Bank Analyst & Commentator Opinions
Last Update : June 9, 2009
Information has been redacted from the articles as they originally appeared and some information has been bolded for
emphasis.
Bank of America - Merrill Lynch Research
Research by Francisco Blanch, Sabine Schels, Gustavo Soares & Michael Haase
June 9, 2009
Precious metals will continue to trend higher
We first discussed our view that gold prices could hit $1500/oz over a three year horizon last October. In this not, we reiterate our average spot gold price forecast of $1000/oz for 2009 and $1050/oz for 2010. Helped by our outlook on gold, we have maintained a positive view on silver. We are now revising up our 2009 silver price forecast to $15.25/oz, and we see silver averaging $16.15/oz in 2010....
3. Precious metals outlook
We first discussed our view that gold prices could hit $1,500/oz over a three stages in our October 13th Metals Strategist entitled "Turn you lead into gold". Here we reiterate our average spot gold price forecast to $1000/oz for 2009 and $1050/oz for 2010.
3.1 Outlook for Gold
Risk, currency and commodity prices define gold moves
As the ultimate means of storing value over thousands of years, the price of gold can reflect many macro variables at once. For the most part, however, we believe three variables alone go a long way in explaining the fluctuations in the price of gold: risk, currency and commodity prices. As we first discussed in our Metals Strategist, our analysis shows that gold is sometimes a currency, sometimes a commodity and sometimes a store of value (Table 7). Although the decomposition is not perfect, it helps to explain three major forces influencing gold returns. Departing from this framework of analysis, we believe gold prices will move up to $1500/oz in three steps over the next three years. With the outburst of the credit crisis last August, we entered into the first step where gold started to reflect the rising risk premium. The second stage should primarily be about currency weakness. Finally, as global currency markets stabilize, the third stage in the appreciation of gold will be driven by a recovery in energy prices, in our view.
Gold remains the ultimate safe haven asset for investors....
The same policies that are helping bring down market risk across the world—enormous fiscal stimuli and expansion of the money supply—are also bringing doubts about the reliability of other safe haven assets such as domestic currency denominated sovereign debt. Actual debt defaults are unlikely to happen in the developed world, but governments can simply erode the value of their debt by letting the currency weaken relative to other currencies (devaluation) or to the goods in the economy (inflation). These growing concerns have struck a cord with investors...The movements in non-commercial net-long positions in gold futures clearly point to a strong pick up in investor interest, a move very much in line with the recent appreciation of gold prices....
...even without investor physical buying increasing, gold prices could continue to rally as the USD losses value relative to other currencies.
Currency weakness is much more than just USD weakness
Of course, currency weakness is much more than just USD weakness. The long-term sustainability of the current fiscal and monetary policies has direct consequence to the relationship of all major currencies to gold. Unlike gold, which is completely free of credit risk, sovereign bonds are increasingly being seen as risky assets even in developed markets...In our view, official sector sales should decline considerably from their 2008 levels of 246 tonnes to 200 tonnes in 2009....
Deflation now, inflation later to support gold prices
All G7 and many EM economies are currently cutting taxes and putting forward enormous fiscal stimulus packages (5.8% of GDP in the US and 15% GDP in China). While the recent fiscal and monetary policy measures are directed at offsetting the private sector credit contraction, we expect them to have severe fiscal consequences in the long run. Governments around the world are easing monetary policy and raising liquidity provisions. When economic growth starts picking up again, it may prove difficult to engineer a U-turn on money supply growth. Consequently, the world may be facing serious inflationary pressure later if the current policies are successful in avoiding deflation now.
Money supply growth is linked to gold price changes
At the same time, with EM central banks easing monetary policy in an attempt to stimulate aggregate demand, EM markets inflation rates, which are still relatively high, are likely to pick up later. We may still be a few months away from seeing core inflation picking up across the world as the global output gap is still considerably wide. However, an increase in money supply is a debasement of fiat currencies relative to above ground gold stocks by construction. Hence, the high speed of money supply growth should translate into higher gold prices even if inflation in itself is not a major threat in the short-run (Chart 29)....
As we expect gold to maintain its long-run relationship with other commodities, prices could well push higher to $1500/oz.
3.2 Outlook for silver
Helped by our outlook on gold, we have maintained a positive view on silver during the last eight months. The rebound in silver prices has, however, exceeded our expectations and we are now revising up our 2009 silver price forecast from $14.50/oz to $15.25/oz. Similarly, we now see silver prices averaging $16.15/oz in 2010, compared to 15.00 prior. The upside pressure on silver will continue to come on the back of further upside in gold prices, a recovery in the industrial activity around the world, and a reduction in risk aversion.
Silver will likely follow our positive outlook on gold.
[ TOP ]
Northwestern Mutual Makes First Gold Buy in 152 Years (Update2)
By Andrew Frye
Bloomberg
June 1, 2009
June 1 (Bloomberg) -- Northwestern Mutual Life Insurance Co., the third-largest U.S. life insurer by 2008 sales, has bought gold for the first time the company's 152-year history to hedge against further asset declines.
