A Big Summer For Gold Prices?

Traditional seasonality may not hold this year...

TRADITIONALLY, Gold Prices tend to take a breather during the Northern Hemisphere summer, writes Geoff Candy at MineWeb. 

But, there are some, like Sprott Asset Management chief investment strategist, John Embry, who believe this year might be a little different.

Because of what is going on at a big picture level geopolitically, Embry says, Gold Prices are likely to have a big summer.

"I don't like putting numbers and dates in the same sentence because you always make yourself look bad – but I would be very surprised if it doesn't take out $1,650 this summer and maybe headed towards $1,800 over the next three months," he told MineWeb.com's Gold Weeklypodcast.

To back up the statements, Embry points to a number of macroeconomic factors that are likely to have a bearing on Gold Prices over the next few months.

Firstly, much of the seasonality that is traditionally associated with the metal comes from Asia where gold purchasing is strongly related to the wedding season and, in India because much of the demand traditioanlly comes from rural areas, the sowing cycle.

"People forget," Embry said, "that the gold market is changing fairly significantly from traditional sources of demand into investment demand as an alternative to currencies... investment demand doesn't know seasons - it buys gold because it is fearful of other assets."

Fear is a dominant theme in another of this summer's big economic events - the end of quantitative easing in the U.S and worries about the country reaching its constitutionally mandated debt ceiling.

Embry says, these two events are likely to have a significant impact on the Gold Price, especially given the recent data that suggests, the US economy could begin to recede once more.

"If you want to withdraw enormous amounts of stimulus by cutting the deficit dramatically at this point, or if QE2 actually marks the end of quantitative easing there's no question that the United States' interests rates are going to go up dramatically because from the numbers I look at, the Federal Reserve has been buying the vast majority of the all the treasuries that have been coming into the market."

"In my opinion we have reached the point of no return. We are either going to take a collapse in the Dollar or a collapse in the economy depending on which direction they take. The idea that they can return to normalcy in my opinion is out of the question at this point. They are way too far off line."

The third reason for gold's likely strong performance comes from Europe. "There are an enormous number of problems in Europe, just as there are in United States and to me the conclusion one should arrive at is neither of these currencies are attractive and that to me is one of the underlying factors why I am so bullish on the Gold Price," he says.

"I look at the Greece situation and I see absolutely no way out that's palatable to the Euro and the European banks or what have you that hold a lot of this paper. In some way the Greeks cannot afford to carry the debt load they've have got and somehow that's going to have to be addressed."

Beyond the summer, Embry continues to remain positive on the outlook for precious metals, but he does caution that it can never be only way traffic.

"You are always going to have corrections and there are people who are in this market who are using leverage that had better be careful because the corrections can be quick and violent. But having said that, for you to say that the bull market in gold is over is essentially by saying that we are going to re-establish paper currency as viable and I don't think that's going to happen – I am of the mind that before this whole mess is ended we are going to have a new monetary system and as we make our way towards that, gold and silver will be refuges."

Source: http://goldnews.bullionvault.com/gold_prices_summer_060820116

Is Silver The New Gold?

Investors are talking about gold, and why not? In the past 10 years, the price has climbed more than fivefold from less than $300 to more than $1,500 an ounce. A $10,000 investment made in June 2001 would be north of $50,000 in value today.

But guess what? Silver has actually done quite a bit better, rising from less than $5 to nearly $40 per ounce - good for about an eightfold price gain over the previous decade. So instead of the $50,000 you'd have if you bought gold, your $10,000 would now be worth around $80,000. (For more on silver, read Silver Thursday: How Two Wealthy Traders Cornered The Market.)

TUTORIAL: Investor Guide To Commodities

Considering this outperformance, it may be time to think of silver as "the new gold." Indeed, there's compelling evidence it could soon replace gold as the precious metal of choice for investors. For example, some analysts project silver prices as high as $90 an ounce by the end of 2011 - more than double current levels. Gold, however, may hover around $1,500 an ounce throughout the year, suggesting there won't be much, if any, money to be made in the yellow metal for a while.

