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As South Korea Sets Off To Formally Expand Its Gold Holdings, Is China Far Behind?

Tyler Durden's picture




 

Today's most important piece of news for holders of precious metals comes from the far East, where Kim Choong-soo, governor of South Korea’s central bank, told a parliamentary committee on Monday, that the country: "needs to give careful consideration to the matter of increasing gold volumes in the foreign reserves.” In other words, as the FT summarizes, "South Korea, holder of the world’s fifth-biggest foreign exchange reserves, is considering expanding its small holdings of gold to diversify its dollar-heavy portfolio." Last week, a mere unsubstantiated whisper that China was doing the same sent gold $10 higher. So with the regional game theory framework changing, as more countries rush into the yellow metal, will China finally be forced to come out of its shell of gold shyness and officially start accumulating, sending gold soaring?

More from the FT:

Such a move would have a powerfully bullish effect on the gold market. With just 14 tonnes of gold – or 0.2 per cent of $290bn reserves – Seoul is one of the smallest holders of gold among large economies. The world average is about 10 per cent, according to the World Gold Council, while countries such as the US, Germany and France hold well over 50 per cent of their reserves in gold.

That trend is one of the most important changes in the gold market in recent history, and has helped drive the metal’s rally to a series of fresh highs. On Thursday it touched $1,387.10 a troy ounce, an all-time nominal record.

South Korea’s central bank stressed any moves would have to be “cautious” and “prudent” because of the high gold price . One person familiar with the Bank of Korea’s stance on the metal said it was “receptive to the idea” of buying gold, but stressed that there remained “differences of views” within the central bank.

It appears that South Korea's traditional repository of FX reserves have been UST Bills, which however, as we demonstrated a few weeks ago, have lost value in FX adjusted terms even when taking into account the price appreciation. Furthermore, with the 2 Year trading at 0.3%-ish, there is little room for capital upside, and little yield to be extracted in the future.

“The bank is likely to remain hesitant, waiting for gold prices to come down, which is unlikely,” he said. “Although gold prices have risen sharply in recent months, the upward trend is likely to continue for now as the dollar is likely to remain weak, with Ben Bernanke talking about additional easing measures and central banks worldwide likely to keep buying gold amid ultra-low interest rates.”

Another issue for central banks looking to diversify into gold is the size of the market. Relative to the size of foreign exchange reserves, the gold market is tiny, meaning any large purchases could drive up the price. An increase in Seoul’s gold holdings of just a few percentage points would translate into 100-200 tonnes of purchases – a significant additional source of demand compared to annual production from mines of just 2,500 tonnes.

Not only that, but the ratio of short paper bets hedging long physical exposure as done by such market manipulating luminaries as JPM, means that should the price take off in a parabolic blow off like that seen in Apple recently, then the short covering capitulation, once set off post margin call thresholds, will shoot the price of gold into the stratosphere. Of course, with JPM being the FRBNY's banker of choice, one wonder how far Bill Dudley will go to give Jamie Dimon preferential terms on overnight liquidity before the bank is forced to cover its billions in paper shorts. Which of course may be the easiest way to pull a Soros, and take the US central bank on. After all, even the Fed has a breaking point.

h/t Papa Swamp

 

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Mon, 10/18/2010 - 09:03 | 657949 septicshock
septicshock's picture

GOLD Bitchezzzz!!     Had to be said.

Mon, 10/18/2010 - 09:49 | 658016 Michael Victory
Michael Victory's picture

In case you missed it..

This month's interview was with another Von Mises Austrian, Robert Murphy.
The primary topic of our conversation: Sound Money & AU

Link to the interview:

http://thevictoryreport.org/2010/10/16/robert-murphy-sound-money/


~MV

Mon, 10/18/2010 - 13:48 | 658687 midtowng
midtowng's picture

It wasn't long ago that the South Korean CB was talking trash about gold. The chairman was basically laughing at the notion that they would ever be buying it.

How times have changed.

Mon, 10/18/2010 - 09:03 | 657951 cossack55
cossack55's picture

Nothing better than eating Ramon and Kimchee with 24K chopsticks.

Mon, 10/18/2010 - 09:09 | 657958 Illya Kuryakin
Illya Kuryakin's picture

Who is Ramon?

Mon, 10/18/2010 - 09:11 | 657962 Cognitive Dissonance
Mon, 10/18/2010 - 09:22 | 657986 Temporalist
Temporalist's picture

Ahh the memories...  I still remember the videotape display cover for that movie when 7-11 used to rent movies.

Mon, 10/18/2010 - 09:41 | 657997 Cognitive Dissonance
Cognitive Dissonance's picture

Video "tape"? What's a video "tape"? :>)

I was certain many here on ZH would understand the reference. But anytime I use a reference that is more than 10 years old, I always include a link so others may enjoy, or at least understand, the genesis.

Gotta help the younger generation understand us old(er) farts, otherwise they'll warehouse us in the nursing homes or start practicing "mercy" killings. :>)

When you don't "have" value in the eye of the beholder, you'd better start creating some fast.

Mon, 10/18/2010 - 11:08 | 658110 GoinFawr
GoinFawr's picture

Gotta help the younger generation understand us old(er) farts, otherwise they'll warehouse us in the nursing homes or start practicing "mercy" killings. :>)

Logan's Run style?

http://www.imdb.com/title/tt0074812/

Regards

Mon, 10/18/2010 - 11:21 | 658264 RockyRacoon
RockyRacoon's picture

CD, while walking thru a thrift store with my daughter some 15 years ago, she picked up an item and asked me what it was.   It was a Led Zep 8-track tape.  I had a fun time telling her what it was.  My buddies and I listened to that an other fine musical interludes  while I was in the Air Force, driving around in one of the guy's camouflaged VW bus.  There was some alcohol involved.

