2ndlook

Gold drops over $77, posts monthly loss

Posted in Current Affairs, Gold Reserves by Anuraag Sanghi on March 1, 2012


As gold prices recovered from December lows, to 3-month highs, there was ‘news’ that ‘someone’ dumped some gold. No surprise.

On February 29th, 2012

Gold advanced to a three-month high and silver posted its biggest gain in eight weeks as investors bought precious metals as an alternative to a weakening dollar. Platinum and palladium also rose.

Gold futures for April delivery advanced 0.8 percent to settle at $1,788.40 an ounce at 1:30 p.m. on the Comex in New York, after climbing to $1,792.70, the highest level for a most- active contract since Nov. 14.

Prices are up 14 percent this year after a 10 percent increase in 2011, the 11th consecutive annual gain, as investors sought to diversify from equities and some currencies. The dollar index has declined 1.2 percent this month while gold advanced 2.8 percent. (via Gold Leads Precious Metals Rally on Investor Demand for Dollar Alternative – Bloomberg).

And the next day, on March 1st, 2012

Gold fell 5% to below $1,690 an ounce on Wednesday for its biggest one-day drop in more than three years.

Gold fell nearly $100 and silver was down $3 from session highs. Losses started to snowball at (2030 IST).

Trading volume exploded when speculation about an unusually large sell-order ran rampant. Option traders said funds were heavy buyers of puts to protect against further losses.

Wednesday’s sell-off wiped out gold’s gains from earlier in February, and the metal ended the month with a 2.5% loss for its second decline in three months.

Earlier in the session, bullion touched a 3-1/2 month high at $1,790.30 after the European Central Bank completed offering cheap loans worth over half a trillion euros to banks.

Spot gold fell below its 150-day moving average for the first time in a month.

Analysts said the next important resistance level is $1,650 an ounce, where the metal found support during its last sell-off in late January.

Funds were heavy buyers of December $1,500 put options as some looked to profit and others tried to protect further downside risks in futures, said Jonathan Jossen, a COMEX gold options floor trader. (via Nymex gold down 5%, biggest 1-day drop in 3 yrs).

It was said that

in afternoon dealings, gold was also hit “by a large sell order on Comex, said to have been 1 million ounces (or 31 tonnes) prompted by the Bernanke testimony,” said Ross Norman, chief executive officer at London-based bullion broker Sharps Pixley. (via Gold drops over $77, posts monthly loss – Metals Stocks – MarketWatch).

Mainstream press manufactured some explanation.

Financial journalists were quick to talk about the “disappointment” that Bernanke didn’t discuss detailed plans for QE3, but that doesn’t make much sense. This bullish pattern was not unfolding merely on speculation that QE3 was imminent. There just really wasn’t anything all that remarkable from the Fed chairman on Wednesday, and certainly nothing to trigger this type of sell-off.

The Wall Street Journal ran a story called “Market Roiling Trade Likely Not ‘Fat-Finger’ Error” that discussed how an order to sell 100,000 treasury futures hit the market just minutes after Bernanke started speaking. This could have caused a cascade effect that knocked other algorithmic and high-frequency trading platforms into chaos, including programs linked to currencies, and therefore, to gold.

There was also a rumor that JP Morgan sold — shorted? — a million ounces of gold all at once for an Asian fund, which is 10,000 futures contracts. That is a HUGE order, and that kind of size just cannot be readily absorbed by the gold market. I’m not a gold conspiracy theorist, but it does make you wonder after this type of sudden drop.

One of the really interesting things about Wednesday was how the carnage was for the most part limited to gold and silver. (via Fractal Gold Report: Flash Crash).

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Why are gold prices going down?

Posted in America, Business, Gold Reserves, politics by Anuraag Sanghi on December 18, 2011

The story behind the gut-wrenching US$300 drop in gold prices.

Many ways to skin a cat

Under the guise of ‘modern’ economics, some fundamental truths have not been remembered, over the last 50 years. Importance of gold in the world monetary system is one of these ‘forgotten’ truths.

This has damped down gold prices – and printing presses have been busy printing money. Especially in the last 40 years – after the Nixon Chop.

24 hour coverage of financial markets has also created an impression that financial cycles play out in a matter of hours and days. So also, the the drop in gold prices of the last two weeks.

Many people have been puzzled over the last few months by gold’s (GC2G -0.19%) behavior. It has tumbled since the start of September from around $1,900 an ounce to below $1,600. This has happened even while a financial crisis has erupted in Europe which, says traditional analysis, should be bullish for gold.

But there are a couple of other factors at play.

First: Gold hasn’t fallen as far as it looks. The gold price is typically quoted in U.S. dollars. Yet in the past four months the dollar has rallied.

At the start of September, when gold touched $1,900 an ounce, the dollar was $1.45 to the euro. Since then the euro has slumped to $1.30.

Net result? Gold, which traded at around 1,300 euros per ounce back then, has declined to 1,200 euros per ounce now.

The second factor: Sentiment.

