Goldman predicts deeper dollar drubbing

November 11, 2010 11:55 am

Hasn’t the greenback suffered enough?

Not by a long shot, say Goldman Sachs economists in a note to clients this week. They estimate the dollar’s value would have to drop by another 10% to bring the U.S. trade deficit down to its natural, internally balanced level.

Another dollar downer
A call for a further decline in the dollar hardly ranks as a shocker, what with sages from around the globe weighing in daily on the supposed boneheadedness of Fed chief Ben Bernanke’s decision to buy more Treasury bonds.

But as far as the dollar has fallen, Goldman Sachs’ Dominic Wilson says it’s important not to underestimate the size of the remaining decline.

“To meaningfully reduce global imbalances, [the dollar] needs to fall a lot more from here,” he writes.

He adds that ideally, further drops in the dollar will come not at the expense the usual suspects, the euro and the yen — both of which have shot straight up against the dollar since the U.S. recovery ran out of steam in June.

The dollar traded recently at $1.37 against the euro, off its recent low of $1.42, and 82 yen, after a recent 15-year low near 80.

Instead, Wilson says, the lion’s share of any coming decline should come against the rising currencies of developing Asia. That’s noteworthy because rebalancing global trade is under discussion as global leaders meet in Seoul for the G-20 meetings.

Recent weeks have brought cries of trade and currency wars as the fall of the dollar has pushed up free-trading rivals such as the yen and euro, while exposing dollar peggers such as China to rising inflationary pressures.

Apropos of Treasury Secretary Tim Geithner’s proposal to limit national trade gaps, Wilson estimates how much various currencies would need to appreciate or decline to put trade accounts into broad balance.

By his reckoning, the four most overvalued currencies in the world are called the dollar –with only the commodity-exporting powerhouses of Australia, Canada and New Zealand topping the United States.

By contrast, the most undervalued currencies are those in emerging Asia, led by China, Singapore, Taiwan and Malaysia.

To put the world on a balanced trade footing, Wilson estimates, China’s yuan needs to appreciate 19% in real, or inflation-adjusted, terms. He also calls for big increases elsewhere in what Goldman dubs non-Japan Asia, or NJA — 28% for Singapore, 23% for Taiwan, and 13% for Malaysia.

“The basic picture that emerges is that current FX trends—USD weakening and NJA strengthening—have a long way to go from here, in line with our call for more broad USD weakness ahead,” he writes.

Of course, for that to happen the way Goldman forecasts, global leaders will have to come to a landmark agreement to change the very economic policies that have brought them increasing prosperity over the past decade.

“The likelihood of our seeing a massive paradigm shift over 36 hours is not all that good,” said Jessica Hoversen, an analyst with MF Global. “There are so many questions, and for the moment the self-righteous aren’t apt to compromise.”

But given the cracks in the established order, it’s a good sign that the discussions are happening at all, which will free everyone to keep hoping that progress will be made one of these days, if not quite yet.

In the meantime, Ben Bernanke will continue to get yelled at and leaders in China and other emerging nations will face a growing risk of asset bubbles and inflation. It’s an unhappy reality, Wilson writes, and “no amount of G-20 word-smithing can get around this fact.”

Silver Trust ETF Adds 352 Tonnes of Silver

The stockpile of silver bars for the iShares Silver Trust ETF (NYSE:SLV) increased by an astonishing 352 tonnes yesterday – the biggest single-day addition since the fund was launched back in early-2006, save for the odd Dec. 31st, 2007/Jan. 1st, 2008 sequence during which 617 tonnes were added and then 555 tonnes removed the next day.

Some 580 tonnes have been added to the trust in just the last four trading days, bringing the total inventory to 10,718 tonnes, up almost 20 percent since August when metal prices took off. Of course, the price of silver has risen by more than 50 percent since that time, so, don’t be surprised if metal continues to be added to the trust.

Disclosure: Long gold and silver for the foreseeable future

G-20 Nations Wrangle Over Strengthening Vow on Currencies

Group of 20 nations’ efforts to tackle currency and trade imbalances floundered as China rejected policy prescriptions that fault its exchange rate regime and directed criticism at additional monetary easing in the U.S.