Tue, 10/19/2010 - 04:03 | 660584 66Sexy
66Sexy's picture

sabbath; we sold our soul for rock n roll.... 'Warning' interrupted in the middle of tony iommi's epic guitar solo... fade out.. fade in.... track 3 to track 4. they called 'em 8 track's but they had really 4 tracks.

Mon, 10/18/2010 - 10:07 | 658059 DarkMath
DarkMath's picture

Oh man, CD, I laughed my ass off on this one. You get a gold star for making my morning.

Mon, 10/18/2010 - 10:43 | 658140 Cognitive Dissonance
Cognitive Dissonance's picture

I love that I can showcase my sick mind on ZH. I'm always amazed what pops into the brain whenever I read stray words or phrases. It speaks to some dark place I haven't fully explored.......yet. 

Mon, 10/18/2010 - 09:36 | 658010 papaswamp
Mon, 10/18/2010 - 09:44 | 658025 cossack55
cossack55's picture

Thanks for the assist, Ps.  This is what happens when the coffee is not yet perked.  Or maybe I was thinking about the Spanish banks while typing.  Hmmmm.

Mon, 10/18/2010 - 09:58 | 658045 papaswamp
papaswamp's picture

No worries..

Mon, 10/18/2010 - 09:07 | 657954 etienno
etienno's picture

"A mere unsubstantiated whisper", do you mean a ZH rumor creation ?

Mon, 10/18/2010 - 09:07 | 657955 bigdumbnugly
bigdumbnugly's picture

so that's why so many people have been eyeing my gold tooth in a totally different way of late.

i don't even trust my dentist's intentions anymore...

Mon, 10/18/2010 - 09:08 | 657957 cat2
cat2's picture

When is gold going to pull back?  I need to add more...

Mon, 10/18/2010 - 09:16 | 657970 Cognitive Dissonance
Cognitive Dissonance's picture

Don't wait for a pullback. If you think Gold is going to double in the next 5 years (Do you?) what happens if it doesn't pull back until it hits $1,500 or $1,600, then doesn't come back to here and now? Or what happens if you don't have the nerve to buy it when it does pull back because you think it might pull back further, then it reverses and takes off and you missed the boat?

You like Gold, buy Gold when you can. I'm assuming you understand that you want to take physical possession. You DO want physical possession, right?

Mon, 10/18/2010 - 09:23 | 657990 Jake Green
Jake Green's picture

I've been buying gold coins from my local coin dealer; but he charges like an extra hundred bucks over spot. I like that the tranactions are anonymous, but do you think that fee is too steep?

Mon, 10/18/2010 - 09:31 | 658000 Temporalist
Temporalist's picture

Yes.

Mon, 10/18/2010 - 09:32 | 658002 Cognitive Dissonance
Cognitive Dissonance's picture

Not when the Internet stores are charging $50 to $80 (or more) and they record your transaction.

You'll think the premium was cheap once it goes to $200. 

Mon, 10/18/2010 - 09:56 | 658041 DosZap
DosZap's picture

Your getting SCREWED, do you feel it?.If being Anon is worth a 100% markup, ok.

He's charging you DOUBLE, if your stateside.

Mon, 10/18/2010 - 10:04 | 658056 tmosley
tmosley's picture

I hate to tell you, but gold hasn't been $100 since the 70's.

These days, $100 is more like an 8% markup.  This is worth it for Eagles, Maples, Philharmonics, and certain other specialty bullion products, but not for Kug's, rounds, or bars.  If you are paying that big of a markup, you should shop around.  If everyone else is charging the same thing, then you're probably good.  If you can get it for less, great.  The best you are likely to get is a $20 discount IF you are buying the name brands mentioned above.

That said, I might be behind the times, as I haven't been buying much since the latest run-up.  Could just as easily be that premiums have just plain gone up, which makes sense, since APMEX appears to be running out of a lot of products.

Mon, 10/18/2010 - 11:27 | 658300 DosZap
DosZap's picture

tm,

you misunderstood my figure.

If he is paying a $100.00 over spot for Mapes,Phils, he's paying a near 100% markup  more than he has to.

Why pay a $100.00, when you can get the same thing for $50.00?.

 

 

Mon, 10/18/2010 - 12:58 | 658561 tmosley
tmosley's picture

Ok, I was a bit confused there.  Makes more sense now.

Gold Eagles are a $64 premium to spot on APMEX right now.  $36/oz of gold is not a bad price to pay for anonymity, and certainly isn't a rip off.

Mon, 10/18/2010 - 13:16 | 658599 Cognitive Dissonance
Cognitive Dissonance's picture

2.6% above and beyond the spot price (plus the "normal" Internet premium) to remain hidden in the shadows. A small price to pay.

Tue, 10/19/2010 - 11:29 | 661323 DosZap
DosZap's picture

24k Mapes are $53.00,screw Eagles @1-10...........$47.00/oz,is a lot to some folks if you  buy 10 at a pop,(for DCA) that's $530.00.

Most of the world prefers 24k anyway.

Plus, their is NO anonymity,if you ever sell it your tagged.

Black Mkt, barter,fine, if we get to that point we're screwed anyway.

 

Mon, 10/18/2010 - 09:09 | 657960 Cognitive Dissonance
Cognitive Dissonance's picture

South Korea thinks they should own more of the barbarous relic? Heavens to DMZ, why would any central bank wish to do that?