Four months ago, sentiment was massively bullish on gold. It had just skyrocketed, in the wake of the U.S. debt ceiling debacle. According to data published by the Commodities and Futures Trading Commission, speculators and traders had taken nearly record speculative bets that it would rise further.

This usually precedes a backlash, and so it has been.

Today? Sentiment is pretty bearish. The CFTC says the number of speculative bets on higher gold have collapsed by more than a third. (via Will the Europeans have to sell their gold? – Portfolio Insights by Brett Arends – MarketWatch).

A bump on the road

The first 15 days of December, 2011, has seen weakness in gold prices – falling from roughly US$1900 to US$1600. The biggest drop, after ‘gold dropped 25 percent in the fall of 2008 — from over $1,000 an ounce to about $750’. Broad parameters of the situation were similar then – as now.

In 2008, the US economy was tanking, and gold was at psychological barrier of US$1000. This time around gold is at US$2000 psychological mark. And it is feared that the Euro-zone may collapse.

“The worst case scenario (a euro zone break-up) was pretty much ridiculous a year ago but it is now becoming more and more possible, to say the least,” Juan Valencia, credit analyst at Societe Generale, said.

This time around

So, what are the specifics now.

First are the European banks. It is reported

banks face about 320 billion euros in senior and government guaranteed debt redemptions next year. By comparison, they had issued just 12 billion euros of debt in the past six months.

With no solution to the euro zone debt crisis in sight, interbank market players say they are reducing credit lines to an ever increasing number of banks.

“It is utter madness … When we see big names paying 300 basis points over overnight rates for dollars you know something is wrong,” said the head of money markets at a bank in London, who asked not to be named.

“Credit lines have already been reduced, we are seeing the big names paying through the nose for cash from corporates as wholesale is pretty much dead. The focus now is for the core banks to raise cash through the retail/corporate space. Central banks may be called upon.”

French banks’ borrowing from the ECB topped 100 billion euros in the maintenance period ending November 8, compared to 87 billion euros the month before. French banks are more exposed than any those of any other euro zone country to Italian, Spanish and Greek debt, with holdings in excess of 600 billion euros, according to Bank for International Settlements data.

Of the contributors to daily Libor rates, French banks BNP Paribas, Credit Agricole and Societe Generale say they pay the most for three-month dollars, around 0.6 percent. But dollar rates have recently been on the rise for other core country banks as well.

In such an environment liquidity is at a premium. Some investors are even taking money out of banks and paying to keep it in short-term German or Dutch government paper, which is trading with negative yields.

Where has all that yellow stuff gone? Buried under a mound of silence? | Cartoonist - Dave Simonds on 18-6-2011 in guim.co.uk | Click for larger image.

Where has all that yellow stuff gone? Buried under a mound of silence? | Cartoonist – Dave Simonds on 18-6-2011 in guim.co.uk | Click for larger image.

Where is gold coming from

Negative yield brings us to another grey area.

Gold lending at negative rates. Europe has an organized market where gold owners can lend gold to borrowers – at rates varying between 0.5% to 2%. There are ominous whisper-reports.

The partnership between the Federal Reserve and European Central Bank to provide hundreds of billions of relatively low-cost dollars for euro-area banks should have relieved the pressure to come up with greenbacks. Yet gold market people say European commercial banks are being driven to lend gold for dollars at negative interest rates just to raise some extra cash for a few weeks. There’s not a lot of transparency about where the banks are getting the gold they are lending out, but it could be lent to them by either their national central banks or by gold exchange-traded funds.

There is also a third source of gold that is being lent in the market.  Gold that does not belong to any European Governments or to any ETF.

But obtained from deposed Middle East rulers of Egypt, Tunisia, and Libya.

Cash is king

Regardless of the source of gold, the cash situation at European banks remains a trigger for this gold sell-off.

The need for cash has overwhelmed gold’s traditional status as a safe haven in past few months, putting the metal on course for its first quarterly fall since end-September 2008 when the global credit crunch was at its worst.

“With access to liquidity being constrained, market participants have increasing problems to refinance,” Credit Suisse said in a research note. “As a result they have to sell their assets – including precious metals – to raise the much needed cash. This is the main reason why gold prices fall on days of increasing funding stress.”

This has obviously raised concerns in the Asian markets – the main buyers of gold. This extra supply of gold from European banks has led to a sell-off – led by Asian markets.

In recent weeks the gold price has fallen significantly from around $1900 to $1535 (intraday). Gold is now trading near Q3 target of $1650. The size of the move was far more significant compared to other recent unwinds, like those in May or August. One of the key factors for  long-term bullish view on gold is Asian demand – the majority of end-user demand for gold is from Asia. From an Asian valuation perspective, gold is also relatively cheap.

One way to proxy Asian demand for gold is to look at how gold performs during Asian trade. Over the past few years, gold has generally appreciated during Asian hours, reflecting strong demand for the metal. However, recent weeks have shown weakness in Asian hours. On previous occasions when gold traded poorly, such as in May and August, it remained relatively robust during Asian hours, with any sell-off tending to come in London and New York hours, suggesting that Asian investors were supporting an unwind of Western investors’ long gold positions.