Why Silver's HotSilver has skyrocketed for many of the same reasons as gold, a big one being widespread fear about the condition and direction of the economy. Anytime there's economic uncertainty and a risk of higher inflation, just like there is right now, precious metals become increasingly popular because of their perceived safety and reputation as strong inflation hedges.

The big advantage of silver is it's not mainly a store of value like gold. Besides offering an inflation hedge and helping to calm investors, silver has many applications in industry, medicine and dentistry thanks to its electrical and thermal conductivity, usefulness in making metal alloys and other unique properties. Commercial and industrial applications account for about 60% of silver demand each year. (To help take advantage of these increases, read Investing In The Metals Markets.)

Why It Will Get Even HotterWhereas gold might be in a cooling phase, silver could be set to soar for several reasons.

1. Industry and Investor Demand Are Set to Rise 
These groups may both want to bulk up their silver holdings, but for different reasons. Whereas the pickup in hiring and other signs of economic recovery we've seen could spur higher demand from industry, investors may want more silver because they're not yet convinced the recovery is for real and still want a safe haven for their money.

2. Silver's Popular in Emerging Countries 
While the United States and other Western economies have been struggling, China, India and many other emerging countries have been expanding by leaps and bounds. Their industries need lots of silver. Moreover, the number of investors in emerging countries is rising as those areas become more affluent, and many of those investors value precious metals like silver for the same reasons we do.

3. There's a Threat of Higher Inflation 
Significant inflation isn't here yet, but it could be on the way (we've all seen food and gasoline prices go up). The government has been printing billions of dollars to cover its huge debt, creating more new money in the past couple years than at any other time in U.S. history. This sets the stage for higher inflation by diluting the money supply and reducing the value of the dollar. (To learn more on how metals increase and decrease in value, check out A Beginner's Guide To Precious Metals.)

The Bottom LineThe economy is at a crossroads of sorts: There are signs of recovery, yet conditions are ripe for inflation. In this situation, silver may be a better investment than gold because there are two sources of demand - investors and industry. Gold, by contrast, is much more at the whim of investors and tends to sink or swim based on their need to feel safe. If the economy really picks up steam and investors start to feel bullish about stocks, gold could quickly become yesterday's news. (To learn more on gold and silver, see Trading The Gold-Silver Ratio.)

http://www.sfgate.com/cgi-bin/article.cgi?f=/g/a/2011/06/09/investopedia52774.DTL

Gold Often Consolidates In Summer, But This Year Could Be Exception With Unresolved Issues

(Kitco News) -Gold often undergoes a period of summer doldrums in which the metal meanders sideways, and in fact it has been in a roughly $35 range for the last two weeks.

Analysts said this summer could be different, however, as gold could make a bolder move due to some unresolved issues such as U.S. and Greek deficits.

Gold for August delivery has not been below $1,520 an ounce on the Comex division of the New York Mercantile Exchange since May 26. However, it also has been unable to make a sustained push above $1,550, although it did get as high as $1,555 on Monday.

“It’s a tug-of-war between the bulls and the bears,” said George Gero, vice president and precious-metals strategist with RBC Capital Markets Global Futures.

The metal might be sideways lately, yet “range-bound is a good performance” considering a number of other commodities have given up some of their strength from earlier in the year, hurt as stocks sagged  on worries about the economy, said Mike Zarembski, senior commodities analyst with optionsXpress.

Gold has held up better than other commodities due to some of the ongoing uncertainty about European sovereign debt, especially Greece, as well as rising deficits in the U.S. and worries about when Congress will raise the debt ceiling, Zarembski said. A weak U.S. dollar has also played a role.

“A lot of traders and investors are looking for some kind of safe-haven hedge, keeping gold supported,” he said.

Further, some of the agricultural commodities remain lofty, adding to inflation concerns, Gero said. Also, he continued, expectations for continued low interest rates in the U.S. are supportive for gold since this reduces the carry cost.

