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Gold And The Watched Pot Theory

Commodities / Gold & Silver 2009 Oct 07, 2009 - 02:41 AM GMT

By: Mike_Shedlock


Diamond Rated - Best Financial Markets Analysis ArticleThe G-7 meeting has concluded and the only accomplishment was yapping about the need for a strong dollar. Please consider G-7 Finance Chiefs Campaign for ‘Strong Dollar’.

Finance chiefs headed for Group of Seven talks in Istanbul pushing for a “strong dollar” amid concern its slide will impede their recoveries from the worst global recession since World War II.

“Everyone needs a strong dollar,” French Finance Minister Christine Lagarde told reporters in Gothenburg, Sweden, today as she met European Union counterparts. “We’ll have a chance to discuss this in the coming days.”

Her comments came four days after similar remarks from European Central Bank President Jean-Claude Trichet. Treasury Secretary Timothy Geithner yesterday also pledged support for a “strong” currency.

“Market-moving announcements could be forthcoming,” said Geoffrey Yu, a foreign-exchange strategist at UBS AG in London. “We expect to hear renewed commitments to the U.S. strong dollar policy and the European delegation may be tempted to communicate their worries on further rises in the euro.”

Canadian Finance Minister Jim Flaherty yesterday pushed China to let its yuan appreciate “more quickly” after keeping it little changed against the dollar for more than a year

G7 Wimps Out, Avoids Formal Dollar Criticism

Those hoping to see a firm stand by the G-7 regarding currencies may be hoping for another 20 years.

As expected, the G-7 Avoids Dollar Criticism, Warns Against Currency Volatility.

Group of Seven finance chiefs stopped short of singling out the weaker dollar for criticism and stuck to their mantra that “disorderly” swings in currencies threaten economic growth.

“Excess volatility and disorderly movements in exchange rates have adverse implications for economic and financial stability,” G-7 ministers and central bankers said in a statement after talks today in Istanbul. Officials welcomed China’s “continued commitment” to a more flexible currency, which they said would promote balanced global growth. The statement repeated language used at the last G-7 in April.

“Following the escalated rhetoric, investors may have been braced for some escalation in language,” said Sophia Drossos, co-head for global foreign exchange strategy at Morgan Stanley in New York. “Since we didn’t get it, I look for the trend of dollar weakness to reassert itself.”

G-7 Meritorious Statements

The German Deputy Finance Minister Joerg Asmussen said G-7 "Statements will be published on merit." Please consider the following meritorious statements.

  • There is no room for complacency since the prospects for growth remain fragile and labor market conditions are not yet improving.
  • We will keep in place our support measures until recovery is assured.
  • We reaffirm our shared interest in a strong and stable international financial system.
  • Excess volatility and disorderly movements in exchange rates have adverse implications for economic and financial stability.
  • We will continue to promote the fundamental norms of propriety, integrity and transparency, as agreed in the Lecce Framework and the Core Values of the Charter for Sustainable Economic Activity.

Is there any merit to throwing a party just to say that? If the G-7 cannot agree on anything meaningful, how the hell is the G-20 ever going to agree on anything?

For more on the complete uselessness of these summits, please see G-20 Summit - We've Seen This Movie Before with an analysis of select entries from the historical record of a League of Nations 1930-1931 Chronology.

Export Dependency Madness

Canadian Finance Minister Jim Flaherty effectively summarized the global G-7 sentiment when he pushed China to let its yuan appreciate “more quickly”.

Every country wants to grow by ramping up exports in a world of decreasing consumer demand. To achieve that end, every country wants its currency to be weaker against every other currency. Of course that is logically impossible.

Besides, the US consumer is tapped out. European consumers are tapped out as well. And tapped out or not, the Japanese consumer just does not want to buy.

Demographics are a huge problem in Japan and ironically paying 0% on deposits does not do much for supporting consumption.

Can China Alone Support Global Growth?

Forget about it.

I discussed China at length in How Will China Handle The Yuan? Here are a few very small snips.