This contrasts with the recent fall, noticeable across multiple time zones. In the very short term, we believe a reversal would need to be led by appreciation in Asia. Although a few data points do not constitute a trend, on Tuesday and Thursday gold rose by 2%, its largest moves higher during Asian hours since October 2008 and perhaps a signal that it could be turning back up.

Gold often trades like a risky asset. This has been evident in recent weeks where we have seen a strong positive correlation between gold and the S&P500, which we use as a proxy for risky assets. The rationale is that heavy losses in risky assets forces investors to unwind other positions to free up cash. As a liquid asset and also with heavily extended net long speculative positioning heading into this episode, gold has suffered.

The price-drop also generated sell-orders based on stop-loss triggers at US$1700. For the time being the stampede has abated. Asian markets were at the forefront of some investment demand.

Gold rebounded in thin trading during the Asian session Friday, paring some of this week’s losses with traders expecting gains to hold in the near-term with some dip buying likely amid a modest bounce in stock markets.  The yellow metal rose more than 1% in the session to a high of $1,589.90 a troy ounce after falling for four consecutive days this week.

A Hong Kong-based trader said there is some investment demand, which is driving up prices. Some speculators have also returned to the market after prices fell sharply this week.  Despite the slight improvement in sentiment, however, investors continued to be wary of the European sovereign debt crisis.

There is hardly any dissonance between various reports – which supports a belief that this may have a momentary technical correction before gold breaks the US$2000 per ounce barrier. In a year, where most asset classes have performed badly and market volatility took away whatever little was left on the table, fund managers may have locked in their profits on gold for the year. Remember, this is also the time of the year, when bonuses get calculated. The long-term fundamentals of the gold remain beyond argument.

Even in the short-term, this maybe a buying-opportunity one may regret having missed.

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Mystery of the missing Russian gold

Posted in Business, Current Affairs, European History, Gold Reserves, History, India, politics by Anuraag Sanghi on January 18, 2010

As the Soviet Empire crashed

In November 1991, the head of Gosbank the Central Bank of USSR, Viktor Geraschenko confirmed that USSR had less than 400 tons of gold reserves – and not the 1000-1500 tons as estimated. Russia, which has been one of the world’s Top 10 gold producers for the last 100 years, to have a paltry less than 400 tons of gold as reserves created a flutter in the IMF, World Bank, and the Western world. Where did this ‘estimated’ 1000 ‘extra’ gold go?

The declared gold reserves of Gosbank in mid-1937 were 374.6 tons. No additions were made after that, and the reserves were turned over to the People’s Commisariat of Finance. The size of of the reserve had been kept secret since the late 1930s. Geraschenko wrote to Gorbachev on November 15, 1991: “It was reported in October of this year that the official gold reserves of the country are only 240 tons. The declared level of official gold reserves, which is one of the most important indicators of a country’s solvency, is not commensurate with the status of a superpower and leading gold producer, according to experts. Reports of the size of the USSR gold created confusion among specialist on the gold market, who had previously estimated them to be 1,000-1,300 tons”. (via Collapse of an empire: lessons for modern Russia By Egor Timurovich Gaĭdar, page 238).

A preachy and superior writer about the Soviet implosion

A preachy and superior writer on the Soviet implosion

After Gorbachev’s ‘perestroika’ and ‘glasnost’, as the Russian economy was loosening the grip of the CCCP, the Russian Central Bank set-up an

“offshore firm, Financial Management Co., known as Fimaco, based in Jersey, the Channel Islands, to handle Russia’s foreign currency reserves. By one estimate, the offshore fund managed $37 billion between 1993 and 1998. The firm was a subsidiary of Eurobank of Paris, which is 78 percent owned by the Central Bank.”

The Washington Post revealed in another report how Russia,

funneled billions of dollars in Russia’s hard currency reserves through… Fimaco … Documents disclosed by The Washington Post showed that some of the money was then pumped back into Russia’s high-flying government bond market in 1996, in the months before President Boris Yeltsin’s reelection.

One of the few journals to get this story right was Businessweek – based ‘on-the-ground’ whispers.

Managing the Russian Central Bank during the mayhem

Described by Jeffery Sachs, repeated many times by Western bankers, as “the worst banker in the world”, Viktor Gerashchenko was chairman of the Russian Central Bank. Twice: the first time from 1992 to 1994, and the second time was after the default crisis of 1998 – upto 2002; resigning after “expressing opposition to proposed legislation that aimed to make the Central Bank subordinate to a new government led body, The National Banking Council.”

Without any conspiracy theories

For Russia, as one of the Top 10 producers of gold, to have 1000-1500 tons of gold would not be excessive. But between 1971, after the Nixon Chop, in little time, dollar value depreciated from US$35 per ounce of gold to US$800 in 1980. Over the next 20 years, through various clandestine methods (check out the Edmond Safra and the Yamashita stories below), gold prices were ‘managed’ and brought down to US$225 per ounce. Co-incidentally, along with oil prices. This reduction in gold and oil prices simultaneously, severely undermined the health of USSR’s economy – these two being the most valuable ‘hard currency’ exports from USSR.

