Joe Weisenthal|Oct. 20, 2009, 2:50 PM | 13,608 |66
PrintTags: Economy, China

Economic historian Niall Ferguson warns that China's love affair with the dollar is fading faster than anyone realizes.

TechTicker: "The idea they don't have anywhere else to go or would shoot themselves in the foot if there were a steep decline in the dollar or appreciation of their currency reassures many people in Washington ‘we can relax'," he says. "An appreciation of the renminbi may reduce value of their international reserves but increases the value of every other asset the Chinese own," most notably the commodity assets they have been buying all over the world.

China's "current strategy is to diversify out of dollars and into commodities," Ferguson says. Furthermore, China's recent pact with Brazil to conduct trade in their local currencies is a "sign of the times."

Perhaps most importantly, China's massive stimulus program is helping to generate internal consumption in the People's Republic, meaning local manufacturers are less dependent on exports. Because of the "rapid growth" of Chinese domestic consumption, Ferguson predicts China's international trade surplus could be gone by next year.

Eric Hommelberg: Hold That Gold!
Source: The Gold Report  10/20/2009

Since the bull gold market began in 2001, Gold Drivers Report publisher and Bullion Store proprietor Eric Hommelberg argues that gold has significantly outperformed the Dow in terms of valuations, and as he sees it, the bull run will last at least until the middle of the next decade. The rhythm of this market over the past eight years tells him that $1,000 gold is history, and we can expect the current climb to push the price past the $1,250 mark next spring. In this exclusive Gold Report interview, Eric tells readers why. He also explains that while he prefers the precious metals in physical form, he recommends holding a select set of junior explorers, too—ones with trustworthy, savvy managements and promising drill results.

The Gold Report: The big jumps in the gold price lately have taken a lot of people by surprise. What's behind these jumps?

Eric Hommelberg: Investors were waiting for a sharp move, anticipating it for weeks, whether up or down. Giant speculative long positions have been taken on versus giant commercial short positions. Something had to give. It was time for a trigger.

Most of the analysts predicted a crash in the gold price due to the extreme commercial short position, arguing that commercial traders know what they are doing and always win. They're always right so they'll most probably be right again they say. But as weeks passed, it became clear that some big buyers were waiting just below the $1,000 mark

Again, investors were waiting for a trigger. When the news came out that the Gulf Arabs—along with China, Russia, Japan and France—plan to end dollar dealings for oil, all heck broke loose. The news made it very clear that a new basket of currencies will most likely include gold—as well as the yen, the yuan and the euro. Sure enough, it was very dollar-bearish—and therefore very gold-bullish news. This prompted, of course, a buying spree for gold, which overwhelmed the short players in the short term.

TGR: Not long ago, you aired a fictitious dialog between "GB" (a staunch gold bull and GATA supporter and "MI," a mainstream investor. Through their discussion, you brought up several themes that explained why the price of gold is increasing. One, argued by GATA (the Gold Anti-Trust Action Committee), is the notion that governments have been suppressing the price of gold artificially and that practice has run its course. Another is that a bunch of commercial shorts are coming due. Other themes included the current recession, pending inflation, and the U.S. dollar devaluation. As you look forward, which of these themes do you expect to influence the price of gold the most?

EH: When you look at the big picture, the main driver for gold has always been the U.S. dollar. Look at the long-term charts for both the dollar and gold. You'll find a major bottom for gold at the same time you'll find a major top for the dollar around 2001-2002. In 2009, we find ourselves with record high gold prices and a major low for the dollar. So that's the big picture, dollar down, gold up.

Now the dollar will continue to sink so gold will continue to rise, it's as simple as that. As we all know, confidence in the U.S. dollar is waning by the day. That's why countries such as China, India and Russia are demanding a new world reserve currency. There will be a new world reserve currency. Whether it takes five years, 10 years from now, I don't know. But until something replaces the dollar as a world reserve currency, the dollar will keep going down and gold will keep going up.

TGR: But what about an economic recovery? Wouldn't that be good for the dollar?

EH: There is a lot of talk about recovery but the simple truth is you can't have a recovery without people getting back to work. Consumer spending accounts for 75% of GDP, and consumer spending is not going to increase on the back of record high unemployment figures month after month. Housing prices, which are still in decline, aren't a big help either. The recovery people talk about these days is simply the result of huge stimulus packages thrown at the economy. Sure enough, these stimulus programs are being paid with money the U.S. government doesn't have. Since they don't have the money they simply print it. By printing new money the U.S. government is adding more debt to its already exploding debt levels. In fact the U.S. tries to solve its debt problem by issuing even more debt, and this, of course, is not sustainable and drives down confidence. At one point confidence will reach such a critical low that no one wants to own the dollar anymore, the dollar will crash and then we're not talking about inflation anymore, but about hyperinflation.

TGR: You've been among those who say GATA is right about gold prices having been suppressed artificially. In that context, why shouldn't other governments, in essence, try to bulk up the confidence in the U.S. dollar by keeping a lid on the gold price, at least until the issue of an alternative reserve currency is resolved? It certainly doesn't help other countries around the world to have hyperinflation in the U.S.

EH: Of course, it's not in the interest of China or Russia to see the dollar crash because they have so many dollars. On the other hand, they don't want to go forward with a world reserve currency that no longer has any value. Something needs to be adjusted. They demand that the U.S. do something about its ballooning deficit and the U.S. promises to take care of it. The problem, however, is they can't. It's impossible. If you try to run a business with debt growing much faster than income, you know you're heading into bankruptcy. It's no different for a nation.

Regarding the manipulation you referenced, the U.S. has been very much involved in suppressing the gold price for more than 30 years. The reason is quite simple—in order to maintain the illusion of a strong dollar they had to keep a lid on the gold price. A sharp rising gold price would set off all kinds of alarm bells which would undermine the dollar's credibility as a world reserve currency.

Now GATA has done an outstanding job by exposing the gold manipulation scheme by western central banks. After more than 10 years of extensive research, GATA concludes that more than half of all central banks' gold, which is about 15,000 tons, has been leased/sold into the market. Sure enough, this gold was mobilized in order to stem the rise of gold. Even Alan Greenspan admitted this when he said in his testimony before the U.S. House Banking Committee in 1999 that central banks stand ready to lease gold in increasing quantities should the price rise. Now GATA demonstrates that about 15,000 tons of central bank gold has been mobilized over the years and sold into the market. The problem, however, is that it's impossible for these central banks to get their leased gold back without catapulting gold prices to new record highs. Are the central banks going to lease their remaining gold reserves in order to stem the rise of gold? Most likely the answer is no, since central banks became net buyers recently for the very first time since 1987. So central bank gold coming to the market is no longer an issue here, something GATA already predicted in 2001—that this would happen in seven to ten years. Without central bank gold hitting the market there's no way to prevent gold prices to rise in coming years.

TGR: Given the recent run-ups, would you expect a pullback before the price rises again?