They can't eat it, it costs "money" to store, it doesn't earn interest. Silly rabbit, why would they want something that's been around for thousands of years when I have some freshly printed greenbacks for them? In with the new, out with the old.

Get with it dudes. :>)

<sarcasm off>

Mon, 10/18/2010 - 09:16 | 657971 Shameful
Shameful's picture

Now that you mention the DMZ, how do you think policy makers in the US will respond?  After all the US still has a decent number of troops there and we are nominally allies.  It's clear they would have to lighten the UST load to get gold, wonder how much of the US being there factors into their calculus.

Mon, 10/18/2010 - 09:23 | 657983 Cognitive Dissonance
Cognitive Dissonance's picture

I think South Korea is so far behind the eight ball...

With just 14 tonnes of gold – or 0.2 per cent of $290bn reserves – Seoul is one of the smallest holders of gold among large economies.

...with regard to owning Gold as a significant portion of their foreign currency reserves precisely because the US responded to SK back room feelers and discussions. That's why in my view this is so significant.

Anyone else?

Mon, 10/18/2010 - 09:34 | 658006 bigdumbnugly
bigdumbnugly's picture

hell, even johnny bravo probably owns 14 tons of gold.  S.K.'s got a whole lotta catching up to do.

Mon, 10/18/2010 - 09:38 | 658013 Cognitive Dissonance
Cognitive Dissonance's picture

The only Gold Johnny Bravo has is the minuscule amount he's able to lick off his master's ring.

Mon, 10/18/2010 - 09:47 | 658029 Johrny Bravo
Johrny Bravo's picture

I certainly didn't find any kissing my master's ass!

Goled to $900 bitchez!

Mon, 10/18/2010 - 10:32 | 658111 Cognitive Dissonance
Cognitive Dissonance's picture

I suspect you are correct, that the genuine imitation (Johrny Bravo) has been kissing something other than the master's ring. :>) 

I hear they have anal rings.

Mon, 10/18/2010 - 11:46 | 658372 bigdumbnugly
bigdumbnugly's picture

yep, they do.  they're known in the biz as bullseyes.

Mon, 10/18/2010 - 13:19 | 658608 Cognitive Dissonance
Cognitive Dissonance's picture

God help me.

How do I go about un-knowing this little factoid. It was bad enough suspecting there was such a thing, but to know the actual term is just too much.

Aaaarrrggghhh

Mon, 10/18/2010 - 13:42 | 658668 bigdumbnugly
bigdumbnugly's picture

 

 

truthfully, cd, i just made that up.  but maybe in certain quarters it will catch on...?...

Mon, 10/18/2010 - 14:10 | 658758 Cognitive Dissonance
Cognitive Dissonance's picture

LOL

Doesn't matter, the damage has been done. It has been burned into my psyche and I will die with that word in my brain. :>)

And I suspect that it does exist somewhere out there and that there is a name for it. Always bet on man's moral/sexual depravity and insanity. A look at any large city's police log will confirm my thesis. :>) 

Mon, 10/18/2010 - 12:01 | 658421 Hulk
Hulk's picture

It is very nice to be a genuine imitation CD!

Goled to infinity and beyond Biatchies!

Mon, 10/18/2010 - 13:31 | 658633 Council of Econ...
Council of Economic Terrorists's picture

The bigger issue is China.  In order for the U.S. to win the race to the bottom in currency, China has to quit "manipulating their currency" as Timmah and Obama whine about all the time.  However, China doesn't manipulate it rather it is pegged to the dollar. That's why the administration wants it to float.  The Chinese will only do this if we bomb their military bases and a city where there aren't too many American Corporations (a.k.a. getting the Saddam Hussein treatment).

In related news, on HuffPo there was a write up about creative ways to create jobs.  Number 10 was rapid currency devaluation.  There was a PhD economist spewing that if the currency is debased fast enough it will balance out our exports and imports.  In theory it would work, but in my opinion taking that route would take years for the "jobs to come back" as this would take American companies spending lots of money closing plants overseas and starting some here.  However, he also forgot to mention: 1) China pegging their currency to the dollar, so no matter what we lose this battle. 2) Rapid currency debasement without immediate job creation and with sticky wages = hyperinflation

 

 

Mon, 10/18/2010 - 09:36 | 658009 Temporalist
Temporalist's picture

"Bring us some fresh wine!  The freshest you've got"  "He doesn't realize he's dealing with sophisticated people here."

-Navin Johnson

http://www.entertonement.com/clips/jgdjvdjgch--Steve-Martin-Waiter-The-J...

Mon, 10/18/2010 - 10:20 | 658083 gmrpeabody
gmrpeabody's picture

Too funny...

Tue, 10/19/2010 - 04:06 | 660588 66Sexy
66Sexy's picture

gold is critical to the legitimization of any new coglomorate of currencies.

 

think about it; which would you prefer in trade.. a currency with even a quasi gold backing, or a fiat government controlled currency

Mon, 10/18/2010 - 09:13 | 657967 Conrad Murray
Conrad Murray's picture

Taekwondo the Fed, hang the bankers! 

 

Monday's music, Steak and Shake:

http://www.youtube.com/view_play_list?p=438A49417E0A53F7

 

Mon, 10/18/2010 - 09:14 | 657968 tmosley
tmosley's picture

This is big news.  Things are set to accelerate in an uncontrolled and extremely rapid manner.  With news like this, I would suggest that anyone trading in paper metals needs to close out their positions and move all in to physical metal (although short GLD and SLV/long physical gold and silver remains a good bet on the failure of paper vehicles).  

