Posts Tagged ‘CentralBanks’


>

Gold: The Enemy of Currencies
Last week saw gold prices rise despite deflationary fears.
Taking a look at the chart below we can see the gold price in US dollars has traded in a narrow range since May. This is despite the dollar declining for much of that time, see chart further below. (Click to enlarge)

 

 We noted last week that we were going to keep an eye on the Fed Open Market Committee meeting in case they decided to increase the money supply even further. But they didn’t.

The Federal Open Market Committee failed to commit to anything… they didn’t say they would resort to more quantitative easing… they didn’t say they wouldn’t. Instead they’re pausing for breath.

The inflation, deflation debate continues 
As the deflationary, inflationary debate continues to be waged between financial heavyweights we stand on the side and watch. We’ve always believed the act of quantitative easing is inflationary; It inflates the money supply. We also think the governments only way out, of this huge debt burden it has imposed upon itself, is to inflate the debt. If you make the value of your debt less you have less to pay back, but it’s a juggling act. Inflate too much and you run the risk of hyperinflation, something that, the Germans will tell you, doesn’t bode well for an economy.

US Trade Deficit
What’s the next move for gold? We have to wait and see what happens around the globe to find that out. Certainly, its course is no longer dictated by the movement of the dollar as much as it once was. Will this relationship resurface? Probably, but when it does it will most likely be when the dollar makes a significant move, triggering panic in the dollar or gold.

Which is more likely – a panic or strength in the dollar?
Last week Bloomberg reported that the US trade deficit has swelled to an incredible figure:
“The U.S. trade deficit widened by $7.9 billion in June, the most since record-keeping began in 1992, to $49.9 billion, a report from the Commerce Department showed. Exports posted the biggest decline since April 2009.

“Investors should prepare for “major structural changes” as the global economy shifts to slower growth, Mohamed A. El- Erian, chief executive officer at Pacific Investment Management Co. said yesterday in a radio interview on “Bloomberg Surveillance” with Tom Keene.”

This news reverberated around the markets.

A quick look at the VIX index shows us that fear has reentered the market… again. At the far right of the graph you can see the index rises sharply which signifies a growing fear of volatility in the markets.

With a stuttering economy and growing tension between the US and China, the trade balance could play a huge role in a dollar devaluation. But in order for the dollar to drop further people will have to lose faith in its safe haven status. Which means an alternative currency will need to take its place. The problem with this scenario is that there aren’t too many other candidates for the role as a global reserve currency. And whilst that is the case gold can continue to take center stage.

Will things get better?
In the grand scheme of things the debt, from Dubai to Greece has just been shuffled around. The run up in the stock markets suggests stability but investors are cautious. They’re wondering if this is another ‘suckers rally’. And they’re right to be cautious. If you play with fire… well you know that old saying. In other words it doesn’t end well.

Can things get better? That depends on what governments do.

More money printing can only add to the attractiveness of gold. But gold is the enemy of currencies. As Alan Greenspan once noted, to control the dollar you have to control the gold price.

The fight for governments around the world is one which is traded in blows against the gold price. And should they win the price of gold may very well settle back to lower prices until supported by a strong level of jewelry demand. But this is dependent on currencies being kept under control. Both the US and the UK have not ruled out further money printing, and with each new wave of money the original currency is worth less and less.

It all sounds too reactionary to us. There doesn’t seem to be a grand plan. Maybe there cannot be as the markets lead themselves. But whatever the case, none of the actions by those in power have any finiteness about them. There’s no plan and no control.

Disclosure: No positions
http://seekingalpha.com/article/221174-gold-the-enemy-of-currencies?source=feed
Share |

_______________________________________

Check it out on The MasterCharts

>


U.S. Lawmakers Gear Up to Seek New Yuan Policy

WASHINGTON—The U.S. trade deficit with China in June hit its highest level in nearly two years and could spur congressional pressure on Beijing to revamp its currency policy.

America’s trade deficit with China jumped 17% in June over the previous month to $26.2 billion, the biggest gap since October 2008. Earlier this week, China said its overall trade surplus hit $28.7 billion in July, an 18-month high.

Associated Press

A production line in Guangdong province, in southern China, in May.

The Commerce Department figures could set the stage for a fight in Congress this fall over China’s currency policy. Some lawmakers, arguing that China has set the yuan artificially low to make its exports more price competitive on global markets, are keen to pass laws that would penalize countries that are found to be manipulating their currencies.

China, under pressure from the U.S. and other countries, announced a shift to a more-flexible exchange rate in June. But the yuan has appreciated less than 1% since then, and some economists say that it remains undervalued against the dollar by at least 25%.

While efforts to pass such legislation have made little headway, lawmakers and industry groups agree that the issue could gain traction in September, given that voters, who head to the polls in November, are angry about the country’s continued weak economy and high unemployment rate.

A number of bills have garnered bipartisan support, including measures promoted by Tim Ryan (D., Ohio) and Patrick Murphy (D., Pa.) in the House, and by Charles Schumer (D., N.Y.) in the Senate.

These efforts would, among other things, make it easier for companies to seek import duties on goods from countries designated as having undervalued currencies. The Ryan-Murphy bill has more than 127 co-sponsors, including 37 Republicans.

Nadeam Elshami, a spokesman for House Speaker Nancy Pelosi (D., Calif.), said the House Ways and Means Committee would hold a hearing on the currency issue in September after Congress returns from summer recess.

“But no final decisions have been made on moving legislation forward,” he said.

Sen. Sherrod Brown (D., Ohio), a co-sponsor of the Schumer bill and a member of President Barack Obama’s Export Council, wrote Mr. Obama on Aug. 4, urging the administration to take tougher measures to address “unfairly subsidized exports” by countries such as China. Ten other senators signed the letter, including Republicans Jim Bunning of Kentucky and Olympia Snowe of Maine.

The Treasury Department on Wednesday declined to comment on the U.S.-China trade gap or China’s currency policy.

Business groups are expected to intensify their lobbying on the issue, although they differ over whether punitive legislation aimed at China’s currency policy is the best solution for narrowing the U.S.-China trade gap.

Augustine Tantillo, executive director of the American Manufacturing Trade Action Coalition, a Washington trade group representing U.S. manufacturers, says the group backs the Ryan-Murphy bill and is lobbying lawmakers, targeting those from Midwestern and Southeastern states with large manufacturing sectors and high unemployment.

“These trade surpluses aren’t a result of happenstance,” he said. “We’re hoping concerns about job creation and the fall election environment will finally give us an opportunity to bring the legislation to a vote.”

Erin Ennis, vice president for the U.S.-China Business Council, which represents U.S. companies doing business in China, said the window for China to “show it was serious” about addressing U.S. concerns about the yuan would close in September, when Congress returns to session.

But while Ms. Ennis expected the Chinese currency policy to be a major issue in the fall, “this isn’t our member companies’ top priority,” she said.

Rather, she said that Congress and the administration should focus on reducing barriers to China’s market and on the country’s new “indigenous innovation” policy, which many Western companies say unfairly favors Chinese companies by promoting domestic innovation.
Write to Kathy Chen at kathy.chen@wsj.com

U.S.-China Trade Gap Stirs Lawmakers – WSJ.com

_______________________________________

Check it out on The MasterCharts




%d bloggers like this: