David Hale on Gold

I have know David for over 25 yrs.  He is not known as a gold bug.

Potentially the most important new factor in the gold market is China. China now has more than $2,400bn of foreign exchange reserves, but only 1.7 per cent of this is invested in gold. The IMF is projecting that China will run a current account surplus of $2,600bn during the next five years. If it does, its forex reserves could rise to the $5,000bn-$6,000bn range. Even if it keeps the gold share of its reserves constant, it will have to buy a further 1,000-1,500 tonnes. Yet the odds are high that China will want to expand the gold share of its reserves in order to lessen its vulnerability to dollar devaluations and strengthen the renminbi’s status as a global currency.

As with the US 100 years ago, China will probably regard large gold holdings as a way to project financial power. In 1913, before the dollar had emerged as a global currency, the US had 2,293 tonnes of gold compared with 248 tonnes for Britain, 439 tonnes for Germany, 1,030 tonnes for France and 1,233 tonnes for Russia. The Americans’ large gold reserves made the dollar a natural replacement for sterling when the first world war crippled Britain’s financial position. The US is now running a fiscal policy that has parallels with Britain during wartime, which could undermine the dollar’s global role at some point.

Some Chinese officials have publicly called for the central bank to purchase 10,000 tonnes of gold. The central bank has declined to comment on these proposals, but they will become increasingly attractive if the US pursues a policy of dollar devaluation while the renminbi emerges as a global currency.

It is also possible that the massive expansion of China’s foreign exchange reserves could spawn faster monetary growth and increase China’s inflation rate. If it does, there could be a sharp rise in Chinese private demand for gold.

China has deregulated its gold market since 2008 and private demand is increasing rapidly. It totalled 143 tonnes during the past 12 months compared with 73 tonnes in 2009 and 17 tonnes in 2008. It could easily rise to several hundred tonnes if investors perceive that China’s monetary growth is going to produce higher inflation.

The US government has been critical of China’s policy of pegging the renminbi to the dollar, but it would abandon this criticism if China pursued a policy of unsterilised currency intervention and allowed inflation to accelerate. The renminbi would then appreciate in real terms, and make Chinese goods less competitive.

There is no way to predict the timing of China’s future gold purchases, but there can be little doubt they will create a demand for gold that will dwarf all other factors during the next quarter-century and guarantee large price gains irrespective of what happens to Federal Reserve policy.

Why the Fed will print money

yuk

Consumer Metrics' Contraction Severity

(Click on chart for fuller resolution)

Chicago Fed Activity Index Weakens

Click on graph for larger image 

SATURDAY, OCTOBER 23, 2010

Best Quote

Kenneth Rogoff, a Harvard professor and former International Monetary Fund chief economist, puts it differently. He likens the Fed’s predicament to a golfer stuck in a sand bunker. Tap lightly and the ball will not get out of the hazard. “I would say: ‘I am now going to slam the ball and I don’t know where it is going to go but if it ends up on the fairway I am going to hit it towards the hole,” he says of the Fed’s next step.

FRIDAY, OCTOBER 22, 2010

Huge Drop in Home Prices?

Clear Capital™ Reports Sudden and Dramatic Drop in U.S. Home Prices

“Clear Capital’s latest data through October 22 shows even more pronounced price declines than our most recent HDI market report released two weeks ago,” said Dr. Alex Villacorta, senior statistician, Clear Capital. “At the national level, home prices are clearly experiencing a dramatic drop from the tax credit-induced highs, effectively wiping out all of the gains obtained during the flurry of activity just preceding the tax credit expiration.”

This special Clear Capital Home Data Index (HDI) alert shows that national home prices have declined 5.9% in just two months and are now at the same level as in mid April 2010, two weeks prior to the expiration of the recent federal homebuyer tax credit. This significant drop in prices, in advance of the typical winter housing market slowdowns, paints an ominous picture that will likely show up in other home data indices in the coming months.

... if previous correlations between the Clear Capital and S&P/Case-Shiller indices continue as expected, the next two months could be ugly.