A simple explanation may be that the central bankers of the erstwhile USSR used a lot of that gold to ‘support’ alliances. Much in the manner of the USA, which does the same with its USCAP system. To this add the possibility that Soviet apparatchiks did not want to divvy up Soviet gold with members of the CIS and the subsequent splinter countries of the USSR, or lose it to ‘impatient’ and ‘opportunistic’ Western creditors.

This ‘unexplained’ reduction in gold reserves, was done according to Gosbank head, Gerashchenko, to “to avoid the seizure of assets during talks with foreign governments and private creditors on the restructuring of Moscow’s Soviet-era debts.” Russian authorities also “questioned the $50 billion figure reported by Skuratov. They said $1.4 billion was the most FIMACO ever managed at one time, in 1994”. After his stint at Gosbank, Geraschenko became chairman of the Yukos board. Yukos is the company that belonged to the jailed billionaire, Mikhail B. Khodorkovsky.

La Leopolda at Villefranche sur Mer, France, the former home of King Leopold, Gianni Agnelli and Edmond Safra.

La Leopolda at Villefranche sur Mer, France, the former home of King Leopold, Gianni Agnelli and Edmond Safra.

Death Of Edmond Safra

Friday. December 3rd, 1999. TV channels (in India too) announced that Edmond Safra died in mysterious circumstances – at his villa in Monaco.

Based out of Monaco, a known off shore finance centre, Edmond Safra was reputed to have been in the know and arranged numerous gold dealings. His claim to fame was to ‘arrange’ the evacuation of Sephardic Jews, with their wealth from various West-Asian and Middle East countries between the 1920-1960s. He was ‘whispered’ to be behind the George Soros run-in with the Bank Of England gold sale and physical delivery.

The US FBI was conducting investigations about money laundering through Safra’s bank by the Russian ‘mafiya’, based on information given by Edmond Safra. Behind many of these money transfer and manipulation operations through Safra’s Bank, was the Russian ‘mafiya’ – and lubricating these transactions, were hundreds of tons of Russian-Soviet gold. Sold through Edmond Safra? Was it this investigation or a ‘double-cross’, that triggered Safra’s killing?

At the time of Edmond Safra’s death, he was negotiating the sale of his bank to The Hong Kong & Shanghai Banking Corporation.

Yamashita Gold – Underground gold from Japan

Korea claims that Japan plundered Korea of hundreds of tons of gold from 1937-1944. Philipines, Indonesia have all raised claims against Japan for war time gold loot.

Regardless, one American writer had definitely hit a jackpot – Gold Warriors: America’s Secret Recovery of Yamashita’s Gold (By Sterling Seagrave, Peggy Seagrave). Ian Fleming is supposed to have based his story on the Yamashita chapter of WW2.

Japan’s top underworld crime boss, Taisho (Admiral) Yoshio Kodama, (ranked as an admiral at 34 years) a major figure in the Japanese underworld was in charge of Project “Golden Lilly” – after one of Hirohito’s poems! Objective – looting gangsters in Japanese occupied territories. Supervising the operations was Emperor’s Hirohito’s brother, Prince Chicubi. Management – Japan’s top financial figures.

Central Bank - Gold Sales
Central Bank – Gold Sales

Subsequently, allegedly, a lot of this gold landed with Ferdinand Marcos; the Filipino dictator. Swiss banks, Macao criminals, American generals and politicians – all involved.

Glen Yeadon, writer of “The Nazi Hydra in America: Suppressed History of a Century” writes how Presscott Bush (grand-father of George Bush), Douglas MacArthur were involved in various launderings, diversions and subterfuge involving Nazi gold and Japanese gold after WW2.

After the Japanese surrender, Tomoyuki Yamashita, was tried by a kangaroo court, convicted of vague crimes and hung to death – which added to the rumours of Yamashita’s gold.

Recovery of Boticelli’s Venus

Sandro Botticelli’s Venus Rising, a ‘priceless’ renaissance period painting, now in the Ufizzi gallery, stolen and hidden, was ‘discovered’ by Indian soldiers, during WWII. This ‘discovery’ of Botticelli’s Venus was a highlight of the mopping up operations – and the role of the Indians soldiers has been wiped clean. No book review of a hagiographic account, The Venus Fixers: The Remarkable Story of the Allied Soldiers Who Saved Italy’s Art During World War II By Ilaria Dagnini Brey mentions this contribution by Indian soldiers. I wonder what would have happened if ‘others’ had found this painting. Blame the Nazis for the loot! The painting would never have been recovered, I presume!

Central Bank Gold Sales

Between 1999-2009, European Central Banks have sold more than 4000 tons of gold under the Central Bank Gold Agreement (CBGA).

Switzerland, which had held the most gold reserves per capita in Europe in 1999, has sold more than 1,300 tons of its gold reserves. Other major sellers in the past 10 years included France, the Netherlands, and the U.K.

Countries like France, where monetary policy is now set by the European Central Bank, still maintains its own central bank. The U.S. hasn’t sold gold.

