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Gold, Dollar, Euro & China: Four To Tango in 2011

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By Dian L. Chu, EconForecast

For the most part of 2010, the typical image of Europe—one of cultural sophistication—has been replaced by widespread riots, burning cars, large scale strikes over labor reform and unemployment resulting from austerity measures amid a sovereign debt crisis in the region.

Gold Chart’s European Tale 

Fear about defaults and more bailouts throughout the European Union (UN) has formed a dark storm cloud hanging over the otherwise robust global rally, and pushed Gold to an all-time high of $1,432.50 an ounce on Dec. 7.

The market’s emotion related to the European debt crisis is clearly reflected through the interaction between Dollar, Euro and Gold, where you can literally trace the timeline of significant macroeconomic events in Europe and the United States (See Chart).

The general pattern is simple - Whenever there’s bad news out of Europe, investors first course of action is to dump Euro and go into gold and dollar as the two top safe haven choices…. and vice versa.

Conventional Wisdom Rewritten

Historically, gold is seen as the ultimate hedge against inflation and dollar weakness with a typical inverse relationship with the U.S. dollar. Meanwhile, Euro had been gaining on the dollar as the choice of global reserve currency over the past decade mostly on concerns over the mountainous debt of the U.S. government.

However, the conventional wisdom has been totally rewritten by the global financial crisis, the European debt crisis, and the unprecedented and synchronized global quantitative easing. As horrendous as the U.S. budget deficit and debt situation is, compared with the depth and breadth of European debt woes, investors now see euro as the risky currency, while dollar has regained its safe haven status as Gold.

China In The Gold House 

So, how will the dynamics between Dollar, Euro and Gold play out in 2011?

At current price levels, the main gold buying action will come from investors and funds as inflation and currency hedge as well as price speculation, instead of from jewelry demand. From that perspective, there’s a fourth major player, in the name of China, emerging in the global gold market.

Bullion Vault noted that with savings-deposit rates now more than 2% below the rate of consumer-price inflation, China has fast become the world's No.2 source of physical gold demand. In fact, China recently revealed that its gold imports rose almost 500% year-over-year to 209 tons during the first ten months of this year.

China’s Surging Gold Trade

People’s Daily Online also noted the explosive growth in China's private gold investment market. In the first three quarters, the individual customers in Shanghai Gold Exchanges neared 1.6 million; gold trade exceeded 4,600 tons and its turnover topped 1.1 trillion Yuan, both rising sharply. That means Chinese has traded more gold than the total global identifiable demand (about 3,201 tons) over the first nine months of the year.

Love of Gold – A Chinese Tradition

The surge in China gold demand seems to have befuddled some including Richard Daughty (aka The Mogambo Guru) at The Daily Reckoning who wrote “…there is nothing about Chinese trusting gold for the last few thousand years or so.”

Well, let me set the record straight here.  The Chinese, like many other Asian countries, have a tradition of reserving and investing in gold for thousands of years. Gold and real estate are typically the top two investment choices mainly due to a distrust of paper instruments resulting from much turmoil throughout the region’s history.

It is mostly this propensity, the clear present danger of an escalating inflation, and rising tensions at neighboring Korea, that are behind the rising gold demand in China

Gold = Financial Competitiveness

What’s more telling is that according to People’s Daily Online, in August, six China ministries, including the People's Bank of China, and the China Securities Regulatory Commission, jointly issued a notice to promote the gold market and positively connected the future development of the gold market with the competitiveness of financial markets.

China is already the world’s top gold producer, but has remained somewhat muted in the global gold market. Now, with the expanding of the Chinese gold market (China just approved its first gold mutual fund on Nov. 29), the increasing investment demand from the Chinese government and / or individual investors will become a major force influencing the world gold market.

China Can’t Save the Euro

Now, let’s take a look at the Euro.

According to data from the Bank for International Settlements (BIS), German and French banks have the largest debt exposure to Ireland and the southern rim of euro zone in the second quarter--so, the European debt crisis most likely will not evolve into a global contagion as many have feared.

Nevertheless, due to the single currency union’s inherent structural weakness, EU has not been able to agree on any meaningful system-wide measures to combat the debt crisis. As such, EU’s country-by-country, crisis-by-crisis approach is only adding market volatility, and further derailing the region. And not even China’s pledge of its $2.7trillion overseas investment fund as European debt rescue could thwart market’s pessimism about the euro.

Spain – Too Big To Bail?

Multiple rating agencies already put Portugal, Spain and Greece on future downgrade watch, while Italy is another highly indebted euro member persistently coming up in market chatters.

Deutsche Bank AG has pegged Portugal as the next seeking a bailout after Greece and Ireland, while Spain is a hidden debt bomb dubbed as “too big to bail” since the size of Spain’s economy (about $1.4 trillion, with 20% jobless rate) is twice that of Greece, Ireland and Portugal combined.