Yet, analysts also cited some factors limiting the upside.

“When the market does rally a little bit, traders seem quicker than normal to take profits,” said Mike Daly, gold and silver specialist with PFGBEST. Some of this is concern about more rate hikes in nations other than the U.S., such as China, he said.

On the one hand, gold remains underpinned by still-high crude prices and economic worries due to the weak U.S. jobs market, Daly said. Still, he said, gold might still be “technically overbought,” and a pullback to the $1,500-$1,450 area might be help attract fresh buying.

Zarembski suggested some market participants might have sold some of their gold to raise cash and offset losses in other markets lately.

He also cited conjecture on the part of some that sales from the International Monetary Fund or central banks could come about to help nations like Greece with their debt problems. “We haven’t seen any evidence of this so far, but that could be in the back of some active traders’ minds,” he said.

Some bears are also concerned about “too many late-comers” to the rally, Gero said. This creates potential for a bout of selling in the form long liquidation, should the market suddenly move against them.

“I think this tug-of-war is going to keep us range-bound for at least the next month or so,” Gero said. Still, he has raised his expectations for a summer range of mostly $1,525 to $1,585 an ounce.

Analysts: This Summer Has Potential For Movement Beyond Usual Consolidation

Gold activity tends to slow down over the summer in part due to the absence of major gift-giving holidays until autumn, as well as summer vacations by traders and investors in the Northern Hemisphere.

Gold will typically “drift around” during the summer months before picking up again in autumn, said Ira Epstein, director of the Ira Epstein division of the Linn Group. He backed this up in a Wednesday research report by running charts showing this pattern for each year since 2001, with 2008 being the notable exception.

“I don’t see anything abnormal going on right now that should impact the ‘norm,’” he said. “The markets already know about the U.S. hitting its debt ceiling, sovereign debt issues in Europe, war in Libya, Yemen being out of control, Iran, Venezuela and Saudi Arabia splitting on oil output issues and so on. In other words while there can always be an unknown force coming into play, the above plays are known.”

Nevertheless, Epstein said, “this is not a typical trading year” with the U.S. economy on weak footing.

UBS pointed out that CME Group trading activity already confirms a quieter environment, with an average daily turnover of just 144,000 contracts so far in June compared to an average 286,000 from January to the end of May.

“Given the event risk surrounding Greece, the end of QE2 (second round of U.S. quantitative easing) and the potential for an extended economic soft spot, however, these range-bound conditions are unlikely to last,” UBS said.

Others say gold could break out of its range due to any escalation one of the many simmering issues. Conversely, should any of these matters be put to rest, this could mean liquidation and an abatement of safe-haven buying.

The normally lighter summer liquidity could exacerbate any big move that occurs, should there be one, said Afshin Nabavi, head of trading with MKS Finance. “We may have a surprising summer,” he said, suggesting that direction of the U.S. dollar could be one key influence.

“We are probably due for a little sideways action,” Zarembski said. “Trading volume has been kind of light so far as the summer season starts in the Northern Hemisphere. But given the political situations, I don’t think the short-term consolidation is going to last.

He suggested gold could threaten $1,600 if the U.S. and European debt situations worsen. “That could be the impetus to get at least one more rally before the end of the summer,” he said.

Gold and the Collapsing Dollar

Last week the U.N. warned of a possible collapse of the US dollar –if its value against other currencies continues to decline. The U.N. mid-year review of the world economy did not get extensive coverage. Their economic division said that a crisis of confidence in the dollar, stemming from the falling value of foreign dollar holdings, would imperil the global financial system. This trend had recently been driven by interest rate differentials between the U.S. and other major economies and growing concern about the sustainability of the U.S. public debt, half of which is held by foreigners including the Chinese government.  

There is a real sense of both desperation and denial about the debt crisis and the global nature of the debt crisis. On Friday Moody’s threatened the U.S. with a downgrade if the ‘ceiling’ is not raised by mid-July. Bad labor figures made QE 3 more of a possibility and we see a continued slowdown in the developed world economies.

