Secret moves launched by China, Russia, Japan, France, Arab States to end the Dollar

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China, gold, and the civilization shift

By Ambrose Evans-Pritchard Economics Last updated: November 26th, 2009
79 Comments Comment on this article

Stephen Jen from the hedge fund Blue Gold Capital has a warning for those who think that gold has risen far too high, is necessarily in a speculative bubble, and must soon come clattering back down.



Mr Jen is an expert on sovereign wealth funds from his days at Morgan Stanley. The gold story — essentially — is that the rising economic powers of Asia, the Middle East, and the commodity bloc are rejecting Western fiat currencies. China, India, and Russia have all been buying gold on a large scale over recent months.

Why should that stop when the AAA club of sovereign debtors is pushing towards the danger threshold of 100pc of GDP?

These new players account for almost all the accumulation of foreign currency reserves worldwide over the last five years, so what they do matters enormously.

After crunching the numbers, Mr Jen found that the share of gold in their reserves is just 2.2pc compared to 38pc for the Old World (perhaps we should just call them the deadbeats from now on). They would have to buy $115bn of gold at current prices to raise their bullion to just 5pc of total reserves, and $700bn to reach just half western levels.

The killer-term here is at current prices since any such move in the tiny global market for gold would send prices into the stratosphere.

Mr Jen says that you know where you are in the currency markets — more or less — because there are concepts of “fair value” used by experts. Ditto for the equity markets, where you have P/E ratios (warts and all I might add, since the actual reported P/E of the S&P 500 was a record 141 in September before the agency stopped publishing the figure — a far cry from the forward earnings in vogue).

How on earth do we determine what fair value should be for gold? “We have no such concept,” he said. Actually, that is not quite true. You can use the dollar monetary base as a proxy.

Mr Jen said China alone accumulated $150bn in reserves in the third quarter, pushing the total to $2.3 trillion. These are colossal sums. China is amassing almost as much each month as the United States ($63bn) has built up in the entire history of the country. True, the US understates the value of its gold, but you get the picture. Something big is going on.

So far, China has just 1.7pc of its reserves in gold, or 34m troy ounces. I was told by a top Chinese official that they are buying on the dips so as not to crowd out the market, which means of course that gold cannot “crash” unless you think China itself is going to crash — or stop building reserves (which is possible: Albert Edwards from SocGen says China may be in current account deficit next year, leading to a yuan move — down, not up).

The gold proportions are: Hong Kong (0), Singapore (0), Korea (0.2), Brazil (0.6), India (4.8) after its shock purchase of IMF gold, and Russia (5.5). Yes, the West still has a lot in percentage terms — US (86), France (78), Italy (72), Switzerland (33), Germany (25) — but they don’t count for so much any more.

It is true that the Old World could meet demand for a while (a short while actually) by selling some of their gold. But will they do so? They did not use up their quota for the last year under the Washington accord.

My own guess is that they too are wondering whether it makes any sense to keep selling metal in order to buy the fiat paper of the bankrupt peers (note that the Bank of England’s own pension fund has got rid of almost all its Gilts, buying inflation protection instead). Britain may become a net buyer of gold under the Tories, Who knows?
Bottom line: “The scope for EM central banks to buy more gold is substantial, if they choose to do so,” he wrote cautiously in a note to clients.

Will they choose to do so?

“I suspect they will,” he told me.

Personally, I have been feeling vertigo with gold near $1180. All my contrarian instincts cause me to dislike momentum stories — but there again, maybe this is not momentum. Perhaps it is a civilization shift.

Can’t make up my mind.

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Dubai crisis gives China chance to buy oil, gold: report

Reuters
Monday, November 30, 2009 8:39 AM

BEIJING (Reuters) - Dubai's debt crisis could be China's opportunity to snap up gold and oil assets, a senior Chinese official said in remarks published on Monday.

No Chinese banks have yet reported exposure to debt from Dubai World, a flagship firm that last week said it was seeking to delay debt payments by six months. Some Chinese real estate and construction firms have limited exposure to projects in the emirate, state television reported this weekend.

China's $2.27 trillion in foreign exchange reserves are mostly parked in U.S. treasuries, despite calls from some in China to invest the reserves in oil and other natural resources that the fast-growing Chinese economy will need in future.

While the impact of the Dubai crisis on the global economy and on China was not known yet, it would last a while at the very least, Ji Xiaonan, who chairs the supervisory board for big state-owned companies under the State Council's state assets commission, told the Economic Information Daily.

"That could give China a buying opportunity to put some forex reserves into gold or oil reserves," Ji was quoted as saying by the paper, which is widely read by Chinese officials.

Another paper, the China Youth Daily, quoted Ji as saying that a team of experts from Beijing and Shanghai had set up a task force last year to look at the issue of gold reserves.

"We suggested that China's gold reserves should reach 6,000 tons in the next 3-5 years and perhaps 10,000 tons in 8-10 years," the paper quoted him as saying.

That is in line with many officials' view that China should decrease the proportion of its $2 trillion foreign exchange reserves held in dollar-linked investments and raise its gold holdings to diversify its portfolio.



China last acknowledged a change in its national gold holdings in April, when Hu Xiaolian, head of the State Administration of Foreign Exchange (SAFE), told Xinhua news agency that the country's reserves had risen to 1,054 tons from 600 tons since 2003.

But it did so by buying domestically produced gold to help soak up unsold output. It has not yet shown any interest in buying from international gold markets.

"If the gold price comes down for a while, we might take the opportunity to buy a bit," the Economic Information Daily, run by Xinhua news agency, quoted economist Li Yining as saying.

Li added that China must gradually diversify the asset and currency composition of its foreign exchange reserves. He recommended buying more land, mines and equity stakes in companies.