Anyone caught without a physical position when these dominoes start falling is going to be sorry.  There is absolutely no reason to think that the coming event won't occur in foreign markets overnight, meaning you go to bed with gold and silver down, and wake up with both having risen ten fold or more.

I would maintain a position of 100% physical metals (I am overweight silver, which won't change until the GS ratio hits 1:10--this is speculative, safety is 50:50 in dollar terms)) for the next six months before a reassessment, or wait for the event, whichever comes first.  If there is a significant liberalization of some overseas market in the next six months, that is likely where I would direct some of the gold and silver should I liquidate it.  DON'T TOUCH FIAT CURRENCIES UNLESS YOU HAVE TO FOR TRANSACTION PURPOSES.  As far as I am concerned, they are ALL toxic, and will remain so until the PM event has passed (said event will likely weed out the weak/poorly managed currencies--any left standing several months later will likely survive for at least a few more years).

Mon, 10/18/2010 - 09:21 | 657980 Shameful
Shameful's picture

Wise words.  It's what I'm doing, but then I have 0 faith in our government, or really most governments.  Not as into silver as you, I like it but I tried to keep my silver holdings to what I can realistically haul around if I need to carry it in a hurry :)  Still not a bad idea to have physical FRNs though.  figure if/when the balloon goes up people will be accepting them for a little while and would be nice to use them to get what you need.

Mon, 10/18/2010 - 09:31 | 658001 tmosley
tmosley's picture

To use an Old West metaphor, I would say that owning gold is like owning a farm in Texas in late 1800's.  You could sell that farm for an increasing amount of value, and it certainly preserved your wealth.  Buying silver at this point is like buying a farm where the railroad is going to go.  It will certainly retain its value unless something changes in a major way, but once the train comes through town, you'll own land that is worth many, many times what you paid for it, and it will be very sudden.

I sympathize with moving the silver.  If you have a significant amount, it is very hard to move.  I had to move my hoard last year, and let me tell you, it was NOT fun.

Mon, 10/18/2010 - 09:49 | 658032 Pegasus Muse
Pegasus Muse's picture

I'll be happy to give you a hand next time you need to move the stuff.  :-) 

Mon, 10/18/2010 - 09:25 | 657992 SheepDog-One
SheepDog-One's picture

Wow LOOK at what theyve done...destroyed the world in order to save a few precious central bankster crooks, millions will die due to the 'elite'. Even more demonic, they had planned it that way all along, for the last 40 years or so at least.

Mon, 10/18/2010 - 09:26 | 657979 Temporalist
Temporalist's picture

Got Kimchi Bitchez?!?!

Cabbage shortage leaves Koreans hungry for kimchi

"Koreans have taken to jokingly calling the side dish "geum-chi," substituting in the Korean word for gold."

http://edition.cnn.com/2010/WORLD/asiapcf/10/05/skorea.kimchi.shortage/i...

Mon, 10/18/2010 - 09:22 | 657985 gwar5
gwar5's picture

 

Japan is the big dog. They have $10 trillion to rollover for higher returns, their people are old and their bond returns not sufficient for their retirements. 

Even a fraction of that $$ going to gold....

 

Mon, 10/18/2010 - 09:51 | 658035 zaknick
zaknick's picture

They're accumulating like the Chinese: buying and operating mines.

Mon, 10/18/2010 - 11:36 | 658332 DosZap
DosZap's picture

China's production #'s for this year is 340 Metric tons, and you know not one ounce is leaving China.

Plus, they are doing exactly what you said also.(in all energy, commod sectors).

Mon, 10/18/2010 - 09:27 | 657995 Cheyenne
Mon, 10/18/2010 - 09:45 | 658026 Temporalist
Temporalist's picture

Shush up!  Just go buy an Apple ipad and listen to Lady Gaga and all will be forgotten.

Mon, 10/18/2010 - 10:17 | 658075 i-dog
i-dog's picture

Wow ... "history is being erased"!

Not a good sign.............

Mon, 10/18/2010 - 09:27 | 657996 Turd Ferguson
Turd Ferguson's picture

Well, we tested the bottom end of my projected weekly range last night and I must admit that I got as little nervous as I watched it unfold. We'll see where this week takes us but I won't start thinking that we've seen any kind of short-to-intermediate term top until and unless we break down through 1345 on a closing basis.

Again, I'd expect a volatile week but one that stays within the bounds of a 1360-1395 range. We could conceivably test more downside but 3 POMO days out of 5 will provide ample liquidity to keep gold well bid. Additionally, skyrocketing silver has been a key driver of gold through this entire period. Hard for gold to go down if silver doesn't follow along. 

If the trend from late July (11 weeks now!) continues, next week should be the launch week for the next "stair" up, probably to 1430-40. Lastly, at the risk of seeming a stock pimp, the link below describes one of my favorite junior silver miners. Worth a look.

http://www.thestreet.com/_yahoo/story/10886940/1/silver-miner-gussies-up...

Mon, 10/18/2010 - 09:39 | 658007 Cognitive Dissonance
Cognitive Dissonance's picture

The Turd was nervous?

I assure you everyone else is "nervous" when the Turd enters the ZH room. So worry not my little Turd, you've got nothing to be nervous about..........except maybe an even bigger Turd. :>)

Mon, 10/18/2010 - 09:42 | 658020 Turd Ferguson
Turd Ferguson's picture

Good morning, CD. Been meaning to track you down to show you this link. A favorite from way back. Thought you'd enjoy it.

http://www.youtube.com/watch?v=5TQ3pC9W1o4

Mon, 10/18/2010 - 10:39 | 658127 Cognitive Dissonance
Cognitive Dissonance's picture

As someone who dabbled in.....er......gardening in my younger years, all I'll say is that those are some extremely nice wild flowers. I always had deer problems, forcing me to spend more time defending my garden that cultivating it.