"Gold just seems to make sense; it's a store of value," Chief Executive Officer Edward Zore said in an interview following his comments at a conference hosted by Standard & Poor's in Brooklyn. "In the Depression, gold did very, very well."
Northwestern Mutual has accumulated about $400 million in gold, and Zore said the price could double or even rise fivefold if the economy continues to weaken. Gold gained 10 percent last month, the most since November. The commodity has more than tripled since 2000, rising for eight straight years. Gold futures for August delivery slipped $4.80 to $975.50 at 4:03 p.m. in New York.
"The downside risk is limited, but the upside is large," Zore said. "We have stocks in our portfolio that lost 95 percent." Gold "is not going down to $90."
Policyholder-owned Northwestern Mutual, based in Milwaukee, ranks third by 2008 life insurance premiums according to data from the National Association of Insurance Commissioners. The data excludes annuities.
[ TOP ]
Treasuries Rise as Geithner Says There Will Be Enough Demand
By Wes Goodman
Bloomberg
June 2, 2009
June 2 (Bloomberg) -- Treasuries rose as Treasury Secretary Timothy Geithner said in Beijing that there will be enough demand for the record amount of debt the U.S. is selling....
China is the biggest foreign holder of U.S. Treasuries with $768 billion at the end of the first quarter. Premier Wen Jiabao called for the U.S. "to guarantee the safety of China's assets" and central bank Governor Zhou Xiaochuan proposed a new global currency to reduce reliance on the dollar, both speaking in March....
"I wish to tell the U.S. government: ‘Don't be complacent and think there isn't any alternative for China to buy your bills and bonds,'" Yu said in an interview yesterday. "The euro is an alternative. And there are lots of raw materials we can still buy." Yu said he was scheduled to meet Geithner in Beijing today.
[ TOP ]
China's Doubts About the Dollar
Behind its push to revamp the monetary system and promote the yuan are real worries about U.S. deficits
By Steve LeVine and Dexter Roberts
Business Week
June 1, 2009
Beijing's quest to dethrone the dollar as the world's dominant currency is a natural strategy for hard-line Chinese leaders bent on undercutting U.S. influence in the world. Yet here's a twist: A key figure behind this policy drive, Chinese central banker Zhou Xiaochuan, is actually an economic reformer and internationally respected economist....
Beijing is nudging trading partners to use its currency, the yuan, in trade transactions. Meanwhile Zhou, who has served as governor of the People's Bank of China since 2002, backs the creation of a "super-sovereign reserve currency" managed by the International Monetary Fund that would challenge the dollar's power...an international campaign led by China to move away from a dollar-centric global economy is gathering momentum....
The U.S. budget deficit has exploded, and the Federal Reserve is effectively printing money to buy Treasury bonds. That's a recipe for a weak dollar, a bond glut—and a nasty financial hit to Chinese holdings of U.S. Treasuries....
To reduce its exposure to U.S. economic policy, Beijing is forging currency swaps with Asian and Latin American nations, contracts that provide their central banks with yuan to use in trade with China.
[ TOP ]
Pimco's Gross takes bleak view
Boom times are over, bond manager says
By Sam Mumudi
MarketWatch
May 28, 2009
CHICAGO (MarketWatch) -- Bill Gross, co-chief investment officer of bond mutual-fund giant Pimco, on Thursday offered investors a sobering market outlook in which he sees lower returns, decreased U.S. growth and the loss of the dollar's status as the world's reserve currency....
... "it's hard for [Pimco] to imagine" the Dow Jones Industrial Average climbing back to 14,000 or home prices returning to 2006 levels, Gross said.
"Growth will be stunted," he said. "It will be a different type of world and we have to get used to that."
The U.S. economy will grow at between 1% and 2% a year rather than 2% to 3% a year for the next three to five years at least, Gross said. "That will make a significant difference for corporate profit growth," he said.
Moreover, unemployment will hover around 7% to 8% rather than the recently typical 4% to 5%, he added, and the higher rate would be around "for a long time to come."
Gross added that inflation would also start to accelerate in about three to five years' time.
This new economic climate should prompt investors to question many previously held assumptions -- especially about whether stocks will outperform bonds....
In light of this new reality, investors should look for stable income from their investments, rather than reaching for returns....
Gross also said, with certainty, that the dollar will lose its reserve status. "We simply have too much debt," he said.
[ TOP ]
U.S. Bubble Collapse to Be Worse Than Japan's, CLSA's Wood Says
By Patrick Rial
Bloomberg.com
February 23, 2009
Feb. 23 (Bloomberg) -- The U.S. is facing a deflationary collapse more severe than the crash that hobbled Japan's economy in the 1990s, leaving gold as the only defensive play for investors, according to CLSA Ltd.'s Christopher Wood....
"The collapse of securitization is a much more deflationary situation in the U.S. than anything seen in Japan when the bubble collapsed in the early 1990s,....
Gold may be the safest haven for investors as policy makers accelerate responses to the crisis, devaluing currencies versus hard assets such as gold in the process, said Wood. Gold is likely to more than quadruple from the current level of $986 per ounce currently to $3,500 in 2010, he said.