In the past, abrupt selling has sometimes depressed gold prices. The Bank of England’s announcement in early 1999 that it was selling part of its reserves helped gold prices slump to a 20-year low. Gold traded at just above $250 an ounce by the summer of that year.

But efforts to coordinate those sales have reduced those shocks. On Sept. 26, 1999, 15 European central banks, led by the ECB, signed the first CBGA to take concerted moves on gold sales.

The banks agreed that in a five-year period, they will cap their total gold sales at around 400 tons a year, with sales in five years not exceeding 2,000 tons. The CBGA was renewed in 2004 for another five-year period. The second CBGA raised annual ceiling to 500 tons and the five-year limit to 2,500 tons.

The interesting bit was where did the European Central Banks get so much gold from! Was it the various gold hoards, that had disappeared from 1900-200o, making a re-appearance!

For long, these calls for accountability from ‘conspiracy theorists’ have been ignored. The good news. These ‘conspiracy theorists’ have not been able to locate any more of such extra sources of gold, which may disturb the market in the next few years.

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Gold and currencies outlook

Posted in Business, Current Affairs, European History, Gold Reserves, India, politics by Anuraag Sanghi on January 16, 2010
Gold /Silver /Oil and the BSE-Sensex Co-relation - How will this pan out?

Gold /Silver /Oil and the BSE-Sensex Co-relation - How will this pan out?

Gold scenario for this year

With gold prices at a historic high, the future trend of gold price is the question on everybody’s mind. There are a few wrinkles which make the future of gold price a complex subject. Gold prices in the coming 1-3 years, may not be a open-and-shut case. Lending stability to gold prices are the following six factors.

  1. IMF gold sales – IMF has some 3000 tons of gold – of which,  some 400 tons have been earmarked for sale. 200 tons has been bought by RBI and another 20 tons by sundry central banks of Sri Lanka, Mauritius, etc. Leaving less than 200 tons on the table. RBI claims that they have put in a bid for the rest also – and the decision on that will be taken soon. Thus, any downward pressure on gold prices due to IMF sale is unlikely.
  2. Central Bank gold sales – Various European banks have been selling gold from their ‘reserves’ on the open market, over the last ten years. Not much is left from that quota. No downward pressure from this quarter also.
  3. Chinese Yuan appreciation – The whisper on the street is that the Chinese yuan may see 10%-15% appreciation in the next 4-8 months. This may trigger a re-balancing of the global currency equations, making the dollar weaker in narrow range. This may lead to a welcome lowering of the US trade deficit – which will strengthen the dollar, against non-yuan currency. And re-create some confidence in the US dollar.
  4. Indian business outlook – Yuan appreciation will end up making the Indian export sector, specifically and corporate sector generally, more profitable. An increase in merchandise export seems unlikely. Improvement in profitability will attract dollar inflows into India for investment in Indian stock markets; increasing liquidity in India, decreasing interest rates and mildly strengthening the rupee.
  5. Double whammy – A strengthening rupee and a stronger dollar is likely to further put downward pressure on gold prices. For the first time in many years, India has slipped to number two position (by a minor ten tons) as the largest gold ‘consumer.’ Accompanied by the drumbeat of official media, Chinese consumers have been encouraged to buy gold – and comparisons to India are being freely made.

    6. “Even if it’s sold at a market price, we should still buy,” counters Xia Bin, head of a key Beijing think tank advising the State Council cabinet (and also making plain that this is his personal view).

    “India’s okay with it, why shouldn’t we be? What’s the use for so many dollars, whose purchasing power is weakening anyway? With so many foreign reserves in hand, I think China should buy, without doubt.”

  6. Gold value is 10% of Indian capital stock – Keep in mind that India is a US$1 trillion economy and India’s 25,000 tons of private gold reserves @Rs.18,000 per tola and Rs./USS$ rate @Rs.45 to dollar converts to US$ 1 trillion also. Adopting a return on capital employed @ 10%, implies total capitalization of the Indian population at US$10 trillion. And gold forms 10% of that capital. Is this an equilibrium in India. From here on, Indian gold demand may well be damped.
What about the Eagle's loot?
What about the Eagle’s loot?

One tremor is all

What can trigger a fresh upward burst in gold prices, can be any of the following events.

One tremor, in the market, on any of these triggers, will set off another stampede towards gold.

Depending on the event, the next breather gold may then take will possibly be at US$1800 (ounce)/ INR25,000 (tola).

As the last one year unfolded, the Citi, GM, rescue plans, have strained the US Treasury. The next upheaval may be sovereign debt.

How can Greece, Spain or the UK unravel the EU

Greece, Iceland, Ireland, Spain, UK et al are tethering at the brink. If they regain their balance, world economic outlook may give reasons for optimism – and for gold prices to take a breather. To avoid a default by Greece, Spain or UK, the ECB may need to extend some really big sums of money.

What makes these five cases specially worrisome, is the near-absence of manufacturing and industrial output in these countries. Unlike France, Germany or Italy. This may make EU-member countries balk at extending lines of credit, sovereign guarantees, underwriting of new loans, interest /capital waivers, rescheduling of debts, rollovers – the works.