EH: I don't expect a sharp pullback; nothing like the correction last year. That's not going to happen. Since gold breached the $1,000 mark for the first time in March 2008, the $1,000 area had been a resistance area. It took about five attempts to slash the $1,000 mark. A long-time resistance area becomes a support level once that level has been breached to the upside. That's exactly what happened a few of weeks ago, when we saw our first weekly close above the $1,000 mark in history. Furthermore we had our highest monthly close ever as well and this marks the beginning of a new up leg. The charts leave no doubt; they point to gold prices of $1250+ within the next six months. When you analyze the long-term charts you'll notice a pattern of long consolidation phases followed by sharp up moves. The consolidation phases last for about 18 months, the sharp up moves last for about six months, whereby gold can appreciate by 50% or more. We saw it in 2005 when gold just finished an 18-month consolidation period and then it shot up within six months from $430 to $730. That move started with a commercial signal failure, today with record high commercial shorts outstanding we could be on the verge of a commercial signal failure again.

TGR: So, how should investors play this market now?

EH: I wouldn't try to trade it at all. The risk is to be out of the market, not to be in. I would just sit tight and enjoy the move. When confidence in the dollar is going to collapse, anything can happen to the gold price. It's no use to predict gold prices of $1,500, $2,000 or $3,000. It's just a matter of how much the dollar will be devalued. As I pointed out, I think we're at the beginning of a sharp up move again and going to new record highs.

TGR: You obviously like the safety aspects of physical gold. Can you describe why you prefer that over investing in gold equities?

EH: Physical gold in your hand is the safest investment you could ever think of. Of course, you can go to the stock market and buy ETF gold. For example, you could buy SPDR Gold Trust (ETF) (NYSE:GLD) or other instruments that represent gold. But what happens when a major financial crisis hits, stock markets are closed, banking holidays or whatever? Then what? It will be impossible to withdraw your money. Besides that, there's a growing distrust against the gold ETFs—do they really own the gold they claim? How could it be that a gold ETF accumulates more than a 1,000 tons of gold without causing a tremendous spike in the gold price? Why is it that no independent audit can be done regarding their supposed gold holdings? Why should we just believe the custodians of the bullion EFTs that are coincidently also the biggest short players in those bullion markets? What happens with the silver ETF ( iShares Silver Trust (ETF) (NYSE:SLV) if JPMorgan goes bust? What happens with GLD if HSBC goes bust? Too many uncertainties here; that's exactly why more and more investors withdraw their gold ETF holdings and switch to the real metal. A good example, of course, is Greenlight Capital, a $6 billion hedge fund that switched $500 million of investment in GLD to physical gold recently.

TGR: With greater risk, of course, comes higher returns. And aren't the risks that you outline an extreme? Aren't there upsides along the way?

EG: Sure. I'm not saying you shouldn't invest in equities at all. I'm invested in equities myself. The only thing I'm advocating is you should own some physical gold just for the worst case. That's all.

When you look at gold equities, especially the mining shares, they could provide a good leverage to gold. If gold goes up by 5%, your gold mining shares could go up by 10% or 15%. There's definitely a leverage there. Especially when it comes to the junior sector, the leverage could be astronomical. So, yes, some of your money should be devoted to equities.

TGR: What percentage of physical gold should be in a portfolio?

EH: That's very personal. It depends on how much risk you're willing to take. If you come up to me and you say, "I'm not willing to take any risk at all, nothing. I want to have the safest bet." Then I would say you should invest 100% of your money into physical gold. But if people ask me what I am doing, I'd say half of my money is in the physical metals— about 30% in physical gold, 20% in physical silver. I just split the remaining 50% in half—25% in senior shares and 25% into junior shares. And I spread the juniors' share among at least 10 different companies.

TGR: So your portfolio is all in precious metals, either physical or equities?

EH: Yes, that's correct.

TGR: If you're looking at the juniors—taking more risks but potentially getting greater upside rewards— is this the time to start accumulating juniors?

EH: Let's go back a bit first. The gold bull market began in 2001; in early 2004, we had a small mania in the junior sector. Juniors that came out with good drilling results back then were rewarded tremendously. Four years later they moved to the exact opposite end of the spectrum to extreme undervaluation. Most of the juniors had been decimated to penny levels, levels not seen since the beginning of the gold bull market. We saw a junior sector so depressed that no one wanted to own junior shares anymore.

Now investing is quite a simple game. You buy equities when stocks are extremely undervalued. You sell when they are extremely overvalued. The pendulum is swinging back and forth all the time. We are now one year further from late 2008, and the junior sector certainly started to recover from its most depressed levels then. Finally the juniors started outperforming gold and we're seeing most juniors trading at multiples (100% to 500%) of levels seen last year.

So is it a time to get in junior shares? I think, yes, but you have to be careful to pick the high-quality ones because many juniors are not going to survive this dark winter. The problem is money. Most junior business models are simple. They raise money and drill it away, then they raise money again and drill it away again. If they're lucky, they make a discovery and the stock starts moving up. But generally it takes a lot of money to make a discovery if the junior makes a discovery at all.

TGR: So what do you look for in juniors then? What is important?

EH: First of all, I like to see juniors whose management demonstrates the capability of raising money even during the most difficult periods in our financial history. Furthermore, I would like to see juniors that are producing or on the verge of becoming a producer, because then they can generate their own cash flow and are less dependent on external financings. Last but not least, I would like to see juniors with promising properties, which increases the odds of a significant discovery. If you're lucky enough to be invested in a junior that makes a big discovery, the reward can be astronomical—which is why I think you should always own a few juniors in your portfolio. But I never have more than 2.5% of my entire portfolio in any one single junior company.

TGR: Could you give us an example of a junior that meets these criteria?

EH: Sure, I think a typical example of what a junior should be concerns Endeavour Silver Corp. (TSX:EDR) (NYSE.A:EXK). What they've done over the last five years is really phenomenal; four discoveries in just five years' time is amazing. In 2004 management turned Endeavour from an exploration company into a producing company overnight. Although they had no money to do it, they did it. They raised the money, became a producer and have reported record high silver production almost every single quarter since then. Besides that, they keep expanding their resource base year after year. Their growth profile is so aggressive that they will most likely become a mid-tier silver producer within the next two years, which will make it an attractive target for the major silver producers. What I like about Endeavour's management is their transparency. They simply do what they've said they would do; that's what you should demand from management from any junior company.

TGR: Absolutely. Keeping the promises they make. The upside potential would also be limited in companies in that are in politically shaky areas or have managements that aren't as savvy.

EH: Exactly. If you talk to management of a dozen companies, they will all tell you, "Oh, listen, we're on the verge of a big discovery." Anyone can tell you anything. They all say that.

And what we have seen in the last couple of years? Only a very few big discoveries. So it's a matter of faith in management. Even if you're a geologist yourself, it's difficult to see the real potential of a company. So in the end, they have to deliver. That's why I like to see companies go out and start the drilling programs; the results will tell me whether I should buy or not. Drill rigs are the real truth machines.

Many of the juniors that are priced at penny levels are telling shareholders they aren't going to raise money because they don't want to dilute their shares. I couldn't disagree more; an investor wants to see a company go forward. An investor wants to participate in new discoveries. To make new discoveries, you need to drill; in order to drill you need money. But if you aren't going to raise money to go out for exploration, nothing will happen. I don't buy into the argument of waiting for better times and higher share prices before raising money. I don't like it.