Moody's estimated Spain may have to raise €170 billion from the markets next year, not including the amount banks may need to recapitalize. Bank of England, meanwhile, is not instilling much confidence either by forecasting a possible return to recession in 2011, adding that further quantitative easing may be used, if an "external shock" hits the economy.

Expect A Full-on Assault on Euro

All this is not to say other EU members are in good financial and fiscal fitness either (See Graph). So, if you think the series of down-grades and rising concerns on euro zone countries' debt has worked against the euro this year, expect a fresh new round of downgrades--over debt or growth prospect—to bring about a full-on assault on Euro next year, particularly when you see Spain come up in headlines.

Trouble in Euro should boost Gold while providing support to the Dollar (i.e. the dog with fewer fleas.), which is the scenario that would play out in 2011.

Global Inflation Spike

Inflation is already running rampant in countries like China, Russia and India, mostly driven by food shortages. In Beijing, for example, food costs soared nearly 12% year-on-year in November. Now, on the heel of U.S. Federal Reserve’s QE2 announcement in Nov, more monetary easing could be expected from central banks to stimulate their economies in 2011. This will only add fuel to the fire of the growing anxiety over rising inflation, and again bode well for gold.

Gold As a Reserve Currency

The shiny yellow metal is headed for a 10th straight annual gain.  But with excess liquidity distorting everything, the typical trend and regression analysis will not work any more. 

Nonetheless, combining the fundamental factors discussed here and technical signals, I believe Euro could break below $1.25 or even $1.20 sometime next year, which could drive gold upwards towards the $1,600 levels. U.S. Dollar and Treasury would gain support as safe haven, which could push the bond yield down.

Furthermore, it is also worth noting that Gold priced in Euros has risen more than 38% so far in 2010, reaching a new record high above €34,475 per kilo, far outpacing the Gold’s nominal price gain (in dollar) of around 28%.

So, in a way, gold is treated almost like a second reserve currency replacing the Euro, and you would have gotten a better return getting into gold via Euro.

Dian L. Chu, Dec. 29, 2010  | Mobile Reader, Website Facebook

 

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Thu, 12/30/2010 - 01:36 | 837252 BigCash
BigCash's picture

The Dark Ages, crap, it wasn't much fun the last time.

Thu, 12/30/2010 - 00:39 | 837212 David99
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Pilbara faces cyclone risk December 30, 2010 - 2:23PM

A tropical depression over Australia could develop into a cyclone over the next few days and bear down on offshore oil and gas installations, and iron ore shipping zones, Australia's Bureau of Meteorology said today.

Gale-force winds may develop along the Pilbara coast in Western Australia by Saturday as the storm makes its way out to sea, though flooding was not expected due to the storm's steady movement, the bureau said in a warning notice.

BHP Billiton, Rio Tinto and Fortescue Metals export hundreds of millions of tonnes of iron ore mined annually from inland Pilbara deposits via coastal terminals at Port Hedland, Dampier and Cape Lambert.

Also Cockatoo Coal ceases operations as mine flooded

Be Careful with longs of miners

Thu, 12/30/2010 - 00:26 | 837207 David99
David99's picture

The Casino doesn't care or worry about China or any one else i./c WH / Capitol Hill / Pentagon except daily POMO's.

Bigger the POMO's, higher it goes.

Very simple

Wed, 12/29/2010 - 23:47 | 837175 David99
David99's picture

Hello buddy Helicopter Ben

So long you are printing unlimited for us, we will keep jacking up the Casino, nothing to worry.

Who cares for hundreds of doomers posting their comments daily here and wasting their time for nothing.

Thanking you

Fraud Street gang

Wed, 12/29/2010 - 23:45 | 837171 David99
David99's picture

1. Recession 2007 -2010
2. Depression 2011
3. Suicidal stage  2012 
4.Adam & Eve era  2013 
5. Back to Stone Age 2014

Wed, 12/29/2010 - 23:39 | 837166 Rotwang
Rotwang's picture

A Swedish newspaper article about China.

http://www.dn.se/nyheter/varlden/huaxi-har-hogt-flygande-planer

 

Wed, 12/29/2010 - 23:30 | 837153 JW n FL
JW n FL's picture

***** "So, in a way, gold is treated almost like a second reserve currency replacing the Euro, and you would have gotten a better return getting into gold via Euro." *****

 

So, if I would blow my head off with a shotgun I wouldnt have a headache? LMFAO!

Thanks! I needed that!

 

Wed, 12/29/2010 - 23:07 | 837135 David99
David99's picture
Hello buddy Helicopter Ben

Year 2010 is ending and $ 600 B finished yesterday.

