highs.
By the end of 2007 credit crisis concerns in global financial markets would be cleared out and the geopolitical tension coupled with additional catalysts has the potential to continue the drive of gold price afresh 28 year high.
Strong physical and investor demand emerging upon price dips should provide a solid footing for prices coupled with sustained ETF positions.
This outweighs the two bearish factors for gold, one, a slowdown in producer de-hedging and pick up in central bank sales and secondly speculative length in gold is high and there is potential for short-term price correction but chances are strong in medium & long term.
Indian jewelry demand rose by 70% during the first half compared with the same period last year. Domestic consumption increased to 387 tones from 227 tones during the same period. Rising disposable income of middle class people and strengthening of the Rupee by around 10% also made the yellow metal more attractive to surge the demand.
Industrial consumption for gold has also increased during this period. Automotive industry adopts breakthrough technology that would allow use of gold to reduce of emission.
Gold is expected to replace platinum in automotive catalysts. According to international projection during 2007, 4.24 million oz or 119 tones of platinum was used in automotive catalysts. Using gold in this sector with nearly half of the price ($800 OZ) will further reduce the use of platinum.
Expecting the overall sentiment remain bullish unless the US markets take some more series to post up side economic growth, the gold price may test around $900 per oz in middle-term.
By the end of 2007 credit crisis concerns in global financial markets would be cleared out and the geopolitical tension coupled with additional catalysts has the potential to continue the drive of gold price afresh 28 year high.
Strong physical and investor demand emerging upon price dips should provide a solid footing for prices coupled with sustained ETF positions.
This outweighs the two bearish factors for gold, one, a slowdown in producer de-hedging and pick up in central bank sales and secondly speculative length in gold is high and there is potential for short-term price correction but chances are strong in medium & long term.
Indian jewelry demand rose by 70% during the first half compared with the same period last year. Domestic consumption increased to 387 tones from 227 tones during the same period. Rising disposable income of middle class people and strengthening of the Rupee by around 10% also made the yellow metal more attractive to surge the demand.
Industrial consumption for gold has also increased during this period. Automotive industry adopts breakthrough technology that would allow use of gold to reduce of emission.
Gold is expected to replace platinum in automotive catalysts. According to international projection during 2007, 4.24 million oz or 119 tones of platinum was used in automotive catalysts. Using gold in this sector with nearly half of the price ($800 OZ) will further reduce the use of platinum.
Expecting the overall sentiment remain bullish unless the US markets take some more series to post up side economic growth, the gold price may test around $900 per oz in middle-term.
'Gold price may get under pressure'
St. LOUIS (ResourceInvestor.com): No one predicts the bust of the global economic bubble better than economist Marc Faber. Faber spoke with Resource Investor about his outlooks for the economy, commodities and the U.S. dollar heading into 2008.
RESOURCE INVESTOR: Hi, this is Jane Louis with Resource Investor Podcasts. We’re here today with everyone’s favourite contrarian economist, Dr. Marc Faber. Marc is the editor and publisher of “The Gloom, Boom and Doom Report”, an economic and financial publication that promotes against the grain investments and cautions against widely accepted investment themes. You can read more at www.gloomboomdoom.com. Marc is known for his realistic, though admittedly pessimistic, views on the state of the global economy. Hi, Marc. Welcome to Resource Investor.
MARC FABER: Hi.
RESOURCE INVESTOR: So let’s go back to September when you predicted in a U.S. Global Investors webcast that the synchronized global economic boom was going to burst. It’s three months later now, and 2007 is coming to an end. How do you feel about the global boom now?
MARC FABER: Well, basically we still have very strong growth in emerging economies. If you travel around the world practically every economy is a boom condition. There’s only one economy really in recession. That’s Zimbabwe, where obviously money printing didn’t work and where we find an example that in the U.S. money printing also will not work in real terms.
It may boost asset prices at some point, but I would imagine that in the U.S. we are already in recession, if inflation - in other words, price increases were measured properly, then there would be no real economic growth at this stage.
RESOURCE INVESTOR: Well, as Alan Greenspan pointed out recently, the U.S. economy might actually be headed for a stagflation. Do you think that’s a possibility?
MARC FABER: Well, basically I don’t listen anymore or never have to Mr. Greenspan since he’s a hopeless forecaster, a hopeless economist and since he denies that he created this huge mess by having kept interest rates artificially low for too long.
So he’s not a person that I would consider to be trustworthy in terms of either economic statements or forecast. But it’s clear that in the U.S. we are already at some kind of a stage of stagflation where say retail sales are strong because grocery prices are rising very strongly. So that boosts essentially grocery sales whereas sales of discretionary items are sluggish, and this is also reflected in the performance of retailers. Retailers that sell essentially necessities of life are performing reasonably well, and the retailers that are selling discretionary items, their stock prices have performed miserably.
RESOURCE INVESTOR: The subprime credit crunch remains a big driver in the U.S. economy. How deep do you think the credit crunch runs?
MARC FABER: I published already in 2006 numerous papers on the subprime lending industry. And it’s not just subprime lending industries because all the banks were involved in it. The subsidiaries of GE Capital and General Motors Acceptance Corp. were involved in it, and in January of last year I wrote a piece called “Irreparable Cracks in the Financial Market”. And that had to do with the whole credit crisis, and in my opinion it took longer for the credit crisis really to sink in.