“Don’t make other people take the medicine for your disease,” Yu Jianhua, a director general at China’s Ministry of Commerce, told reporters in Seoul late yesterday. “Quantitative easing will have a very big impact on developing countries including China.”

Market Nuggets: Silver Inflows To ETFs Rise Sharply

Market Nuggets: Silver Inflows To ETFs Rise Sharply – Barclays11 November 2010, 8:23 a.m. By Debbie Carlson Of Kitco News http://www.kitco.com/

(Kitco News) — Inflows to silver exchange traded funds rose sharply on Wednesday, registering an increase of 354 metric tons, Barclays Capital says in a research note. That figure almost matches the total inflows during all of October. The bank says Wednesday’s flows are the largest daily influx since December 2007. Nearly all of the purchases went to the largest ETF, iShares. The heavy inflows are a turnaround from April, when the largest ever monthly outflow was 335 tons. The bank notes the rise in ETF inflows is in contrast to the drop in long speculative interest in Comex silver futures. “A build in ETP interest is normally more positive as it reflects longer-term demand for the metal; however, silver’s own fundamentals still look burdensome and heavily reliant on investment demand to drive prices higher,” they say. By Debbie Carlson of Kitco News; dcarlson@kitco.com 11 November 2010, 8:23 a.m. By Debbie Carlson Market Nuggets: Base Metal Restocking Likely To Start In 2011 – Barclays (Kitco News) — Demand for base metals has surged past market expectations, which has lifted prices, and market participants are likely working through inventory, rather than have restocked supplies, Barclays Capital says in a research note. Because of that demand for base metals might pick up in early 2011 as market users need to rebuild supplies once the seasonally slow period of the fourth quarter ends. The bank believes Chinese consumers will be ending 2010 with unsustainably low inventories as they work through current supplies and deal with power-related production curbs to refined metal output. Other regions will need to rebuild supplies, too, they say. “We therefore see the potential for a sizeable restocking boost to base metals buying in early 2011, in China, North America and parts of Europe, even if prices are still high. This stronger buying is likely to be the next catalyst for base metals prices, in our view, with those metals where supply is tight, such as copper and tin, posing the biggest upside potential,” Barclays says. By Debbie Carlson of Kitco News; dcarlson@kitco.com 11 November 2010, 7:56 a.m. By Allen Sykora Market Nuggets: LME Copper Hits Record High After Chinese Economic Data–R.J. O’Brien (Kitco News) — China’s strong economic reports have sent three-months copper on the London Metal Exchange to an all-time high, says Janet Mirasola, managing director of metals at R.J. O’Brien & Associates. Chinese data include a 4.4% rise in the Consumer Price Index, industrial-production growth of 13.1% and growth in retail sales of 18.6%. Furthermore, Moody’s Investors Service raised China’s debt rating. China is the world’s largest consuming nation of copper. As of when Mirasola wrote her daily research report, copper had peaked at $8,966 a metric ton, surpassing the previous high of $8,940 from July 2008. By Allen Sykora of Kitco News; asykora@kitco.com 11 November 2010, 7:49 a.m. By Allen Sykora Market Nuggets: Commerzbank: Price Of Rare-Earth Metals To Rise From Elevated Levels (Kitco News) — The price of rare-earth metals is likely to keep rising, says Commerzbank. The metals, which compromise 17 elements of the periodic system, are critical to a number of industries, including consumer electronics and technology, auto, alternative energy, plus they are used in military hardware. Prices have already skyrocketed in 2010, with cerium jumping from $3.88 per kilogram in 2009 to $50 at the start of November, Commerzbank reports. China, which has a virtual monopoly on production of these metals, has cut export quotas. There is little alternative supply in the short to medium term, as additional supply from the U.S. and Australia won’t hit the market until 2012-13 at the earliest. “As it will likely take years to raise the supplies necessary to meet global demand, we argue that rate-earth prices will rise strongly over the short to medium term from their already-elevated levels,” Commerzbank concludes. “In fact, there is also the risk that a shortage may be ahead.” By Allen Sykora of Kitco News; asykora@kitco.com

Gold climbs as jitters over euro zone debt intensify

Gold rose back toward $1,415 an ounce in Europe on Thursday as concerns over sovereign debt in some peripheral euro zone economies intensified, boosting interest in the precious metal as a safe store of value.