Wu Nianlu, a professor at the central bank's graduate school, expressed concern about the safety of China's non-bond holdings.

"Strictly speaking, almost half of our country's foreign exchange reserve is not stable in value and is of high risk," Wu was quoted as saying by the same paper.

(Reporting by Lucy Hornby, Langi Chiang and Tom Miles; Editing by Sue Thomas)

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China wary of gold 'bubble’ danger after quietly doubling its reserves

The Chinese authorities have given the clearest indication to date that they view the surge in gold to an all-time high of $1,217 (£730) an ounce as a speculative frenzy.

By Ambrose Evans-Pritchard
Published: 8:22PM GMT 02 Dec 2009

Hu Xiaolian, the vice-governor of the central bank, said Beijing would not buy gold indiscriminately.

“We must keep in mind the long-term effects when considering what to use as our reserves,” she said. “We must watch out for bubbles forming on certain assets and be careful in those areas.”

China announced this year that it had quietly doubled its gold reserves to 1,054 tonnes, the world’s fifth largest holding. India has also joined the rush, gobbling up half the IMF’s gold sale.

News that the rising powers of Asia are shifting a chunk of their fast-growing reserves into gold in a flight from Western paper currencies has emboldened investors to take out large gold bets on the futures markets or through exchange traded funds (EFT), leading to the parabolic rise in price over recent weeks.

However, officials in Beijing are aware that China’s $2.3 trillion reserves are now so enormous that the central bank cannot buy much gold without distorting the price, so they have adopted a de facto policy of buying in a calibrated fashion each time prices fall back to their rising trend line – “buying the dips” in trading parlance. Experts say that China is putting a floor under the gold price but does not chase rallies once they are under way.

There is also a double-edged twist to news that Barrick Gold, the world’s biggest gold mining company, has closed the final 3m ounces of its notorious hedge book ahead of schedule. While the move is a bet that prices will continue to rise, it also means that Barrick has been a big buyer of gold lately. These purchases have now stopped. One of the key drivers behind the spike this autumn has been removed.

BNP Paribas said yesterday that the current rally may have another two months or so to run, advising clients to stay invested as a form of “financial-calamity” insurance.

The “quasi-sovereign” default by Dubai serves as a powerful backdrop to gold fever, reminding funds that many countries, starting with Greece, Latvia, Ukraine, Bulgaria and Vietnam, are also on thin ice and may face debt difficulties over the next year.

Ken Rogoff, the IMF’s former chief economist and author of a history of defaults, told Jeff Randall on Sky News that so many countries are in trouble that it is hard to know where the crisis could hit next. Once one sovereign state veers into default, clusters of others usually follow.

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Japan Says It Has No Plans to Sell US Treasurys

Published:
Friday, 4 Dec 2009 | 6:56 AM ET
By: Reuters

Japan's top government spokesman said on Friday that the government had no plan to sell U.S. Treasuries, dismissing market speculation that Japan may sell Treasuries to improve its public finances.

"There is no such plan at all at this point in the government," said Chief Cabinet Secretary Hirofumi Hirano when asked about the market speculation that bubbled up in U.S. markets the previous day.

Traders had said they were wary of Japan selling U.S. Treasuries, which fell on Thursday more due to concern about next week's government debt sales.

Treasuries were steady in Asian trade with the benchmark 10-year notes yielding 3.380 percent.

Japan's foreign reserves stood at a record $1.057 trillion in October, the second-biggest in the world after China's reserves, much of which is thought to be invested in U.S. assets.

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Here It Comes... (Sovereign Treasury Sales)

I have repeatedly warned that there's an "end game" coming if we do not cut out the monetization games.

I have repeatedly warned that the "end of the world" scenario comes about if The Government cannot finance its operating requirements (e.g. interest cost exceeds income), as that event will result in an instantaneous "death spiral" of credit downgrades and ramping CDS spreads, which in turn drive up interest rates further, etc.

I have repeatedly warned that if we do not get our own house in order others will force it upon us, as we have given them the weapons to do so by selling trillions of dollars worth of Treasuries to overseas sovereigns and institutions over which we can exert no control (except by threatening to use our 6,000 nuclear weapons.)
This morning there's a nasty rumor on the wire - that Japan may be intending to sell US Treasuries.



Their purported reason for this, of course, would be to weaken the Yen. Selling Treasuries would have this effect since it would strengthen the dollar, and in a fiat monetary system all values are relative.
Here's the problem: The first seller wins in these circumstances, since price is essentially "coupon x duration."

If Japan starts selling in size rates on the long end will go materially higher. This will whack the daylights out of the cash price for these bonds. Who else has a lot of these things?

China.

Stampede risk here? Yep.

Danger to our government's ability to finance its profligate spending?

Uh huh.

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Gulf petro-powers to launch currency in latest threat to dollar hegemony

The Arab states of the Gulf region have agreed to launch a single currency modelled on the euro, hoping to blaze a trail towards a pan-Arab monetary union swelling to the ancient borders of the Ummayad Caliphate.

By Ambrose Evans-Pritchard
Published: 7:12PM GMT 15 Dec 2009
Comments 65 | Comment on this article


Traders at the Kuwaiti Stock Exchange

“The Gulf monetary union pact has come into effect,” said Kuwait’s finance minister, Mustafa al-Shamali, speaking at a Gulf Co-operation Council (GCC) summit in Kuwait.

The move will give the hyper-rich club of oil exporters a petro-currency of their own, greatly increasing their influence in the global exchange and capital markets and potentially displacing the US dollar as the pricing currency for oil contracts. Between them they amount to regional superpower with a GDP of $1.2 trillion (£739bn), some 40pc of the world’s proven oil reserves, and financial clout equal to that of China.

