2p ET Wednesday, December 30, 2009

Dear Friend of GATA and Gold:

GATA today brought suit against the U.S. Federal Reserve Board, seeking a court order for disclosure of the central bank's records of its surreptitious market intervention to suppress the monetary metal's price.

The suit was filed in U.S. District Court for the District of Columbia and targets Fed records involving gold swaps, exchanges of gold with foreign financial institutions. In a letter dated September 17 this year to GATA's law firm, William J. Olson P.C. of Vienna, Virginia, (http://www.lawandfreedom.com) Fed Board of Governors member Kevin M. Warsh acknowledged that the Fed has gold swap agreements with foreign banks but insisted that such documents remain secret:

http://www.gata.org/files/GATAFedResponse-09-17-2009.pdf

The lawsuit follows two years of GATA's efforts to obtain from the Federal Reserve and the U.S. Treasury Department a candid accounting of the U.S. government's involvement in the gold market. These efforts parallel those of U.S. Rep. Ron Paul, R-Texas, who long has been proposing legislation to audit the Fed. The Fed has wrapped in secrecy much of its massive intervention in the markets over the last year, and Paul's legislation recently was approved by the U.S. House of Representatives.

The Fed claims that its gold swap records involve "trade secrets" exempt from disclosure under the U.S. Freedom of Information Act.

While GATA has produced many U.S. government records showing both open and surreptitious intervention in the gold market in recent decades (see http://www.gata.org/node/8052), Fed Governor Warsh's letter is confirmation that the government is surreptitiously operating in the gold market in the present as well. That intervention constitutes a huge deception of financial markets as well as expropriation of precious metals miners and investors particularly. This deception and expropriation are what GATA was established in 1999 to expose and oppose.

Of course GATA's lawsuit against the Fed will take months if not years to resolve. We think we have a good chance of winning it in court. But we can win it outside court, and much sooner, if the suit can gain enough publicity from the financial news media and market analysts and prompt enough inquiry from them and from the public, the mining industry, and members of Congress.

So GATA urges its friends to publicize the suit and to urge journalists, market analysts, mining companies, and members of Congress to join us in seeking disclosure of the Fed's gold market intervention records. If enough clamor is directed at the Fed about these records, the gold price suppression scheme will lose its surreptitiousness and fail.

Unfortunately the World Gold Council, which each year collects tens of millions of dollars in membership fees from mining companies in the name of representing them and gold investors, refuses to question governments about their surreptitious interventions in the gold market. These interventions powerfully influence not only gold's price but the prices of government bonds and currencies, as well as interest rates generally and the value of all capital and labor in the world. There is no more important issue in the world economy than gold price suppression.

So what should have been the World Gold Council's work has fallen to GATA, a non-profit educational and civil rights organization that operates from month to month on donations from people who share its objective -- free and transparent markets in the precious metals and fair dealing among nations generally. As we prosecute our lawsuit against the Fed, we'll be grateful for your support. We promise to do something with it.

For information about supporting GATA, please visit:

http://www.gata.org/node/16

GATA's lawsuit against the Fed is listed in federal court records as civil case No. 09-2436 ESH, the letters being the initials of the district court judge assigned to it, Ellen S. Huvelle.

You can find the lawsuit here:

http://www.gata.org/files/GATALawsuitVs.Fed-12-30-2009.pdf

CHRIS POWELL, Secretary/Treasurer
Gold Anti-Trust Action Committee Inc.

* * *

Presented to: The National Enquirer

By: Bill Murphy
Chairman Gold Anti-Trust Action Committee

Date: December 7, 2009

I am taking this to The National Enquirer because no one else in the US financial press has the gumption to explain a clandestine scandal, one which has indirectly affected every American. The Gold Anti-Trust Action Committee (GATA) was formed in January 1999 to expose a gold price suppression scheme fostered by a Gold Cartel, which includes the Federal Reserve, US Treasury, bullion banks like Goldman Sachs and JP Morgan Chase, and other entities such as The Bank of England.

In February of 1999 I was interviewed by Ron Insana on CNBC and that was the last time GATA was heard from via the US financial market press. Once they heard what GATA had to say about the rich and powerful in America, we were blackballed. The lone media exception came from outside the US, where I appeared on Bloomberg’s Asia Confidential last March and in November. It may be viewed here:

Asia Confidential - Bernie Lo interviews Bill Murphy, Chairman of GATA November 19, 2009:

http://www.youtube.com/watch?v=rw4T6IdHJ3w

http://www.youtube.com/watch?v=06_NMci4xnw

http://www.youtube.com/watch?v=OYiQZzbzeXo

***

The gold price suppression scheme is not a conspiracy theory, but, in numerous instances, a matter of public record. They may be reviewed in my colleague Chris Powell’s speech in Munich in early November:

Gold suppression is public policy and public record, not 'conspiracy theory'

Submitted by cpowell on Sat, 2009-11-07 18:16. Section:

Remarks by Chris Powell, Secretary/Treasurer
Gold Anti-Trust Action Committee Inc.
International Precious Metals and Commodities Show
Olympia Park, Munich, Germany
Saturday, November 7, 2009

-END-

Chris is the editor of the Journal Inquirer in Manchester, Connecticut.