Defaults by any or all names. Without credit lines, loans, underwriting, guarantees to these on-the-edge countries, may set off an exodus or a break-up of the EU.

Can Russia and China become a problem?

Russia has seen a major drop in export income, due to crash in oil and raw material prices. Yuan appreciation in the China could the other trigger. But these two scenarios may take 2-5 years to play out. These may not be the reasons for the immediate run-up on gold prices.

But to get a real perspective on how changes in gold prices can happen, the Soviet Gold saga is worth looking at.

“Even if it’s sold at a market price, we should still buy,” counters Xia Bin, head of a key Beijing think tank advising the State Council cabinet (and also making plain that this is his personal view).

“India’s okay with it, why shouldn’t we be? What’s the use for so many dollars, whose purchasing power is weakening anyway? With so many foreign reserves in hand, I think China should buy, without doubt.”

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The Third Currency Option – Junk the Dollar and the Euro

Posted in Business, Current Affairs, Environment, European History, Gold Reserves, History, Indo Pak Relations, Media, Uncategorized by Anuraag Sanghi on November 8, 2008

Europe’s Been Onto Something … While the US gently weeps

The EU region calling for a ‘G8 + India & China’ conference to thrash out this global monetary issue – and has been twisting the knife in the reluctant US side. The US has been dragging its feet. While the EU has been going gung-ho on this, the US has been floating many trial balloons.

Warren Buffet, Paul Volcker and Lawrence Summers have been co-opted by the President-elect of the US – Barack Obama. There has been talk of a manipulation in bullion prices – which may be required for re-anchoring currencies. Interesting deals – considered impossible till a few years, are being done in a tearing hurry.

Europe would obviously like to break the dollar hegemony – and muscle into the racket. They know the Third World-Russia-China are not prepared.

And what do Europeans want – some seats at the global regulatory table, to force US moneybags (for now) and others to seek approvals, which will come at a cost … or is it that the approvals will come at a price …

Which will solve no one’s problems … back to square one …

The US Gameplan

US analysts, led by Paul Krugman, have been calling for Barack Obama to emulate Roosevelt – who waded into WW2, with 25,000 tons of nationalized gold. If gold is nationalized, it may depress demand in the short term – giving rise to huge volatility in gold prices. But Warren Buffett has been on the silver bandwagon for a while – and that is making the gold-silver equation hazy. What if Warren Buffet becomes the new US Treasury Chief? There is the real risk of another fraud like the gold standard happening all over again.

The US has been making its moves – differently. Paul Krugman’s Nobel Prize is an indication of this. Will the US use Paul Krugman as the Keynes of the Bretton Woods. The background of Bretton Woods itself, is of course, something that the US and Europe do not want the world at large to know.

The financial stimulus plan hasn’t even a snow flakes chance in hell – as there are no targets left who can be funded. Industrial corporations are lip deep in debt. The housing sector is knackered. The tech sector has over capacity. No go, no show.

What Has Been India upto? Either … or …

India seems to completely lack direction on how to move independently in times like these. After, all why should India even look at IMF and World Bank – which are fig leaf organizations of the West, as transfer mechanisms of wealth from the Third World to the rich.

Interestingly, Manmohan Singh has done some huge work in the last 60 days – the nuclear deal with the USA and NSG, the IBSA Summit, the ASEAN free trade agreement – and now his three Asian nation visits. India’s Trade and Commerce Minister, Kamal Nath, has been talking about a multi-lateral set up. The UN was made to issue a statement on this. While the US has been resisting calls for action, busy doing post-mortem, Asia and Europe have been moving.

India is unlikely to get seriously affected by the current crisis – which is possibly creating complacency in India about what needs to be done.Or India is working on a different plan, of which we know nothing. After all, India does believe in moving steadily (even, if slowly).

Are we reading too much into this? At times, India has seemed clueless.

Russia and China – The DragoBear Dance

The big issue is of course, China and Russia. China has 2 trillion of US dollars – and what does China do with this? This crisis seems to have made the Chinese Premier shaky. Russia has come out from a default about a decade ago – with a nearly US$400 billion reserves – flexing its muscles in Georgia and dependent on a high oil prices. What happens to Russia if a new Pacific Republic (Cuba, Haiti, West Indies, etc) were to start drilling for oil? In 5 years, the world would be awash with oil – and Russia’s mineral earnings could evaporate.

So, the world may not trust China and Russia too much. Russia and China can be the party poopers – but they cannot be the life of the party. Russia and China as significant military powers as well as a part of P5, will want their pound of flesh. They will, of course, be afraid of being left out!

Among the P5, US and EU have their own reserve currencies – leaving Russia and China out in the open. Russia and China (as full P5 powers) will want a ‘lion’s share’ of influence in any new architecture. Which any Third World grouping will not give.

The US will not have them and the EU does not want them!

Stalemate.

Russia and China play blame-the-US game

The US has been evading transparency by not revealing M3 figures (on dubious grounds), printing money 24×7×365 and creating toxic assets. Now when the muck has hit the fan, they are acting coy. And this made the Chinese very angry.