The solution of creating more public debt to cure a private debt crisis will be seen as a blunder and will likely lead to greater financial and economic woes. Part of the solution will be to utilize gold in the monetary system in hopes that it will support and shore-up the monetary system. What else is there that is trusted globally?

Is the U.N. economic division incompetent? Are their opinions of little consequence?

The statement they made is huge. A collapse of the US dollar! Maybe the news is too much for the media and the world to cope? Maybe we’re in denial. “So far, so good!” said the man who fell off the 50-storey building, as he passed the 12th floor…

Importance of the US Dollar

The US dollar replaced gold as the fulcrum of the global money systems of the world in 1971 at a time when its value was falling alongside the British pound. It was accepted back then because it was tied to the oil price.   This made the US dollar indispensable. If you used oil you needed the dollar to pay for it. You had to convert every other currency to get oil. Everyone sold it in the US dollar.

Moreover, the U.S. persuaded Europe (at the time led by President Charles de Gaulle) to stop converting their dollars into gold and accept them as vital currency. The link to oil forced their hand. The dollar had no other virtues at the time, and so that ingredient changed their thinking.  

We had thought many times that the oil producers themselves would have broken the link as the dollar’s reputation floundered. But they all realized that their country’s power was, in a way, permitted by the kind permission of the U.S. –as we saw in Kuwait, then in Iraq and no doubt, by extension in Libya. The U.S. guarantee of security has made them putty in U.S. hands.

Even O.P.E.C. realizes that things are changing and their oil is all they have. Middle Eastern oil producers discussed setting up a Persian Gulf currency the year before last, but nothing has come of it. There will most likely be no Gulf currency unless monetary chaos ensues. If the dollar collapses, their incomes will collapse with it, and in turn their power base. They mostly likely have a plan B. Until then they will keep oil prices in the US dollar and raise them as the dollar falls.  

Russia is another kettle of fish. They are not part of O.P.E.C. and will accept the Yuan in payment of their oil as well as the dollar. Iran is fearful, but independent of the U.S. and has discarded all their dollar reserves as well as priced their oil in Euros. But the rest of O.P.E.C. will keep their oil priced in the dollar.  

Since the oil price fell back to $35 in the credit crunch, they have demonstrated that they can manage the oil price. For the last year we’ve seen the price of oil more than compensate for the fall in the US dollar. Right now it is holding the $100 level up from $80 last year, countering the fall in the dollar against hard currencies. As a result the oil price has been steady in the euro.

Now that the U.S. consumer (and the U.S. recovery) is faltering we hear loud calls for increased oil supplies.   This would drop the oil price, but be unacceptable to O.P.E.C. The U.S. government will accept higher oil prices because of the importance of the $:oil link.

It looked as though the world was stuck with the US dollar. Until two new elements emerged to change the picture…

Mismanagement of the US Dollar

Apart from U.S. gold reserves, there are only a small amount of currencies to protect the U.S. if the dollar were to become unacceptable for international payment. U.S. foreign exchange reserves are structured so that the dollar is the only global reserve currency. It’s rather like the use of English in the world. Why learn another language when English is the globally-accepted language? To date foreigners have had to accept the dollars because there is no viable alternative.   If the States needs more they print more.  

Because of its connection with oil, the dollar will be used until other nations can pay oil producers in other currencies, and if that occurs then usage of the dollar will shrink considerably. Furthermore, The U.S. balance of payments developed this perpetual trade deficit, a form of tribute exacted from the rest of the world. Over the last forty to fifty years, this has worked well as developing countries use the dollar to promote growth. It would work even better if the management of the dollar were handled with its global reserve status in mind and not the U.S. economic situation as the priority. Who cares the world boomed over the last half century?

Once dollar issuance increased to fund imports –as well as to counter the credit crunch—global economic interests were subject to the health and integrity of the U.S. economy. From the day the euro was first issued in 1999 until now we have seen a 46% decline in the value of the dollar against the euro alone. The rest of the world cannot afford to allow the U.S. to continue to take advantage of the world. Still worse, the government deficit in the U.S. has ensured that they are getting increasingly reliant on the reinvestment of foreign (mainly Asian and oil-producing nations) surpluses into the U.S. for its solvency.  