As Chris explains in his presentation, the gold price suppression scheme, kicked into high gear by President Clinton’s Treasury Secretary Robert Rubin as the essence of his Strong Dollar Policy, is about the surreptitious feeding of central bank gold into the marketplace to keep US interest rates lower than where they should have been, enhancing the role of the dollar as the international reserve currency, and to foster confidence in US financial markets.

Why is this important for National Enquirer readers to know?

As a result of the Gold Cartel engineering central banks to secretly lease gold into the physical marketplace, the price was artificially kept much lower than it would have been otherwise. Their deceptive maneuvers defused the gold price as an effective barometer indicating something was going wrong in the US financial market system. Lawrence Summers, who followed Robert Rubin as US Treasury Secretary, and is now President Obama’s top economic advisor, co-authored a paper while at Harvard titled Gibson’s Paradox and the Gold Standard, in which he explained the relationship between gold and US interest rates.

After all, when the price of gold takes off, the financial media talks of what? … too much inflation, higher interest rates coming down the road, bad news for the dollar, or a crisis of some sort. A rising price of gold is bad for business for the big banks in New York and for the politicians in Washington. The problem is this clandestine gold operation directly led to the financial crisis and high unemployment mess which is affecting all Americans today. GATA was not shy about telling the world what was going on, and what was to come, because of the gold price suppression scheme. We stated the case in a full-page, $264,400, color ad in the Wall Street Journal on January 31, 2008.

In the ad we said: "This manipulation has been a primary cause of the catastrophic excesses in the markets that now threaten the whole world." … Surreptitious market manipulation is leading the world to disaster."

You many review the ad here;

We also alluded to a gold price of $3,000 to $5,000 in the years ahead. How right we have been thus far as the price of gold has soared since we placed the ad, and we were right-on about the US financial crisis which ensued as 2008 progressed. And yet, NOT ONE person of the US financial market press contacted us regarding what our ad was all about.

So, you might ask WHY is this such a scandal and why should it be of importance to your readers? There are SO MANY REASONS…

*The gold market is the worst reported on market in history. Never have so many in an industry known so little about their own product. The gold industry is working with the wrong facts because they refuse to deal with the gold price suppression scheme, its ramifications, and the correct supply/demand fundamentals. This is why GATA has been so right about what the gold price would do the last years, while most gold analysts have had it all wrong. The industry says the central banks have 30,000 tonnes of gold in their vaults. But the work of several GATA consultants has revealed the central banks have well less than HALF that amount left.

The Gold Cartel has been using this secretive feeding of gold into the physical marketplace to meet a huge supply/demand deficit. But now their supply is drying up, which is the main reason the price of gold has begun to soar. Central banks have even turned buyers, as was the case recently when the central bank of India bought 200 tonnes of gold.

In the years ahead the price of gold will have to rise to $3,000 to $5,000 per ounce to clear the market, a prediction I made publicly over four years ago. Fortunes will be made for those invested in the gold market. High karatage gold jewelry is going to be worth a LOT of money. Much is being made of the public selling their gold for cash now. I suggest they think twice about doing so at this point in time. There is a lot of money on the table here, literally.

*The actions of the Federal Reserve, such as their facilitation of the gold price scheme, have hurt the average American terribly, in favor of the big banks like JP Morgan Chase, which is well known as the Fed’s bank and Goldman Sachs, also known as Government Sachs because so many from that firm have gone on to The Treasury. Recent Treasury Secretary Hank Paulson is a prime example.

*Congressman Ron Paul has sponsored a bill before Congress to audit the Fed. 313 Congressman are supporting his efforts, but The Fed and powerful banking interests are doing what they can to stop the bill from being passed. This past week Congressman Paul was on C-Span explaining why the bill is so needed. One of the reasons he mentioned was the Fed’s secretive operations, like the Fed leasing gold in an undeclared manner.

*There is great concern in the GATA camp that much of the 8,134 tonnes of US gold reserves has been compromised … that it is gone via "swap operations." GATA has a running struggle with the Fed via our Freedom of Information Act requests to find out about these operations. Their first response was to omit and redact hundreds of pages of the pertinent information we requested. President Obama said his Administration would be much more transparent. Thus, we again requested the information regarding "gold swaps" only to be denied once more. GATA appealed the denial, which was directed to the Fed Board of Governors’ Kevin M. Warsh, who responded to our Washington lawyer, William J. Olsen saying:

"In connection with your appeal, I have confirmed that the information withheld under Exemption 4" -- that's Exemption 4 of the Freedom of Information Act -- "consists of confidential commercial or financial information relating to the operations of the Federal Reserve Banks that was obtained within the meaning of Exemption 4. This includes information relating to swap arrangements with foreign banks on behalf of the Federal Reserve System and is not the type of information that is customarily disclosed to the public. This information was properly withheld from you."