But when it sank in and it sullied, we’re in 2007 and everybody was looking for stock market crash because it’s 20 years after 1987. We didn’t have a stock market crash, but we certainly had a crash in the bond market, in the CDO market, in lower quality paper. And that, in my opinion, leads to slower credit growth on the side of the marketplace.
In other words, the individuals that borrowed money they find it now harder to get access to credit and the financial institutions. Let’s say you’re a board member of Citigroup or UBS or any of the large banks. As a board member you suddenly tell management, “Now no more lending to lower quality credit. No longer acquiring CDOs, and of course, so the whole credit bubble that we’ve built over the last 25 years, I have to point it out, has now basically come to an end. We will have lower credit growth.
Now opposing this lower credit growth is of course the Fed and also the ECB that are printing money like crazy and trying to create liquidity in the marketplace.
But for a while the private sector may win, and that leads to poor economic conditions. When the Fed will eventually win because they can print an unlimited amount of money, and they can essentially expand their balance sheet by not only acquiring treasury securities, but also lower quality paper, eventually I suppose they’ll win the support at that market, but then at that point I suppose that inflation will become a problem. And so in real terms you will have no economic growth, and you have a real kind of stagflationary environment.
RESOURCE INVESTOR: Now as a contrarian do you think the U.S. dollar is going to be a good investment in the coming year?
MARC FABER: What had happened between 2001 and 2006, international liquidity as defined for foreign official dollar reserves or international reserves, was drawing at an accelerating rate. And now it’s still growing, but no longer at an accelerating rate, so we have international liquidity kind of in a relative tightening mode.
Whenever international liquidity expands, the dollar tends to be weak. And whenever international liquidity tends to kind of contract or when you have relative tightening of international liquidity - in other words, the gross rate slows down or turns negative - at that point you have a period of dollar strength.
And so combined with extremely negative sentiment we had about the U.S. dollar just two, three weeks ago with many leading media publications, like the Economist and the Eagle in Germany. Headlines and front page cover of negative views about the dollar, I think that we may have for the next three months at least a rebound in the U.S. dollar.
RESOURCE INVESTOR: Well you say precious metals, and especially gold, are likely to out perform financial assets for years to come. Now that doesn’t sound very contrarian because a lot of economists are calling for a rally in gold.
MARC FABER: Well, basically right now given the relative international tightening of liquidity and given my relative positive view for the next three months about the U.S. dollar and don’t make the mistake to think I’m foolish about the dollar long-term. I think long-term the dollar is a doomed currency because you have a money printer at the Fed and you have basically Hank Paulson at the Treasury who comes straight out of Wall Street and who has more interest in stabilizing the price of Goldman-Sachs stock than of having a strong dollar.
So, given these things I think long-term I’m negative about the dollar, but short-term bullish about the dollar. That leads to corrections in commodity markets. In particular, in industrial commodities also given my view that the global economy will slow down very considerably over the next six to 12 months.
So I’m not very bullish about commodities right now. I think the price of gold will also come under some pressure. Indeed the timing of tightening of liquidity.
But long-term I think that having Mr. Bernanke at the Fed, you have essentially a friend of gold at the Federal Reserve because he will print money. That will be very supportive of gold prices, whether you have one day inflation or whether you have deflation. In both cases it will be gold supported. So in any weakness I would buy gold.
Then I would like to add to your comments that so many people are bullish about gold. When people talk and when they act is sometimes two different things. I go to a lot of investment conferences, and when I ask the attendants, “How many of you have more than 5% of your assets in gold or gold shares?” Normally it’s about 3 to 5% of the audience; several hundred people frequently have more than 5%. That’s the maximum.
So people have actually very little gold in their portfolio. You go to the Asian central banks, they have 2% of their reserves in gold maximum. You go to the Sovereign Wealth Fund, they have practically no gold exposure.
So I would say if people say that people are bullish about gold, yeah, the gold bugs are bullish about gold, but the other 95% of the world, they have no gold exposure at all.
RESOURCE INVESTOR: All right, well that’s a very good point. Thank you, Mark. We appreciate your time. Again, you can find Marc Faber’s “The Gloom, Boom and Doom Report” at www.gloomboomdoom.com
Courtesy: www.resourceinvestor.com
RESOURCE INVESTOR: Hi, this is Jane Louis with Resource Investor Podcasts. We’re here today with everyone’s favourite contrarian economist, Dr. Marc Faber. Marc is the editor and publisher of “The Gloom, Boom and Doom Report”, an economic and financial publication that promotes against the grain investments and cautions against widely accepted investment themes. You can read more at www.gloomboomdoom.com. Marc is known for his realistic, though admittedly pessimistic, views on the state of the global economy. Hi, Marc. Welcome to Resource Investor.
MARC FABER: Hi.
RESOURCE INVESTOR: So let’s go back to September when you predicted in a U.S. Global Investors webcast that the synchronized global economic boom was going to burst. It’s three months later now, and 2007 is coming to an end. How do you feel about the global boom now?
MARC FABER: Well, basically we still have very strong growth in emerging economies. If you travel around the world practically every economy is a boom condition. There’s only one economy really in recession. That’s Zimbabwe, where obviously money printing didn’t work and where we find an example that in the U.S. money printing also will not work in real terms.
It may boost asset prices at some point, but I would imagine that in the U.S. we are already in recession, if inflation - in other words, price increases were measured properly, then there would be no real economic growth at this stage.