The markets are nervous over a meeting of Group of 20 leaders this week, at which currency imbalances may be addressed. Worries over the stability of the foreign exchange markets has been a key support for gold this year.

Spot gold was at $1,414.20 an ounce at 1107 GMT (6:07 a.m. ET), less than $10 an ounce below the record $1,424.10 an ounce it hit earlier this week, versus $1,402.70 late on Wednesday. U.S. gold futures for December delivery rose $14.80 to $1,414.10.

Gold priced in euros also rose, reaching its highest since mid-June at 1,029.59 euros an ounce.

“The dollar is a tad firmer, but so are commodities in general,” said Saxo Bank general manager Ole Hansen. “We have not seen anything on the currency front yet that could rattle people’s belief in higher commodity prices.”

“(There is) nervousness about the outcome of the G20 and the European debt situation,” he added. “As we edge closer to the time of year where position reductions begins to kick in, I see the sector supported as long we do not see sudden strength in the dollar.”

The dollar rose against the euro on Thursday, with tensions in the euro zone periphery expected to trigger further selling of the single currency as investors fretted over the outlook for the Irish and Portuguese deficits.

A stronger dollar usually weighs on gold, but risk aversion kept the metal supported. The cost of insuring Spanish, Portuguese and Irish debt against default hit record highs as market jitters over euro-peripheral economies rose.

“Worries over euro zone troubles were still mounting amid fears that Ireland will have to resort to a Greek-style bailout should the situation worsen,” said VTB Capital analyst Andrey Kryuchenkov in a note.

“A stronger dollar is still capping the upside in gold, but should risk sentiment turn outright sour, gold would decouple from the rest of the precious complex with investors running for bullion’s safety amid rising currency and sovereign risks.”

SCRAP SELLING RISES

In Asia, traditionally a key region for gold consumption, gold scrap selling increased after spot prices hit record highs, though it fell short of meeting burgeoning demand.

“The collection of scrap has definitely increased compared to last week, but not enough to fulfill fresh demand in the market,” said a dealer with Mumbai’s Jugraj Kantilal & Co.

Among other precious metals, silver rose to $27.70 an ounce against $27.20. Holdings of the iShares Silver Trust, the world’s largest silver exchange-traded fund, rose 3.4 percent to a record 10,718.82 tonnes by Nov 10, it said.

“At 40.6 million ounces over the past five business days, global ETF investment enjoyed its largest absolute one-week increase since the first week of the first-ever contact (iShares) in April 2006,” said UBS analyst Edel Tully in a note.

The Precious Gold to Game the G-20

Jim Cramer

11/11/10 – 04:00 AM EST

Tough to play the G-20. You know why? Because I think that the only way to make money off the conference is to bet that it won’t go well or that it will be reported that it doesn’t go well. That means buy gold.

Gold’s been on a tear of late. I am sure there is a propensity to believe that the run is done, or has to be done soon. But meetings like the G-20 are going to be all about the U.S. telling the world, “Look, this is how it is going to be. We are not going to allow you to take our markets, have us defend you militarily, let you dump goods on us and tell us what to do.” We are in a “new sheriff in town, and his name is Bernanke” mode.

That’s a prescription for people who own dollars to go into the only currency that will hold its value no matter what, one that has increased in value for a decade: GOLD.

Coming out of the G-20, I think it will be more evident than ever that gold is not a commodity but a currency, a substitution for every currency out there that’s duking it out with the dollar, not just the dollar itself.

I have always favored the SPDR Gold Shares(GLD) as a way to play gold. But of late I have switched directions. With gold so high, and so many miners with $400 costs — like El Dorado and Agnico Eagle — I think it is time to overweight the miners over the actual commodity.

My new favorite, the one we have been buying aggressively for ActionAlertsPlus — NovaGold(NG) — is still one more play for the G-20 and its aftermath. It is a multiyear play because you are really just buying the asset of gold, not the mined gold. That’s because I do not expect any production from NovaGold until 2015 at the earliest.

I know this will sound like a strange analogy, but NovaGold is like a biotech stock. It is something that you know will be huge — it’s got the largest deposit of gold in North America — that I think will only build in value over as I believe that gold is going to have a very long run.

I have been telling people that, until gold represents 5% of an average portfolio manager’s holdings, they should continue to accumulate the precious metal. Not until then — wherever the price is — will we have reached the peak of gold.