Saudi Arabia, Kuwait, Bahrain, and Qatar are to launch the first phase next year, creating a Gulf Monetary Council that will evolve quickly into a full-fledged central bank.

The Emirates are staying out for now – irked that the bank will be located in Riyadh at the insistence of Saudi King Abdullah rather than in Abu Dhabi. They are expected join later, along with Oman.

The Gulf states remain divided over the wisdom of anchoring their economies to the US dollar. The Gulf currency – dubbed “Gulfo” – is likely to track a global exchange basket and may ultimately float as a regional reserve currency in its own right. “The US dollar has failed. We need to delink,” said Nahed Taher, chief executive of Bahrain’s Gulf One Investment Bank.

The project is inspired by Europe’s monetary union, seen as a huge success in the Arab world. But there are concerns that the region is trying to run before it can walk.

Europe took 40 years to reach the point where it felt ready to launch a currency. It began with the creation of the Iron & Steel Community in the 1950s, moving by steps towards a single market enforced by powerful Commission and European Court. The EMU timetable was fixed at the Masstricht in 1991 but it took another 11 for euro notes and coins to reach the streets.

Khalid Bin Ahmad Al Kalifa, Bahrain’s foreign minister, told the FIKR Arab Thought summit in Kuwait that the project would not work unless the Gulf countries first break down basic barriers to trade and capital flows.
At the moment, trucks sit paralysed at border posts for days awaiting entry clearance. Labour mobility between states is almost zero.

“The single currency should come last. We need to coordinate our economic policies and build up common infrastructure as a first step,” he said.

Mohammed El-Enein, chair of the energy and industry committee in Egypt’s parliament, said Europe’s example could help the Arab world achieve its half-century dream of a unified currency, but the task requires discipline. “We need exactly the same institutions as the EU has created. We need a commission, a court, and a bank,” he said.

The last currency to trade in souks from Marakesh, to Baghdad and Mecca, was the Ottomon Piaster, known as the “kurush”. It suffered chronic inflation as the silver coinage was debased.

There is a logic to an Arab currency. The region speaks one language, has the unifying creed of “Umma Wahida” or One Nation from the Koran, and has not torn itself apart in savage wars – ever – in quite the way that Europe has in living memory.

Yet hurdles are formidable even for the tight-knit group of Gulf states. While the eurozone is a club of rough equals – with Germany, France, Italy, and Spain each holding two votes on the ECB council – the Gulf currency will be dominated by Saudi Arabia. The risk is that other countries will feel like satellites. Monetary policy will inevitably be set for Riyadh’s needs.

Hans Redeker, currency chief at BNP Paraibas, said the Gulf states may have romanticised Europe’s achievement and need to move with great care to avoid making the same errors.

“The Greek crisis has exposed the weak foundations on which the euro is built. The gap in competitiveness between core Europe and the periphery has grown wider and wider. The obvious mistake was to launch EMU without a central fiscal authority and political union, as the Bundesbank warned in the 1990s,” he said.

“The euro was created for political reasons after the fall of the Berlin Wall to lock Germany irrevocably into Europe. It was not done for economic reasons,” he said.

Ben Simpfendorfer, Asia economist for RBS and an expert on the Middle East, told the FIKR conference that the rise of China had paradoxically disrupted the case for pan-Arab economic integration.

There was a natural fit ten years ago between rich oil state and low-wage manufacturers in Egypt and Syria, but cheap exports from China have forced poorer Arab states to retreat behind barriers to shelter their industries. “The rationale for a single currency has become weaker,” he said.

The GCC also agreed to create a joint military strike force – akin to the EU’s rapid reaction force – to tackle threats such as the incursion of Yemeni Shiite rebels into Saudi territory earlier this year.
This is a major breakthrough after years of deadlock on defence cooperation.

The Sunni Gulf states are deeply concerned about the great power ambitions of Shiite Iran and its quest for nuclear weapons, to the point where the theme of a possible war between Iran and a Saudi-led constellation of states has crept into the media debate.

They nevertheless repeated on Tuesday that “any military action against Iran” by Western powers would be unacceptable.

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Flaherty Says Russia, China May Buy Canada Dollars

By Theophilos Argitis and Christopher Fournier

Dec. 23 (Bloomberg) -- Canada’s Finance Minister Jim Flaherty said China, with the world’s largest currency reserves of $2.3 trillion, may be poised to buy Canadian dollars as it seeks to shield its reserves against the U.S. dollar’s decline.

“It does not surprise me that China and Russia would take greater positions in the Canadian dollar than they have previously,” Flaherty, 59, said during an interview in his office in Ottawa. “I would expect countries looking around the world to invest in market currencies that are reliable.”

The U.S. dollar has declined against all but one of the 16 most-active currencies this year, prompting major reserve- holding countries such as Russia and China to express concern about their U.S.-denominated investments. Russia last month said it will add Canadian dollars to its reserves to lower its dependence on the U.S. currency.

The Bank of Canada has warned “persistent strength” in the currency is a main risk for the economy, potentially acting as a “significant” drag on growth. Canada’s currency has gained 15 percent this year against the U.S. dollar. Chinese purchases of Canadian dollars would also cement growing economic links between the U.S.’s two largest trading partners.

Chinese Premier Wen Jiabao said in March that the nation was “worried” about the safety of its investment in U.S. debt, as a weakening dollar eroded the value of its reserves. China’s currency regulator said earlier this month it will “improve” its utilization of foreign-exchange reserves.