TGR: What do you think about new equities that represent a basket of seniors or juniors?

EH: I like the ETF GDX (Market Vectors Gold Miners (NYSE:GDX)), for example, which tracks the HUI (Gold BUGS Index) quite closely; it's a basket of senior mining companies. Why do I like it? If you're investing in single companies, you have to follow the company. You worry about management, about their cash position, about trustworthiness, about the political situation where they operate and many other things. But if you invest through an ETF, you're investing in many companies at the same time and you just know you're tracking an index. It saves a lot of headaches.

TGR: Any final thoughts you'd like to give our readers?

EH: Yes, most likely you'll be hearing bearish gold tunes in coming months from the traditional gold institutions, saying that gold's rise is not justified by its fundamentals and therefore bound to fall. They did so in 2003, they did so in 2005 and now they are at it again. The traditional gold institutions simply don't appreciate the fact that gold is money and how it has been manipulated over the years. Traditional gold institutions in 2005, with gold prices at $425, were saying that increased gold production would bring down gold prices; that certainly didn't boost their credibility. Still many analyst quote these very same institutions today for the very same argument— that increased gold production will bring down gold prices in the years ahead. GATA, on the other hand, said in 2001 that gold was going to $850 and that central bank selling wouldn't be an issue anymore within seven to ten years from then. We find ourselves right in the middle of that projection and gold is trading well above $850 and central bank sales have dried up completely. You are not going to hear these kind of predictions from the traditional gold institutions. No one has been right on the money more than GATA. It's therefore no wonder that GATA's credibility is rising fast. To give you an example here, the Chinese sovereign wealth fund ,which manages over $200 billion, has held already three teleconference calls with GATA—they wanted to know what GATA knows. We all know now that China has been accumulating gold for years; we all know now that China wants a new world reserve currency. This, of course, won't happen overnight, but it's quite obvious that the U.S. dollar as a world reserve currency is not going to survive. Gold will continue to rise until something new has been put in place on the monetary front and I think we are years away from that. So what I'd say is. "Stick to it and stay the course."

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Major institutions should be broken up if necessary, Greenlight manager says

By Alistair Barr, MarketWatch

NEW YORK (MarketWatch) -- Greenlight Capital is betting on the possibility of a major currency collapse and a surge in interest rates, the hedge-fund firm's manager David Einhorn said Monday, citing ballooning government deficits in some of the world's most developed countries.

Einhorn, who warned about Lehman Brothers' frailty before it collapsed last year, also said financial institutions that are deemed as "too big to fail," such as Citigroup Inc. , should be broken up.

Greenlight has been buying physical gold this year because Einhorn is concerned that efforts to save the financial system and fuel economic recovery are undermining the value of such currencies as the U.S. dollar.

On Monday, he said Greenlight has added new trades to this investment theme, buying long-dated options on much higher interest rates in Japan and other developed regions -- effectively giving the firm the chance to make big profits from a jump in rates. The options, bought from major banks, are tied to interest rates four to five years out, Einhorn noted.

"Japan may already be past the point of no return," he said during a presentation at the Value Investing Congress in New York.

'Lehman shouldn't have existed in any size to threaten the financial system.'

Japan's debt is equal to 190% of the country's gross domestic product and its government deficit will be 10% of GDP this year, according to Einhorn.

Japan has been able to borrow money at roughly 2% a year to finance these deficits, partly because the country has many savers willing to buy low-yielding government bonds. However, some of these savers may begin spending instead as they enter retirement, Einhorn argued.

"When the market refuses to refinance at cheap rates, problems emerge," he said, adding that this could trigger a "currency death spiral."

Interest rates have been very stable in Japan for years, so the options on higher rates that Greenlight bought were relatively cheap. Einhorn said the "asymmetry" of that trade was interesting: If rates were to jump suddenly in Japan, Greenlight stands to make "multiples" on its positions.

"There remains a possibility that I'm wrong, and I hope I am," he commented. But earlier in the speech he remarked: "Just because something hasn't happened before, that doesn't mean it won't."

Remedy to shore up system
Einhorn also compared potential problems in sovereign-debt markets to the financial crisis that engulfed markets last year.

When Lehman collapsed, investors reacted by dramatically increasing the cost of borrowing for rival Wall Street firms to the point where their business models were threatened, he Einhorn. The collapse of any major currency could have same impact of rerating the cost of financing governments in deficit.

Unlike Japan, the United States isn't past the point of no return, the fund manager stressed. However, he criticized financial-reform proposals pushed by Treasury Secretary Timothy Geithner, arguing they provide a government backstop for the largest institutions, entrenching them further.

No institution should be too big to fail, Einhorn contended. "The real solution is to break up anything that fails that test. Lehman shouldn't have existed in any size to threaten the financial system."

The same applies to Citigroup and Bear Stearns, which J.P. Mortgage Chase & Co. acquired, as well as American International Group Inc. and "dozens" of other firms, he said.

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Why buy Gold from the GoldDrivers Bullion Store?

Posted Oct 12, 2009 09:00am EDT by Aaron Task in Newsmakers, Commodities

Famed investor Jim Rogers is "quite sure gold will go over $2000 per ounce during this bull market."
Rogers' confidence gold will continue to rally stems from a view the U.S. dollar is on its way to losing status as the world's reserve currency.

"Is it going to happen? Yes," Rogers says. "I don't like saying it [and] I'm extremely worried about it but we have to deal with the facts. America is not getting better [and] the dollar is going to be replaced just like pound sterling [was]."

Rogers didn't offer a timetable, and it's likely gold would exceed $2000 per ounce if the dollar were to lose its reserve status.

Still, "I wouldn't buy gold today," Rogers says. "I think I'll make more money in other commodities, which are cheaper," as discussed in more detail here.

Among many others, Rogers is "worried about the fact the U.S. government is printing huge amounts, spending gigantic amounts of money it doesn't have," the investor and author says. "People are very worried [and] skeptical about paper money [and] looking for places to protect themselves. The best way is to buy real assets. [That] has always protected one during currency turmoil, and it will again."
..

Dear member,

So far so good for all those gold analysts predicting gold to crash due to the extreme commercial short positions. Boy, where they wrong or what? Ever since $940 gold they called for a gold ambush but here we are, gold blasted through its old all time high of $1035 put in place in March 2008.  Again, record high short positions are no guarantee for a gold ambush as many want you to believe. Rember what we said in our latets chart update of Sept 16:

Excerpt TGDR Chart Update Sept 16: 

Could a commercial signal failure be in the making here? Are we on the verge of a spectacular historical move in gold? We will know the answer within days. Some wild swings are in the pipe-line since record high commercial shorts vs record high spec longs can't be solved without violent spikes up or down. In 2005 we had a commercial signal failure which send the commercials running for the hills thereby launching gold from $430 to $730 in short order. We could be very well on a similar juncture here right now.