Given that gold is less than 0.5% of the average portfolio manager’s holdings, you can see why I believe we are going to see a long-term run in gold as we get to my target. That’s why having a long-dated asset like NovaGold is the best way to play the trend.

The G-20 will be just another Bernanke bash session. I say take that bash session for what it is, an attempt to get the dollar down to where we are going to see economic growth imported to our country. That means the dollar will be a terrible place to be. Whether you think it should or not, gold will be the default currency.

I am not daunted by the $1,400 price. Meetings like the G-20 just remind you how valuable gold is.

Gold grabs limelight as G-20 tackles dollar’s fall

Published: 2010/11/11 06:28:14 AM

GOLD is taking centre stage as the Group of 20 (G-20) two-day summit opens in South Korea today, with world leaders looking to the metal to underpin a new consensus on the global economy to avert a currency war and a damaging retreat into trade protectionism.

The meeting takes place against a backdrop of criticism of the US Federal Reserve’s $600bn quantitative easing (QE2) programme, which critics say has overinflated the currencies of emerging-market countries and compromised the competitiveness of their exports.

The US, fending off criticism of QE2, is also expected to continue to pursue its feud with China over its currency and its trade surplus, which was yesterday reported to be a mammoth $27,1bn last month, up from $16,9bn.

Although China has defended its yuan policies, it lifted the required reserve ratio for all deposit-taking institutions yesterday, meaning its biggest banks are setting aside a record 18% in reserves, BNP Paribas said.

Banking shares in China fell 2% after the increase, which could force lenders to put a total of about $ $27bn on deposit with the central bank, preventing them from extending it as credit.

Concern over the fate of the dollar has pushed the search for a new global consensus centre stage, turning a spotlight on gold that the metal has not enjoyed since the end of the gold standard in 1971 and its replacement by a system of floating currencies.

Yesterday, World Bank president Robert Zoellick, who first mooted a return to the gold standard in an interview with the Financial Times (FT) at the weekend, again stated that the global economy is moving towards a new monetary system with gold emerging as a preferred alternative to existing assets.

“There’s uncertainty about the future of the international monetary system,” he told a news conference in Singapore.

“As I said, whether people wish to acknowledge it or not, we are moving towards a Bretton Woods 3,” he said, referring to a possible agreement to replace the current system of floating currencies.

He also tried to ease concerns over the possibility of a global “currency war” but warned of growing protectionism if tensions over exchange rates were allowed to continue to fester.

Mr Zoellick stressed his FT article was not necessarily a call for a return to the gold standard. “What I tried to outline in the piece was that I don’t believe that you can return to a fixed exchange rate system, and therefore I don’t believe you can return to a gold standard,” Mr Zoellick said.

“But then the question is if you’ve got multiple reserve currencies, how will the international system co-operate?”

He said governments had to recognise the changes taking place in the global monetary system and take the necessary steps to adjust to a new regime.

“These things are happening…. So in my view, it’s better for the key governments involved to recognise it and start to figure out how do they want to change the rules and norms in the international system.”

Gold has become a favourite choice for investors seeking higher yields, a safe haven from volatile foreign exchange movements and uncertainties surrounding the global economy, he said.

“It’s also the case that gold is now being viewed as an alternative monetary asset.

“Gold has become a reference point because holders of money see weak or uncertain growth prospects in all currencies other than the renminbi (yuan), and the renminbi is not free for exchange. So in relative terms, gold is appealing to people who ask ‘where should I put my money?’…. it’s a hedge on uncertainty.”

He said the dollar will remain dominant but “people will look at alternative investment sources”.

Gold struck a record high yesterday in London, a day after it broke the 1400/oz barrier.

Under a new system he said “the key currencies will be the dollar, the euro, the pound, the yen and over time the renminbi (yuan) as it internationalises and moves towards an open capital account”.

He tried to downplay the possibility of a currency war but voiced concern about growing protectionism if “tensions in exchange rates” remain unchecked.

“I do think there are tensions in exchange rates and if not properly managed, those tensions risk increasing protectionism and that is what I am trying to fight and offer a counter approach.”

Chinese officials have raised concern that the Fed’s $600bn QE into the US economy will lead to capital inflows hitting emerging markets, reflecting global tensions over economic rebalancing on the agenda of the summit.