Mon, 10/18/2010 - 15:33 | 659004 Boba Fiat
Boba Fiat's picture

Those must've been some mellow deer.

Mon, 10/18/2010 - 09:34 | 658004 StychoKiller
StychoKiller's picture

What is the difference between the NY Globex and the NY Nymex?  I've noticed that the price of Gold rises once the NY Nymex takes over trading.

Mon, 10/18/2010 - 09:35 | 658008 pmn
pmn's picture

been watching the gold price all morn, went long at US open..waited 45 mins before a break higher, the gold price is well bid despite the weekend 'sell gold anlaysis'  from a number of gold pundits. QE has put a floor in at 1360 IMO, cancel that correction, if it didn't break lower this morn it aint breakin- period.

Mon, 10/18/2010 - 11:29 | 658310 Snidley Whipsnae
Snidley Whipsnae's picture

The past few weeks trend has been rising gold prices in overnight trading...like SE Asia trading.

Not every night but the majority of the time.

I believe that China is buying on dips...just a hunch.

Mon, 10/18/2010 - 09:37 | 658011 gwar5
gwar5's picture

Truman said in FT he'd consider selling our gold.  I guess S Korea is calling his bluff. 

Everybody knew Truman was being a douche trying to head fake gold lower.

He just made it worse for team bankster

 

Mon, 10/18/2010 - 09:39 | 658014 RobotTrader
RobotTrader's picture

Gold trying to rebound, but the XAU is stil getting crushed.

Amazing how gold stocks are the very first items thrown overboard by the F12 - punching momentum monkeys at the first sign of a correction in stocks.

No conviction to this sector whatsoever.

Zero, nada, zip.

Mon, 10/18/2010 - 10:10 | 658062 DarkMath
DarkMath's picture

"No conviction to this sector whatsoever."

Robot, I don't think you could get a clearer sign that Gold isn't in a bubble. Time to back up the truck my friend.

Mon, 10/18/2010 - 13:00 | 658559 GoinFawr
GoinFawr's picture

Far better to have wind at your back than to be pissing into it, like Robo's favourites.

What a fenis.

Mon, 10/18/2010 - 09:41 | 658017 papaswamp
papaswamp's picture

Whoops US industrial production missed the +0.2% increase by coming in at -0.2% and capacity usage dropped though not by much...0.1% to 74.7%

Mon, 10/18/2010 - 09:49 | 658031 SheepDog-One
SheepDog-One's picture

Hmmm well totaly ignored by the robot traders of course.

Mon, 10/18/2010 - 09:42 | 658019 High Plains Drifter
High Plains Drifter's picture

I love the new CNBC  heat map courtesy of Jimbo Cramer. What a innovative idea.

Mon, 10/18/2010 - 09:56 | 658042 cossack55
cossack55's picture

Can't wait for and electrical short to bring the Heat Map to life.

Mon, 10/18/2010 - 09:42 | 658021 Spalding_Smailes
Spalding_Smailes's picture

Astonishingly enough this was still pretty much the debate we had this week.  It is almost impossible to pick up a newspaper today without seeing several articles that directly or indirectly indicate how much worse things must get before we reach bottom, and yet there are still too many people who can’t understand the numbers.  I would argue that a lot of people, especially in China, think that it is mainly US pre-election posturing that is driving all of this anger.  If that is the case, why are we seeing article like this (“Fears of global currency war rise”) in the Financial Times?

Thailand is introducing a tax on foreign holdings of bonds, the latest in a string of attempts by emerging economies to curb destabilising capital inflows amid fears of a global currency war.  The Thai cabinet on Tuesday imposed a 15 per cent withholding tax on capital gains and interest payments for government and state-owned company bonds, a clear signal that it would take tough measures to curb inflows of “hot money”.

Or how about this one?

Japan has called on South Korea and China to “act responsibly” on exchange rates in an unusually strong statement ahead of the G20 summit of leading nations in Seoul, expected to be overshadowed by rising tensions over currencies.

The statement by Naoto Kan, Japan’s prime minister, adds to pressure on Seoul as the host of the meeting in November to broker a discussion on currencies despite some countries, including China, pushing to keep the issue low on the agenda.

In fact it seems that every third article in the front section of the Financial Times indicates one way or another a country that is battening the hatches and preparing for a beggar-thy-neighbor world.

The problem is not pre-election posturing in the US.  It is much worse than that.  The problems is that the numbers actually do not work.  China and Germany need to grow their surpluses to maintain growth.  In fact China has to choose between an unhealthy overreliance on the trade surplus and an even unhealthier over-reliance on investment, as I mentioned in a comment in Bloomberg yesterday.  Japan cannot allow its trade surplus to decline because with no demand growth this can only come about as a contraction in production.

On the other hand European deficits are collapsing as a consequence of the financial crisis.  And the US cannot tolerate a rapid increase in its deficits.  How does this math work?  Surpluses and deficits, after all, must balance to zero.

 

Mike Pettis

Mon, 10/18/2010 - 09:44 | 658023 Kina
Kina's picture

been buying gold minors this past month, have another lined up. Had a down day today, interesting to see what this does.

Mon, 10/18/2010 - 19:07 | 659733 Al Gorerhythm
Al Gorerhythm's picture

Do you mean "juniors" or "miners"?

Mon, 10/18/2010 - 09:50 | 658033 Turd Ferguson
Turd Ferguson's picture

With the $ rolling over and headed back toward 77, its not going to take much to drive gold back into the green.