Investors betting on the commercial shorts since they come out as winners most of the time please note that the massive short position they have accumulated has been accumulated when the Central Banks have become net buyers, when Barrick Gold rushes to cover its 6 B$ short position, when China has said it has lost confidence in the dollar and will buy dips in the gold price, when the Middle East and India crank up into high demand gear, when the Chinese government has encouraged its citizens to buy gold and silver, when South African mine supply has again declined by 7.8% y-o-y., when investors such as Greenlight Capital are switching from GLD to real bullion etc etc. Now even a chimpanzee could recognize the vulnerability of the massive short position here so betting on them (commercial shorts) could very well be proven wrong coming weeks.. Again, it did happen before.  In 2005 the commerial shorts were forced to cover thereby launching the gold price from $430 to $730 in short order

END.

Well, here we are, commercials are running for tthe hills while gold finds itself in record high demand. Gold enjoys record high demand since confidence in the once almighty dollar is evaporating like snow in hell. Yesterday's news that some Middle East countries launched secret moves with China, Russia and France to stop using the US currency for oil trading won't be a big help for the dollar either:

The Demise of the Dollar

In a graphic illustration of the new world order, Arab states have launched secret moves with China, Russia and France to stop using the US currency for oil trading

By Robert Fisk
Tuesday, 6 October 2009

In the most profound financial change in recent Middle East history, Gulf Arabs are planning – along with China, Russia, Japan and France – to end dollar dealings for oil, moving instead to a basket of currencies including the Japanese yen and Chinese yuan, the euro, gold and a new, unified currency planned for nations in the Gulf Co-operation Council, including Saudi Arabia, Abu Dhabi, Kuwait and Qatar.

END.

Where do we go from here?

It seems that we have had our last chance to buy our gold below $1000 indeed. We just finished a 18 months consolidation period which could be follwoed by another sharp upswing to $1350 ore more within the next 6 months. It has been the rhythm of this gold bull market so far, sharp 6 months upswing, 18 months consolidation, sharp 6 months upswing, 18 months consolidation, now another sharp 6 months upswing? My bet is yes. The weekly chart support this idea very much. The reversed head and shoulder pattern has a price objection of $1300+ on it, see updated daily and weekly weekly charts above:

TGDR Gold Chart - Daily

TGDR Gold Chart - Weekly

Best regards,

Eric Hommelberg
GoldDrivers.com Inc

In a graphic illustration of the new world order, Arab states have launched secret moves with China, Russia and France to stop using the US currency for oil trading

By Robert Fisk
Tuesday, 6 October 2009

In the most profound financial change in recent Middle East history, Gulf Arabs are planning – along with China, Russia, Japan and France – to end dollar dealings for oil, moving instead to a basket of currencies including the Japanese yen and Chinese yuan, the euro, gold and a new, unified currency planned for nations in the Gulf Co-operation Council, including Saudi Arabia, Abu Dhabi, Kuwait and Qatar.

Secret meetings have already been held by finance ministers and central bank governors in Russia, China, Japan and Brazil to work on the scheme, which will mean that oil will no longer be priced in dollars.

The plans, confirmed to The Independent by both Gulf Arab and Chinese banking sources in Hong Kong, may help to explain the sudden rise in gold prices, but it also augurs an extraordinary transition from dollar markets within nine years.

The Americans, who are aware the meetings have taken place – although they have not discovered the details – are sure to fight this international cabal which will include hitherto loyal allies Japan and the Gulf Arabs. Against the background to these currency meetings, Sun Bigan, China's former special envoy to the Middle East, has warned there is a risk of deepening divisions between China and the US over influence and oil in the Middle East. "Bilateral quarrels and clashes are unavoidable," he told the Asia and Africa Review. "We cannot lower vigilance against hostility in the Middle East over energy interests and security."

This sounds like a dangerous prediction of a future economic war between the US and China over Middle East oil – yet again turning the region's conflicts into a battle for great power supremacy. China uses more oil incrementally than the US because its growth is less energy efficient. The transitional currency in the move away from dollars, according to Chinese banking sources, may well be gold. An indication of the huge amounts involved can be gained from the wealth of Abu Dhabi, Saudi Arabia, Kuwait and Qatar who together hold an estimated $2.1 trillion in dollar reserves.

The decline of American economic power linked to the current global recession was implicitly acknowledged by the World Bank president Robert Zoellick. "One of the legacies of this crisis may be a recognition of changed economic power relations," he said in Istanbul ahead of meetings this week of the IMF and World Bank. But it is China's extraordinary new financial power – along with past anger among oil-producing and oil-consuming nations at America's power to interfere in the international financial system – which has prompted the latest discussions involving the Gulf states.

Brazil has shown interest in collaborating in non-dollar oil payments, along with India. Indeed, China appears to be the most enthusiastic of all the financial powers involved, not least because of its enormous trade with the Middle East.

China imports 60 per cent of its oil, much of it from the Middle East and Russia. The Chinese have oil production concessions in Iraq – blocked by the US until this year – and since 2008 have held an $8bn agreement with Iran to develop refining capacity and gas resources. China has oil deals in Sudan (where it has substituted for US interests) and has been negotiating for oil concessions with Libya, where all such contracts are joint ventures.

Furthermore, Chinese exports to the region now account for no fewer than 10 per cent of the imports of every country in the Middle East, including a huge range of products from cars to weapon systems, food, clothes, even dolls. In a clear sign of China's growing financial muscle, the president of the European Central Bank, Jean-Claude Trichet, yesterday pleaded with Beijing to let the yuan appreciate against a sliding dollar and, by extension, loosen China's reliance on US monetary policy, to help rebalance the world economy and ease upward pressure on the euro.

Ever since the Bretton Woods agreements – the accords after the Second World War which bequeathed the architecture for the modern international financial system – America's trading partners have been left to cope with the impact of Washington's control and, in more recent years, the hegemony of the dollar as the dominant global reserve currency.

The Chinese believe, for example, that the Americans persuaded Britain to stay out of the euro in order to prevent an earlier move away from the dollar. But Chinese banking sources say their discussions have gone too far to be blocked now. "The Russians will eventually bring in the rouble to the basket of currencies," a prominent Hong Kong broker told The Independent. "The Brits are stuck in the middle and will come into the euro. They have no choice because they won't be able to use the US dollar."

Chinese financial sources believe President Barack Obama is too busy fixing the US economy to concentrate on the extraordinary implications of the transition from the dollar in nine years' time. The current deadline for the currency transition is 2018.

The US discussed the trend briefly at the G20 summit in Pittsburgh; the Chinese Central Bank governor and other officials have been worrying aloud about the dollar for years. Their problem is that much of their national wealth is tied up in dollar assets.

"These plans will change the face of international financial transactions," one Chinese banker said. "America and Britain must be very worried. You will know how worried by the thunder of denials this news will generate."

Iran announced late last month that its foreign currency reserves would henceforth be held in euros rather than dollars. Bankers remember, of course, what happened to the last Middle East oil producer to sell its oil in euros rather than dollars. A few months after Saddam Hussein trumpeted his decision, the Americans and British invaded Iraq.

WASHINGTON (Reuters) - World Bank President Robert Zoellick said the United States should not take the dollar's status as the world's key reserve currency for granted because other options are emerging.