Will you be kind enough to print another $ 1 Trillion only for 2011 so that we keep Ponzi Casino floating, otherwise it may plunge like Titanic.

Ball is in your court buddy Ben

Thanking you

Fraud Street gang

Wed, 12/29/2010 - 22:35 | 837109 Chappaquiddick
Chappaquiddick's picture

Great research - thanks.

Wed, 12/29/2010 - 21:27 | 837034 MiningJunkie
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"I would rather be a gold BUG than a paper WORM." - anon

Wed, 12/29/2010 - 21:58 | 837031 blindman
Wed, 12/29/2010 - 20:44 | 836962 ciscokid
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Gold and Silver are the only legitimate money.

Happy New Year and God bless.

Wed, 12/29/2010 - 19:38 | 836852 gwar5
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Thanks for the good report.

I consider it my patriotic duty to get rid of as many inflationary USD out of the system as possible by storing it into gold.

Wed, 12/29/2010 - 19:33 | 836842 FreedomGuy
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Question: I have seen several articles on China encouraging its citizens to buy gold. I have  not read WHY the Chinese government would be doing this. Normally, governments would be loathe to do it because it would imply an admitted weakness in their currency. Anyone know or have a good theory as to why?

Thu, 12/30/2010 - 05:58 | 837346 AnAnonymous
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Anyone know or have a good theory as to why?

 

The Chinese government for now two decades (or such) is used to calling its citizenry to buy a certain kind of assets to materialize the rise in life standard of the country. It had been fridges, it  had been ovens etc...

Nothing new here in the trend.

Why gold? Contrary to some previous calls, gold does not consume energy which  has to be provided to the population. As China has to import energy, and requires USD to do so, with the US being their major provider and the holder of the monopoly, plus the various buzzes on the trade balance, currency  manipulation and stuff,non adding to the energy balance sheet was likely a valuable criterion when it came to tell the item of the year.

Another point is that redirecting Chinese people's resources toward gold might help to ease the estate bubble. At least, it might be thought as a means to ease the estate bubble, the real effect being unknown.

So two angles:

-one, the continuation of a government trend, with energy consumption in mind

-two, relieving the estate bubble by capturing resources elsewhere.

Wed, 12/29/2010 - 19:52 | 836878 gwar5
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1. They're not as crooked as our Fed.

2. The don't have the social safety nets we do, they must save on their own (30% savings rate) so this adds a layer of social stability and savings diversity

3. The Mack Daddy: To increase demand to hurt the West. It's economic war with the West, and the Chinese government knows our Fed and big banks want to suppress the price of gold as an alternative. So, they do the opposite and encourage 1.2 billion Chinese to buy grams and ounces -- brilliant -- it adds up big.

The West wants to continue some form of fiat forever. Chinese and BRICS favor a new gold backed reserve currency. Score one for the Chinese. BTW we're in the same boat holding FRNs as the Chinese. 

 

 

 

 

Thu, 12/30/2010 - 00:14 | 837196 FreedomGuy
FreedomGuy's picture

Good theory. What's mind boggling is that that would make the Communist Chinese government more concerned about their economy and citizens than our "free" Western-capitalist government. It also would represent a better preparation and more honesty than our government/s. Makes me wonder what the world will look like in 50 or 100 years from now.

What is sad is that as we default on our debt, the average Chinese citizen will get robbed, not to mention anyone holding our debt anywhere else. I have a son in China and told him to stay there and do his best. I think things may be better there for a long while.

Wed, 12/29/2010 - 19:29 | 836836 FreedomGuy
FreedomGuy's picture

The primary point of investing in gold for the long term is twofold in my mind. First, it is a reserve currency you can own anywhere in the world. It crosses language and cultural boundaries. I could be in any foreign country with no language skills and pull out a gold piece and begin trading for things. In America we have no other currencies available to us, so gold and silver serve as a reserve currency. To emphasize, we can each hold our own reserve currency which is highly convertible into the official state currencies if necessary.

Second, as a reserve currency it acts as an insurance policy for everyone but especially the little guy who cannot transfer and trade lots of other assets. We can all buy it anywhere in America. If super or hyperinflationary scenarios occur then our gold/PM insurance policy kicks in and we look like the smartest guy on the block.

The secondary purposes of gold are day to day commodity investing, and I would argue even just storing the value of your money when you get nervous for a short period of time. That is still a type of temporary hedge or investment. As things cool down or your fears subside you are fully willing to sell and lose the insurance and reserve currency aspect. I suspect a lot of the super wealthy are in this category. That's why those charts correlate as they do. I also note that entire countries are getting in on gold as I read a story that India, Thailand and others took large deliveries of gold earlier in the year. I find that significant. They must feel very smart right now. 