BLS data State by State

In the latest amusing discrepancy to come out of the BLS, today's reported unemployment data by state indicated that at the end of September, there was a total of 129,699,600 people employed across the various states. Not very surprisingly, the biggest deterioration occurred in California which lost 63.5 K jobs, followed by New York at 37.6K (Wall Street layoffs?) and Massachusetts at 20.9K. The total change from August's 129,923,400 employed was a drop of 223,800. Well, this is a little confusing as the NFP number for September indicated that total jobs lost were 95,000, a slightly more than 50% improvement compared to the job losses at the state level. As Zero Hedge has demonstrated, the data coming out of the BLS is statistically impossible to say the least, and at best, worthless. But now at least we are getting confirmation that just like in the Fed, there may be those within the BLS, who actually know how to count. Too bad, those are not the people in charge of actual propaganda dissemination.

THURSDAY, OCTOBER 21, 2010

Philly Fed Index

Click on graph for larger image in new window.

This graph shows the Philly index for the last 40 years.

This index turned down sharply in June and July and was negative in August and September (indicating contraction). The index was barely positive in October, and the internals (new orders, employment) are still weak.

Gold is a Bubble????

Trade Deficit, Back to the Future (redux)

The blue line is the total deficit, and the black line is the petroleum deficit, and the red line is the trade deficit ex-petroleum products.

The increase in the deficit in August was due to both oil and China, although the bulk of the increase was because of trade with China. The trade deficit with China increased to $28.0 billion in August from $25.9 billion in July (NSA).

The imbalances have returned ...

Preview of Coming Attractions

On Friday, Fed Chairman Ben Bernanke will speak at the Federal Reserve Bank of Boston Conference "Monetary Policy Objectives and Tools in a Low-Inflation Environment".

Jon Hilsenrath at the WSJ has a preview: Fed Chief Gets Set to Apply Lessons of Japan's History 

Mr. Bernanke is preparing for a potentially important policy speech Friday, when he could detail his thinking on the Fed's next steps ... The conference is a reprise of a 1999 conference at which Mr. Bernanke and other academics took Japanese officials to task for failing to get their economy moving.

You can't make this stuff up!

Rosenberg -

Then we came across this surreal column in the op-ed article of yesterday’s NYT 

by Daniel Gross.  His message is that “the new frugality is a myth — and that's 

good for the economy.”  He adds, “for this recovery to mature, broaden and 

persist, the greatest economic force known to mankind — the American 

consumer — has to get back in the game.”  

Wow.  Talk about playing by the old rules.  There was no mention in the article 

the fact that with a 70% share of GDP, the U.S. consumer never exactly went 

into hibernation, even if spending decisions have changed.  

Then he goes on to extol the virtues of debt (what would Kant say?) and longs 

for the days when we collectively lived beyond our means: “The renewed 

willingness and confidence to spend money we don’t have is vital to the 

continuing recovery.”  

Huh?  And I thought employment and income were the vital components to 

sustainable growth.   

Then Mr. Gross goes on to say — brace yourself: “Money may make the world go 

'round, but credit makes the gears of commerce run smoothly.”  

Yes, sure it does.  Up until you reach a point where 30% of the population have a 

sub-620 FICO score.   

But listen to this ... the coup-de-grace: “As the economy slowly recovers, there 

are signs that Americans are rediscovering their free-spending ways.  Total 

consumer credit, which includes non-revolving debt like car loans, have 

stabilized, and it rose in both June and July.  It’s back to where it was in the 

second quarter of 2009.” 

What?   

CdeR: wow, combine the above with NY Fed VP Brian Sack's comments that lifting asset

prices higher than they would be via Fed asset purchases "would be a good thing" and you

get a glimpse into the crack addicted economy that is the USA.

Currency Wars

---- Original Message -----
From: Douglas Borthwick
Sent: Tue Oct 05 23:44:12 2010
Subject: Friday IMF Side Meeting

We are increasingly interested in the Currency-Focussed Side meeting that has been arranged at the IMF Meeting on Friday.  We note that with the weakening USD and increased talk of trade wars, that the possibility of a new 'Plaza' Accord is now not out of the question.  We note that at the time of the Plaza Accord the US Current Account as a %age of GDP was running at 3-3.5%.  In Q2 2010 the US current account as a %age of GDP was 3.4% of GDP.  Also going into the Plaza Accord, interest rates were near all time lows in most countries, a similar situation to today.  In 1985 Germany and Japan financed the US deficits through purchasing US fixed income.  This time around China and Japan are the primary financiers.  Following the Plaza Accord Japan and Europe saw their currencies strengthen by 50% and the US weakened by the same amount.  With a Current Account deficit at elevated levels once more, interest rates at near lows and trade wars looming another Accord may be on the near-term horizon