Despite worries about speculators, the rebound in China’s trade surplus last month highlighted how most of the cash rushing into the country is coming via more ordinary channels.

“They (the data) showed an outlook for strong economic growth, and I think the Chinese government will have more confidence to further tighten its monetary stance,” said Eliza Liu, an economist with CCB International in Beijing.

Although some analysts forecast that the surplus would narrow, the impressive trade performance came at a politically awkward time for Beijing. Reuters, Sapa-AFP

Geithner Says Greenspan Wrong, Dollar Fell on Risk Appetite

Treasury Secretary Timothy F. Geithner said the dollar’s drop in recent months is due to a reversal in safe-haven capital flows, rebutting former Federal Reserve Chairman Alan Greenspan’s assessment of U.S. policy.

Investors are no longer seeking as much of a refuge in dollars, and that’s “a sign of greater confidence that although we face challenges in the U.S. and globally the risks we face are more manageable,” Geithner said in a transcript of an interview with CNBC television distributed by e-mail today. This shift is “the dominant trend that we see,” he said.

The remarks follow criticism from Chinese officials, including Vice Finance Minister Zhu Guangyao on Nov. 8, that the Fed plan to buy $600 billion of Treasuries may “shock” emerging markets by flooding them with short-term capital. German Finance Minister Wolfgang Schaeuble called the Fed “clueless” and Greenspan wrote in the Financial Times today that the U.S. is “pursuing a policy of currency weakening.”

“I have enormous respect for Greenspan, had the privilege of working with him for a long period of years but that’s not an accurate description of either the Fed’s policies or our policies,” said Geithner, who arrived in South Korea today to join President Barack Obama in efforts to rally support for U.S. trade initiatives. “We will never seek to weaken our currency as a tool to gain competitive advantage or to grow the economy.”

G-20 Talks

Leaders from the Group of 20 nations are deliberating on whether to endorse proposals to refrain from competitive currency weakening and to monitor trade balances for signs that deficits or surpluses are reaching risky levels.

Finance ministers endorsed the plan last month. Since then, nations including Germany and China have criticized what they say is a U.S. push to impose unfair limits while the Fed weakens the dollar.

The Dollar Index, which IntercontinentalExchange Inc. uses to track the dollar against the currencies of six major U.S. trading partners including the euro and yen, slid on Nov. 4 to the lowest level since December 2009. It lost 11 percent versus the yen in the past six months, to 82.17 as of 1:13 p.m. in Tokyo, and 8.2 percent against the euro to $1.3797.

Dollar’s Ride

The Dollar Index surged by March 2009 to its highest level since 2006 as the financial crises deepened after the failure of Lehman Brothers Holdings Inc., before retreating by year-end as the world economy recovered from the deepest postwar recession. The American currency strengthened again in the first half of this year as Europe’s sovereign-debt crisis undermined the euro.

Geithner said today he’s “very confident” the leaders will endorse the framework set out by the finance chiefs.

“We provided a proposal that allows for a cooperative framework to manage through those kinds of things,” he said. “You’re going to see very broad support for that because, again, it’s better than the alternative. Because the alternative is countries want to go their own way and you see the cooperative forces so important in solving the crisis dissipate.”

The Treasury secretary also said that China is making progress on allowing a more flexible yuan and that “it’s very important to them, and I think they believe this in China too, that they let this process continue.”

The yuan has strengthened about 0.7 percent against the dollar since Nov. 8, its biggest three-day advance since a currency peg ended in July 2005. Premier Wen Jiabao’s government has kept the gains to about 3 percent since pledging to allow greater flexibility in June.

“If you resist those market forces, that pressure is not going to go away,” Geithner said, attributing the tendency toward a higher yuan to confidence in the outlook for China’s economic growth. “It’s just going to end up in higher inflation or higher asset prices and that’ll be bad for China.”

G-20 Nations Wrangle Over Strengthening Vow on Currencies

Nov. 11 (Bloomberg) — Mitul Kotecha, head of global foreign exchange strategy at Credit Agricole CIB in Hong Kong, talks about the outlook for Group of 20 discussions on global currencies. Speaking with Maryam Nemazee on Bloomberg Television’s “Countdown,” he also discusses the outlook for the euro. (Source: Bloomberg)

The Group of 20 is struggling to build on a commitment last month to address currency and trade imbalances blamed for fueling asset bubbles and stoking protectionism.