China has alleged that the US has plundered the world – and is is now looking after its own. China alleges that the US is not bothered about the problems the US has created for other countries.

Late In the day, Mr.Hu … This is something that the world has been talking about for a long time. China has been a major supporter (and victim) of this scam – by allowing US companies unlimited access and support. Chinese citizens have been duped with low paying jobs at these enterprises.

Is China forgetting history … Mr.Hu – Today it is the US – but yesterday, it was Europe, Mr.Hu. Europe was blockaded by the US for the last 100 years – and hence, European loot is possibly forgotten in China. European loot was accompanied by a lot of bloodshed and killing also, Mr.Hu.

Has the Leopard Changed its spots Possibly, you dont know, Mr.Hu, because China has very little wildlife left. Leopards dont change their spots. Europe behaves today, because it has no options.

China is making common cause with EU over the dollar crisis. While Chinese disappointment is understandable, their actions are beyond comprehension. Just why will Europeans be bothered about Chinese welfare? Just look at their history!!

For that matter why in the world would anyone be interested in Chinese welfare – except the Chinese, of course. The Chinese Government is looking at all options – except Chinese welfare, unfortunately.

The answers A new currency floated by the five major economies who are most affected today – China, Russia, India, Brazil, South Africa. Maybe Japan will also join in. But, the answer, Mr.Hu is with these 5 – and not Europe.

OK … join the gang

Sometime back, Medvedev joined China in blaming the US. Now that the blame game is over, is it finished. Over. Satisfied with blaming the US, Mr.Medvedev.

Now what

Mr.Medvedev, now that you have blamed the US, are you better off. Apart from some (dubious) satisfaction, what else have you got.

Russia has a lot to feel bad about, I agree. US$400 billion is a lot of money – and to see it being printed out of existence, cannot be good. Sometime back China started the blame game – and now Russia has joined in. However, I am yet to see any constructive action. Especially from China and Russia.

Russia, China should join up with with Brazil, South Africa and India to present an alternative to the world community. With this grouping and backing, at least a 100 countries will sign up within 30 days.

Wakey, wakey, Mr.Medvedev. Let us get to work. Blaming the US gets us no where.

Japan + ASEAN

China-leaning Lee Kuan Yew with an Islamic Malaysia may not be very hot about ‘giving so much influence’ to a ‘new member’ like India for an ASEAN initiative. Any action which hurts the US, their largest market and patron, will be something that will make Japan and ASEAN hesitate. The very economic model of ASEAN + Japan is undervalued currency + exports to the USA. Hence, they will be wary of any initiative that affects the USA – and the West.

Status Quo …

And that is why South Africa and Brazil are essential for India. China and Russia must join in. The benefits are too obvious – and the fallout is non-existent!

The New 5 – Three Horsemen Of Apocalypse

The real action will be 5 countries – Russia and China on one hand – and India, South Africa and Brazil on the other.

The G3 (i.e. India, South Africa and Brazil) have functioning democracies, decent regulatory systems (which can be ramped up), the technology platforms, the trading systems, a vibrant entrepreneurial class – all of which is powering their economies forward. What they don’t have is P5 status – which is useful, though not essential.

This Washington meeting – Contours Of The Deal

During the con-fab, ‘committees will be set up’ which will create mechanisms for this management. The EU-USA-Asia may agree (for the time being) on a broad a global regulatory and oversight body to monitor and maintain oversight over a Dollar-Euro currency regime. Some of Asia may want to cling to this Dollar-Euro skirt.

But what the BRICS must work on is a Third reserve currency for the Third World.

The new currency may an Asian-Developing world currency. The big issue for the developing world will be obtaining assurances against predatory raids by the dollar bloc and the Euro-zone to dismantle any new system – like the alleged plot of 1997 Asian crisis.The lesser issues will also be inter-bank settlements, anchoring currencies (the role of gold or bullion).

Following is a 2ndlook at the how the Third currency option will work.

The Organization for the 3rd currency option

Q: Who will handle this currency?

A: The BRIX Reserve Organization will be a the global body which will manage the operations of the BRIX currency. This organization will have initially shareholding by the BRICS countries – equally.

Q: What will happen when new shareholders come in?

A: The promoter shareholders will (later) offer shareholding to other countries to the extent of minimum 1% of total capital and not exceeding 5%. The promoter countries will gradually reduce their shareholding proportionately and equally by inducting other shareholders or selling existing shareholding to new shareholders.

Q: What will be the capital contribution by member countries?

Member countries will contribute to capital equal to 4000 tons of gold (but not gold). Capital will be increased by addition of new members and/or existing members. In case of exchange rate fluctuations, exchange rate will be based on 90 days average. In case of any significant decline in exchange value, concerned member country to make good the shortfall in capital contribution or face shift in member status.

Q: What will be the role of gold in BRIX-BRO system?

A: All citizens of member countries will be allowed to own and trade in gold – within and outside the country during peacetime. In cases of national emergencies, countries may impose export restrictions for a limited defined period.

Governments will not be required to maintain any gold balances at all.

Q: What will be the role of BRO?

