The Gold Price Is Not Discounting the Full $ Story
Source: Julian D.W. Phillips, Gold Forecaster - Global Watch††(11/30/07)
The foreign exchange markets are not solely about exchange rates. They are about values, smooth flowing of international trade, about trust and reliability. The sight of the $ falling over a long period of time, with bounces and recoveries that donít change the downward trend is far more than simply a drop in value!
The $ is steadily weakening, but more than a drop in the $í international value is happening here. The loss of confidence is in the $ is accelerating each time it slips one or more percent on a persistent basis, with small short recoveries being seen in the midst of this decline. How important is this loss of confidence? Critical for it precedes policies, which long-term will lessen the role of the $ to one of the worldís top 5 currencies. Growing surplus holders donít want to dump the $ for fear of losing value in the remaining ones in their portfolio, but donít think that a dumping of the $ is what it will take to remove it from the position of principal global currency. All realize that it is the knowledge of the declining value of the $ that will bring on a major toppling of that currency. So it is a choice of a steady Ďcontrolledí fall or a steep decline to disaster. To get perspective on the global scene what is the thinking out there?
➢ China & neighbors: - China's premier, Wen Jiabao has expressed concern at the decline in the $, of which they hold $1,430 billion which total is growing by the day. He said it was becoming difficult to manage these reserves, while their value was under unprecedented pressure. China has stockpiled £700bn worth of foreign currency, and has only to decide to slow its accumulation of the U.S.$ to weaken the currency further. Yes, Europe is now its top customer so it is acquiring the Ä at a rapid pace, but it has to lower the $í presence in their reserves. So, what can they do? All they can do is to speed up the spending of them on assets, other currencies and whatever else they can and as quickly as they can. The warning by the Premier was reinforced by a Chinese central bank vice-director, Xu Jian, who said the $ was "losing its status as the world currency". Korea's central bank has urged shipbuilders to issue invoices in the local currency and take precautions against the weakened $.
➢ The Middle East: - Kuwait, which cited imported inflation as the reason for its decision to drop the $ peg. The Dinar has gained 4.76% since the central bank switched to a currency basket. The Saudi Riyal rose to a 20-year high after the Fed cut rates on Sept. 18 and the Saudi Arabian Monetary Agency chose not to follow. This set off an appreciation of the Riyal from the time just after al- Suwaidi questioned of the United Arab Emirateís currency peg to the $. Saudi Arabia may be considering its first revaluation in 21 years to help bridge a divide with oil-producing neighbors worried about their pegs to the $. UAE Central Bank Governor Sultan Nasser al-Suweidi said last week he was under growing social and economic pressure to follow Kuwait's lead, although he would only act in concert with Saudi Arabia and three other states preparing for monetary union. Contracts to buy 12-months futures in the U.A.E. Dirham rose the most in at least 10 years this week after al-Suwaidi's comments, to trade at a 2.5% premium to the spot price. Businesses are complaining about rising costs and migrant construction workers rioted in Dubai this month to demand a pay rise to compensate for savings lost due to the $'s slide. The U.A.E. economy ministry said exchange-rate reform would be one of the ways of containing inflation driven by the dollar's slide, which was making some imports more expensive. OPEC's $6 billion development fund is hedging its exposure to the weakening $, Director-General Suleiman Jasir al-Herbish said this week. Last month the central bank of Iraq, four years after the United States invaded, stated that it wished to diversify reserves from a reliance on the U.S. $.
➢ Other O.P.E.C. nations: - Venezuela backed an Iranian proposal to add the group's concern over the falling $ to a summit declaration to be made today. Saudi Arabian Foreign Minister Prince Saud Al-Faisal said that no mention of the $ should be made in the declaration because he didn't want the U.S. currency to "collapse." Nigerian Finance Minister Shamsudeen Usman said last Friday that his country's laws has been changed to allow it to diversify its foreign reserves out of the $. Angola may shift its international reserves away from the $, Finance Minister Jose Pedro de Morais said. Angola has $10.2 billion of foreign-currency reserves. De Morais said around 80% of the reserves are in the U.S.$. Three of the world's big oil exporters, Iran, Venezuela, and Russia, are demanding payment in the Ä rather than in the $. Iran insisted that Japan should make all its payments for oil in Yen, rather than in the $.
This list of important $-holding entities concerned about the $ and one thatís getting longer by the day.
We are moving to the end of the U.S. $ís 62-year reign as the world's main international currency for trade, financial transactions and central-bank reserves? Unless something is done to give real value to the $, we believe that the process has to accelerate, rupturing the global monetary system, only to bring back Protectionism in the large trading blocs, exacerbating political and economic instability. We see this rising wave of concern moving forward to a major crisis. Any calming of the situation will cause a short-term strengthening of the $ to be followed by steeper declines.
On the back of this, confidence in the precious metal markets, particularly gold and silver, will climb as a counter to the decline of the $.