Now the U.S. is facing a downturn and is heavily extended on the credit front. Nations are closer to making changes to the currency hierarchy in hopes they can overcome a potential dollar collapse. There is a point when actions against the dollar will be precipitous. The poor, Friday labor report has us watching the dollar fall and points to levels beyond €1: $1.50.

Holders of dollars have to act in the interests of retaining the value of their reserves. This can mean supporting the dollar on foreign exchanges or it can mean selling the dollars for assets, resources and other foreign currencies. At some point, it will mean not accepting the dollar in payment of foreign goods. It is only a matter of time for the dollar to be removed from its pole position, where it is already causing so much volatility and damage to profits.

The biggest potential damage that could blindside the dollar is a switch by Asian nations from pricing their products in the U.S. dollar to the Yuan or other currencies. This is so they stop accumulating dollars; however, they still need it for as long as oil is being sold in the dollar.  

This position can only be changed if oil producers (other than O.P.E.C.) accepting currencies other than the dollar. These changes are needed now, but they will not come until the damage to the dollar’s value can be ‘contained’ by the surplus holders. China is already using Roubles and the Yuan to pay Russia for oil and the day may not be far off when Europe does the same. If O.P.E.C. felt the pain of a dollar collapse (or even excessive inflation inside the U.S.) it might accept other currencies from buyers (U.S. excluded). O.P.E.C. cannot continue raising the dollar oil price because of the outcry it would cause in the U.S.   

The Emergence of Asia

U.S. global wealth and power is on the decline. China is the world’s second largest global economy. If the current rate of development is sustained it is only a matter of time before China becomes the world’s largest –before the Yuan becomes the world’s reserve currency. It is only a matter of time before nations will need Yuan in their reserves to pay for Chinese imports.  

Part of the emergence of Asia is the replacement of the dollar in global trade. The only dollars reserved are to pay for U.S. goods and oil. When other currencies are used in place of the dollar, the purchasing power of the US dollar will decline. This is happening fast!

There is nothing to convince us that the will stop declining. From now until then, the gold price will move in the opposite direction.

Pricing Gold In A Deflationary Environment - Mineweb

Gold as a store of value rather than looking for growth is taking the lead once again as the global economy continues to falter and deflation becomes a real possibility.

Author: Adrian Ash

LONDON (BULLIONVAULT.COM) - 

The gold price goes up when cash and bonds fail to beat inflation. True in the Seventies, and true again in the last decade.

Both times, gold also beat both stocks and industrial commodities as well. Perhaps because storing value, rather than trying to grow it, takes precedence when the cost of living eats into your capital.

But now, from here?

"Markets don't expect inflation; professional forecasters don't expect inflation, and economists who know how to do their job don't expect inflation," claims academic economist Brad DeLong on his blog.

Never mind that inflation-linked 5-year Treasury bonds do see inflation ahead, or that the global gold market clearly fears it. Never mind that conventional Treasury bonds didn't wake up to the 1970s' inflation until 1980, and never mind today's "fail" for professional forecasters on May's US jobs data. (But hey, they were sold a pup by March and April's false readings). And never mind that economists-who-know-how-to-do-their-job are all too often now in a different job, trying to run the economy rather than observe it, and opting everywhere to devalue money at the fastest pace - accounting for post-inflation interest rates - in well over three decades.

No, "Whichever inflation measure you prefer, there's no reason to tighten," as DeLong's fellow economist Paul Krugman puts it, blogging at theNew York Times.

So what if inflation goes negative - making real interest rates positive, even if the official rate is slashed even to zero? Outside early-2000s Japan and the global wipe-out of spring 2009, modern history offers no examples. Both times, expert economists urged policy-makers to cut nominal interest rates below zero somehow, either by printing money to excess or taxing bank deposits or generally destroying cash, so that real rates could also stay negative.