RESOURCE INVESTOR: Well, as Alan Greenspan pointed out recently, the U.S. economy might actually be headed for a stagflation. Do you think that’s a possibility?
MARC FABER: Well, basically I don’t listen anymore or never have to Mr. Greenspan since he’s a hopeless forecaster, a hopeless economist and since he denies that he created this huge mess by having kept interest rates artificially low for too long.
So he’s not a person that I would consider to be trustworthy in terms of either economic statements or forecast. But it’s clear that in the U.S. we are already at some kind of a stage of stagflation where say retail sales are strong because grocery prices are rising very strongly. So that boosts essentially grocery sales whereas sales of discretionary items are sluggish, and this is also reflected in the performance of retailers. Retailers that sell essentially necessities of life are performing reasonably well, and the retailers that are selling discretionary items, their stock prices have performed miserably.
RESOURCE INVESTOR: The subprime credit crunch remains a big driver in the U.S. economy. How deep do you think the credit crunch runs?
MARC FABER: I published already in 2006 numerous papers on the subprime lending industry. And it’s not just subprime lending industries because all the banks were involved in it. The subsidiaries of GE Capital and General Motors Acceptance Corp. were involved in it, and in January of last year I wrote a piece called “Irreparable Cracks in the Financial Market”. And that had to do with the whole credit crisis, and in my opinion it took longer for the credit crisis really to sink in.
But when it sank in and it sullied, we’re in 2007 and everybody was looking for stock market crash because it’s 20 years after 1987. We didn’t have a stock market crash, but we certainly had a crash in the bond market, in the CDO market, in lower quality paper. And that, in my opinion, leads to slower credit growth on the side of the marketplace.
In other words, the individuals that borrowed money they find it now harder to get access to credit and the financial institutions. Let’s say you’re a board member of Citigroup or UBS or any of the large banks. As a board member you suddenly tell management, “Now no more lending to lower quality credit. No longer acquiring CDOs, and of course, so the whole credit bubble that we’ve built over the last 25 years, I have to point it out, has now basically come to an end. We will have lower credit growth.
Now opposing this lower credit growth is of course the Fed and also the ECB that are printing money like crazy and trying to create liquidity in the marketplace.
But for a while the private sector may win, and that leads to poor economic conditions. When the Fed will eventually win because they can print an unlimited amount of money, and they can essentially expand their balance sheet by not only acquiring treasury securities, but also lower quality paper, eventually I suppose they’ll win the support at that market, but then at that point I suppose that inflation will become a problem. And so in real terms you will have no economic growth, and you have a real kind of stagflationary environment.
RESOURCE INVESTOR: Now as a contrarian do you think the U.S. dollar is going to be a good investment in the coming year?
MARC FABER: What had happened between 2001 and 2006, international liquidity as defined for foreign official dollar reserves or international reserves, was drawing at an accelerating rate. And now it’s still growing, but no longer at an accelerating rate, so we have international liquidity kind of in a relative tightening mode.
Whenever international liquidity expands, the dollar tends to be weak. And whenever international liquidity tends to kind of contract or when you have relative tightening of international liquidity - in other words, the gross rate slows down or turns negative - at that point you have a period of dollar strength.
And so combined with extremely negative sentiment we had about the U.S. dollar just two, three weeks ago with many leading media publications, like the Economist and the Eagle in Germany. Headlines and front page cover of negative views about the dollar, I think that we may have for the next three months at least a rebound in the U.S. dollar.
RESOURCE INVESTOR: Well you say precious metals, and especially gold, are likely to out perform financial assets for years to come. Now that doesn’t sound very contrarian because a lot of economists are calling for a rally in gold.
MARC FABER: Well, basically right now given the relative international tightening of liquidity and given my relative positive view for the next three months about the U.S. dollar and don’t make the mistake to think I’m foolish about the dollar long-term. I think long-term the dollar is a doomed currency because you have a money printer at the Fed and you have basically Hank Paulson at the Treasury who comes straight out of Wall Street and who has more interest in stabilizing the price of Goldman-Sachs stock than of having a strong dollar.
So, given these things I think long-term I’m negative about the dollar, but short-term bullish about the dollar. That leads to corrections in commodity markets. In particular, in industrial commodities also given my view that the global economy will slow down very considerably over the next six to 12 months.
So I’m not very bullish about commodities right now. I think the price of gold will also come under some pressure. Indeed the timing of tightening of liquidity.
But long-term I think that having Mr. Bernanke at the Fed, you have essentially a friend of gold at the Federal Reserve because he will print money. That will be very supportive of gold prices, whether you have one day inflation or whether you have deflation. In both cases it will be gold supported. So in any weakness I would buy gold.
Then I would like to add to your comments that so many people are bullish about gold. When people talk and when they act is sometimes two different things. I go to a lot of investment conferences, and when I ask the attendants, “How many of you have more than 5% of your assets in gold or gold shares?” Normally it’s about 3 to 5% of the audience; several hundred people frequently have more than 5%. That’s the maximum.
So people have actually very little gold in their portfolio. You go to the Asian central banks, they have 2% of their reserves in gold maximum. You go to the Sovereign Wealth Fund, they have practically no gold exposure.
So I would say if people say that people are bullish about gold, yeah, the gold bugs are bullish about gold, but the other 95% of the world, they have no gold exposure at all.