A: Firstly to provide and maintain Realtime Settlement System (RSS) – a on line, real time, trading platform – for all the national currencies of member banks and countries. Additionally, there can be ‘permitted’ currencies’ – like the Dollar and the Euro, for trading in non-member currencies.

The RSS will enable participating members will be allowed to nett off transactions.Th BRO will also approve ‘standard packages’ for over-the-counter (OTC) trading of derivative products.

Q: How will BRO make money?

A: The RSS will earn fees through transaction fees and earnings from float – which currently is used by the US and ECB. Individual countries based on trade and production patterns can expand or contract currency supply. Based on supply and demand for individual currency, the RSS will aid the price discovery and setting. National Central Banks will be able to borrow or lend BRIX through the BRO.

Q: Who will man the BRO?

A: Banking specialists will be deputed from (initially, founder) member countries in equal proportion at each level in the organization. Over a period of time, the BRO will build it own cadre of banking specialists – starting with entry level candidates.

The Currency

Q: What will the currency be called?

A: Initially, the start up name of the currency unit can be BRIX.

Q: How will the BRIX currency look like?

A: The BRIX currency will only exist in bank accounts. It will not be printed, circulated physically or stored in vaults.

Q: What will happen to current US$-Euro reserves?

A: Initially all dollar reserves will be used to facilitate trade between member and non-member countries. The BRO will maintain Dollar /Euro reserves equal to 3 months requirements for member countries. Excess dollar reserves of member countries will drawn down gradually over 12-36 months based on market developments.

Q: How will monetary expansion of the BRIX be handled?

A: All monetary expansion of the BRO will happen through trade volumes and capital infusions. The BRO cannot print, monetize, expand money supply.

The Mechanics and Operations

Q: How will exchange rates be determined?

A: Demand and supply for currencies will determine exchange rates. Output of products, services, will create supply and demand for various currencies.

Q: Who will be allowed to trade on the RSS?

A: National currencies will be traded on electronic platforms with accredited traders, backed by institutional settlement system, trade guarantee – based on demand and supply for various national currencies.

Member Benefits

Q: What changes will countries need to make?

A: Very few. All transactions must be linked to the index currency – the BRIX. No country will be required to change from their current currency system. As trades happen, a BRIX amount will be created. As the payout happens, that many BRIX will be extinguished.

Q: What reserve requirements will be imposed on member countries?

A: All countries will be required to maintain a reserve of 1 month’s BRIX usage with the BRO. This amount will earn interest rate at market determined rates.

Q: What happens when countries go through emergencies, catastrophes or calamities?

A: In case of extreme volatility in any currency due to currency /economic /natural disaster, the BRO Board of Governors may approve loans – which will be guaranteed by the donor central banks. Loans by BRO will at all times will be covered by guarantees.

The benefit of this that any country can raise loans from BRO by finding sponsors. Thus hegemony by a few powerful country will not be possible. Thus a small economy (like say) Iceland can raise a loan by finding a consortium of guarantor (say African) countries.

National central banks may guarantee ‘interest’ payments or ‘interest+principal’ amounts. In case of normal commercial loans, the principal and interest repayments can be a commercial credit decision by the BRO.

Q: How will countries maintain their foreign currency reserves?

A: Countries will need to maintain minimal BRIX reserves. BRIX will be fully convertible into other currencies. However, since all national currencies will be convertible, the need will be minimal.

Q: What will be the disclosures and information requirements?

A: BRO will collate, circulate and publish information given by all member Governments regarding M3, currency, etc.

Safety, Checks & Balances

Q: What will happen when a ‘rogue’ Government prints too much money?

A: Whenever, exchange rate volatility exceeds the prescribed bands, BRO will impose trade restrictions after due inquiry.

Q: What about predatory currency traders?

A: Since, BRIX cannot be bought except by creating business trade, there cannot be large holdings of BRIX which can be used for predatory activities. National currencies of member countries can be at risk if excessive monetization happens. But, since, trading in all currencies will happen continuously, excessive monetization will first come to light in terms of excess supply and deterioration in exchange rates.

Q: What about fake currency?

A: The BRO will have its own mint and currency printing units which will print currencies for member countries. This will ensure that mala fide, fake currency by foreign agencies, criminal elements will be eliminated. The BRO may also insist that weak economies print their currency at the BRO mint to ensure that there is transparency in money supply.

Q: What about trade in Government debt and securities?

A: All member countries will be required to intimate and route transactions of Government debt, securities through the RSS. This will ensure that there will be complete transparency in debt, M3, etc.

End game

With a BRICS grouping behind an initiative outlined above, a 100 countries will join this system within 30 days. Japan will defect – as will some poorer European countries. OPEC countries will dither – and then join. Singapore and Malaysia may also dither for some time – but will finally join. Most of Africa, South America and Asia will sign up.

With US$6 trillion amongst the BRICS, Japan, ASEAN and Africa, the Third currency Bloc can give a huge financial stimulus to the global economy. Poorer countries can jump start industrialization – and massive orders for high tech equipment can be placed with Japan, EU and USA to jump start their economies.

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