So there it is: The Federal Reserve today -- right now -- has gold swap arrangements with "foreign banks," which means the US does not have the gold they say they have in their vaults to support our currency, the dollar.

*Your readers might like to know there has not been an independent audit of US gold reserves since 1955 during the Eisenhower Administration. Can you imagine anything going that long without a true audit?

*GATA has been trying to explain the real gold story for a decade, but the gold establishment and financial press have been blocking our efforts all this time. For years (some still do) they called us "conspiracy nuts," but most of what we have been talking about is panning out, including the last nine years of price rises.

The GATA camp is not without stellar credentials, having hosted three international gold conferences…

1. The GATA African Gold Summit in Durban, South Africa on May 10, 2001, attended by 5 sub-Saharan African nations, the South African Reserve Bank, leading South African gold producers, the South African unions, etc., - an event that was prime time on SABC television. It focused on how the gold price suppression scheme was hurting the poor in South Africa.

2. Gold Rush 21 in Dawson City (the Yukon in Canada) on August 8^th and 9^th 2005 to expose the manipulation of the gold market. One hundred delegates attended from 14 countries, including Andrey Bykov, an economic consultant to Russian President Vladimir Putin, who said it was the finest conference he ever attended.

While there are a lot of Johnny Come Latelies trying to explain what the gold market is doing these days, GATA has had the scoop all along, a scoop which has essentially been banned in the US public media domain. Gold Rush 21 is our finest example of what we have accomplished over the years; showing the backgrounds of the people behind it; and forecasting to the world why the gold price was going to explode over four years ago.

I point to our TWO MINUTE trailer on this extraordinary event, which can be seen at

***

3. The "GATA Goes To Washington" conference on April 18 and 19 in Arlington, Virginia. 180 attendees came from 17 countries for the gathering. The conference showcased GATA’s FOIA efforts to learn the truth about US gold reserves from the Fed and US Treasury.

*When the gold scandal breaks, it will dwarf the earth shaking Madoff Ponzi scheme because of its financial implications, not only in the US, but all over the world. Harry Markopolos went to the SEC for a decade explaining that Bernie Madoff’s operation was a fraud. They paid no attention. GATA has gone to the CFTC for a decade about the gold fraud, including a meeting on December 18, 2008 with four members of the CFTC including their senior legal counsel. They have not paid attention either. But, what can we expect? The newly appointed CFTC Chairman came from Goldman Sachs.

*GATA believes the US Government would rather release nuclear bomb secrets than allow any information which would expose the gold price suppression scheme. We have gone to Washington and met with James Saxton, co-chair of the Joint Economic Committee; Dennis Hastert, Speaker of the House; Spencer Bachus, Chairman of the sub-Committee of Domestic and International Monetary Policy with gold oversight; and Speaker of the Texas House, Tom Craddick, a boyhood friend of President Bush. Mr. Craddick sent what we had to say to the President on his private fax. None of our efforts came to any fruition.

* Financial turmoil in the US is very likely to appear again in the coming months, much of it due to the aftereffects of the gold price suppression scheme. During this time, and throughout 2010, the price of gold is going to explode even further. The GATA camp recently uncovered some comments made by former Fed Chairman Alan Greenspan which he made in 1993 during a Federal Open Market Committee meeting:

Page 40 of the transcript here (Page 42 of the PDF version:

I have one other issue I'd like to throw on the table. I hesitate to do it, but let me tell you some of the issues that are involved here. If we are dealing with psychology, then the thermometers one uses to measure it have an effect. I was raising the question on the side with Governor Mullins of what would happen if the Treasury sold a little gold in this market. There's an interesting question here because if the gold price broke in that context, the thermometer would not be just a measuring tool. It would basically affect the underlying psychology."

What Greenspan was saying way back when was that by secretly putting gold into the market, it would affect the psychology of the markets, investors and the public. This was the beginning of the gold price suppression scheme. Greenspan used the word thermometer. For a decade GATA has used the word barometer to explain why The Gold Cartel was surreptitiously suppressing the price … they SHOT THE MESSENGER!

In the end, NOW, the American public has paid a terrible price for this falsely induced thermometer/barometer reduced complacency engineered by The Gold Cartel … which is a significant reason why so many Americans have been blindsided by the collapse of our markets.

WHERE IS OUR SO-CALLED FREE PRESS IN AMERICA?