Mon, 10/18/2010 - 09:55 | 658039 Clint Liquor
Clint Liquor's picture

"Surpluses and deficits, after all, must balance to zero."

Obviously, you do not have a PHD in Economics from an Ivy League School. If you did, you would recognize nothing needs to balance as long as there is worldwide consumption. You would also recognize that Ben Bernanke is God and can create everything that is necessary, from nothing.

Mon, 10/18/2010 - 10:01 | 658049 cossack55
cossack55's picture

Would not a golden idol resembling the Bernankonator, roughly 700' tall, be in order.  Perhaps at ground zero.  It would also allow each citizen to inventory our sovereign gold holdings daily.

Mon, 10/18/2010 - 10:17 | 658069 Spalding_Smailes
Spalding_Smailes's picture

After all everyone is already doing it – cheating on trade, that is.  The big surplus countries are dragging their feet on enacting the kinds of policies that will increase domestic demand and so reduce the drag on global growth caused by their deficient demand.  The big deficit countries are either in collapse (Europe) or are warily eyeing the amount of their domestic demand that leaks abroad to create foreign jobs (the US).  In a world of beggar-thy-neighbor policies and anemic global demand growth, countries that do not retaliate will almost certainly see rising unemployment.

So that is why I think pressure on the renminbi is inexorable.  The way the numbers work, I see only three options.  First, the US can allow its trade deficit to explode.  Second, the world can organize a concerted attempt to deal with imbalances.  Or third, each country can continue implementing policies aimed at acquiring a larger share of dwindling global demand.

The first two, I think, are unlikely, and so I suspect the renminbi issue will not go away.  But excessive focus on currencies and tariffs is likely to make a bad situation worse, and this is what I really want to discuss today.  Currencies matter to trade, and it is strange to see the gyrations among many economists who try to deny it.

http://mpettis.com/2010/10/what-happens-if-the-rmb-is-forced-to-revalue/

 

Take the most obvious example, the PBoC itself.  The central bank officially has about $2.5 trillion in reserves.  This by the way almost certainly understates its true position but let’s ignore that for a moment.  The PBoC has funded this position with an equivalent amount of RMB liabilities, which makes it very vulnerable to changes in the value of the currency.

Rate addiction

In fact there were strong rumors last year that the PBoC was technically insolvent as a consequence of the 20% increase in the value of the RMB against the dollar during the 2005-08 period of currency appreciation.  Weirdly enough, although the numbers are huge, it has proven difficult to convince anyone that the PBoC is not the richest institution in the world, and that it is actually very vulnerable to big losses (although I notice that Sovereign Trends’ Terrence Keeley, in an OpEd in the Financial Times Tuesday, seems also to have done the numbers).

The problem for the PBoC occurs not just because of the currency mismatch but also because it needs repressed funding costs to keep it profitable.  How much do the PBoC foreign currency assets earn?  I would guess probably between 3% and 4%, maybe less.  The RMB funding cost, on the other hand, is roughly between 1.5% and 2.5%.  This leaves the PBoC with a net positive carry of between 1% and 2%.

If the RMB appreciates by as little as 2% a year, in other words, the PBoC runs a negative carry on its assets.  Every further 1% increase in interest rates, or additional 1% rise in the value of the RMB, then, erodes its capital by at least $25 billion (annually, if it happens through an increase in interest rates).

Let’s assume, for example, that over the next two years we see a combined appreciation and interest rate increase of 10% (let’s say a 2% increase in interest rates and a 4% annual appreciation), which is, in my opinion, the absolute minimum that China must do to slow down the worsening domestic imbalances.  Assuming no change in the rate earned on reserve assets, which in fact may decline, this means that the PBoC’s net indebtedness would rise by over $250 billion, or roughly 5% of the country’s GDP.

These kinds of number quickly add up.  And of course it is not just the PBoC that has this addiction to repressed interest rates.  Many years of very low cost borrowing has created a huge dependency on low interest rates among SOEs, local governments, and other creditors of the bond markets and the banks (not to mention the banks themselves), all of whom are directly or indirectly funded by long-suffering households.

http://mpettis.com/2010/07/the-pboc-can%E2%80%99t-easily-raise-interest-...

Mon, 10/18/2010 - 10:35 | 658116 Horatio Beanblower
Horatio Beanblower's picture

 

"There's No Bubble in Gold, Peter Schiff Says: "We're Still Relatively Early in the Game"" - http://tinyurl.com/27dnk6z

 

Mon, 10/18/2010 - 10:38 | 658125 trav7777
trav7777's picture

This is what I've been saying it is:  there is an emergent collective point of recognition that promises need to be exchanged forthwith for something real as promises about a future of growth are being discounted in the face of what the more astute are coming to recognize.  The future does not hold growth.

There is, as the previous poster wrote, a mad dash now to try to capture a larger share of a dwindling global demand pie.  There is a parallel effort by many nations to shore up their real asset position.

We're seeing a global decline in the moneyness of debt-backed assets.  Nations with stronger resource positions are avoiding this for now.  Their national wealth as far as resources go is what is backstopping stronger currencies (BRL, CAD, AUD).  Nations without such endowments have either production or real assets.  The currency attacks are coming, bank on that.

Eventually, it will lead to real war.  There is much talk about how China should dump USTs or some other aggressive action to destabilize the dollar.  What if the US withholds food from China and starts starving them?  Or we blockade their oil inputs like we did Japan in the 30s?  This very quickly leads to shooting.