PetroChina

PetroChina Co., China’s largest oil company, this year bought its first stake in the Canadian oil sands, paying C$1.9 billion ($1.8 billion) for 60 percent of a project run by Athabasca Oil Sands Corp. Vancouver-based Teck Resources Ltd., Canada’s biggest base-metals producer, sold a 17 percent stake to China’s sovereign wealth fund for C$1.74 billion in July.

Prime Minister Stephen Harper, seeking to cut dependence on the U.S., traveled to China earlier this month to secure Asia’s second-biggest economy as a customer for oil, natural gas, uranium and other commodities.

“We know that China has been interested in things in Canada, whether it’s the bond market or the oil sands or oil companies,” said David Watt, senior currency strategist in Toronto at RBC Capital Markets, a unit of Canada’s biggest bank. “They’ve been sniffing around in the past. We know they’ve been interested.”

Watt said an amount equal to 2 percent of Asian reserves would mean about C$100 billion of currency flows into Canada.

“It would certainly be a positive backdrop for the currency,” Watt said.

Move to Parity

The Canadian currency gained 0.9 percent to C$1.0484 per U.S. dollar at 3:07 p.m. in Toronto, from C$1.0575 yesterday. One Canadian dollar purchases 95.38 U.S. cents.

Canada’s currency will appreciate to parity with the U.S. dollar by the middle of next year, Bank of Nova Scotia predicts. The median estimate of 38 analysts surveyed by Bloomberg News is for the currency to strengthen to C$1.04 in that period. The currency last traded on a one-for-one basis in July 2008.

Asked whether the Canadian dollar’s gain was a concern, Flaherty said the government is worried about “sudden” moves that don’t give companies “sufficient time to adjust.”

Canada’s currency has gained in part as investors bet an accelerating economic recovery will prompt the central bank to raise interest rates sooner than in the U.S. Canada also sits on the largest pool of oil reserves outside the Middle East and is a major exporter of other commodities such as gold. A Canadian commodity price index compiled by the Bank of Canada has advanced more than 20 percent this year.

Canada also has the lowest debt levels among the Group of Seven nations, making its currency a relatively safer investment, Flaherty said in the interview on Monday.

‘Upward Pressure’

“It’s been clear for some time now that the downward pressure on the U.S. dollar is significant and that results in the other reliable market currencies having some upward pressure,” Flaherty said from his 21st-floor office that looks out to the hills of Gatineau Park. “I see it as a reflection of the relative strength of the Canadian dollar and the relative strength of our fiscal situation.”

Flaherty said China might relieve pressure on Canada’s dollar if the Asian country did more to loosen restrictions on movements of its currency.

Global “imbalances” will be a “primary subject” of discussion at a meeting of Group of Seven officials in February, he said. Canada will host a meeting of finance ministers and central bankers from the group on Feb. 5-6 in Iqaluit, a northern town near the Arctic Circle.

Lawmakers around the world are redesigning their financial architecture in the wake of the worst financial crisis in a generation that forced governments to spend more than $500 billion in the past year bailing out banks.

Officials will discuss “mutual assessment systems” to ensure the G-7 countries can be “checking on each other,” and developing so-called macro-prudential regulations that focus on risks to the financial system instead of a single financial institution, Flaherty said.

Last Updated: December 23, 2009 15:08 EST

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Canada Hints Russia, China to Shun U.S. Dollar

Wednesday, 23 Dec 2009 12:17 PM
Article Font Size

By: Dan Weil

Russian and Chinese officials have been warning for months that they plan to diversify away from the U.S. dollar.

And Canadian Finance Minister Jim Flaherty says his country may be a beneficiary.

“It does not surprise me that China and Russia would take greater positions in the Canadian dollar than they have previously,” Flaherty told Bloomberg.

“I would expect countries looking around the world to invest in market currencies that are reliable.”

The Canadian dollar has jumped 15 percent against its U.S. counterpart this year.

The U.S. dollar accounts for most of China’s $2.3 trillion in currency reserves, and Chinese officials have expressed concern about its recent decline.

“We know that China has been interested in things in Canada, whether it’s the bond market or the oil sands or oil companies,” David Watt, senior currency strategist at RBC Capital Markets, told Bloomberg.

“They’ve been sniffing around in the past. We know they’ve been interested.”

Russia said in November that it will add Canadian dollars to its currency portfolio, to lessen its exposure to the greenback.

Many experts argue that the U.S. dollar will eventually lose its status as the world’s primary reserve currency.

“The strength of the dollar is becoming riskier and riskier,” Nobel laureate economist Joseph Stiglitz writes in The National Interest.

“The growing U.S. deficit and the ballooning of the Federal Reserve’s balance sheets leave many worried that in their wake will come inflation.”

Earlier this month, China’s foreign-exchange reserve regulator said the U.S. dollar stands secure as the anchor of China's mammoth foreign exchange reserves, even as Beijing seeks to diversify its investments across different currencies and assets.

The statement by the State Administration of Foreign Exchange, which manages the country's $2.3 trillion of currency reserves, followed a suggestion by an official from the agency that diversification has been very gradual.

Wang Xiaoyi, deputy head of SAFE, said China had maintained a consistent reserve allocation in different currencies and that dollar weakness was a long-term trend, not a near-term worry, Reuters reported.

China's desire to see a stronger dollar was reinforced by a recent opinion piece in the People's Daily, the main newspaper of the ruling Communist Party, which said that the slumping greenback was harming the world economy.

Global markets have periodically been shaken by the idea that China could dump dollars, as it is estimated to hold about two-thirds of its currency reserves in dollar-denominated assets.

In November, Chinese banking regulator Liu Mingkang said that ultra-low U.S. interest rates and weak dollar were a "new systemic risk" for the global economy, driving up asset prices in emerging markets.

Such criticism has been dismissed by U.S. Federal Reserve Chairman Ben Bernanke.