In excerpts released on Sunday from a speech that he is to deliver on Monday, Zoellick said global economic forces were shifting and it was time now to prepare for the fact that growth will come from multiple sources.

"The United States would be mistaken to take for granted the dollar's place as the world's predominant reserve currency," he said. "Looking forward, there will increasingly be other options."

Zoellick said that a meeting of Group of 20 rich and developing countries in Pittsburgh on Thursday and Friday had made "a good start" toward increased global cooperation but they will have accept global monitoring of their activities.

"Peer review will need to be peer pressure," he said.

Zoellick said that the G20, as the new chief forum for international economic cooperation, also must not forget the 160 countries left outside its structure and should try to open opportunity for them.

"We need a system of international political economy that reflects a new multi-polarity of growth," Zoellick said. It needs to integrate rising economic powers as 'responsible stakeholders' while recognizing that these countries are still home to hundreds of millions of poor and face staggering challenges of development.".

Whatever happens at the G20, the days of Western dominance are at an end, says Jeremy Warner.

Telegraph.co.uk
September 25

Sometimes it takes a crisis to restore reason and equilibrium to the world, and so it is with the trade and capital imbalances that were arguably the root cause of the financial collapse of the past two years.

To economic purists, the changes now under way in demand and trade are inevitable, necessary and even desirable. Even so, dollar supremacy and the geo-political dominance of the West are both likely long-term casualties.

One, almost unnoticed, effect of the downturn is that past imbalances in trade and capital flows are correcting themselves of their own volition, the simple consequence of lower demand in once profligate consumer nations.

Current-account surpluses in China, Germany and Japan are narrowing, as are the deficits of the major consumer nations – primarily America, but also smaller profligates such as Britain and Spain.

The key question for G20 leaders as they meet in Pittsburgh is not bankers' bonuses, financial regulation and other issues of peripheral importance, but whether this correction in trade might be used as the basis for a permanently more balanced world economy.

In direct contradiction of US objectives, Angela Merkel, the German Chancellor, accuses Britain and America of using the issue of trade imbalances to backtrack on financial reform and bankers' bonuses. "We should not start looking for ersatz [substitute] issues and forget the topic of financial market regulation," she said before boarding the plane to Pittsburgh.

To the big export nations, the primary cause of the crisis was Anglo Saxon financiers, whose wicked and avaricious ways created a catastrophe in the financial system, which led to a collapse in world trade. Once bankers are tamed, this one-off shock can be put behind us and the world will return to business as usual.

Blaming bankers is politically popular – Ms Merkel has an election to fight on Sunday – but the idea that the world economy will return to the way it was once this supposed cancer is removed is fanciful.

A seminal shift in behaviour is being forced on the deficit nations where, despite massive fiscal, monetary and financial system support, there is a continuing scarcity of credit and a growing propensity to save. Neither of these two constraints on demand will reverse any time soon.

This, in turn, is forcing change on surplus countries, whether they like it or not. Export-orientated nations can no longer rely on once profligate neighbours to buy their goods. Against all instinct, they are having to stimulate their own domestic demand.

The most startling results are evident in China, where retail sales grew an astonishing 15.4 per cent in August. Fiscal action has succeeded in boosting consumption in Germany, too, despite mistrust of what one German politician has dubbed "crass Keynesianism".

Unfortunately for him, Germany will have to persist with its Keynesian medicine for some time yet if it is to avoid a collapse back into recession. Tax cuts and perhaps the removal of fiscal incentives to save are essential to the process of supporting domestic demand.

The challenge for a developing nation such as China is a rather different one. In China, the propensity to export and save is driven by an absence of any meaningful social security net, in combination with the legacy of its oppressive one child policy, which has deprived great swathes of the population of children to fall back on for support in old age.

What's more, most Chinese don't earn enough to buy the products they are producing, so in what has become the customary path for developing nations, they export the surplus and save the proceeds.

Yet even in China the establishment of a newly affluent, free-spending middle class may now have gained an unstoppable momentum. In any case, the country can no longer rely on American consumers to provide jobs and growth. It needs a new growth model, which means ultimately adopting the
Henry Ford principle that if you want a sustainable market for your products, you have to pay your workers enough to buy them.

These trends – all of which pre-date the crisis but which, out of necessity, are being greatly accelerated by it – will eventually drive a move away from the dollar as the world's reserve currency of choice. As China takes control of its economic destiny, spends more and saves less, there will be less willingness both to hold dollar assets and to submit to the domestic priorities of US monetary policy.

None of this will happen overnight. Depressed it might be, but US consumption is still substantially bigger than that of all the surplus nations put together. All the same, that the dollar's reign as the world's dominant currency is drawing to a close is no longer in doubt

Joe Prendergast

Last Updated: September 21. 2009 7:17PM UAE / September 21. 2009 3:17PM GMT

The US dollar still retains a disproportionately large representation in international trade transactions, official reserves and exchange rate regimes.

This is largely due to the many institutional arrangements and incumbencies which remain from the Bretton Woods era of 1944 to 1971 when the gold-linked dollar provided the formal anchor for the world monetary system.

Now, though, this privileged, inherited status of the paper dollar is under threat from the falling relative economic size of the US and its cyclical influence and the scale of the excesses that very privilege has allowed.

Appropriately straddling the turn of the 21st century, the “borrowed” consumer decade of 1997–2007 may come to be regarded as the fin de siecle, marking a critical juncture in the drift away from the US dollar hegemony that has dominated the international financial system since the Bretton Woods regime ended in 1971.

Instead, we are on the road to a new, multilateral currency order.

As far back as the 1970s, in the earliest years of the floating rate regime when the US dollar declined rapidly in value after its link with gold was formally broken, its hegemony was under threat. But, back then, the US was still a net creditor nation and there was no obvious liquid alternative.

Today, after almost 25 years of deficits, the US is the world’s largest debtor with little chance of shrinking that debt without significant further real depreciation of its currency.

Moreover, while the US financial system is in crisis with increasing public intervention in the system, liquidity and transparency in both industrialised and emerging currency and financial markets, while still imperfect, has greatly increased.

Finally, there is a credible, liquid alternative currency which can at least share the role of global numeraire; the euro.

This backdrop of cyclical and structural pressures presents a challenging environment for even the most established and rigid dollar-peggers such as Hong Kong and the Gulf states. Their pegs have resulted in unprecedented foreign currency reserve accumulation, as warranted exchange rate adjustments are prevented via intervention and capital control.

Before the crisis in the US financial system, higher inflation was also a natural consequence of having to keep monetary policy linked to the US Federal Reserve.

The credit crisis has distracted attention from the disequilibrium of many dollar-pegged currencies around the world, not least as the dollar has recovered significantly in value over the past year. But, as the world emerges from the crisis, US monetary policy may stay expansive for a prolonged period and the dollar may become significantly weakened again.

This could drive a new wedge between the appropriate monetary policy of the dollar-pegged states and the policy of the US, especially as expansive monetary policy may eventually drive up global commodity prices upon which the economic performance of many dollar-pegged states depends.

Domestic price adjustments, in imports, housing, wages and ultimately all goods and services, will be part of the equilibrating costs of a currency peg during such phases as long as the peg is maintained.