Thu, 12/30/2010 - 05:48 | 837342 AnAnonymous
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First, it is a reserve currency you can own anywhere in the world. It crosses language and cultural boundaries. I could be in any foreign country with no language skills and pull out a gold piece and begin trading for things.

 

You hit it on the head. Gold universal side has no longer the same edge as it used to.

The gap in wealth between various societies all over the world has strongly increased throughout time. And ultimately, you can only buy what is available.

If you consider that the world has been parted in two, one part where life is extremelly good, granting an access to the best of what humanity can offer and another part that is being played as a dump depot, a garbage collector for the waste economy of the one part, gold universality is seriously impaired.

Being able to buy a radioactive cave thanks to gold is nice. Being able to buy a mansion with fiat is nicer.

Because the one part is where fiat reigns supreme.

Wed, 12/29/2010 - 19:25 | 836831 MarketTruth
MarketTruth's picture

Food For Thought: The privately owned United States Federal Reserve  bank increases the quantity of their Dollar product to the tune/rate of $400 per month per ounce of gold.

Wed, 12/29/2010 - 19:24 | 836822 THE DORK OF CORK
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I was lucky to buy most of my Gold in Euros during a dip in it 2009 summer price - greatest investment I ever made......

Spitzer the Euro is a dog which was happy to see a massive increase in the shadow banking sector with little prospect of long term revenue gain.

Unless the ECB acts like a real central bank and stops protecting its client bondholders its  going down.

 

 

 

 

 

Wed, 12/29/2010 - 20:51 | 836974 beastie
beastie's picture

So what's the word on the streets of Ireland DOC? Sinn Fein gathering any momentum etc.

 

Wed, 12/29/2010 - 21:20 | 837021 THE DORK OF CORK
THE DORK OF CORK's picture

nah nothing really - I think the internet has atomised everyone - I just want to visit my favourite blogspot (Beyond Apollo) and forget this sad western collapse and dream of what might have been.

It looks like its really over this time - give it 2 thousand years and we might get another renaissance but forget about this shithole.

Dark ages here we come - THE LAND OF SAINTS AND SCHOLARS WAS A MYTH

 

 

 

Thu, 12/30/2010 - 05:39 | 837341 AnAnonymous
AnAnonymous's picture

Most Irish must understand they've got a good deal, allowing them to keep consuming thanks to debt.

Wed, 12/29/2010 - 21:46 | 837059 beastie
beastie's picture

Cheer up man. I have faith Sinn Fein will get a meaningful voter turn out and upset a few applecarts. I'm a glass half full kind of guy. 

If that doesn't pan out strap on a pair of steel toed Doc Martins and head over to trendy night club and kick a banker or politican square in the nuts. 

 

Wed, 12/29/2010 - 22:16 | 837092 blindman
Wed, 12/29/2010 - 20:19 | 836921 Spitzer
Spitzer's picture

and what about the dollar ?

Thu, 12/30/2010 - 05:39 | 837340 AnAnonymous
AnAnonymous's picture

The USD remains the USD as long as it opens the gates of the world commodities market.

Its strength against major currencies will remain in the same range as the countries holding these currencies will keep needing an access to commodities.

Gold will remain a nice speculative asset as pressure of demand keeps beating the extraction capacity.

 

No crash in the USD until  the link between commodities and USD is not broken. Expect more troops movements and debt schemes on commodities providers to make sure that it does not happen.

 

 

Wed, 12/29/2010 - 20:42 | 836952 THE DORK OF CORK
THE DORK OF CORK's picture

Its fucked - but it will be the last fiat standing.

 

The west has been destroyed by fiat kings with no concept of capital creation - the final nail in the coffin was the blowback from noughties Russia.

 

Without a awakening and action the locusts will dine on the last blade of grass.

 

 

Wed, 12/29/2010 - 18:55 | 836773 Spitzer
Spitzer's picture

dollar safe haven MY ASS.

The Euro zone is a net creditor that actually pays for its imports with exports. The US dollar is the bubble.

U.S. Dollar and Treasury would gain support as safe haven, which could push the bond yield down.

rolls eyes

Thu, 12/30/2010 - 01:30 | 837249 TBT or not TBT
TBT or not TBT's picture

Retards! We do way better than them. The rest of the world ships us great stuff in return for unremarkable bits of paper.    The Europeans have to actually make more stuff than they get sent to them, and they end up on the wrong side of the deal for it, collecting bits of paper instead of stuff?    They're doomed.     It is really quite laughable.

Wed, 12/29/2010 - 18:47 | 836764 MichaelNY
MichaelNY's picture

"I remember a German farmer expressing as much in a few words as the whole subject requires; 'money is money, and paper is paper.'" - Thomas Paine

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