Answering questions at a recent confirmation hearing, he said countries that are concerned about speculation "have their own tools to address bubbles in their economy" and shouldn't look to U.S. monetary authorities to do the job for them.

© Newsmax. All rights reserved.

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How China Might Buy More Gold Than America Owns

Vincent Fernando | Dec. 23, 2009, 2:02 PM | 5,125 | 23



China has a long way to go before coming anywhere near America's gold reserves.

Yet apparently it's on their to-do list and a must, at least according to the country's China Gold Association.

Commodity Online: In 1981, China had 395 tonnes of gold holdings; it increased to 500.8 tonnes in 2001, and 600 tonnes in 2002. In April 2009, China officially announced that it has increased its gold holdings to 1054 tonnes. Since then, Chinese officials and People’s Bank of China have been meticulously chalking out plans to build up gold reserves in the next one decade.

According to Zhang of the China Gold Association (CGA), India’s decision to buy IMF gold has been the real boost for China’s recent spirited moves to step up gold reserves.

“In view of the declining US dollar value, it is paramount that China steps up gold reserves. How to do this is the only question that China is debating these days. The possible steps include opening up new gold mines, aggressively going for gold mining, buying gold from the open market etc. All said and done, it is imperative that China needs to buy more gold,” Zhang points out.

Free Republic: “We recommend that China’s gold reserve should reach 6000 tons in 3~5 years, and probably reach as high as 10,000 tons in 8~10 years,” according to Ji Xiaonan on November 28 at the third Chinese Industry Stability Forum. He is the head of the supervisory committee at the state-owned Assets Supervision and Administration Commission.

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Willem Buiter warns of massive dollar collapse



Americans must prepare themselves for a massive collapse in the dollar as investors around the world dump their US assets, a former Bank of England policymaker has warned.

By Edmund Conway, Economics Editor
Published: 5:34PM GMT 05 Jan 2009

The long-held assumption that US assets - particularly government bonds - are a safe haven will soon be overturned as investors lose their patience with the world's biggest economy, according to Willem Buiter.

Professor Buiter, a former Monetary Policy Committee member who is now at the London School of Economics, said this increasing disenchantment would result in an exodus of foreign cash from the US.

The warning comes despite the dollar having strengthened significantly against other major currencies, including sterling and the euro, after hitting historic lows last year. It will reignite fears about the currency's prospects, as well as sparking fears about the sustainability of President-Elect Barack Obama's mooted plans for a Keynesian-style increase in public spending to pull the US out of recession.

Writing on his blog, Prof Buiter said: "There will, before long (my best guess is between two and five years from now) be a global dumping of US dollar assets, including US government assets. Old habits die hard. The US dollar and US Treasury bills and bonds are still viewed as a safe haven by many. But learning takes place."

He said that the dollar had been kept elevated in recent years by what some called "dark matter" or "American alpha" - an assumption that the US could earn more on its overseas investments than foreign investors could make on their American assets. However, this notion had been gradually dismantled in recent years, before being dealt a fatal blow by the current financial crisis, he said.

"The past eight years of imperial overstretch, hubris and domestic and international abuse of power on the part of the Bush administration has left the US materially weakened financially, economically, politically and morally," he said. "Even the most hard-nosed, Guantanamo Bay-indifferent potential foreign investor in the US must recognise that its financial system has collapsed."

He said investors would, rightly, suspect that the US would have to generate major inflation to whittle away its debt and this dollar collapse means that the US has less leeway for major spending plans than politicians realise.

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India 2009 gold imports 300-350 T - trade body

NEW DELHI, Jan 4 (Reuters) - India imported 300-350 tonnes of gold in 2009, higher that the previous estimate of a little over 200 tonnes, the head of the Bombay Bullion Association said on Monday.

Suresh Hundia said the trade body had also revised its estimate of imports in 2008 to 439 tonnes from 420 tonnes.

"Figures of export houses had to be revised ... Data for eight months had to be revised," he said.

Hundia said the estimate changed significantly because data from several large trading houses, which were allowed to import gold in early 2009, was not available earlier.

On Jan. 1, Hundia said India imported "a little over 200 tonnes" in 2009.

[ID:nSGE60004E] (Reporting by Ruchira Singh; Editing by Ranjit Gangadharan)

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How China Will Blow Past India And Control The Gold Market In 2010

Vincent Fernando | Jan. 5, 2010, 12:30 PM | 2,197 | 2
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Take the following analysis with a grain of salt, but it appears China will be a massive force in the gold market this year, potentially blowing past India.

Thing is whether this is bullish or bearish remains open to debate. If China pulls ahead of India due to massive domestic gold consumption growth, it's a good thing, but if it's all due to Indians cutting back purchases in response to high gold prices, then it's more of a bad signal.

Commodity Online: But, the ray of hope for the bullion market is that China has fast emerged as the leader in gold buying. In fact, in 2009 China has pipped India to the post in gold purchases.

Chinese New Year gold rush has already begun, and robust demand looks likely to continue through 2010. So, in the coming years, analysts will be watching China, instead of India, to make their decisions on investments in gold.

China’s gold purchases have grown 10% from 2008’s record in volume terms, rising 26% by value to equal $13.5 billion or more.

On recent trends, that would equate to more than 2% of China’s famously massive household savings (up from 1% ten years ago) and account for almost one ounce in every eight sold worldwide.

According to GFMS, physical gold purchases by mainland Chinese households in 2009 was already running 19% ahead of India’s private demand for Q1-Q3.

Given China’s continued economic growth private gold consumption in Q4 most likely remained very robust. Whereas India’s private gold off-take during Oct-December continued to shrink in the face of record-high prices.