Canadian Prime Minister Stephen Harper said he’s “not so sure” an agreement will be reached by the end of the group’s summit in Seoul tomorrow. Negotiators have yet to bridge disagreements on either exchange-rate policy or appropriate imbalances in trade and capital flows, G-20 committee spokesman Kim Yoon Kyung told reporters today.

The arguments center on which of the world’s two biggest economies, the U.S. and China, are to blame for distorting trade and investment flows. Failure to narrow those differences risks fueling further capital controls and hobbling the global economic recovery.

“They have to deal with the underlying causes for this instability, which are these imbalances,” said Josef Ackermann, chairman of the management board of Frankfurt-based Deutsche Bank AG. “It’s not about assigning blame to who is in deficit and who is in surplus — the markets will decide who is in surplus and who in deficit — but to create a framework to find the right balance.”

A meeting of finance ministers and central bankers last month agreed to move toward “more market-determined exchange rate systems” and “reducing excessive imbalances.”

The U.S. Federal Reserve a week later said it would pump $600 billion into the economy to boost growth. Brazil, Germany and China said move would drive down the dollar and fuel speculative flows of capital that risk asset bubbles.

‘Huge Engine’

“The most important thing the United States can do for the world economy is to grow because we continue to be the world’s largest market and a huge engine for all other countries to grow,” President Barack Obama said at a Seoul press conference today with South Korean President Lee Myung Bak.

Obama later sat down with Hu Jintao, president of China, a country whose record $28 billion trade surplus with the U.S. in August — announced on the eve of the summit — heightened complaints it keeps its currency undervalued.

The U.S. is pushing China to let the yuan appreciate faster to curb the trade surplus.

China, along with Germany, opposed a suggestion last month by U.S. Treasury Secretary Timothy F. Geithner that the G-20 consider targets for reining in excessive current-account imbalances. To meet the targets, countries like China would likely have to let the value of their currency rise, making their exports more expensive.

Both to Blame

Former Federal Reserve Chairman Alan Greenspan, writing in an opinion piece in the Financial Times today, said that both the U.S. and China are depressing their currencies.

“We will never seek to weaken our currency as a tool to gain competitive advantage,” Geithner said in a transcript of an interview with CNBC television distributed by e-mail today.

China’s yuan, which Treasury Secretary Timothy F. Geithner said Nov. 8 should further appreciate, rose to a 17-year high against the dollar today and has climbed 3 percent since June. China allowed a faster pace of gains this week, a strengthening of 0.7 percent since Nov. 8, the yuan’s biggest three-day advance since a currency peg ended in July 2005.

Superior Products

German Chancellor Angela Merkel dismissed the idea of setting limits on trade gaps. Differences in competitiveness between countries can’t be leveled by “politically imposed limits,” she told a meeting of global business leaders in Seoul.

Germany’s surplus is a product of market forces and evidence of superior products, Merkel said in an interview with Die Welt newspaper published yesterday.

Germany’s current-account surplus as a percentage of gross domestic product for 2010 is set to be 6.1 percent, the second highest in the G-20, after Saudi Arabia, according to International Monetary Fund projections. The U.S. is likely to see a deficit equivalent to 3.2 percent of GDP, the third deepest, it said.

Setting limits on trade gaps “is an idea that should be discussed,” French Finance Minister Christine Lagarde said.

France takes over the presidency of the Group of 20 tomorrow after the summit chaired by South Korea’s Lee.

“Geithner’s idea is one of many that should be discussed,” she said at a press conference in Seoul. “There will be other ideas, and they all need to be considered to create a system that brings greater stability.”

The French government has said it will begin its G-20 presidency by holding seminars to discuss reforming the international monetary system. France has blamed the dollar’s role as the sole reserve currency for creating massive liquidity flows that led to the financial crisis.

“You have on the one hand a country in deficit with a reserve currency that’s freely floating, and on the other an administered money that’s based on amassing large reserves,” Lagarde said, referring to the U.S. and China. “We need a forum where they can discuss and define mechanisms of stability.”

Gold Chart and the G-20 meeting