RESOURCE INVESTOR: All right, well that’s a very good point. Thank you, Mark. We appreciate your time. Again, you can find Marc Faber’s “The Gloom, Boom and Doom Report” at www.gloomboomdoom.com
Courtesy: www.resourceinvestor.com
Global economy: what is in store for next year
This week the European Central Bank made $500 billion available through money market operations. And only last week $110bn of new money was created by central bank loans with artificially low rates and reduced-quality security. This is money creation on an epic scale.
Why is this happening now? Here's my theory: 31st December is a major day on the financial calendar. If you take a sample of bonds, you'll find that a disproportionate number of them are due for interest and/or redemption on 31st December. Redeeming bonds is very cash intensive, and cash is not freely available in the banking system right now.
So it seems likely that some frantic finance directors will be working long hours to find the cash that will enable them to avoid a default next week.
If that's right the festive season could see the announcement of some nasty shocks. June 30th won't be much fun either, for the same reasons. The credit crunch is deepening, and will go on doing so until at least next summer.
For those of us who like to take responsibility for ourselves (it's called freedom by the way) it's getting just a little tiresome that money creation is diluting our savings, and making us pay - again - for the excesses of the buy-now-think-later generation. Some of us would prefer to see the government react with a shrug and a sympathetic "bad luck" to the losers in the next financial train wreck. But it's not the mood of the nation.
Politicians have begun one of their competitive caring phases, and they're rescuing victims everywhere. Every clapped out bank, every busted pension scheme, every industrial zombie, and absolutely every government department will be nurtured in the warm embrace of the public purse.
This causes a natural backlash. Issuing new money reduces depositors' returns, prompting savers to switch to better stores of wealth. This capital flight should be easy to spot, but modern economic statistics can obscure it. You see, the main way economists measure economic health is by counting the money spent in the economy, and now that savers are dumping currency (and buying better wealth stores) the effect is tough to distinguish from the economist's beloved GDP growth. Our healthy GDP figures are a distortion, and the economy is not making a steady booming noise but an ominous hissing - the noise of savers abandoning the currency.
You can see this at the key entry points to the real economy:
Oil is multiplying in price.
All the grains are multiplying in price.
All the base metals are multiplying in price.
Gold is multiplying in price.
Producer prices are through the roof.
In spite of this, the monetary authorities are racing to issue more money, and economists are clamouring for cuts in interest rates. They're caught 'twixt the devil and the deep blue sea, because although they could address these serious inflationary indicators, doing so risks the revenge of a giant economic threat - a rout in the housing market. And that would mean depression.
So it looks increasingly likely that low rates are staying, and the hot global investment money, sucked in by Britain's recent and comparatively high interest rates, is about to quit Britain and send the currency into a tailspin. This produces higher prices for imported goods. At the same time, our public finances are in a serious mess, and the biggest contributor to our service-based economy - the City - is the main victim of current turbulence. And please don't ask about the trade figures because they're just ugly.
It is becoming genuinely possible that people will refuse to hold sterling for more than a fleeting moment. Inflation could turn so severe that the 'hyper' prefix is justified.
I know - it's too far-fetched to be believable. Or is it? For 150 years the values of Western currencies have stayed way above purchasing power parity levels with Asia. Being a developed country is what drove this premium, as money flowed down a one way street to our advanced economies. These were the only places where sophisticated products could be built or bought.
Today things are different. You could measure circuit board production in two factories in Indonesia and in Britain, and get the output per worker priced in local currency. Multiply both by their conversion rate into US dollars, and the British factory seems to have produced 5 - 7 times more US dollar denominated output. So our GDP looks good, but only through the distorting lens of a western currency conversion. There's another way to measure that same output: simply count the circuit boards. Do that and you'll see there's no material difference in productivity between a British and an Indonesian worker. Perhaps the root cause of western currency premium has evaporated, and the anomaly is now that sterling really is 5 - 7 times overvalued against Asian money.
You could switch to euros. But looking at their policy they're creating as much money as the Bank of England. And the US Federal Reserve is doing it too, while all of Asia is battling to hold down their currencies so that their exports can continue apace. It's a bizarre race to the bottom for the world's currencies.
It's time to sidestep the financial consequences of this largesse. What can we savers do? If you're as bothered as I am, then currency should be struck off your Christmas list and replaced with something more reliably rare. I think gold could soon look so highly priced in sterling that many of us will be too frightened to buy it. But it isn't there yet, so perhaps buy just a little now, and if it makes you a small profit it will be easier to buy a little more next month. If that makes you a profit too, then allow yourself to build a proper stash. I'm not sure we'll ever again be able to buy it for much under £400 an ounce.
I have just instructed my bank to transfer all my remaining cash deposits to BullionVault to Buy Gold, and I look forward to spending 2008 long gold and completely sterling free.
Paul Tustain is the editor of www.Galmarley.com and director of BullionVault.
Why is this happening now? Here's my theory: 31st December is a major day on the financial calendar. If you take a sample of bonds, you'll find that a disproportionate number of them are due for interest and/or redemption on 31st December. Redeeming bonds is very cash intensive, and cash is not freely available in the banking system right now.
So it seems likely that some frantic finance directors will be working long hours to find the cash that will enable them to avoid a default next week.
If that's right the festive season could see the announcement of some nasty shocks. June 30th won't be much fun either, for the same reasons. The credit crunch is deepening, and will go on doing so until at least next summer.