In spite of record worldwide stimulus, a global recession is everywhere you look except perhaps in China. The reason is simple. When the Chinese government "suggests" banks should lend, banks lend. This is how command economies "work", using the word "work" loosely. Yes, the US has massive problems, but let's have an honest assessment of problems elsewhere.

Bottom line, China is busy ramping up production for consumers that don't exist: Not here, not in the EU, and not in China (not yet). This love affair with China, a country that will not float its currency or offer freedom of speech, and hides bank solvency issues even more so than the US, is way overdone.

A 4-Minute Tour of the China Property Bubble

What is China doing with all its printing? Please take a A 4-Minute Tour of the China Property Bubble to find out.

World's Largest Shopping Mall Sits Vacant

The world's largest shopping mall, South China Mall in Guangzhou, China, is almost entirely empty. Click on the link to see a fascinating video.

Spend Money Until There Is A Recovery

While politely pointing fingers at China and the US for political purposes, all such language was removed from the official statement. The only thing we can be sure the G-7 will do is keep spending money until there is a recovery.

The US, China, Japan, and UK are all in on that act. However, major cracks have appeared in the dam. Switzerland has intervened in the Forex markets with Japan and the ECB waiting in the wings. Canada is clearly unhappy about both the US dollar and the Renminbi.

Indeed no one seems happy about anything, yet the G-7 managed to put together this meritorious and flowery conclusion:

"We will continue to promote the fundamental norms of propriety, integrity and transparency, as agreed in the Lecce Framework and the Core Values of the Charter for Sustainable Economic Activity."

Click here for the complete Complete G-7 Statement.

Message From Japan

Just days after welcoming a stronger Yen, the Japanese Finance Minister reversed course as noted by Bloomberg in Yen Effective Exchange Rate for September Rises to 6-Month High.

Japan’s currency rose to a six-month high on a trade-weighted basis last month amid speculation the Federal Reserve will keep interest rates low and the government led by Yukio Hatoyama won’t intervene to stem the yen’s gain.

Japanese Finance Minister Hirohisa Fujii said this week the government may act to stabilize the foreign-exchange market and denied that he supported a stronger yen.

The remarks signal Fujii, 77, is trying to dispel investors’ perceptions that he favors appreciation of the yen and would be unlikely to step into the currency market to stem its gains. After the DPJ came into power for the first time on Sept. 16, Fujii said the idea of a weaker yen helping the nation’s exports is “absurd.”

I place credence on the more recent statements, noting that Toyota could be one reason for the flip-flop.

Toyota Grasps For Salvation From Strong Yen

Auto sales have collapsed and Toyota is blaming a strong Yen as one of the reasons. Please consider Toyota Says Company Is ‘Grasping for Salvation’.

Toyota Motor Corp., the world’s biggest automaker, is “grasping for salvation” as it predicts a second straight annual loss, President Akio Toyoda said. The automaker is one step away from “capitulation to irrelevance or death,” Toyoda said, citing a study of how companies fail.

The company has gone through the phases of “hubris born of success,” “undisciplined pursuit of more” and “denial of risk and peril,” according to Toyoda, who cited Jim Collins, the author of “How the Mighty Fail.”

The yen’s 7.4 percent gain against the dollar in the third quarter also eroded earnings from exports. “The yen is at a very severe level, and just increasing sales won’t make Toyota profitable,” Toyoda said today.

Japanese Moratorium on Principal and Interest

This week the Japanese Finance Minister proposed to Postpone Collection of Principal and Interest on Consumer and Business Loans.

“We’re going to get financial institutions to provide these firms with more loans,” said Kamei. “Banks won’t have to treat debt on which they provide a moratorium as bad.”

The moratorium, postponing repayment of principal and interest, will be extended to individuals as well as firms Kamei said. It will aim at giving relief to companies with about 100 million yen ($1.1 million) or less in capital.

“As long as I’m financial services minister, I’m not going to leave small companies in the lurch unable to get loans,” Kamei said. “If a bank takes that approach, I’ll hit them with a business improvement order.”