Both times, gold rose in nominal and real terms as well. What gives...?

Here in May 2011, there's a "disparity developing" between industrial and precious metals, notes the latest Commodities Market Attributes report from Standard & Poor's.

Dividing its own S&P GSCI Industrial Metals Index by the Precious Metals Index, the agency tracks the relative strength of useful metals against the less industrially useful (but more socially valuable) metals gold and silver.

"This ratio generally has been positively correlated with the S&P 500 [US equity index]," says the report. Which makes sense, because industrial demand and risk-capital will tend to move in the same direction. But "the ratio declined again in May," says S&P, down "to essentially the same level it hit at the end of May 2009.

"What is disconcerting for many analysts is the fact that the S&P500 has increased 54.23% over the same two-year period. The implication is that extremely low interest rates and quantitative easing are likely influencing the level of real assets. At the same time, the ratio of demand for direct economically-related industrial assets...is not keeping up with the demand for store of value assets."

More telling still, S&P's Market Attributes also prints a chart of the S&P equity index against the ratio of gold-to-silver prices. It shows (see page 5) how a falling ratio - with gold becoming less valuable in terms of its industrially useful cousin - usually coincides with rising stock markets. But the gold-silver ratio has just jumped, up from a three-decade low near 31 ounces of silver for 1 ounce of gold to 40 and above.

"Risk-Off and Demand Destruction," is how S&P's report sums up May 2011. Pointing to the rising value of gold - against silver, the other industrial commodities, and common stocks - is simple shorthand, too. Because storing value, rather than trying to grow it, also takes precedence when the risk to your capital is that it might vanish altogether as debtors and businesses go bust amid a true deflation in prices.

That's if deflation gets chance, of course, before economists and central-bankers get to work destroying your savings first.

Formerly City correspondent for The Daily Reckoning in London, Adrian Ash is the editor of Gold News and head of research at BullionVault -where you can buy gold today vaulted in Zurich on $3 spreads and 0.8% dealing fees.

Source: http://www.mineweb.com/mineweb/view/mineweb/en/page103855?oid=128639&sn=Detail&pid=102055

China Gold Demand Seen Rising Over 22% In Three Years

INTERNATIONAL. Chinese gold demand could rise over 22% in the next three years and sharply outpace domestic production, the head of the country's largest state-owned gold miner China National Gold Group said on Thursday, signalling room for a strong ramp up in imports.

Gold production should reach 400 tonnes by 2014, a gain of nearly 19% from 2010, but consumption is set to grow by nearly a quarter to 700 tonnes, Sun Zhaoxue, president of the group, told reporters at the sidelines of a conference in Shanghai.

"I'm very optimistic about the future of China's gold market," Sun said.

China produced 340 tonnes of gold in 2010 and investors locally bought 571.5 tonnes, according to official data, for a gap of 231.5 tonnes made up by either imports or sales of existing stocks.

The proportion of imports is not available because China doesn't regularly publish gold-trade figures and rarely comments on its reserves.

China has seen a spike in demand for gold and silver since late last year as investors looked to precious metals over stocks, property and savings.

India remains the world's largest gold buyer, but China is closing in and from a low base with room to grow quickly as income rise, Sun said, noting gold buying per capita stood at just 4 grams, much lower than other industrialised nations.

In April, Shanghai Gold Exchange, China's only specialty precious metals exchange, started a trial for over-the-counter trading, providing an easier tool for institutional clients to trade large quantities of gold.

Sun said Beijing's move to consolidate the gold mining sector, improve technology and encourage exploration at depths exceeding 1,000 metres would combine to boost the country's underground reserves and output over the coming years.

China's gold output in the first three months of 2011 totalled 73.4 tonnes, up 4.6% from the same months of 2010, the Ministry of Industry and Information Technology said.

Gold's decade-long price rally could take the metal above US$1,600 an ounce by year-end, metals consultancy GFMS said in a widely anticipated industry report as investors' appetite for gold sharpens further.