Mon, 10/18/2010 - 10:46 | 658146 H. Perowne
H. Perowne's picture

One of the factors that may delay open hostilities further is the fact that the shooting, if/when it does begin, will be between at least two belligerents with nuclear capabilities.

Mon, 10/18/2010 - 11:00 | 658187 i-dog
i-dog's picture

Won't happen. No way.

Just as the British Empire would only go to war against armies dressed in grass skirts and armed with sharpened mango cores, the American Empire will only go to war against goat herders in sandals and armed with trusty bolt action Lee Enfields.

Mon, 10/18/2010 - 11:22 | 658257 Spalding_Smailes
Spalding_Smailes's picture

Won't happen. No way.

World war 1,world war 2 ....? Money ?

 

 

Also 6-8 guys from seal team 6 can take out hundreds in a matter of minutes, saunter down the ridge to the camp below, finish job & take pictures of every enemy face killed no matter the damage ... Seen a few pictures, one guy pressing both sides of a head together as the other takes the pictures ...

Very, very bad men ...

Mon, 10/18/2010 - 11:34 | 658324 Sabremesh
Sabremesh's picture

Trouble is they kill everyone and everything in the vicinity, including the hostages they're supposed to be rescuing. Bad men don't necessarily make good soldiers.

Mon, 10/18/2010 - 12:07 | 658379 DosZap
DosZap's picture

H.P,

Yes and why do we need to worry so much about this?.

China, did not have the capability to hit anywhere in the US except the East, and West coasts.And, with no great accuracy capability.

UNTIL, in the infinite wisdom of the Clinton Admin, he allowed them access and sold them our CRAY super computers.Which, allows them to make the guidance devices, and targeting ability that until then, only the Russians had.

Now, they can nail Dallas,Denver, wherever, with pin point accuracy.

Smart move eh?.There he went, thinking with the wrong head yet again.

Mon, 10/18/2010 - 12:38 | 658506 hedgeless_horseman
hedgeless_horseman's picture

One of the problems with your conclusion is that readily available 3-D engineering work stations of today are much, much, faster than super-computers of a just a few years ago.  Feel free to blame that douche, Clinton, nevertheless.

Mon, 10/18/2010 - 10:42 | 658137 Burnsy
Burnsy's picture

It might be time for a correction in gold, but as long as the consensus opinion out there is reflected in articles like this one in today's FT, I think it is safe to stay heavily invested for the longer term and buy on dips. This guy just kills me...my comments in bold.

 

Few silver linings when gold bubble bursts

By Mark Williams

Published: October 17th

Beware of bubbles. Tulips, the dotcom boom and pre-credit crunch real estate have a lot in common; they are assets that were in vogue, became overbought and eventually fell to earth. And now it’s gold.

Historically, two-thirds of gold demand comes from the jewellery industry and from countries like India and China. The remaining demand is generated by investors, manufacturing and the dental industry. But over the last four years, gold has staged a spectacular price rise and won many new investors. Everyone from hedge funds to individuals has jumped in, seeing gold as a way to improve portfolio diversification. Today portfolios often allocate 5 per cent or more to gold. A decade ago such an allocation in sound investment circles would have been heresy (Yes, exactly. You would have bought at the bottom).

(...) 

The 2010 gold bubble is fuelled by a combination of five main factors: historically cheap cost of borrowing, a prolonged bull market, early profiteers, marketing hype and the risk being ignored (uh...unlike the real estate bubble, then?). Investors claim that the current market high of $1,380 an ounce is not overpriced, but a reflection of global economic uncertainty, high unemployment and a decline in currency values. Gold is acting, as it should, as a hedge.

Despite their human origins, most bubbles are not easily spotted until it is too late. The dotcom bubble took four years to burst; the real estate bubble six. The last speculative gold bubble, in 1980, took four years to implode, while this latest reincarnation is seven years in the making. This bubble will likely be pricked only when economic outlooks improve and unemployment figures in countries like the US drop below 8 per cent. This might come in 2011, but it could take much longer(no shit, sherlock. The fiat bubble has been in the making since 1971, btw.)

(...)

Unlike previous asset bubbles gold is a tiny fraction of total global investment capital (is this supposed to be bearish? It is 0.8 %, by the way). When the bubble pops, it will represent less than 2 per cent of the world’s total. Those most hurt will be the investors who are the last ones out(they usually are, no?). These tend to be the smaller investors – just as in the real estate bubble, those who can least afford to lose. However, in the aftermath of the credit crunch we have entered into an era in which global systemic risk is high and unpredictable. Even small events, seemingly unrelated, can trigger larger financial events.

(...)

If there is a silver lining to this bubble, when it does go bust, and gold prices plummet, it will be a sign that the global economy has snapped back from economic chaos to prosperity. This will signal job growth, stable currencies, a stop to US Federal Reserve quantitative easing (How is the labor market these days? Is Benny done with QE? Are currencies stable today, you think?) Then there will be little reason to own gold. In the end, speculators will relearn an age-old lesson: gold in times of financial stability is hazardous to investor health. Like tulips, it is pretty to the eye but does not provide lasting sustenance.

The writer teaches finance at Boston University School of Management (and should stick to that) and is author of Uncontrolled Risk: The Lessons of Lehman Brothers and How Systemic Risk Can Still Bring Down the World Financial System (which I think you can safely skip reading)

Mon, 10/18/2010 - 10:49 | 658161 Turd Ferguson
Turd Ferguson's picture

Wow, what a classic, Keynesian-trained douchebag.

OOOOhhhh. He teaches finance at BU. Whoa, I'm impressed.