Switzerland Intervenes In Forex Markets

Inquiring minds are reading Swiss Franc Drops on Speculation SNB Sold Currency to Curb Gain.

The Swiss franc fell the most in three months against the euro amid speculation the central bank sold the currency to curb its advance. Swiss National Bank Governing Board member Thomas Jordan said last week policy makers will act “with full force” to avoid an appreciation of the franc against the euro.

“Price action and market talk suggests the SNB has intervened today to sell the Swiss franc,” Marc Chandler, New- York based global head of currency strategy at Brown Brothers Harriman & Co., wrote in an e-mail today. “It appears it may be buying dollars and euros. Swiss banks have been rumored to be the featured agents, which fits into the intervention story.”

By holding back the Swiss franc, policy makers are trying to prevent deflation from worsening the steepest recession since 1992 and restore investor confidence. SNB Chairman Jean-Pierre Roth said on June 18 that the nation’s central bankers “fear deflation” and “if we want to fight against deflation we have to stop a further appreciation of the franc.”

All In Favor Of A Weaker Dollar Raise Your Hand

Europe does not want a stronger Euro, Japan does not want a stronger Yen, and Switzerland has surely proven it does not want a stronger Swiss Franc.

Given that China has pegged the Renminbi to the dollar, it is clear China does not want a stronger RMB either. If it did, it would simply change the peg.

I see no hands in support of a weaker dollar.

Dollar Devaluation Countdown

In spite of the above, within a month or two the US$ is supposedly going to be devalued. Please see Countdown To Dollar Implosion Madness for details.

The theory behind the countdown is the "Recent China/US financial Summit meeting in Washington which was requested by China, was not significantly pre-planned".

Is a dollar devaluation was the only thing that could possibly have been on China's mind? What about trade issues, pollution, the recession, or the then upcoming G-7 and G-20 meetings? My vote is for the latter.

2009 US Dollar Devaluation References

Out of curiosity, I did a search for "2009 US Dollar Devaluation"

I found 1,490,000 references.

Here is a good one from 11/5/2008: MASSIVE US dollar devaluation coming very soon

They're going to pull the plug on the dollar now -- full out -- and devalue it to 1/10 of its current value... This is not a joke.

Here is a good one from 12/12/2008: Dollar Devaluation To Fix The Great Recession

During Depression I, I would say it was Frank Roosevelt's 40 percent devaluation of the dollar against gold which finally stopped the deflation. After Wild Ben 'Maggot Brain' Bernanke has cut his policy rate to zero, dollar devaluation is the only policy option left to ease our collective pain.

The source of that reference was a Forbes article with the same name Dollar Devaluation To Fix The Great Recession.

A quick dollar devaluation would work wonders for submerged borrowers. Don't kid yourself: It could happen.

Many of the articles think the dollar devaluation is coming against gold, but others think there is going to be some by force currency devaluation.

On August 14, 2009 the Trader's Journal discusses such a thing in Will Current Expectations of a Dollar Devaluation Cause Gold To Breakout?

Some sage gold watchers are expecting a major dollar devaluation before the end of the year! Some say it could happen any day now. ... If the globe’s major reserve currency is devalued, no one will escape the impact on their daily lives.

For example, if the dollar is devalued against the euro by 30%, an Airbus will be that much more expensive than its Boeing equivalent. An import from China (the yuan is pegged to the dollar) will also drop in foreign currency prices by 30%, but remain the same in the U.S. dollar.

Devaluation By Decree Impossible

The US dollar floats. There is no way the dollar can be devalued by decree without pegging it to something. For example, the US cannot just come out and say "We are devaluing the dollar vs. the Euro by 30%" without pegging the dollar to the Euro and then defending that target.

Moreover, as noted above, all the G-7 countries except the US want a stronger dollar, not a weaker one. Even if a devaluation by decree was possible, the G-7 clearly would not be happy about it.