Read more here >

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Tips: Gold May Hit $1,375, Dollar Going Down


Published: Tuesday, 5 Jan 2010 | 5:14 AM ET
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By: CNBC.com

The price of gold saw strong gains during most of 2009, fueled in part by weakness in the dollar. That trend reversed slightly in the last few weeks of the year, sending the price of the precious metal lower.

But one market expert told CNBC that gold may push higher in 2010, while another said that the dollar's declines could also return.

Gold Prices May Hit $1,375 in 2010

Spot gold prices could hit $1,375 in 2010, predicts John Licata, chief investment strategist at Blue Phoenix.

"I think there're plenty of catalysts that have not been talked about related to gold," Licata said.

The fear of sovereign debt default could continue to drive investors into gold, according to Licata. And California's budget deficit could well join the likes of Greece and Ireland on the watch list for default, he added.

Licata also pointed out that the November Congressional elections could be another potential catalyst for an increase in the gold price if the Republican Party gains more seats.

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Russia diversifies into Canadian dollars

By Peter Garnham
FT.com

Published: January 20 2010 16:46 | Last updated: January 20 2010 16:46

Russia’s central bank announced on Wednesday that it had started buying Canadian dollars and securities in a bid to diversify its foreign exchange reserves.

Analysts said the move could be a sign of increased diversification of emerging market central bank assets away from the dollar and into investments denominated in other commodity-linked currencies, such as the Australian dollar.

Adam Cole at RBC Capital Markets said if taken in isolation, Russia’s announcement that it was buying Canadian dollars was not significant, but if it was part of a broader trend, then it was an important step.

“If it is a barometer for the activity of other central banks, then its is structurally positive for the currencies of countries like Canada and Australia that have a commodity bias in their economies,” he said.

Although not officially confirmed, traders said that other emerging market central banks, including some in Asia which hold large foreign exchange reserves, have also been active in the foreign exchange market in recent weeks buying both Canadian dollars and Australian dollars.

Alexei Ulyukayev, first deputy chairman of Russia’s central bank, said that it would invest in Canadian dollar-denominated deposits and bonds.

“The Canadian financial market is not very deep, so we can invest in deposits in significant volumes, while the bond market is limited,” he said.

Although the central bank did not specify how much of its reserves it was allocating to assets denominated in the Canadian dollar, analysts estimated that the central bank could put up to $9bn, or 2 per cent, of its foreign exchange reserves into the currency.

Russia’s foreign exchange reserves, the world’s third largest, stood at $439bn at the end of December. These stockpiles have grown by 14 per cent since the start of the rally on global asset markets in March as rising commodity prices have boosted mineral-rich Russia’s coffers.

Ahead of Wednesday’s announcement, Russia’s foreign exchange reserves were evenly split between dollar and euros.

Alarmed at the plummeting value of the dollars in its holdings, Russia has been at the vanguard of countries calling for the US authorities to stem the fall of its currency. Last year, along with China, Russia urged the creation of a new supra-national currency to replace the dollar as the world’s reserve currency.

The dollar has fallen more than 12 per cent on a trade-weighted basis since March. Commodity-linked currencies have rallied strongly, however, with the Canadian dollar up 24 per cent against the US dollar over that period and the Australian dollar 40 per cent higher.

This has prompted Russia to diversify its holdings. Indeed, in addition to its plans to buy Canadian dollars, Sergei Ignatiev, chairman of the Russia’s central bank, said last month that its was “discussing the possibility” of buying Australian dollars.

But some analysts warned that emerging market central banks might be in danger of buying commodity-linked currencies at the top of the market.

“In the long run it makes perfect sense for emerging market countries to diversify into commodity linked currencies,” said Simon Derrick at Bank of New York Mellon.

“But in the short-term, I would urge caution given that many commodity-linked currencies currently stand at extremely high levels on a historical basis.”

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Economic Warfare?

Paulson Says Russia Urged China to Dump Fannie, Freddie Bonds

By Michael McKee and Alex Nicholson



Jan. 29 (Bloomberg)

Russia urged China to dump its Fannie Mae and Freddie Mac bonds in 2008 in a bid to force a bailout of the largest U.S. mortgage-finance companies, former Treasury Secretary Henry Paulson said.

Paulson learned of the “disruptive scheme” while attending the Beijing Summer Olympics, according to his memoir, “On The Brink.”

The Russians made a “top-level approach” to the Chinese “that together they might sell big chunks of their GSE holdings to force the U.S. to use its emergency authorities to prop up these companies,” Paulson said, referring to the acronym for government sponsored entities. The Chinese declined, he said.

Russia’s five-day war with U.S. ally Georgia started on Aug. 8, the same day as the opening ceremonies of the Beijing Games. Prime Minister Vladimir Putin told U.S. President George W. Bush during those ceremonies that “war has started,” according to Dmitry Peskov, Putin’s spokesman.

“The report was deeply troubling -- heavy selling could create a sudden loss of confidence in the GSEs and shake the capital markets,” Paulson wrote. “I waited till I was back home and in a secure environment to inform the president.”

Russia never approached China about dumping U.S. bonds, Peskov said today. “This is not the case,” he said by phone.

Russia sold all of its Fannie and Freddie debt in 2008, after holding $65.6 billion of the notes at the start of that year, according to central bank data. Fannie and Freddie were seized by regulators on Sept. 6, 2008, amid the worst U.S. housing slump since the Great Depression.

Putin ‘Combative, Fun’

Paulson said he was surprised not to have been asked about the Fannie and Freddie bonds during a trip to Moscow in June. “I was soon to learn, though, that the Russians had been doing a lot of thinking about our GSE securities,” he said of his meeting with Dmitry Medvedev, who succeeded Putin in the Kremlin the previous month.

