goldsworthy
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- Aug 2, 2009
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The recent ascendance of the gold price to new all-time highs, trading over $1,060 per ounce last week, comes as the U.S. dollar’s role as the world’s reserve currency has increasingly come under assault. Reports last week of secret meetings between Gulf states and China, Russia, and France to denominate oil trading in euroseuros and yen punctuated what has been a relentless attack on the U.S. dollar. However, it is not solely the financial press and private investors that have moved down this path. Recent data released has illustrated the extent to which foreign central bankscentral banks are shedding dollar exposure.
This new data out of Barclays Capital and reported on by Bloomberg shows that global central bankscentral banks are diversifying out of U.S. dollars at an accelerated pace. Only 37% of new cashcash that flowed into foreign central bankscentral banks was put into U.S. dollars in the second quarter, versus an average of 63% since 1999. This comes amidst the largest six month decline in the U.S Dollar on a trade-weighted basisbasis since 1991. Criticism of an implicit weak dollar policy out of Washington has intensified from world leaders in recent months.
Dollar bulls, albeit a relatively small contingent these days, point to the relentless pessimism toward the greenbackgreenback as a contrarian sign that a low is near. With the financial press printing front page stories daily on the dollar’s demise and the ascent of the gold price, it would be foolish to dismiss the possibility of a counter-trend rally. However, from a fundamental perspective, the headwinds facing the U.S. dollar remain strong and severe in nature.
John Mauldin, in his most recent weekly letter, cited Professor Peter Bernholz of the University of Basel, who points out that with $3.6 trillion in federal expenditures projected for fiscal year 2009 versus a $1.6 trillion deficitdeficit, the U.S. government will have to borrow 40% of what it spends. The 2010 fiscal year projections are virtually identical. The deficitsdeficits as a percentage of GDP are staggering, moving into double digits. How long will the appetite be there from foreigners to finance these enormous deficitsdeficits? Maintaining confidence in the U.S. dollar is crucial and Chairman BernankeBernanke’s comments last week regarding the willingness of the Fed to raise rates led to a small bounce in the greenbackgreenback on Friday.
The unprecedented policy actions to combat the creditcredit crisis have not been limited to the U.S. Federal ReserveFederal Reserve. While the U.S. Fed has led the charge, ultra-loose fiscal and monetary policymonetary policy has been a global phenomenon. Mauldin quotes Dallas-based Hayman Advisors, who opined on the current policy initiatives being undertaken by central bankscentral banks across the globe:
“Everywhere you turn, governments are running enormous fiscal deficitsdeficits financed by printing moneymoney. The greatest risk of these policies is that the quantitative easing will persist until the value of the currency equals the actual cost of printing the currency (which is just slightly above zero).”
It is not surprising given the current financial state of affairs, characterized by a transfer of private sector debtdebt to the public sector that investors are increasingly searching for ways to protect themselves from the potential loss of purchasing powerpurchasing power that would result from continued currency depreciationdepreciation. The gold price has set record highs and has begun to re-assert its historical role as a monetary alternative. Funds have flowed into gold as securitized products have made it easier for institutions and individuals to gain exposure to the gold price. The SPDR Gold Trust (GLD) now holds over 35 million ounces of gold and took in over $2 billion in September alone. Gold mining stocks have risen as well on increased volume. In spite of the 42.4% rise in the Philadelphia Gold and Silver Index (XAU) thus far in 2009, the gold mining stocks, relative to the gold price, remain at the lower end of their historical range from a valuation standpoint.
http://www.goldalert.com/stories/Gold-Price-Ascends-as-Central-Banks-Flee-the-US-Dollar
This new data out of Barclays Capital and reported on by Bloomberg shows that global central bankscentral banks are diversifying out of U.S. dollars at an accelerated pace. Only 37% of new cashcash that flowed into foreign central bankscentral banks was put into U.S. dollars in the second quarter, versus an average of 63% since 1999. This comes amidst the largest six month decline in the U.S Dollar on a trade-weighted basisbasis since 1991. Criticism of an implicit weak dollar policy out of Washington has intensified from world leaders in recent months.
Dollar bulls, albeit a relatively small contingent these days, point to the relentless pessimism toward the greenbackgreenback as a contrarian sign that a low is near. With the financial press printing front page stories daily on the dollar’s demise and the ascent of the gold price, it would be foolish to dismiss the possibility of a counter-trend rally. However, from a fundamental perspective, the headwinds facing the U.S. dollar remain strong and severe in nature.
John Mauldin, in his most recent weekly letter, cited Professor Peter Bernholz of the University of Basel, who points out that with $3.6 trillion in federal expenditures projected for fiscal year 2009 versus a $1.6 trillion deficitdeficit, the U.S. government will have to borrow 40% of what it spends. The 2010 fiscal year projections are virtually identical. The deficitsdeficits as a percentage of GDP are staggering, moving into double digits. How long will the appetite be there from foreigners to finance these enormous deficitsdeficits? Maintaining confidence in the U.S. dollar is crucial and Chairman BernankeBernanke’s comments last week regarding the willingness of the Fed to raise rates led to a small bounce in the greenbackgreenback on Friday.
The unprecedented policy actions to combat the creditcredit crisis have not been limited to the U.S. Federal ReserveFederal Reserve. While the U.S. Fed has led the charge, ultra-loose fiscal and monetary policymonetary policy has been a global phenomenon. Mauldin quotes Dallas-based Hayman Advisors, who opined on the current policy initiatives being undertaken by central bankscentral banks across the globe:
“Everywhere you turn, governments are running enormous fiscal deficitsdeficits financed by printing moneymoney. The greatest risk of these policies is that the quantitative easing will persist until the value of the currency equals the actual cost of printing the currency (which is just slightly above zero).”
It is not surprising given the current financial state of affairs, characterized by a transfer of private sector debtdebt to the public sector that investors are increasingly searching for ways to protect themselves from the potential loss of purchasing powerpurchasing power that would result from continued currency depreciationdepreciation. The gold price has set record highs and has begun to re-assert its historical role as a monetary alternative. Funds have flowed into gold as securitized products have made it easier for institutions and individuals to gain exposure to the gold price. The SPDR Gold Trust (GLD) now holds over 35 million ounces of gold and took in over $2 billion in September alone. Gold mining stocks have risen as well on increased volume. In spite of the 42.4% rise in the Philadelphia Gold and Silver Index (XAU) thus far in 2009, the gold mining stocks, relative to the gold price, remain at the lower end of their historical range from a valuation standpoint.
http://www.goldalert.com/stories/Gold-Price-Ascends-as-Central-Banks-Flee-the-US-Dollar