If the currency cannot adjust, then prices must do so. Is the cost of ever-increasing phases of inflation or, in other circumstances, potential deflation, worth sustaining unilateral pegs?

In a world of more diversified trade, fading US dominance and ever-larger capital flows, the answer is, increasingly, no.

Boom-bust cycles, redistributions and inequalities of income and purchasing power, damage to non-US export markets and disincentives for investment are all likely to be prevalent.

Economic considerations would thus argue that adjustment of these regimes is justified, not just cyclically but structurally, too.

But what is the alternative? Given the typically high trade dependence and relatively low liquidity of the currencies in question and the ever greater scale of international capital flows it is unlikely the volatility of a perfectly free float, or “benign neglect” of the exchange rate, will be desirable.

Political considerations may dictate simple revaluation of the dollar peg rate as the only viable option to regain control of inflation in the short to medium term.

However, this may invite yet larger scale speculation because any change in these long-established regimes would be likely to weaken their credibility.

A switch to a peg with the only liquid alternative to the dollar – the euro – may be more inappropriate unless the country in question has highly concentrated trade with Europe alone. The appealing alternative in a more diversified world economy is a multilateral currency regime consisting of a blend of major currencies such as the euro and dollar or a much broader trade-weighted basket. This approach is already favoured by several countries which have moved away recently from unilateral pegs including Russia and Kuwait and, with great success, Singapore since 1981. While China has maintained tight control of the yuan’s exchange rate versus the dollar since the unilateral peg was abandoned in 2005, it is ostensibly managed with reference to an unpublished, broader exchange rate basket. Such a multilateral currency world should be a natural consequence of economic growth over time.

But the pace at which the shift takes place will depend, critically, upon the stability of the US and its economic policies. For the first time in modern history, many of today’s largest foreign currency reserve holders are not part of the Group of Seven (G7) industrialised countries. This is important because the G7 has traditionally acted as a co-operative stabilising influence dampening major currency swings with intervention at times of greatest stress and illiquidity and maintaining confidence in the dollar. Today’s largest currency reserve holders may act as stabilisers to preserve their own self interest but no more than that.

As almost 100 countries still use currency pegs in varying forms, mainly versus the US dollar, the procession to a more multilateral exchange rate regime is expected to continue. With increasing diversity of central bank reserve assets and an increasingly diverse range of reserve holders themselves, a tri-polar world with shared primary reserve status between the principal currencies of the Americas, Asia and Europe is likely to take shape.

The euro is increasingly posing that challenge and can expect to see further increases in its global currency reserve share from about 30 per cent now.

And, in the much longer run, China’s yuan may well be both liquid and flexible enough to represent Asia’s primary role in the multilateral system.

Joe Prendergast is the chief currency strategist at Credit Suisse Private Banking

China could consider IMF's sale of 403 tonnes of gold

* China looking to diversify, has 1,054 tonnes already

* Market value of IMF sale around $13 billion (Adds comments of central bank officials, paragraphs 7- 15)

BEIJING, Sept 21 (Reuters) - China is considering buying gold being offered for sale by the International Monetary Fund, Market News International said on Monday, citing two unnamed government sources, but the report could not immediately be confirmed.

"China will consider buying if the price is right and the return is relatively high," MNI quoted one of the government sources as saying.

Gold XAU=, which had dipped just below $1,000 an ounce, rebounded to $1,003.45 after the report. That would put the market value of the 403.3 tonnes on offer from the IMF at close to $13 billion.

"There was a small reaction to the news that China may discuss its gold plans at the G20, it recovered a little, but overall the market isn't overly concerned, not yet anyway," a Europe-based trader said.

China, the world's biggest producer and buyer of gold, revealed earlier this year that it had lifted its own stocks of gold to 1,054 tonnes from 400 tonnes when it last reported its holdings in 2003.

The IMF formally endorsed a plan on Friday to sell 403.3 tonnes of gold, one eighth of its holdings, to central banks or in the gold market. [ID:nN18272627]
Two Chinese central bank officials not directly involved in the issue told Reuters China should consider buying the gold being put up for sale by the IMF, but only at a big discount.

The officials, neither of whom had direct knowledge of the gold strategy, said they were expressing personal opinions.

"China only has about 1,000 tonnes of gold reserves and the investments in other assets are performing not very well," said one official, who declined to be named.

"I think we should build up more gold with foreign reserves, but when to buy is the key. It's a good idea if China can buy the gold from IMF at prices well below market level."

The official said he had no idea if the sale would be on the agenda for the G20 summit.

"I personally think China should buy the IMF gold. It will help China to diversify its reserve assets," the second official said. "For the purpose of reserve safety, it is also good to increase the proportion of gold by a suitable amount."

The estimated $13 billion cost of the is small beer for the Chinese exchequer, with foreign exchange reserves of more than $2 trillion. If it decided to buy the gold, China would be likely to seek a discount for the bulk purchase, since a market sale would put heavy pressure on the price.

The IMF has said it will try to sell the gold, one-eighth of its holdings, to central banks. If there are no takers, it could sell to the market, which saw world gold demand of 3,880 tonnes last year, according to World Gold Council figures.

The huge increase in reserves that China announced earlier this year had had little impact on the market because the gold was accumulated over a long period and mainly through direct purchases from Chinese producers. (Reporting by Eadie Chen and Tom Miles; Editing by Clarence Fernandez)

September 19, 2009 06:00pm

THE International Monetary Fund will sell 403.3 tonnes of its gold reserves, worth an estimated $A15 billion, to provide loans to poor countries and shore up its finances.

While the fund's executive board said it decided on Friday to sell its stocks in a way that would not disrupt commodity markets, gold prices are expected to be hit hard.

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Gold has been seen as a safe haven during the global economic crisis and recently breached $US1000 an ounce for the first time.

Australia is the world's fourth-largest gold miner behind China, the US and South Africa, producing 232 tonnes last year worth $8.6 billion.

When Australia sold most of its gold reserves in 1997 _ which was only 167 tonnes _ it drove the price down to a then 20-year low of just over $US250 an ounce.

The IMF sale represents an eighth of the Washington-based fund's 3217-tonne gold reserves.

The IMF said the decision was a core element of a new income model to make it less dependent on its lending revenue to cover expenses and allow it to offer favourable conditions on loans to the poorest countries.

It said in a statement that sales would be ``in a volume strictly limited to 403.3 metric tonnes, with these sales to be conducted under modalities that safeguard against disruption of the gold market''.

``The new income model is designed to provide the fund with more diverse income sources that are better aligned with the variety of functions performed by the fund, with a central component being the funding of an endowment with the profits from these limited gold sales,'' the IMF said.

The sales ``will also increase the fund's resources for lending to low-income countries'', a strategy that won board backing in July.

``I am delighted that the executive board has given its overwhelming backing to a strictly limited sale of fund gold to put the financing of the IMF on a sound long-term footing, and enable us to step up much-needed concessional lending to the poorest countries,'' IMF managing director Dominique Strauss-Kahn said.

``These sales will be conducted in a responsible and transparent manner that avoids disruption of the gold market.''