It is time for the truth to be told so that Americans can prepare for what is to come and so that this sort of financial engineering nonsense, in violation of our free market principles and orchestrated by the rich and powerful in the US at the expense of the average American, never be allowed to happen again.

END.

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The International Monetary Fund said Wednesday it had sold 10 tonnes of gold to Sri Lanka's central bank for 375 million dollars, as part of a restructuring of IMF financial resources

It was the third IMF sale of gold in a month as the Washington-based institution seeks to reduce its dependence on lending revenue and bolster its finances amid the global economic crisis.

"The sale was conducted on the basis of market prices prevailing on" Monday, the IMF said in a statement.

Gold prices had hit a record high that day, topping 1,170 dollars an ounce. Since then, the price of the precious metal has soared higher to new all-time peaks as investors seek a safe haven amid economic uncertainty.

The sale brought the total IMF gold sold to central banks to 212 tonnes. India bought 200 tonnes between October 19 and 30 for 6.7 billion dollars and Mauritius bought two tonnes on November 11 for 71.7 million dollars.

Sri Lanka has a 20-month IMF loan of 2.7 billion dollars that was awarded in July after the island nation's reserves slumped to just over one billion dollars as the government made a final offensive to crush separatist Tamil Tiger rebels.

Sri Lanka's central bank in early November said it has been buying gold to diversify its reserves amid volatile currency markets but refused to reveal from which sources the bank was buying the gold or at what prices.

The IMF executive board approved the sale of 403.3 tonnes of gold in September. The fund, which currently holds roughly 3,000 tonnes of gold, is the world's third-largest official holder of the precious metal after the United States and Germany.

Gold and other commodity prices have surged in recent months amid a move away from a sliding dollar. The metal is also winning support over fears about a spike in inflation, as gold is widely regarded as a safe store of value.

The IMF said it would sell gold directly to central banks and other official holders for an initial period before selling the remaining amount on the open markets "in a phased manner over time," in line with an approach used by central banks to avoid market disruptions.

By Mandakini Raina Nov 24 2009 , New Delhi

Tags: IMF, Plan
India is open to buying more gold from the International Monetary Fund

It bought 200 tonnes for $6.7 billion on November 3. The Reserve Bank of India (RBI) may well buy IMF’s remaining hoard of 201.3 tonnes on acceptable terms, which are now under negotiation.

A government official said that the additional purchase would depend on the “successful pitching by RBI”. “RBI is an independent body, and the government does not interfere in its affairs. It will get the gold if its bid is successful and at the price it has offered,” said the official.

RBI did not respond to Financial Chronicle questions if it was bidding for the remaining IMF gold. The purchase of the first lot of 200
tonnes, RBI had said at the time, was a part of its foreign exchange reserves management operations.

Responding to query from FC, an IMF spokesperson said the gold sale process was still under way and “there is no fixed timetable for completing the sale”. Its spokesperson further said that “the fund does not wish to comment on discussions with individual members.”

RBI has good reasons to further enrich its gold reserves. In just three weeks it has been able to benefit by as much as $800 million on the investment of $6.7 billion it made in buying 200 tonnes from IMF.

Since 1999 RBI has been periodically valuing its gold reserves at “prices close to the market”. It has not done so since it purchased the gold from IMF.

RBI bought the 200 tonnes at $1,045 an ounce. The transaction, from IMF to RBI, involved daily sales that were staggered over a two-week period, October 19-30, with each daily sale conducted at a price set on the basis of that day’s market price.

On Tuesday, gold prices stood at $1,168, an increase of 12 per cent over the price RBI paid. The market value of the gold, as of Tuesday, thus stood at $7.5 billion – indicating a cool gain of $800 million for RBI.

RBI holds its forex reserves in a basket of currencies expressed in dollar terms. It is able to earn only a nominal return on the dollar reserves.

In an article in FC on November 4, Guild Investment Management CEO Monty Guild listed the merits of buying of gold. “It helps China and India more because their responsibility for financing IMF grows as they become powerful financially. It is a method to get IMF to self-finance in the short run and save China and India money,” he wrote. Guild said that since most of the gold bought would be out of reach for the retail market, “gold prices will not get hammered”.

Prime minister Manmohan Singh on Sunday said there wasn’t a substitute for the dollar yet. “My own feeling is that we have not entered an era of irreversible shift in the economic strength of the US,” he said ahead of his visit to Washington.

On November 3, the day RBI bought IMF gold, finance minister Pranab Mukherjee told the economic editors’ conference that the government wasn’t preferential in its treatment to either the dollar or gold. The buying of gold had a sentimental significance, as the government had to pledge gold with the Bank of England in 1991 to borrow money to maintain imports.