Putin kept Paulson waiting before their meeting at the government’s headquarters and made the conversation “fun” by being “direct and a bit combative,” Paulson said. “He never took offense and we could spar back and forth,” he said.

Paulson’s book is scheduled to be released Feb. 1, though Bloomberg News bought a copy at a New York bookstore.

To contact the reporters on this story: To contact the reporter on this story: Michael McKee in New York at Alex Nicholson in Moscow at on anicholson6@bloomberg.net;

Last Updated: January 29, 2010 05:32 EST

[Ryan Ruck]

Wow, sounds like economic warfare to me!

Wonder what will happen should China decide to call in all of their debt we owe!

[Malsua]

Wow, sounds like economic warfare to me!

Wonder what will happen should China decide to call in all of their debt we owe!

I dunno, say 'we can't pay' what ya planning to do about it?

Besides, a sell off of that size will crash the price and be self-defeating.

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Economic warfare erupts between U.S., Russia and China

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The Dumping Begins: Chinese Reserve Managers Notified That Any Non-USG Guaranteed Securities Must Be Divested



Submitted by Tyler Durden on 02/09/2010 22:00 -0500

It appears that this time China's posturing is for real. Following up on our earlier post that Chinese military officials want to "punish" America by selling Treasuries, Asia Times Online is reporting that an explicit directive by the Chinese government has notified reserve managers to sell all risky US assets, including asset backed and corporates, and just hold on to explicitly guaranteed Treasuries and Agency debt. And from following TIC data we know that China's enthusiasm for MBS/Agencies over the past year has been matched solely by that of one Bill Gross.

From Asia Times:

Dollar-denominated risk assets, including asset-backed securities and corporates, are no longer wanted at the State Administration of Foreign Exchange (SAFE), nor at China’s large commercial banks. The Chinese government has ordered its reserve managers to divest itself of riskier securities and hold only Treasuries and US agency debt with an implicit or explicit government guarantee. This already has been communicated to American securities dealers, according to market participants with direct knowledge of the events.

It is not clear whether China’s motive is simple risk aversion in the wake of a sharp widening of corporate and mortgage spreads during the past two weeks, or whether there also is a political dimension. With the expected termination of the Federal Reserve’s special facility to purchase mortgage-backed securities next month, some asset-backed spreads already have blown out, and the Chinese institutions may simply be trying to get out of the way of a widening. There is some speculation that China’s action has to do with the recent deterioration of US-Chinese relations over arm sales to Taiwan and other issues. That would be an unusual action for the Chinese to take–Beijing does not mix investment and strategic policy–and would be hard to substantiate in any event.

Furthermore, demonstrating just how seriously China is approaching a populist-driven adversarial stance with the US, was earlier speculation that instead of unpegging its currency (a move much desired by the US administration in its goal to further weaken the dollar and make China less competitive in the export market), China would reduce its trade balance not by the traditional way of currency inflation, but by the economic textbook footnote approach of raising salaries.

Higher labor costs would cut Chinese export competitiveness while boosting domestic spending power and sustaining economic growth, according to the bank. Premier Wen Jiabao’s government has been pressed by U.S. and European officials to end a 19- month yuan peg to the dollar to help diminish trade and investment imbalances that contributed to the credit crisis.

“Wage increases are a better option because they largely benefit Chinese workers,” Tao Dong, a Credit Suisse economist in Hong Kong who has covered the Chinese and Asian economies for more than 15 years, said in an interview yesterday. “Currency appreciation will only result in Chinese exporters losing out to competitors in countries such as Malaysia and Mexico.”

The strategy may limit gains in the yuan to 3 percent this year, according to Tao. This month’s 13 percent increase in minimum wage in eastern China’s Jiangsu province indicates that higher pay will play an important role in officials’ efforts to rebalance growth in the fastest-growing major economy, Tao said.

The wage decision “argues against a large one-off yuan revaluation,” Ben Simpfendorfer, an economist with Royal Bank of Scotland in Hong Kong, wrote in a note this week.

One thing is certain - China will now focus on doing precisely the opposite of what America would urge Chinese authorities to do, in order to establish itself as the focal point of negotiating leverage and increasingly humiliate the Obama regime. If this involves selling USTs or corporates (both fixed income and equities) so be it. This is further confirmed by carefully worded disclosure in today's copy of China Securities Journal:

The China Securities Journal, a government-backed daily, accused the U.S. in a tough-worded front page editorial of playing the "exchange rate card."

It said that, just as China didn't interfere with Federal Reserve purchases of U.S. Treasuries, "the U.S. has no right to interfere in China's exchange rate policy."

"Whether or not to appreciate is our own business," the newspaper said.

"Whether it will appreciate, when and by how much is an integral part of China's monetary policy."

It is not clear when the asset divestiture directive takes place or if it is already being enforced. Judging by the after hours action in futures and the currency markets, some dumping may already be taking place. Alternatively, we now know just who it is that sell into every rally (yes, even in this market, every buyer is matched with a seller).

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Head of IMF Proposes New Reserve Currency

IMF's Strauss-Kahn suggests IMF may one day provide global reserve asset

By HARRY DUNPHY Associated Press Writer
WASHINGTON February 26, 2010 (AP)

Dominique Strauss-Kahn, the head of the International Monetary Fund, suggested Friday the organization might one day be called on to provide countries with a global reserve currency that would serve as an alternative to the U.S. dollar.

"That day has not yet come, but I think it is intellectually healthy to explore these kinds of ideas now," he said in a speech on the future mandate of the 186-nation Washington-based lending organization.

Strauss-Kahn said such an asset could be similar to but distinctly different from the IMF's special drawing rights, or SDRs, the accounting unit that countries use to hold funds within the IMF. It is based on a basket of major currencies.