Board approval required an 85 per cent majority of the total IMF voting power.

The US, by far the largest stakeholder, gave its green light after Congress passed legislation authorising the sale and President Barack Obama signed it into law on June 24.

The fund is required by its founding document to conduct all gold sales at market prices.

The IMF did not state the value of the gold to be sold, but based on the current bullish near-record market price for the metal it is estimated the sale would fetch $US13 billion ($A15 billion).

Under the approved plan, the IMF would offer to sell gold directly to central banks ``or other official sector holders if there were to be interest from such holders''.

A prime candidate could be China, which is sitting on the world's largest foreign exchange reserves, topping $US2 trillion, and has been seeking to diversify away from the dollar.

Perth-based Stock Analysis author Peter Strachan agreed.

``When it was announced, (the gold price) went down about $US5,'' he said.

``I think it will be under pressure and the Chinese will probably be buying it on the back foot.

``We might see it go down $US20-$30, but I think ultimately the Chinese will be looking at this as a great opportunity to get a big chunk of it.''

Tue Sep 15, 2009 11:39am EDT

DENVER, Sept 15 (Reuters) - The price of gold could rise above $1,110 an ounce in 2010 as central banks diversify their reserves into gold due to a faltering dollar, economist Martin Murenbeeld told the Denver Gold Forum on Tuesday.

Murenbeeld, president of Canada-based consultant DundeeWealth Economics, forecast gold could rise to an average of $1,116 an ounce in 2010.

Spot gold XAU= was trading at around $1,002 an ounce on Tuesday. Bullion closed above $1,000 for the first time last Friday on the back of dollar weakness.

In a keynote speech at the Gold Forum, an annual industry get-together, Murenbeeld said that there was a positive change in central banks' attitudes toward gold as an investment and a key part of their reserves.

"The central banks and the G20 (countries) have complained more precipitously about the U.S. dollar and the U.S. monetary and fiscal policies, which leads them to think more and more about shifting their reserves," he said.

"They don't have a lot of options for shifting their reserves, and gold is being mentioned more frequently as an important asset."

Recently, China and other emerging economic powers have signaled growing interest in gold rather than stockpiling their currency reserves in U.S. dollar-denominated assets.

In addition, Murenbeeld, who is also an adjunct professor for the MBA program at the University of Victoria, said that gold is becoming increasingly used in investment portfolios for performance and lowering overall risks.

"More and more portfolio managers are starting to think gold and commodities as an asset class," he said.

Murenbeeld also said it was possible that a geopolitical event or crisis could drive gold prices sharply higher.

"Slowly but surely, gold is going back to its days where it was being held in a precautionary form by people worry about currency debasement, inflation, whatever you worry about," he said. (Reporting by Frank Tang; Editing by Christian Wiessner)

• Gold breaks out violently to the up-side from its wedge formation

• Gold first weekly close above the $1000 mark ever

Gold broke out with force last week from its wedge formation.  You may wonder what happened, what caused the sudden outburst in gold? Inflation fears? Dollar collapse? Safe haven play? In my piece 'Last chance to buy gold below $1000' I made the case for a break-out to the upside hwich would lead to a $1000 handle on gold soon.  Let's first take a peek at the gold chart from my editorial 'Last Chance to buy gold below $1000?'  published on Sept 2, 2009 and see what happened next:
 

TGDR Gold Chart - Daily  September 01, 2009

Well, we said that a close above $960 would clear the way to $1000 in short term and that's exactly what happened indeed, see updated chart below:

 
TGDR Gold Chart - Daily  September 14, 2009 

So $1000, what next?

The weekly chart below show the $1000 - $1030 resistance area which needs to be taken out. How long it will take? Well, good question. The commercial short players have digged in themselves like never shown before in history. The record high short positions are telling us they don't want to see gold above $1000. Their worst nightmare however are the Chinese and an ever increasing amount of investors stepping up the plate buying gold hand over fist, see also Last Chance to buy gold below $1000?..

 
TGDR Gold Chart - Weekly  September 14, 2009 
 

 
Could a commercial signal failure be in the making here? Are we on the verge of a spectacular historical move in gold? We will know the answer within days. Some wild swings are in the pipe-line since record high commercial shorts vs record high spec longs can't be solved without violent spikes up or down. In 2005 we had a commercial signal failure which send the commercials running for the hills thereby launching gold from $430 to $730 in short order. We could be very well on a similar juncture here right now.

Investors betting on the commercial shorts since they come out as winners most of the time please note that the massive short position they have accumulated has been accumulated when the Central Banks have become net buyers, when Barrick Gold rushes to cover its 6 B$ short position, when China has said it has lost confidence in the dollar and will buy dips in the gold price, when the Middle East and India crank up into high demand gear, when the Chinese government has encouraged its citizens to buy gold and silver, when South African mine supply has again declined by 7.8% y-o-y., when investors such as Greenlight Capital are switching from GLD to real bullion etc etc. Now even a chimpanzee could recognize the vulnerability of the massive short position here so betting on them (commercial shorts) could very well be proven wrong coming weeks.. Again, it did happen before.  In 2005 the commerial shorts were forced to cover thereby launching the gold price from $430 to $730 in short order.

By Millie Munshi and Veronica Navarro Espinosa

Sept. 9 (Bloomberg) -- Gold prices that jumped above $1,000 an ounce this week are signaling that investors are buying metals to hedge against declines in currencies, former Federal Reserve Chairman Alan Greenspan said.

The gains are “strictly a monetary phenomenon,” Greenspan said today at an investment conference in New York. Rising prices of precious metals and other commodities are “an indication of a very early stage of an endeavor to move away from paper currencies,” he said.

The price of gold has jumped 13 percent this year as rising government debt coupled with declines in the dollar spurred demand for the metal as a haven. Silver, platinum and palladium also gained.

“What is fascinating is the extent to which gold still holds reign over the financial system as the ultimate source of payment,” Greenspan said.

Yesterday, gold futures for December delivery touched $1,009.70 an ounce on the Comex division of the New York Mercantile Exchange, the highest for a most-active contract since March 18, 2008. The metal touched a record $1,033.90 an ounce on March 17, 2008. As of 9:42 a.m., gold traded at $988.

China, the world’s fastest-growing major economy, will continue to be a “large consumer” of commodities, including energy and metals, Greenspan said.

“China is turning out to be the 900-pound gorilla in the energy and commodity market,” Greenspan said. “The increase in oil consumption in China has been quite extraordinary.”

By Elizabeth Campbell and Millie Munshi

Sept. 9 (Bloomberg) -- Investor Marc Faber said government spending and low interest rates will keep the U.S. deficit “very high” and will spur inflation.

Interest rates will be kept “artificially low” and remain “near zero for a long time” in the U.S., Faber, the publisher of the Gloom, Boom & Doom report, said today in a presentation broadcast on the Internet. “The deficit will stay very high and that will create some kind of more inflation down the road.”

The Federal Reserve is likely to continue to “print money” in an effort to boost the U.S. economy, and that, combined with low interest rates, will spur weakness in the dollar, Faber said. U.S. President Barack Obama has pumped up the nation’s marketable debt to an unprecedented $6.94 trillion as he borrows to spur the world’s largest economy.