The IMF executive board had on September 18 approved the sale of 403.3 tonnes of gold -- one-eighth of the fund’s total gold holdings -- half of which was eventually sold to India. Bank of Mauritius bought 2 tonnes, leaving 201.3 tonnes still with IMF. The limited sales are part of IMF’s efforts to put its finances on a firm footing and raise money to lend to low-income countries.

Yahoo, November 24, 2009

Gold production will continue to fall, despite a brief boost in 2009 and soaring prices, as deposits are exhausted and new discoveries remain elusive, say miners

In terms of production, "2009 is the outlier as far as the trend," Omar Jabara, spokesman for US-based Newmont Mining, the second-largest gold producer in the world, told AFP.

Overall, "it's a fact that gold production from mines has been in decline since 2001 and has gone roughly from 85 million ounces to about 75 million ounces a year," said Vincent Borg, spokesman for number one producer Barrick Gold.

"It sort of goes down about one million ounces every year and our forecast is that it will continue to decline despite the higher price" for gold nowadays, he said.

Almost everywhere, mineral deposits are being exhausted and new deposits are not being found fast enough to replace them, these experts explain.

South Africa, which was once at the vanguard of world production, saw a 9.3-percent drop in production year-over-year in the second quarter, according to its Chamber of Mines.

Globally, "it's just that the assets are not there anymore," Tonya Todd, a spokeswoman for Goldcorp, Canada's second biggest gold mining firm.

"Just because gold reached a new high today doesn't mean we can send a message to our 26 mines saying produce as much gold as you can today because they are already," said Borg.

"It's not like a water tap you can turn on and it comes right away."

Barrick and Newmont expect nevertheless to continue increasing production next year by seven percent and five to 10 percent, respectively. But long-term, it's downhill.

Omar Jabara explained that it takes from seven to 10 years to start production of a mine after finding an economically viable gold deposit.

And "no significant new discoveries have been found in recent years, despite the higher gold prices and despite higher exploration budgets," said Borg.

What is already happening and is likely to continue is that the grade or quality of deposits industry-wide will be "on average lower than deposits discovered in the past," opined Jabara.

The global gold mine production is forecast to rise by 3.7 percent in 2009 to about 2,500 tonnes, but will satisfy only two-thirds of demand, which soared this year amid the global financial crisis to 3,800 tonnes, according to the World Gold Council.

Historically, gold recycling or the sale of central bank stockpiles made up for supply shortages.

But during the latest financial crisis, banks have been buying up gold in large quantities to protect monetary reserves against weakness in the US dollar.

Since the start of November, for example, India's central bank has scooped up 200 tonnes of gold from the International Monetary Fund, at market value for about 6.7 billion dollars.

Amid uncertainty in the stock market, small investors and hedge funds are also coveting gold, driving up demand for the precious metal.

With mine production sloping downwards, an increasing supply of gold must come from existing supplies -- such as coins, bullion or jewelry -- but it will be very limited.

"All the gold ever produced through history amounts to about 165,000 tonnes, which would barely fill two Olympic-size swimming pools," said Jabara.

Gold prices soared to a record above 1,180 dollars in London on Wednesday hitting 1,180.20 dollars an ounce in trading on the London Bullion Market, after striking a series of historic peaks in recent days and weeks.

Global gold production is in terminal decline despite record prices and Herculean efforts by mining companies to discover fresh sources of ore in remote spots, according to the world's top producer Barrick Gold.

By Ambrose Evans-Pritchard, International Business Editor
Published: 7:20PM GMT 11 Nov 2009

Aaron Regent, president of the Canadian gold giant, said that global output has been falling by roughly 1m ounces a year since the start of the decade. Total mine supply has dropped by 10pc as ore quality erodes, implying that the roaring bull market of the last eight years may have further to run.

"There is a strong case to be made that we are already at 'peak gold'," he told The Daily Telegraph at the RBC's annual gold conference in London
"Production peaked around 2000 and it has been in decline ever since, and we forecast that decline to continue. It is increasingly difficult to find ore," he said.

Ore grades have fallen from around 12 grams per tonne in 1950 to nearer 3 grams in the US, Canada, and Australia. South Africa's output has halved since peaking in 1970.

The supply crunch has helped push gold to an all-time high, reaching $1,118 an ounce at one stage yesterday. The key driver over recent days has been the move by India's central bank to soak up half of the gold being sold by the International Monetary Fund. It is the latest sign that the rising powers of Asia and the commodity bloc are growing wary of Western paper money and debt.

China has quietly doubled holdings to 1,054 tonnes and is thought to be adding gradually on price dips, creating a market floor. Gold remains a tiny fraction of its $2.3 trillion in foreign reserves.

Gold exchange-traded funds (ETFs) – dubbed the "People's Central Bank" – have accumulated 1,778 tonnes, making them the fifth biggest holder after the US, Germany, France, and Italy.