He said having other alternatives to the dollar "would limit the extent to which the international monetary system as a whole depends on the policies and conditions of a single, albeit dominant, country."

Strauss-Kahn, a former finance minister of France, said that during the recent global financial crisis, the dollar "played its role as a safe haven" asset, and the current international monetary system demonstrated resilience.

"The challenge ahead is to find ways to limit the tension arising from the high demand for precautionary reserves on the one hand and the narrow supply of reserves on the other," he said.

Several countries, including China and Russia, have called for an alternative to the dollar as a reserve currency and have suggested using the IMF's internal accounting unit.

Strauss-Kahn said the IMF also needs to do a better job of tracing how risk percolates through the global economy.

"Here it will be essential to improve our ability to monitor several dozen large complex financial institutions that make up the `plumbing' through which global capital flows," he said, while leaving national regulators the job of monitoring the solvency of individual institutions.

Copyright 2010 The Associated Press. All rights reserved. This material may not be published, broadcast, rewritten, or redistributed.

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Beijing looks at severing dollar peg

By Geoff Dyer in Beijing

Published: March 6 2010 13:38 | Last updated: March 7 2010 19:24

China’s central bank chief laid the groundwork for an appreciation of the renminbi at the weekend when he described the current dollar peg as temporary, striking a more emollient tone after months of tough opposition in Beijing to a shift in exchange rate policy.

Zhou Xiaochuan, governor of the People’s Bank of China, gave the strongest hint yet from a senior official that China would abandon the unofficial dollar peg, in place since mid-2008. He said it was a “special” policy to weather the financial crisis.

“This is a part of our package of policies for dealing with the global financial crisis. Sooner or later, we will exit the policies.”

Mr Zhou’s comments contrasted with recent Chinese comments on its currency policy in the face of international criticism that the renminbi was undervalued. In December, premier Wen Jiabao said: “We will not yield to any pressure of any form forcing us to appreciate.” Chinese officials have repeatedly emphasised the need for a stable exchange rate.

However, while the recent increase in consumer prices in China has strengthened the hand of those officials who think the currency should now rise, it is not clear that this argument has yet won over the country’s senior leaders.

Indeed, Mr Zhou gave no hint about the possible timing of a shift in policy.

Chen Deming, commerce minister, said the outlook for international trade remained “uncertain and unstable” and that it would take two or three years before Chinese exports recovered to pre-crisis levels.

The argument over Chinese currency policy has been one of a string of disputes that have led to difficult relations in recent months between China and the US, including disagreements over Taiwan, Tibet, climate change and human rights.

Mr Zhou’s different tone on the exchange rate came as the foreign minister said it was up to the US to improve relations between the two countries.

At a separate Sunday press conference on the margins of the National People’s Congress in Beijing, Yang Jiechi, foreign minister, said: “The responsibility for the difficulties in China-US relations does not lie with China. The US should take seriously China’s position and respect China’s core interests.”

He dismissed suggestions that China had been taking a more confrontational approach in diplomacy of late. “Resolutely adhering to one’s principled stance is not the same thing as being hardline,” he said.

A long-planned oil pipeline between China and Russia would be completed this year, he said. Mr Yang also rebutted criticism that China’s economic ties with Africa were encouraging more corruption and hurting labour conditions.

“I notice that some people in the world are not happy to see the development of China-Africa relations, and so they are always trying to find fault in energy cooperation between China and Africa,” he said. ”We as guests in Africa should all respect the host’s inclinations and freedom to choose cooperative partners and friends.”

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China could ease dollar currency peg

China could end its near two-year currency peg on the dollar by as soon as next month, according to respected economist Professor Nouriel Roubini, in a prediction that could have major implications for global trade markets.

By James Quinn, US Business Editor
Published: 8:04PM GMT 08 Mar 2010

Prof Roubini – known as "Dr Doom" due to his pessimistic take on the global economic outlook – believes that the Chinese central bank could let the yuan appreciate as soon as the second quarter.

The economist made his predictions ahead of a statement at the weekend by Zhou Xiaochuan, governor of the People's Bank of China, in which he said China should be "very cautious" when making a move.

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Governor Zhou cautioned that the "global recovery isn't solid" and that therefore China should take care about the "timing of normalising the policies" including its stance on the yuan.

However, Prof Roubini believes that the Beijing government will authorise a 2pc increase against the dollar initially, followed by a further 1pc-2pc strengthening over the next 12 months.

"They will move by a token amount. The world is much cloudier in every dimension. They are super cautious," Prof Roubini told Bloomberg News.

If Beijing were to allow the yuan to rise against the dollar, it would be the first time since July 2008 that the Chinese currency – which rose 21pc in the three years prior to the hold being imposed – has been allowed to gain ground.

Such a move would also ease relations with Washington, as President Barack Obama and Tim Geithner, the US Treasury Secretary, have both been critical of Beijing's stance over the yuan.

The US government has argued that the current situation creates an unfair playing field for China's exports, keeping the price of Chinese imports artificially low so as to undercut domestic suppliers.

Prof Roubini's comments follow those of Jim O'Neill, Goldman Sachs' chief economist, who predicted in February that "something's brewing" in China over the yuan.

But not everyone is convinced. "Given Zhou's caution – which echoed similar comments on the state of the recovery made by prime minister Wen Jiabao on Friday – it is hard to imagine any major shift in exchange rate policy happening in coming weeks," said Mark Williams, of Capital Economics.

"In particular, the chances of an imminent one-off step revaluation, as some had thought likely, are surely very low," added Mr Williams, who believes that when a shift does come, it will be to a "crawling peg" with a chance the dollar will be replaced by a basket of currencies as the target.