For those of us who like to take responsibility for ourselves (it's called freedom by the way) it's getting just a little tiresome that money creation is diluting our savings, and making us pay - again - for the excesses of the buy-now-think-later generation. Some of us would prefer to see the government react with a shrug and a sympathetic "bad luck" to the losers in the next financial train wreck. But it's not the mood of the nation.
Politicians have begun one of their competitive caring phases, and they're rescuing victims everywhere. Every clapped out bank, every busted pension scheme, every industrial zombie, and absolutely every government department will be nurtured in the warm embrace of the public purse.
This causes a natural backlash. Issuing new money reduces depositors' returns, prompting savers to switch to better stores of wealth. This capital flight should be easy to spot, but modern economic statistics can obscure it. You see, the main way economists measure economic health is by counting the money spent in the economy, and now that savers are dumping currency (and buying better wealth stores) the effect is tough to distinguish from the economist's beloved GDP growth. Our healthy GDP figures are a distortion, and the economy is not making a steady booming noise but an ominous hissing - the noise of savers abandoning the currency.
You can see this at the key entry points to the real economy:
Oil is multiplying in price.
All the grains are multiplying in price.
All the base metals are multiplying in price.
Gold is multiplying in price.
Producer prices are through the roof.
In spite of this, the monetary authorities are racing to issue more money, and economists are clamouring for cuts in interest rates. They're caught 'twixt the devil and the deep blue sea, because although they could address these serious inflationary indicators, doing so risks the revenge of a giant economic threat - a rout in the housing market. And that would mean depression.
So it looks increasingly likely that low rates are staying, and the hot global investment money, sucked in by Britain's recent and comparatively high interest rates, is about to quit Britain and send the currency into a tailspin. This produces higher prices for imported goods. At the same time, our public finances are in a serious mess, and the biggest contributor to our service-based economy - the City - is the main victim of current turbulence. And please don't ask about the trade figures because they're just ugly.
It is becoming genuinely possible that people will refuse to hold sterling for more than a fleeting moment. Inflation could turn so severe that the 'hyper' prefix is justified.
I know - it's too far-fetched to be believable. Or is it? For 150 years the values of Western currencies have stayed way above purchasing power parity levels with Asia. Being a developed country is what drove this premium, as money flowed down a one way street to our advanced economies. These were the only places where sophisticated products could be built or bought.
Today things are different. You could measure circuit board production in two factories in Indonesia and in Britain, and get the output per worker priced in local currency. Multiply both by their conversion rate into US dollars, and the British factory seems to have produced 5 - 7 times more US dollar denominated output. So our GDP looks good, but only through the distorting lens of a western currency conversion. There's another way to measure that same output: simply count the circuit boards. Do that and you'll see there's no material difference in productivity between a British and an Indonesian worker. Perhaps the root cause of western currency premium has evaporated, and the anomaly is now that sterling really is 5 - 7 times overvalued against Asian money.
You could switch to euros. But looking at their policy they're creating as much money as the Bank of England. And the US Federal Reserve is doing it too, while all of Asia is battling to hold down their currencies so that their exports can continue apace. It's a bizarre race to the bottom for the world's currencies.
It's time to sidestep the financial consequences of this largesse. What can we savers do? If you're as bothered as I am, then currency should be struck off your Christmas list and replaced with something more reliably rare. I think gold could soon look so highly priced in sterling that many of us will be too frightened to buy it. But it isn't there yet, so perhaps buy just a little now, and if it makes you a small profit it will be easier to buy a little more next month. If that makes you a profit too, then allow yourself to build a proper stash. I'm not sure we'll ever again be able to buy it for much under £400 an ounce.
I have just instructed my bank to transfer all my remaining cash deposits to BullionVault to Buy Gold, and I look forward to spending 2008 long gold and completely sterling free.
Paul Tustain is the editor of www.Galmarley.com and director of BullionVault.
Barra strikes gold in Australia
Perth based Barra Resources, an exploration and mining company with a focus on targeting and developing high grade gold deposits, yesterday said its deep drilling program had hit an intersection yielding a sensational 10 kilograms - of gold per tonne of ore at its Burbanks mine near Coolgardie in Western Australia.
As a result of the findings shares in Barra Resources surged nearly 23 per cent on Friday. The news sent investors piling into Barra shares, which jumped 6.5 to 35 following the announcement.
Barra managing director Dean Goodwin said the explorer would now intensify drilling around the new discovery. The intersection is a relatively modest 21 centimetres; it is part of a longer 4.69 metre structure.
The hole is the deepest ever drilled on the field, hitting the intersection at 350 metres depth. the intersection was believed to be associated with a totally new reef and was the first of six holes scheduled to drill deep targets.
Barra started the drilling program in a bid to beef up its gold reserves after producing around 27,000 ounces of gold this year. Drilling had been halted for the Christmas break but would start again in the second week of January.
As a result of the findings shares in Barra Resources surged nearly 23 per cent on Friday. The news sent investors piling into Barra shares, which jumped 6.5 to 35 following the announcement.
Barra managing director Dean Goodwin said the explorer would now intensify drilling around the new discovery. The intersection is a relatively modest 21 centimetres; it is part of a longer 4.69 metre structure.
The hole is the deepest ever drilled on the field, hitting the intersection at 350 metres depth. the intersection was believed to be associated with a totally new reef and was the first of six holes scheduled to drill deep targets.