Ross Norman, director of theBullionDesk.com, said exploration budgets had tripled since the start of the decade with stubbornly disappointing results so far.

Output fell a further 14pc in South Africa last year as companies were forced to dig ever deeper - at greater cost - to replace depleted reserves, not helped by "social uplift" rules and power cuts. Harmony Gold said yesterday that it may close two more mines over coming months due to poor ore grades.

Mr Norman said the "false mine of central banks" had been the only new source of gold supply this decade as they auction off reserves, but they are switching sides to become net buyers.

Barrick is moving fast to wind down the remaining 3m ounces of its infamous hedge book over the next twelve months, an implicit bet on rising gold prices over time.

Mr Regent said the company had waited too long to ditch the policy, which has made the company enemy number one among 'gold bug' enthusiasts. The hedges oblige Barrick to deliver part of its gold into futures contracts set long ago at levels far below today's spot prices.

The strategy worked well in the falling market of the 1990s, but has cost the company dear in lost profits this decade. "Hindsight is always 20/20," said Mr Regent, who was appointed from the outside earlier this year.

Barrick bit the bullet in the third quarter, taking a $5.7bn charge against earnings on hedge contracts. Liberation is at last in sight. In 2001 the hedge book topped 20m ounces.

Mr Regent said the hedge policy has weighed badly on the share price and irked investors, becoming a bone of contention at every meeting. The financial crisis brought matters to a head as markets fretted about counterparty risk. "It was clear to me that there were a significant number of institutions who wouldn't invest in Barrick because of the hedge book," he said.

Barrick produced 1.9m ounces of gold last quarter, down from 1.95m a year earlier. Costs have been "trending down" to $456 an ounce, though rising energy prices pose a fresh threat. Total reserves are 139m ounces, far ahead of rival Newmont Mining at 86m.

The hedge book venture has not been a happy one, but those who predicted that Barrick would eventually "blow up" on its contracts may owe the company an apology.

11.05.09, 04:55 AM EST   

NEW DELHI, Nov 5 (Reuters) - Sri Lanka's central bank has been buying gold for the past five or six months as it diversifies its reserves amid volatile markets, the bank's governor said in an interview on Thursday.

'We have been fairly strong accumulators of gold reserves over the past few months,' Sri Lanka Central Bank Governor Ajith Nivard Cabraal told Reuters in a telephone interview from the southern Indian city of Chennai.

'We haven't stopped yet,' he added, declining to quantify how much gold the central bank had bought or how much of the more than $4.8 billion of the country's reserves were in gold.

'Many countries are today diversifying. They are also looking at intrinsic value of their reserves, so gold would be a natural candidate for that kind of reserve accumulation,' he said.

(Reporting by Tony Munroe; Editing by Alistair Scrutton)

((tony.munroe@thomsonreuters.com; +91 22 6636 9257; Reuters Messaging: tony.munroe.reuters.com@reuters.net)) Keywords: SRILANKA C.BANK/GOLD

By Joe Leahy in Mumbai

Published: November 5 2009 16:04 | Last updated: November 5 2009 16:04

The Sri Lankan central bank is buying gold to diversify its reserves and smooth out periods of dollar volatility, Ajith Nivard Cabraal, central bank governor, said.

The move, which follows India’s gold purchase, is part of a policy change on the part of the bank.

“We did experience this huge currency volatility during the time of the crisis that gave us the feeling that we need to save in something more solid,” Mr Cabraal told the Financial Times. “Naturally gold crops up as the more logical item.”

He did not reveal the size of the purchases, which analysts said were about five tonnes, far below India’s 200-tonne purchase.

Mr Cabraal described the buying as “fairly substantial . . . We have not stopped accumulating it”.

Jonathan Spall, a director at Barclays Capital, said: that, while Sri Lanka might be a minnow in terms of the gold it may buy, it was another argument “in the case being built for gold”.

Additional reporting by Javier Blas in London
Copyright The Financial Times Limited 2009. You may share using our article tools. Please don't cut articles from FT.com and redistribute by email or post to the web.

Move Seen as Effort to Diversify Reserves Away From the Dollar

By ABHRAJIT GANGOPADHYAY and ELISABETH BEHRMANN
NEW DELHI -- India's central bank bought 200 metric tons of gold from the International Monetary Fund last month, in the first major move by a major central bank to diversify its foreign-exchange reserves.

Analysts said the move is potentially bullish for gold, but it is by no means the start of a significant shift away from U.S. dollar holdings. The Reserve Bank of India said in a statement that the move was part of its effort to manage its foreign-exchange reserves.

"I would have advised the governor of RBI to buy gold as our forex reserve is comfortable," said Indian Finance Minister Pranab Mukherjee. "The RBI has done just that. That doesn't mean we don't prefer dollar any more or like gold any better."