Separately, Sun said the group was still considering whether to inject its copper assets into its Shanghai-listed China Zhongjin Gold .

"Some don't support the idea of an injection. We are the fifth-largest copper producer in China and they think it may be better to spin off our copper assets," Sun said, adding the firm was also in talks with regulators on the subject.

Source: http://www.bi-me.com/main.php?id=52829&t=1&c=35&cg=4&mset=1011

What Happens To Gold If The Dollar Collapses As The U.N. Suggests?

Now the U.N. warns of dollar collapse. If it happens how ill it materialise and what would it mean for the price of gold?

Author: Julian Phillips

BENONI  - 

Last week the U.N. warned of a possible collapse of the US dollar - if its value against other currencies continues to decline. The U.N. mid-year review of the world economy did not get extensive coverage. Their economic division said that a crisis of confidence in the dollar, stemming from the falling value of foreign dollar holdings, would imperil the global financial system. This trend had recently been driven by interest rate differentials between the U.S. and other major economies and growing concern about the sustainability of the U.S. public debt, half of which is held by foreigners including the Chinese government.  

There is a real sense of both desperation and denial about the debt crisis and the global nature of the debt crisis. On Friday Moody's threatened the U.S. with a downgrade if the ‘ceiling' is not raised by mid-July. Bad labor figures made QE 3 more of a possibility and we see a continued slowdown in the developed world economies.

The solution of creating more public debt to cure a private debt crisis will be seen as a blunder and will likely lead to greater financial and economic woes. Part of the solution will be to utilize gold in the monetary system in hopes that it will support and shore-up the monetary system. What else is there that is trusted globally?

Is the U.N. economic division incompetent? Are their opinions of little consequence?

The statement they made is huge. A collapse of the US dollar! Maybe the news is too much for the media and the world to cope? Maybe we're in denial. "So far, so good!" said the man who fell off the 50-storey building, as he passed the 12^th floor...

Importance of the US Dollar

The US dollar replaced gold as the fulcrum of the global money systems of the world in 1971 at a time when its value was falling alongside the British pound. It was accepted back then because it was tied to the oil price.   This made the US dollar indispensable. If you used oil you needed the dollar to pay for it. You had to convert every other currency to get oil. Everyone sold it in the US dollar.

Moreover, the U.S. persuaded Europe (at the time led by President Charles de Gaulle) to stop converting their dollars into gold and accept them as vital currency. The link to oil forced their hand. The dollar had no other virtues at the time, and so that ingredient changed their thinking.  

We had thought many times that the oil producers themselves would have broken the link as the dollar's reputation floundered. But they all realized that their country's power was, in a way, permitted by the kind permission of the U.S. -as we saw in Kuwait, then in Iraq and no doubt, by extension in Libya. The U.S. guarantee of security has made them putty in U.S. hands.

Even O.P.E.C. realizes that things are changing and their oil is all they have. Middle Eastern oil producers discussed setting up a Persian Gulf currency the year before last, but nothing has come of it. There will most likely be no Gulf currency unless monetary chaos ensues. If the dollar collapses, their incomes will collapse with it, and in turn their power base. They mostly likely have a plan B. Until then they will keep oil prices in the US dollar and raise them as the dollar falls.  

Russia is another kettle of fish. They are not part of O.P.E.C. and will accept the Yuan in payment of their oil as well as the dollar. Iran is fearful, but independent of the U.S. and has discarded all their dollar reserves as well as priced their oil in Euros. But the rest of O.P.E.C. will keep their oil priced in the dollar.  

Since the oil price fell back to $35 in the credit crunch, they have demonstrated that they can manage the oil price. For the last year we've seen the price of oil more than compensate for the fall in the US dollar. Right now it is holding the $100 level up from $80 last year, countering the fall in the dollar against hard currencies. As a result the oil price has been steady in the euro.

Now that the U.S. consumer (and the U.S. recovery) is faltering we hear loud calls for increased oil supplies.   This would drop the oil price, but be unacceptable to O.P.E.C. The U.S. government will accept higher oil prices because of the importance of the $:oil link.