“Money printing will be unprecedented because the deficit will need to be financed,” Faber said. “The weaker the economy, the more the stock market will go up because the money that is being printed will go into” speculative assets.

Faber, who recommended buying U.S. stocks in October, before the biggest rally in more than 70 years, said investors should buy equities instead of bonds or holding cash.

“If the dollar is weak, there is a very good chance that equity prices could rise quite substantially,” Faber said. A weaker dollar is “good for asset prices.”

Buying Commodities

Faber also recommends that investors buy precious metals and other raw materials to hedge against declines in the U.S. currency. Before today, the greenback slid 4.9 percent against a basket of six major currencies this year and the 19-commodity Reuters/Jefferies CRB Index climbed 10 percent.

“The dollar will continue to implode against commodities,” Faber said. “I don’t see why someone would hold dollars and not own gold. More and more people will come to the realization that they have to own some resources, some commodities, some mining companies and some physical precious metals.”

Global economic growth won’t recover to pre-recession levels, Faber said.

“I don’t think consumption will come back,” he said. “I don’t think there is much of a recovery. You have to differentiate between the stock market and economy activity.”

To contact the reporters on this story: Elizabeth Campbell in New York at ecampbell14@bloomberg.net; Millie Munshi in New York at mmunshi@bloomberg.net.

Last Updated: September 9, 2009 13:15 EDT

by Larry Kudlow, CNBC
September 8, 2009

A hugely important story from Ambrose Evans-Pritchard of the London Telegraph that China is alarmed by U.S. money-printing has helped drive the dollar price of gold over $1,000, at least temporarily, and drive down the exchange rate of the greenback. Other commodities like oil and copper have also rallied today.

At a conference in Lake Como, Italy, a leading Chinese economic spokesman—Cheng Siwei—criticized Ben Bernanke’s loose monetary policy. “If they keep printing money to buy bonds it will lead to inflation,” said Cheng, “and after a year or two the dollar will fall hard.” Cheng went on to say that China was diversifying its roughly $700 billion of U.S. foreign-exchange reserves into gold. “Gold is definitely an alternative, but when we buy, the price goes up,” he said. “We have to do it carefully so as not to stimulate the market.”

Ambrose-Pritchard interprets this as the “Beijing Put” on gold—meaning the Chinese will buy gold on the dips, which is going to prevent the yellow metal from falling hard. It also puts upward price pressure on gold for the long term. Beijing has in fact doubled its gold reserves to 1,054 tons.

As a corollary to this, the Chinese are clearly losing confidence in the U.S. dollar.

And while nobody is much paying attention to a new UN report that the global financial system needs a new reserve currency to replace the dollar, the fact is that Chinese spokesmen (and Russian and Brazilian spokesmen) have said the same thing from time to time.

Incidentally, the G20 meeting of finance ministers and central bankers in London this weekend failed to articulate a fiscal and monetary exit strategy from all their massive spending, borrowing, and money-creating to fight off the financial meltdown and the world recession. The G20 reluctance to exit from hyper-stimulus is also bullish for gold—and, for that matter, bearish for paper currencies in general

By Jonathan Tirone

Sept. 7 (Bloomberg) -- The dollar’s role in international trade should be reduced by establishing a new currency to protect emerging markets from the “confidence game” of financial speculation, the United Nations said.

UN countries should agree on the creation of a global reserve bank to issue the currency and to monitor the national exchange rates of its members, the Geneva-based UN Conference on Trade and Development said today in a report.

China, India, Brazil and Russia this year called for a replacement to the dollar as the main reserve currency after the financial crisis sparked by the collapse of the U.S. mortgage market led to the worst global recession since World War II. China, the world’s largest holder of dollar reserves, said a supranational currency such as the International Monetary Fund’s special drawing rights, or SDRs, may add stability.

“There’s a much better chance of achieving a stable pattern of exchange rates in a multilaterally-agreed framework for exchange-rate management,” Heiner Flassbeck, co-author of the report and a UNCTAD director, said in an interview from Geneva. “An initiative equivalent to Bretton Woods or the European Monetary System is needed.”

The 1944 Bretton Woods agreement created the modern global economic system and institutions including the IMF and World Bank.

Enhanced SDRs

While it would be desirable to strengthen SDRs, a unit of account based on a basket of currencies, it wouldn’t be enough to aid emerging markets most in need of liquidity, said Flassbeck, a former German deputy finance minister who worked in 1997-1998 with then U.S. Deputy Treasury Secretary Lawrence Summers to contain the Asian financial crisis.

Emerging-market countries are underrepresented at the IMF, hindering the effectiveness of enhanced SDR allocations, the UN said. An organization should be created to manage real exchange rates between countries measured by purchasing power and adjusted to inflation differentials and development levels, it said.

“The most important lesson of the global crisis is that financial markets don’t get prices right,” Flassbeck said. “Governments are being tempted by the resulting confidence game catering to financial-market participants who have shown they’re inept at assessing risk.”

The 45-year-old UN group, run by former World Trade Organization chief Supachai Panitchpakdi, “promotes integration of developing countries in the world economy,” according to its Web site. Emerging-market nations should consider restricting capital mobility until a new system is in place, the group said.

The world body began issuing warnings in 2006 about financial imbalances leading to a global recession.

The UN Trade and Development report is being held for release via print media until 6 p.m. London time.

To contact the reporters on this story: Jonathan Tirone in Vienna at jtirone@bloomberg.net

Sept. 4 (Bloomberg) -- The dollar will weaken and the U.S. risks seeing a crash of the currency unless it does more to control the deficit and reduce debt, said New York University Professor Nouriel Roubini, who predicted the financial crisis.

“If markets were to believe, and I’m not saying it’s likely, that inflation is going to be the route that the U.S. is going to take to resolve this problem, then you could have a crash of the value of the dollar,” Roubini said in an interview today in Cernobbio, Italy. “The value of the dollar over time has to fall on a trade-weighted basis, but not necessarily relative to euro and yen.”

Roubini said he didn’t see a risk of a dollar crash in the “‘short term.” The value of the U.S. currency relative to currencies such as the yen or the euro “cannot change too much compared to current levels because if the dollar were to weaken a lot and the euro strengthen a lot, that’s going to warp any chance for the European economy to recover, same argument as to the yen,” he said.

“Most of the adjustment of the dollar in the future has to occur relative to China, relative to emerging Asia and relative to some of the other commodity exporters in the world, whether these are advanced economies or emerging markets,” he said.

Foreign creditors need assurances that the U.S. will address its deficit, Roubini said.

“Unless in the medium term these issues of fiscal sustainability are addressed, and unless we mop up that excess liquidity from the financial system, eventually the financial markets and the foreign creditors of the United States might get more concerned about the sustainability of the U.S. fiscal deficit and about the U.S. being tempted to use the inflation tax as a way of resolving its private and public debt problems,” he said.

To contact the reporters on this story: Sonia Sirletti in Milan at ssirletti@bloomberg.net; Jeffrey Donovan in Rome at jdonovan26@bloomberg.net

Last Updated: September 4, 2009 09:13 EDT