Sonal Varma, an economist at Nomura Financial Advisory & Securities in Mumbai, said the purchase won't create a substantial mismatch between the Reserve Bank's assets and India's obligations. "Dollar will continue to be a significant part of foreign-exchange
holdings, as most of India's external debt is in dollars," the economist said. "The gold buying, as of now, seems just an asset-diversification strategy."

A senior finance ministry official said the central bank may seek to buy more gold from the IMF directly. "It makes sense to buy gold as it will appreciate more than the U.S. dollar," he said.

News of the purchase of nearly half of the 403.3 metric tons of gold earmarked for sale by the IMF boosted gold prices, reminding investors that central bank reserve diversification will continue to fuel demand for the metal.

In late morning in New York, gold for December delivery on the Comex division of the New York Mercantile Exchange was up $22.90 per ounce, or 2.2%, at $1076.30.

The off-market deal also reinforced the view that little or none of the IMF gold may eventually reach the open market, limiting the bearish impact such a big sale might have had otherwise.

The Reserve Bank bought the gold between Oct. 19 and Oct. 30, an IMF statement said. The $6.7 billion in proceeds from the sale indicate an average estimated price of $1,045 a troy ounce, far higher than the $850 per ounce the IMF expected to get a few months ago, when its executive board approved the sale.

Sue Trinh, currency strategist at RBC Capital in Sydney, said the announcement supported the view that central banks are looking for ways to diversify their reserves away from the dollar.

The Reserve Bank is "still a buyer at current high-price levels, indicating gold is likely to move up further," said Kunal Shah, an analyst at Normal Bang Commodities in Mumbai. "This is positive."

The IMF declined to comment on buyers for the remaining amount, but said it is still in "an initial period to sell gold directly to central banks and other official holders that may be interested in such sales."

There has been speculation that Chinese and Russian central banks may also be interested in buying gold directly from the IMF. Open-market sales will be conducted only if any gold is left after the "initial period" and "the Fund will inform markets before any on-market sales commence," the statement said.

Janet Kong, managing director at Goldman Sachs's commodities investment research division in Hong Kong, pointed out that central banks,once a source of concern to gold bulls as they sold their reserves of the metal, have become net buyers, and exchange-traded funds have become big buyers as well.

"Gold's investor base is broadening, which is positive for gold," Ms. Kong said.

Gold holdings in the SPDR Gold Trust, the world's largest gold ETF, have reached 1,103.52 tons, making SPDR the seventh-largest gold holder in the world.

"Diversification has been an ongoing story for Asian central banks, and gold is one of the possible diversifiers. Gold holdings in comparison to dollar holdings are low," said Justin Smirk, a commodity analyst at Westpac.

Write to Abhrajit Gangopadhyay at Abhrajit.gangopadhyay@dowjones.com and Elisabeth Behrmann at Elisabeth.Behrmann@dowjones.com

Nov. 3 (Bloomberg) -- India, the world’s biggest gold consumer, bought 200 metric tons from the International Monetary Fund for $6.7 billion as central banks show increased interest in diversifying their holdings to protect against a slumping dollar.

The transaction, equivalent to 8 percent of world annual mine production, was the IMF’s first such sale in nine years and propels India to the ninth-biggest government owner globally, according to figures from London-based research company GFMS Ltd. The country previously held 358 tons, the data show. The news was a “surprise because everybody was talking about China being the buyer,” said James Moore, an analyst at TheBullionDesk.com.

“The fall in the U.S. dollar seems to be pushing all the central banks to strengthen their portfolio with gold,” said N.R. Bhanumurthy, professor at the National Institute of Public Finance and Policy in New Delhi. “Gold is a safe store of value compared to the U.S. dollar.”

Gold for immediate delivery rose 0.2 percent to $1,061.48 an ounce at 1:20 p.m. in London and was less than 1 percent below its record $1,070.80 an ounce reached Oct. 14. India purchased the gold at an average price of about $1,045 an ounce, according to an IMF official on a conference call.

IMF Finances

The IMF sale accounts for almost half the 403.3 tons that the Washington-based lender in September agreed to sell as part of a plan to shore up its finances and lend at reduced rates to low-income countries. Asian nations, which have amassed stockpiles of foreign currency reserves since the 1998 financial crisis, have shown increased interest in diversifying out of U.S. assets as the dollar loses value against other currencies.

“The most important thing is that people want gold even at these prices,” said Ghee Peh, head of mining research, with UBS AG in Hong Kong. “There’s good support for prices for now” from the IMF’s disposal of bullion, he said.

The transaction involved daily sales from Oct. 19 to Oct. 30 at market prices and is in the process of being settled, the IMF said in a statement yesterday.