Barra started the drilling program in a bid to beef up its gold reserves after producing around 27,000 ounces of gold this year. Drilling had been halted for the Christmas break but would start again in the second week of January.
Gold council plans big foray into rural areas
In an effort to tap the rural buyers’ potential, the World Gold Council-India is planning to seek the help of micro finance institutions in the country to provide loans to lower income groups to purchase gold in small quantities.
World Gold Council-India officials said the idea came from a project launched in Kerala in collaboration with the Muthoot Group. In that project, around 2,000 individuals from lower income groups were given loans to buy gold and there has been no default till now.
The council is now scouting for MFI partners to launch similar programmes across the country.
In another development, to encourage gold purchase through finance in the urban areas, the council is currently in talks with the ICICI Bank.
The objective is to encourage gold consumption and aptitude for investing in/wearing gold jewellery.
The council is also working on promoting the use of gold jewellery among young girls in the country. The gold consumption by young girls in India is very low as of now. The council is on a mission to bring a mindset shift in the youth about making a fashion statement with gold jewellery.
World Gold Council-India officials said the idea came from a project launched in Kerala in collaboration with the Muthoot Group. In that project, around 2,000 individuals from lower income groups were given loans to buy gold and there has been no default till now.
The council is now scouting for MFI partners to launch similar programmes across the country.
In another development, to encourage gold purchase through finance in the urban areas, the council is currently in talks with the ICICI Bank.
The objective is to encourage gold consumption and aptitude for investing in/wearing gold jewellery.
The council is also working on promoting the use of gold jewellery among young girls in the country. The gold consumption by young girls in India is very low as of now. The council is on a mission to bring a mindset shift in the youth about making a fashion statement with gold jewellery.
Russia to keep oil wealth in bonds
Moscow: Russia will keep its $151 billion Oil and Gas Fund entirely in sovereign bonds next year and will not invest a $19 billion sub-fund in corporate debt or stock, a top Finance Ministry official told Reuters yesterday.
The fund will be split on February 1 into a reserve fund, which will act as an insurance policy to cover any budget deficit caused by a fall in energy prices, and a more growth-oriented National Wealth Fund.
"The National Wealth Fund will be invested in sovereign bonds with a rating not lower than 'AA' in 2008," said Dmitry Pankin, head of the ministry's debt department.
The decision means that Russia will not join this year the ranks of countries like China or Singapore, which have large sovereign wealth funds leading to some concern in the developed world over possible aggressive acquisition strategy and low transparency.
Business
Oil & Gas
Reuters
Gas flares at the Yuzhno Russkoye oil and gas field. The measure, if approved, would bring clarity to rules by which the Kremlin will treat foreign investors.
Russia to keep oil wealth in bonds
Reuters
Published: December 25, 2007, 23:13
Moscow: Russia will keep its $151 billion Oil and Gas Fund entirely in sovereign bonds next year and will not invest a $19 billion sub-fund in corporate debt or stock, a top Finance Ministry official told Reuters yesterday.
The fund will be split on February 1 into a reserve fund, which will act as an insurance policy to cover any budget deficit caused by a fall in energy prices, and a more growth-oriented National Wealth Fund.
"The National Wealth Fund will be invested in sovereign bonds with a rating not lower than 'AA' in 2008," said Dmitry Pankin, head of the ministry's debt department.
The decision means that Russia will not join this year the ranks of countries like China or Singapore, which have large sovereign wealth funds leading to some concern in the developed world over possible aggressive acquisition strategy and low transparency.
--------------------------------------------------------------------------------
--------------------------------------------------------------------------------
The initial plan was to start investing the NWF in corporate paper on February 1,but the government is still struggling to make up its mind about how to use the fund and whether to spend the return on the fund's investment or the fund itself.
The stabilisation fund was created in 2004 to cushion the budget from a fall in oil prices but has since outgrown its original goal, prompting a heated debate about what to do next with the oil windfall.
Key achievement
The government tapped the NWF for 300 billion roubles this year, even before its creation, to capitalise a number of development institutions which for now are mainly being used to provide liquidity for the banking sector.
Ahead of the poll to elect a successor to President Vladimir Putin pressure is mounting to spend some of the oil wealth on improving life for ordinary Russians. Economists see the fund as a key policy achievement of Putin's eight years in office.
The government's leading fiscal hawk and an architect of the fund, Finance Minister Alexei Kudrin, has so far opposed any plans to tap the fund but his position has weakened after his deputy Sergei Storchak was charged with fraud.
Storchak, Russia's foreign debt negotiator and supervisor of the rainy day fund, could face 10 years in jail if convicted of attempting to embezzle $43 million in connection with a failed attempt to recover a debt from Algeria.
Analysts say the prosecution may reflect a struggle between Kremlin factions for control over the state's vast cash hoard.
Pankin said the Finance Ministry proposals, agreed with key ministries and the central bank, have been submitted to the government for review. The Finance Ministry will continue to work on a less conservative investment mechanism.
"We will create a new mechanism when it will become clear to us how and for what the NWF's money will be spent," Pankin said. "As long is there is no timetable for the funds' withdrawal it is not clear which investment strategy will be optimal."
The fund will be split on February 1 into a reserve fund, which will act as an insurance policy to cover any budget deficit caused by a fall in energy prices, and a more growth-oriented National Wealth Fund.