It looked as though the world was stuck with the US dollar until two new elements emerged to change the picture...

Mismanagement of the US Dollar

Apart from U.S. gold reserves, there are only a small amount of currencies to protect the U.S. if the dollar were to become unacceptable for international payment. U.S. foreign exchange reserves are structured so that the dollar is the only global reserve currency. It's rather like the use of English in the world. Why learn another language when English is the globally-accepted language? To date foreigners have had to accept the dollars because there is no viable alternative.   If the States needs more they print more.  

Because of its connection with oil, the dollar will be used until other nations can pay oil producers in other currencies, and if that occurs then usage of the dollar will shrink considerably. Furthermore, The U.S. balance of payments developed this perpetual trade deficit, a form of tribute exacted from the rest of the world. Over the last forty to fifty years, this has worked well as developing countries use the dollar to promote growth. It would work even better if the management of the dollar were handled with its global reserve status in mind and not the U.S. economic situation as the priority. Who cares the world boomed over the last half century?

Once dollar issuance increased to fund imports -as well as to counter the credit crunch-global economic interests were subject to the health and integrity of the U.S. economy. From the day the euro was first issued in 1999 until now we have seen a 46% decline in the value of the dollar against the euro alone. The rest of the world cannot afford to allow the U.S. to continue to take advantage of the world. Still worse, the government deficit in the U.S. has ensured that they are getting increasingly reliant on the reinvestment of foreign (mainly Asian and oil-producing nations) surpluses into the U.S. for its solvency.  

Now the U.S. is facing a downturn and is heavily extended on the credit front. Nations are closer to making changes to the currency hierarchy in hopes they can overcome a potential dollar collapse. There is a point when actions against the dollar will be precipitous. The poor, Friday labor report has us watching the dollar fall and points to levels beyond €1: $1.50.

Holders of dollars have to act in the interests of retaining the value of their reserves. This can mean supporting the dollar on foreign exchanges or it can mean selling the dollars for assets, resources and other foreign currencies. At some point, it will mean not accepting the dollar in payment of foreign goods. It is only a matter of time for the dollar to be removed from its pole position, where it is already causing so much volatility and damage to profits.

The biggest potential damage that could blindside the dollar is a switch by Asian nations from pricing their products in the U.S. dollar to the Yuan or other currencies. This is so they stop accumulating dollars; however, they still need it for as long as oil is being sold in the dollar.  

This position can only be changed if oil producers (other than O.P.E.C.) accept currencies other than the dollar. These changes are needed now, but they will not come until the damage to the dollar's value can be ‘contained' by the surplus holders. China is already using Roubles and the Yuan to pay Russia for oil and the day may not be far off when Europe does the same. If O.P.E.C. felt the pain of a dollar collapse (or even excessive inflation inside the U.S.) it might accept other currencies from buyers (U.S. excluded). O.P.E.C. cannot continue raising the dollar oil price because of the outcry it would cause in the U.S.   

THE EMERGENCE OF ASIA

U.S. global wealth and power is on the decline. China is the world's second largest global economy. If the current rate of development is sustained it is only a matter of time before China becomes the world's largest -before the Yuan becomes the world's reserve currency. It is only a matter of time before nations will need Yuan in their reserves to pay for Chinese imports.  

Part of the emergence of Asia is the replacement of the dollar in global trade. The only dollars reserved are to pay for U.S. goods and oil. When other currencies are used in place of the dollar, the purchasing power of the US dollar will decline. This is happening fast!

There is nothing to convince us that the will stop declining. From now until then, the gold price will move in the opposite direction.

Julian Phillips is a long time specialist analyst of the gold and silver markets and is the principal contributor to the Gold Forecaster -www.goldforecaster.com - and Silver Forecaster- www.silverforecaster.com - websites and newsletters

Source: http://www.mineweb.com/mineweb/view/mineweb/en/page103855?oid=128795&sn=Detail&pid=102055