The purchase didn’t signify any loss of confidence in the dollar, nor did it show that the metal’s appeal was increasing, India’s Finance Minister Pranab Mukherjee said.

Loans to Poor

Proceeds from the sales and other IMF resources as well as individual contributors would help pay for discounted interest rates on loans to low-income countries, the IMF said in July. It plans to grant as much as $17 billion in extra loans to poor nations through 2014. The 403.3 tons the IMF agreed to sell amount to 1/8 of its stockpile.

Suresh Tendulkar, an economic adviser to Indian Prime Minister Manmohan Singh, said in an interview in July that he was urging the government to diversify its foreign-exchange reserves and hold fewer dollars. China and Russia have also stepped up calls for a rethink of how global currency reserves are composed and managed.

“There seems to be consensus among the central banks that it’s better to cut down on currency holdings and diversify into assets like gold, which has upside potential,” Krishna Reddy, a precious metal analyst at Way2Wealth Commodities Pvt., said in Mumbai. “The Reserve Bank of India gold purchase is a clear reflection of this belief.”

More Sales

Russia, China or Brazil may buy the rest of the IMF gold for sale, said Moore from the TheBullionDesk.com.

China, the world’s biggest gold producer, has increased reserves of the metal by 76 percent to 1,054 tons since 2003 and has the fifth-biggest holdings by country, Hu Xiaolian, head of the State Administration of Foreign Exchange, said in April.

The nation may purchase some of the 403.3 tons of gold being offered by the IMF, Market News International reported in September, citing two unidentified government officials.

“It’s more or less certain that government of India expects the U.S. dollar to weaken,” said Suresh Hundia, president of the Bombay Bullion Association Ltd., in an interview today. The purchase is “not so much about India betting gold prices will increase but that the dollar will fall. They are looking to diversify their foreign exchange reserves.”

India’s foreign-exchange reserves advanced $684 million to $285.5 billion in the week ended Oct. 23, the central bank said Oct. 30. That included foreign-currency assets of $268.3 billion, gold reserves of $10.3 billion and the special drawing rights with the IMF.

Off-Market Transactions

The lender has said it is ready to sell directly to central banks and later make transactions on the open market if necessary. The IMF official declined to say yesterday whether other central banks have expressed interest in purchases.

Given the “well-publicized concerns of many central banks over the level of their exposure to the U.S. dollar, further off-market transactions must be a clear possibility,” Aram Shishmanian, chief executive of the World Gold Council in London, said in a statement.

The IMF, which helped shore up economies from Pakistan to Iceland over the past year, has sold gold on several occasions. The last transaction was authorized in December 1999 and took place off-market between then and April 2000.

“Gold production has been declining for the past seven years, while demand, particularly the investment demand, has been growing steadily,” Way2Wealth’s Reddy said. “Central banks and even ordinary investors want to own more gold.”

To contact the reporters on this story: Sandrine Rastello in Washington at srastello@bloomberg.net; Kyoungwha Kim in Singapore at Kkim19@bloomberg.net.

Last Updated: November 3, 2009 08:43 EST

ANKARA, October 28 (RIA Novosti) - Turkey is switching to national currencies in trade with Iran and China, ending dependence on the U.S. dollar and the euro for about 20% of its commodity turnover, local media reported on Wednesday.

Turkey has already switched to settlements in national currencies with Russia amid weakening confidence in the greenback as the world's major reserve currency. The move was initiated by Turkish President Abdullah Gul during his visit to Moscow in February.

Turkey's decision to make settlements with Iran and China in national currencies was announced during a visit to Iran by Turkish Prime Minister Recep Tayyip Erdogan. The Turkish premier told a Turkish-Iranian business forum on Tuesday that the countries had prepared a legal framework for transition to settlements in national currencies.

"We have adopted a necessary legislative act and are prepared for the transition," the Turkish newspaper Milliyet quoted Erdogan as saying.

According to the paper, Turkey's trade with Russia, Iran and China exceeds $65 billion a year. Russia is Turkey's largest trade partner, with $37.8 billion commodity turnover registered last year.

Russian Prime Minister Vladimir Putin said on October 14 that Russia was ready to consider using the Russian and Chinese national currencies instead of the dollar in bilateral oil and gas dealings.

"We are ready to examine the possibility of selling energy resources for rubles, but our Chinese partners need rubles for that. We are also ready to sell for yuans," Putin said.

Britain's Independent newspaper reported in early October that Russian officials had held "secret meetings" with Arab states, China and France on ending the use of the U.S. dollar in international oil trade.

The countries are reportedly seeking to switch from the dollar to a basket of currencies including the euro, Japanese yen, Chinese yuan, gold, and a new unified currency of leading Arab oil producing countries.

The Independent said the meetings have been confirmed by Chinese and Arab banking sources, although Russian officials said they had no knowledge of the talks.

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.

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.

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."
..

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