"The National Wealth Fund will be invested in sovereign bonds with a rating not lower than 'AA' in 2008," said Dmitry Pankin, head of the ministry's debt department.
The decision means that Russia will not join this year the ranks of countries like China or Singapore, which have large sovereign wealth funds leading to some concern in the developed world over possible aggressive acquisition strategy and low transparency.
Business
Oil & Gas
Reuters
Gas flares at the Yuzhno Russkoye oil and gas field. The measure, if approved, would bring clarity to rules by which the Kremlin will treat foreign investors.
Russia to keep oil wealth in bonds
Reuters
Published: December 25, 2007, 23:13
Moscow: Russia will keep its $151 billion Oil and Gas Fund entirely in sovereign bonds next year and will not invest a $19 billion sub-fund in corporate debt or stock, a top Finance Ministry official told Reuters yesterday.
The fund will be split on February 1 into a reserve fund, which will act as an insurance policy to cover any budget deficit caused by a fall in energy prices, and a more growth-oriented National Wealth Fund.
"The National Wealth Fund will be invested in sovereign bonds with a rating not lower than 'AA' in 2008," said Dmitry Pankin, head of the ministry's debt department.
The decision means that Russia will not join this year the ranks of countries like China or Singapore, which have large sovereign wealth funds leading to some concern in the developed world over possible aggressive acquisition strategy and low transparency.
--------------------------------------------------------------------------------
--------------------------------------------------------------------------------
The initial plan was to start investing the NWF in corporate paper on February 1,but the government is still struggling to make up its mind about how to use the fund and whether to spend the return on the fund's investment or the fund itself.
The stabilisation fund was created in 2004 to cushion the budget from a fall in oil prices but has since outgrown its original goal, prompting a heated debate about what to do next with the oil windfall.
Key achievement
The government tapped the NWF for 300 billion roubles this year, even before its creation, to capitalise a number of development institutions which for now are mainly being used to provide liquidity for the banking sector.
Ahead of the poll to elect a successor to President Vladimir Putin pressure is mounting to spend some of the oil wealth on improving life for ordinary Russians. Economists see the fund as a key policy achievement of Putin's eight years in office.
The government's leading fiscal hawk and an architect of the fund, Finance Minister Alexei Kudrin, has so far opposed any plans to tap the fund but his position has weakened after his deputy Sergei Storchak was charged with fraud.
Storchak, Russia's foreign debt negotiator and supervisor of the rainy day fund, could face 10 years in jail if convicted of attempting to embezzle $43 million in connection with a failed attempt to recover a debt from Algeria.
Analysts say the prosecution may reflect a struggle between Kremlin factions for control over the state's vast cash hoard.
Pankin said the Finance Ministry proposals, agreed with key ministries and the central bank, have been submitted to the government for review. The Finance Ministry will continue to work on a less conservative investment mechanism.
"We will create a new mechanism when it will become clear to us how and for what the NWF's money will be spent," Pankin said. "As long is there is no timetable for the funds' withdrawal it is not clear which investment strategy will be optimal."
Dollar May Rise to 115.70 Yen on Technical Charts, MUFG Says
(Bloomberg) -- The dollar may strengthen to a two- month high of 115.70 yen in a few weeks, said Masashi Hashimoto, a currency analyst at Bank of Tokyo-Mitsubishi UFJ Ltd., citing technical charts.
Resistance at around 115.70 yen represents a 50 percent retracement of the dollar's decline from its June 22 high of 124.13 to its Nov. 26 low of 107.23, according to a series of numbers known as the Fibonacci sequence. The U.S. currency is poised to gain after it rose above the upper side of clouds on the so-called Ichimoku chart, which stayed at 113.53 today. Resistance is a level where sell orders may be clustered.
``The dollar's uptrend is very firm technically,'' said Hashimoto at Bank of Tokyo-Mitsubishi UFJ, a unit of Japan's largest publicly listed lender. ``It will likely challenge higher levels in the coming few weeks.''
The dollar traded at 114.28 yen at 7:45 a.m. in London from 114.29 in New York yesterday, when it advanced to 114.49, the strongest since Nov. 7.
Other Fibonacci levels include 23.6 percent, 38.2 percent and 76.4 percent. A break of one indicates a currency may move to the next. A failure suggests a trend may stall.
An Ichimoku chart analyzes the midpoints of historic highs and lows. A cloud, used to identify levels of support where traders expect buying, or resistance where they expect selling, is the area between the first and second leading span lines.
Moving Averages
The dollar is also likely to rise after it broke through its 65-day and 90-day moving averages. The dollar has risen above the 65-day moving average, which stayed at 113.28 yen today, since Dec. 14. It also climbed above the 90-day moving average today, which stayed at 113.83 yen, signaling the dollar is likely to remain strong in the medium term.
Traders typically look for evidence of a currency's short- term trend by viewing the five-day moving average, and aim to forecast two- to three-week trends with the 21-day moving average and a three-month trend with 65-day and 90-day moving averages. They use moving averages to identify levels of support, where buying is expected, or resistance, where selling is forecast to take place.
In technical analysis, investors and analysts study charts of trading patterns and prices to forecast changes in a security, commodity, currency or index.
Resistance at around 115.70 yen represents a 50 percent retracement of the dollar's decline from its June 22 high of 124.13 to its Nov. 26 low of 107.23, according to a series of numbers known as the Fibonacci sequence. The U.S. currency is poised to gain after it rose above the upper side of clouds on the so-called Ichimoku chart, which stayed at 113.53 today. Resistance is a level where sell orders may be clustered.