Mon, 10/18/2010 - 11:10 | 658219 Burnsy
Burnsy's picture

Hopefully, Kotlikoff takes his lunch money every day and gives him an atomic wedgie from time to time.

Mon, 10/18/2010 - 11:55 | 658407 DosZap
DosZap's picture

It's obvious he just like the other chickens that open their mouths when it rains, and look up,and drown.

Whan are people going to realize, that was then, this is NOW.

And there is a major Paradigm shift that has occured?.

We all wish things could go back to Life as we knew it.

It's a new day, and the SHTF just keeps coming............we start making a smidgen of progress on one area, and wham!, Ruh Roh,here comes MORTGAGE GATE.

 

Mon, 10/18/2010 - 12:20 | 658461 H. Perowne
H. Perowne's picture

This man has seen the light and speaks only the truth. Forsooth, there is no reason for any and all to hold this barbarous, inedible relic of a darkened past. Blessed be the prophet John Maynard and his servants, fiat be upon them. As a kind gesture for the shriven, I offer to relieve them of this weighty burden. I know that they will sleep all the easier for this. May their dreams be soft and untroubled by these "bubbles", which they have no familiarity with or responsibility for. Amen.

Mon, 10/18/2010 - 10:56 | 658174 Azannoth
Azannoth's picture

"After all, even the Fed has a breaking point." - Yes they do, at the end of a .50 c. barrel

Mon, 10/18/2010 - 11:37 | 658336 Snidley Whipsnae
Snidley Whipsnae's picture

Gold is purchasing power.

Fiat currency is crap.

Which one is in a bubble?

Mon, 10/18/2010 - 12:28 | 658484 Oh regional Indian
Oh regional Indian's picture

Seriously though, how many people are aware of the "rumored" Black Eagle Fund?

Or Yamashita's gold. A Shita Lotta gold, if this article, which is well researched and far-fetched, is anything to go by. 

http://www.spiritone.com/~gdy52150/gold10a.html

As the time for the final whistle on this rigged game approaches, I have to think like the opponent, yes?

Ok, so they've had something between 3,600 to 400 years to completely bias this system to bring it to this tipping point. If you have watched any of the discovery channel specials on Extra Large Machines, working in a Shale Oil Field somewhere in Alberta, it stuns you. Thousands upon thousands of this gigantic machines clawing, digging, scraping.....GEOENGINEERING. Large Dams : GEOENGINEERING Weather Modification: GEOENGINEERING...

Okay, if that got your attention, I go back to the opponent. If they can take something as massive and powerful as the earth and in this puny time frame, terra form and geo engineer it into imbalance.

And we think they've not got the gold game fixed? 

Space-Stations, Mars Rovers, Hubbles, Chunnel, Swiss Folks latest giant tunnel....

Really, the Machinery-power they have at their disposal, not counting the military apparatus.

Suddenly, it feels like we're in for an Agatha Christie twist to this tale. 

Imagine if Yamashita's gold resurfaces?

What if Christopher Story was on to something?

Why would gold be the one, major lever they'd leave unplanned/manned?

I have a good nose for what's coming and I feel a different kind of storm approaching...

Who amongst us has an inside view into 400-3,600 years of continuous, contiguous knowledge, records, genealogy, ledgers, books, "real" history (so all of this actually makes sense) and of course the access to wealth, which always bought and destroyed, with over plush patronage the best minds in Art, Science and Religion. 

By the way, did you know that one etymological root for Religion is:

according to Cicero, derived from relegare "go through again, read again

Again and again, egregore, meme, self-fulfilling....

At any rate, I digress. Now I know for certain that in and around India, there are many lost and buried gold hordes. The legends always have some basis in fact and it would take one good one to knock our collective, golden socks off.

I'm asking a totally serious question to the gold bug community/gold holding/Freegold community at large.

Why would a group of people who have th eresources available to them to geo-engineer a planet and land on distant ones, destroy incredibly vast and powerful natural resources (Ocean, atmosphere as two pertinent examples)... why would this group allow Free or even freeish gold? Gold is at the heart of their plan but how it shows up in the game might come as a shocker to Golden Fleecers.

For perspective, put all the money supposedly stuck in this suppressed beach ball of Gold Value and put it against the Mortgage mess, and this is only residential. Naive to think they did not know the housing will blow apart at it's weakest link.....financing. For what it's worth, the Capitol is crawling with the best LEgal and actuarial minds. So of course there is a fix in the wings.

You might have heard of the Club of Rome? 

...... Sorry, I realized this was developing into a post, so finished it on the blog. 

At the end of this post on my blog is an opportunity to participate in something historic.

An OIL Investment..... Once In a Lifetime.... ;-)

I would strongly suggest you visit with an open mind.

http://aadivaahan.wordpress.com

 

Regards,

 

ORI

 

 

 

Mon, 10/18/2010 - 12:40 | 658517 sudzee
sudzee's picture

Gunsngold:

http://www.cnbc.com/id/39720745

Out of banks and into guns, gold and silver. Money well spent.

Mon, 10/18/2010 - 13:46 | 658678 DosZap
Mon, 10/18/2010 - 19:06 | 659729 Al Gorerhythm
Al Gorerhythm's picture

The American way.

Mon, 10/18/2010 - 17:02 | 659310 bearnanke
bearnanke's picture

Is Jim suggesting that the US simply 'takes' the gold other countries currently have stored in the US to allow the US to jump to a gold-standard? 10k tons europe gold is partly in US, and so US could simply 'move it to west point or something' and hand us a receipt... WTF?

This stuff is getting more scary by the day...

Blackmail sounds like a rather good description indeed...

 

 

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cycjyf's picture

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daniel's picture

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