Gold, Financial War & The Fed’s Dangerous Exit Strategy

With the United States celebrating Independence Day, oil still trading over $100 a barrel, and continued uncertainty in the Middle-East, today King World News interviewed the director of international economics at the Council on Foreign Relations in New York. Dr. Benn Steil warned KWN about the Fed’s exit strategy, and also spoke about China’s large hoard of U.S. dollars, and their massive accumulation of gold.

Eric King: “What we are looking at right now is a financial war between the U.S. and China.”

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Dr. Steil: “That’s right. In the 1940s the U.S. was the world’s largest international creditor, and Britain was the world’s largest international debtor. Today, China is the world’s largest international creditor, and of course the United States is the world’s largest international debtor.

And it’s fascinating to see that the United States today takes the same position in terms of identifying the flaws in the global monetary architecture that Keynes and the British took in the 1940s. For example, former Treasury Secretary Tim Geithner, in 2010, proposed imposing caps on persistent current account surpluses. Of course that was aimed at disciplining Chinese economic behavior….

“This was exactly the sort of position that Britain was taking in the 1940s, Harry Dexter White and the FDR administration condemned. So where you stand depends on where you sit at the time.”

Eric King: “This is also a quote (from Dr. Steil) ‘At present, the United States has no need to accommodate calls for it to sacrifice its exorbitant privilege (having the world’s reserve currency) to some vague vision of the global good. It will only waver when the market initiates a clear shift toward alternatives.” What about that (Dr. Steil)?”

Dr. Steil: “Well, in the 1940s there was a deal to be done between the United States and Britain. It was a harsh deal, and it was an imbalanced deal as I explained, but nonetheless it was a deal to be done. Britain needed financing to get through the war, and the Americans needed British acquiescence to make the dollar the global unit of account.

But the situation with China today is not the same, and let me give you just one little anecdote to illustrate this: In 1956, the Eisenhower administration forced the British out of (the) Suez (Canal) by threatening to withhold emergency IMF support.

Now, the United States, at the time, could afford to provoke a sterling crisis at no cost to itself because in 1956 U.S. holdings of British securities amounted to only one dollar per U.S. resident. Now, compare that to today, where Chinese holdings of U.S. securities amount to over (a remarkable) $1,000 per Chinese resident.

So China cannot afford to provoke a dollar crisis today because it would be hurting itself at least as much as it would be hurting the United States. And that’s why there is really not, in my view, a deal to be done right now between the United States and China to remake the global international architecture … As you quoted, China has a vast stash of dollar-denominated assets, and it doesn’t want to do anything that would undermine the global purchasing power of this hoard. So they are in quite a bind.”

Source: http://kingworldnews.com/kingworldnews/KWN_DailyWeb/Entries/2013/7/4_Gold,_Financial_War_%26_The_Feds_Dangerous_Exit_Strategy.html

What Happened The Last Time Gold Traded Here?

In November 2009 the IMF decided it was an opportune time to authorize the sale of 403.3 metric tons of gold. Very quickly after announcing this China, India, Russia, and some EU central banks piled in snapping up the IMF‘s offer. The current price of gold is around CNY7,300 per ounce, exactly what it was when China last loaded the boat…

 

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and remember, China does not seem afraid to add on lower prices (hhm buy low?)

Charts: Bloomberg

Source: http://www.zerohedge.com/news/2013-07-02/what-happened-last-time-gold-traded-here

World Central Banks Buying Gold

Today is a national holiday in the United Kingdom and the USA.
Friday’s AM fix was USD 1,385.25, EUR 1,068.95 and GBP 917.81 per ounce.

Gold climbed $5 on Friday and closed at $1,390.25/oz in London and silver closed at 22.482 in NY.

Gold rose 0.45% this morning in quiet European trading with UK and U.S. markets closed for holidays. Silver, platinum and palladium also advanced this morning.

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Gold’s gains come on the back of the best week in a month last week when gold rose 2%.

Gold is being supported by continued diversification from central banks and signs of increased physical demand which is countering continued outflows in ETF holdings.

Gold Price (Nominal) and Central Bank Net Buying/ Selling (1971-2013)

Russia,Turkey, Kazakhstan and Azerbaijan expanded their gold reserves for a seventh straight month in April, buying bullion to diversify foreign exchange reserves due to concerns about the dollar and the euro.

Russia’s steady increase in its gold reserves saw its holdings, the seventh-largest by country, climb another 8.4 metric tons to 990 tons, taking gains this year to 3.4% after expanding by 8.5% in 2012, International Monetary Fund data show.

Kazakhstan’s reserves grew 2.6 tons to 125.5 tons, taking the increase to 8.9% this year after a 41% expansion in 2012, data on the website showed.

Turkey’s holdings rose 18.2 tons to 427.1 tons in April, increasing for a 10th month as it accepted gold in its reserve requirements from commercial banks.

Belarus’s holdings expanded for a seventh month as did Azerbaijan’s.

Interestingly, Greece’s gold holdings climbed for a fourth month, according to the IMF data.

This could be a sign of rising economic nationalism in Greece or that the Greek central bank realises that if Greece leaves the euro and is forced back onto the drachma that gold reserves will offer a modicum of protection. Only a modicum, because Greece’s gold reserves remain miniscule especially considering the scale of their debts.

IMF Greece Gold Reserves, in Mill Fin Troy Oz, (Quarterly 01Jan1956-27May2013)

Central banks are buying gold as an overall strategy of forex portfolio diversification and the recent price drop will not deter them from a long term policy of diversification into gold.

Central bank reserve managers are conservative rather than speculative and will ignore the day to day noise and price predictions emanating from certain banks in favour of passive allocations to gold as part of their foreign exchange diversification strategy.

IMF World Gold Reserves, in Mill Fin Troy Oz, (Monthly 31Mar2007-31Mar2013)

While not driven by price, some central banks may have made the most of the lower prices by increasing their holdings by more than they would have if prices had risen in value.

The long term trend for central banks to increase gold reserves remains intact and will support gold.

Central banks bought 534.6 tons of gold last year, the most since 1964, and may add as much as 550 tons in 2013, the World Gold Council estimates. While central-bank purchases fell 5.2 percent in the three months through March, they totaled more than 100 tons for the seventh straight quarter, according to council data.

IMF China Gold Reserves, in Mill Fin Troy Oz (Quarterly 01Jan1977-27May2013)

China’s foreign currency reserves have surged more than 700% since 2004 and are now enough to buy every central bank’s official gold supply – twice.

China’s foreign reserves surpassed the value of all official bullion holdings in January 2004 and rose to $3.3 trillion at the end of 2012 and are at $3.4 trillion today.

The price of gold has failed to keep pace with the surge in the value of Chinese and global foreign exchange holdings. Gold has increased just 54% in the last 5 years and 250% since 2004, with the registered volume little changed, according to data based on International Monetary Fund and World Gold Council figures.

China’s Foreign Exchange Reserves vs Gold Monthly (2004-2013)

By comparison, China’s reserves rose 721% from 2004 through 2012, while the combined total among Brazil, Russia and India rose about 400% to $1.1 trillion.

Continuing diversification into gold from the huge foreign exchange reserves by the People’s Bank of China and other central banks is a primary pillar which will support gold and should contribute to higher prices in the coming years.

We are confident that the PBOC is quietly accumulating gold and we expect another announcement from the PBOC, possibly this year, when they again disclose to the market that they drastically increased their gold reserves – possibly from 1,054 tonnes to between 2,000 and 3,000 tonnes.

Source: http://www.marketoracle.co.uk/Article40627.html