``The dollar's uptrend is very firm technically,'' said Hashimoto at Bank of Tokyo-Mitsubishi UFJ, a unit of Japan's largest publicly listed lender. ``It will likely challenge higher levels in the coming few weeks.''
The dollar traded at 114.28 yen at 7:45 a.m. in London from 114.29 in New York yesterday, when it advanced to 114.49, the strongest since Nov. 7.
Other Fibonacci levels include 23.6 percent, 38.2 percent and 76.4 percent. A break of one indicates a currency may move to the next. A failure suggests a trend may stall.
An Ichimoku chart analyzes the midpoints of historic highs and lows. A cloud, used to identify levels of support where traders expect buying, or resistance where they expect selling, is the area between the first and second leading span lines.
Moving Averages
The dollar is also likely to rise after it broke through its 65-day and 90-day moving averages. The dollar has risen above the 65-day moving average, which stayed at 113.28 yen today, since Dec. 14. It also climbed above the 90-day moving average today, which stayed at 113.83 yen, signaling the dollar is likely to remain strong in the medium term.
Traders typically look for evidence of a currency's short- term trend by viewing the five-day moving average, and aim to forecast two- to three-week trends with the 21-day moving average and a three-month trend with 65-day and 90-day moving averages. They use moving averages to identify levels of support, where buying is expected, or resistance, where selling is forecast to take place.
In technical analysis, investors and analysts study charts of trading patterns and prices to forecast changes in a security, commodity, currency or index.
Gold Falls in Asia on Speculation Dollar Gain May Reduce Appeal
(Bloomberg) -- Gold fell for the first time in three days in Asia on speculation the dollar may gain, reducing the appeal of the precious metal as an alternative investment. Silver also dropped.
The dollar was little changed at $1.4394 per euro at 3:26 p.m. Shanghai time. A U.S. report this week may show durable- goods orders rebounded, suggesting the economy is weathering the worst housing slump in 16 years.
``Gold's moves will be limited, as trading is sluggish during the holiday, even as the dollar may rise,'' Bill Cai, a gold trader with Bank of China Ltd. in Shanghai, said by phone.
The metal fell $4.80, or 0.6 percent, to $807 an ounce at 2:36 p.m. Shanghai time. Silver dropped 0.5 percent to $14.47 an ounce. Trading on the Comex division of the New York Mercantile Exchange will be closed today for the Christmas holiday.
The dollar has gained against 12 of the 16 major currencies in the past month on speculation that signs of economic resilience and accelerating inflation will discourage the Federal Reserve from cutting borrowing costs next month.
In Japan, gold for December delivery, the most-widely held contract, rose 1.7 percent to close at 2,986 yen a gram ($813 an ounce) on the Tokyo Commodity Exchange.
The dollar was little changed at $1.4394 per euro at 3:26 p.m. Shanghai time. A U.S. report this week may show durable- goods orders rebounded, suggesting the economy is weathering the worst housing slump in 16 years.
``Gold's moves will be limited, as trading is sluggish during the holiday, even as the dollar may rise,'' Bill Cai, a gold trader with Bank of China Ltd. in Shanghai, said by phone.
The metal fell $4.80, or 0.6 percent, to $807 an ounce at 2:36 p.m. Shanghai time. Silver dropped 0.5 percent to $14.47 an ounce. Trading on the Comex division of the New York Mercantile Exchange will be closed today for the Christmas holiday.
The dollar has gained against 12 of the 16 major currencies in the past month on speculation that signs of economic resilience and accelerating inflation will discourage the Federal Reserve from cutting borrowing costs next month.
In Japan, gold for December delivery, the most-widely held contract, rose 1.7 percent to close at 2,986 yen a gram ($813 an ounce) on the Tokyo Commodity Exchange.
Gold May Climb on Demand for Inflation Hedge, Survey Says
(Bloomberg) -- Gold may gain for a second straight week on speculation that the rising cost of raw materials will boost demand for the precious metal as a hedge against inflation.
Fourteen of 27 traders, investors and analysts surveyed by Bloomberg from Mumbai to New York on Dec. 20 and Dec. 21 advised buying gold, which rose 2.2 percent last week to $815.40 an ounce in New York. One said to sell, and 12 were neutral.
Gold is up 28 percent this year as the UBS Bloomberg Constant Maturity Commodity Index has climbed 21 percent. Wheat and rice reached records last week, and soybeans traded at the highest in 34 years.
The majority of analysts surveyed Dec. 13 and Dec. 14 anticipated last week's gain. The survey has accurately forecast prices in 117 of 190 weeks, or 62 percent.
Fourteen of 27 traders, investors and analysts surveyed by Bloomberg from Mumbai to New York on Dec. 20 and Dec. 21 advised buying gold, which rose 2.2 percent last week to $815.40 an ounce in New York. One said to sell, and 12 were neutral.
Gold is up 28 percent this year as the UBS Bloomberg Constant Maturity Commodity Index has climbed 21 percent. Wheat and rice reached records last week, and soybeans traded at the highest in 34 years.
The majority of analysts surveyed Dec. 13 and Dec. 14 anticipated last week's gain. The survey has accurately forecast prices in 117 of 190 weeks, or 62 percent.
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