Message Of Gold

The reason for the strength in gold is not US inflation. As I have pointed out many times, gold fell from 850 to 250 over the course of 20 years, with inflation every step of the way. Thus, the inflation story just does not fit.

However, it should be clear that a major financial crisis is in store following a long period of competitive currency devaluation and massive debt and derivatives expansion by nearly every major country on the planet.

The G-7 agreed to do nothing to fix this mess, nor did the previous G-20 meeting. Countries are going to do what they are going to do: follow misguided Keynesian logic that suggests one can spend one's way to prosperity even though the problem is excessive spending across the board.

Might the US dollar blow up? Yes it might. But so could the RMB if China floated it, and so could the British pound. No one seems to see the crisis brewing in Japan with a huge demographic problem, a shrinking population, falling exports, and no way to pay back its national debt.

There is seldom a mention of the problems in European banks who foolishly lent money to the Baltic States in Euros or Swiss Francs and now those Baltic country currencies have collapsed and the loans cannot be paid back. European banks also lent to Latin America and those loans are also suspect. Arguably, European banks are in worse shape than US banks, but no one talks about it, at least in the US.

Spain has unemployment approaching 20% yet must suffer through the same interest rate policy as Germany. Seldom does one hear about this either.

Certainly the UK is a complete basket case with its banks on government life support. Iceland has already blown up, who is next?

Most are not aware of the problems in China, Japan, or Europe. However, the problems in the US are universally well understood. Indeed all eyes are on the dollar and everyone is talking about deficits, monetary printing, and especially unfunded liabilities even though the latter is tomorrow's problem, not today's.

Watched Pot Theory Revisited

A watched pot may boil, but it's not likely to explode, especially when everyone watching the pot expects an explosion any second.

Indeed, it would be fitting if the Ridiculous Hype Over Secret Oil Meetings, helped form a bottom on the US dollar.

Yet, it's easy to see that a financial crisis is brewing.

Somewhere, something is going to blow sky high, but from where I sit, it's as likely to be in the Yen, the Swiss Franc, the British Pound, or something no one is watching at all as opposed to the US dollar specifically.

By Mike "Mish" Shedlock

Click Here To Scroll Thru My Recent Post List

Mike Shedlock / Mish is a registered investment advisor representative for SitkaPacific Capital Management . Sitka Pacific is an asset management firm whose goal is strong performance and low volatility, regardless of market direction.

Visit Sitka Pacific's Account Management Page to learn more about wealth management and capital preservation strategies of Sitka Pacific.

I do weekly podcasts every Thursday on HoweStreet and a brief 7 minute segment on Saturday on CKNW AM 980 in Vancouver.

When not writing about stocks or the economy I spends a great deal of time on photography and in the garden. I have over 80 magazine and book cover credits. Some of my Wisconsin and gardening images can be seen at .

© 2009 Mike Shedlock, All Rights Reserved

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14 Oct 09, 02:26
Gold: The ultimate hedge


Gold is a necessary investment. Why? It is the ultimate hedge versus the demise of the sinking purchasing power of currencies. So if everybody understands it, and buys even a small quantity of gold, it would then continue going up inexorably.

The issue is two-fold:

1) many investors buy gold funds that are not backed by gold instead of buying funds that are backed by physical gold or buy physical gold directly. The day it becomes clear that most funds cannot deliver the gold, the owners' of physical gold will see their investments rocket.

2) unfortunately, the day physical gold rockets it means that other asset classes have likely been plumetting in terms of purchasing power and the confidence in the monetary system crushed. So I guess no one will become better off at that stage. But to have some gold could provide some hedge. Although capital gains on gold could then be taxed at very high levels.

Conclusion: Who cares about the price of gold when buying it? That is not the point. Who care about the return on gold when buying it? That is not the point. You buy a hedge, the ultimate one, against a major systemic risk. So a little quantity suffices for the retail investor. As for institutional investors, gold as a hedge does not make much sense (beyond some diversification attributes close to other commodities), as those investors 8e.g. pension funds) are part of the system, they would collapse with it.

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