Wood, who in 2003 predicted the U.S. housing crisis, joined New York University economist >Nouriel Roubini in cautioning against investment in Europe due to the rising risk among economies in the eastern and central parts of the continent that carry current account deficits....
"In my view, we will have a full-scale currency collapse in central and eastern Europe, the strategist said. "This will lead to a growing focus on the huge exposure of the European banks to these distressed economies.
[ TOP ]
Russia Ready to Invest $10 Billion in IMF Bonds
By Lidia Kelly
Wall Street Journal
May 28, 2009
MOSCOW -- Russia is willing to invest as much as $10 billion in bonds that could be issued by the International Monetary Fund, Finance Minister Alexei Kudrin said Wednesday.
"We are currently discussing in the government the possibility of making a decision in the near future about investing up to $10 billion in IMF bonds," Mr. Kudrin told President Dmitry Medvedev in a televised meeting.
The IMF is preparing its first bond offering, potentially tailored to Brazil, Russia, India and China. Russia's offering would equal that of India and would be about a quarter of the $40 billion China is expected to contribute to boost the IMF's resources....
Russia holds the world's third-largest foreign-exchange reserves behind China and Japan. The total was $391.3 billion on May 15.
[ TOP ]
China calls for the reign of the dollar to end
China has called for the eventual replacement of the dollar as the world's reserve currency, in a sign of its growing concern about the dominant role played by the US in the global economy.
By Malcolm Moore in Shanghai
Telegraph.co.uk
March 25, 2009
The bold proposal, just days before world leaders gather in London to discuss the financial crisis at the G20 meeting, was made by the head of the Chinese central bank.......Zhou Xiaochuan argued that cost of using the dollar as a global reserve currency "may have exceeded its benefits....he argued that the current international monetary system is causing frequent and increasingly intense financial crises. He added that the United States is "constantly torn between achieving its domestic monetary policy goals and meeting the international demand for a reserve currency....Mr Zhou's essay comes days after the US announced that it would buy back as much as $300bn (£20bn) of Treasuries and $1 trillion of illiquid bank assets. Since the Federal Reserve is likely to print more money to finance the purchase of the Treasuries, it could weaken the dollar and further devalue China's $1.95 trillion of foreign reserves....Instead of using the dollar, Mr Zhou proposed expanding the use of "special drawing rights, a type of synthetic currency created by the International Monetary Fund in the 1960s.... The SDR was originally created as an international reserve currency, but its use was torpedoed by a lack of cooperation from the US....... Russia has made a similar argument recently in a sign of the concern that developing countries have about their lack of a say in how the global economy is managed. Russia strongly criticized the "obsolete unipolar world economic order. Mr Zhou also argued that a change in the system would benefit the US. "The price is becoming increasingly higher, not only for the users, but also for the issuers of the reserve currencies. Although crisis may not necessarily be an intended result of the issuing authorities, it is an inevitable outcome of the institutional flaws, he said.
[ TOP ]
Why Gold Will Rise to at Least $6,000 per Ounce
By Dr. Murray Sabrin
Kitco
May 26, 2009
In November 2003, a month before the 90th anniversary of the creation of the Federal Reserve, I spoke to a group of money managers and bond traders in south Florida about the Federal Reserve's nine decade legacy. At that time the price of gold was approximately $380 per ounce. I informed the attendees that gold was the most undervalued asset on the planet. Nearly six years later, gold has nearly tripled in price and may have been the best performing asset class in the world since then, and one of the best investments in this decade....
With gold currently trading at $950 per ounce, where will the price of gold be six years from now? Conceivably, much higher than any current forecast. How high? Later in this essay, I will explain how returning to a "hard money dollar and a sound banking system will require a gold price of at least $6,000 per ounce and possibly much higher....
There are several ways to revalue the dollar in terms of gold and make the U.S. dollar a hard money once again. This would create a 100% gold dollar. Americans as well as foreigners are used to conducting their exchanges dollars so the goal is to regain the confidence of dollar holders by ending the devaluation of the dollar.
1. All currency and demand deposits and other forms of money would be convertible into gold. That would mean all forms of money that people are familiar with would "backed by gold. Inasmuch as there about $1.6 trillion of this form of money outstanding that would be backed by about 260,000,000 million ounces of gold held by the Federal Reserve, the price of gold or more accurately the value of the dollar would be 1/6,153 of an ounce of gold. In other words, the price of gold would be $6,153 per ounce.
2. According the Rothbard/Salerno definition of the "True Money Supply, the current amount of dollars in the economy that functions as the general medium of exchange is about $5.5 trillion. Based on this approach, the FED's 260,000,000 ounces of gold would have a dollar/ratio of 1/21,153, or the price of gold would be $21,153 per ounce. Before you mortgage the house and sell the kids to make more than twenty times your money, another economist challenges the Rothbard/Salerno definition of the true money supply.
3. Economist Frank Shostak in his essay on the money supply, argues that savings deposits should be removed from the definition of money because they are a credit deposit rather than a demand deposit. Based on the Shostak approach, investment manager Mike Shedlock calculates M', (M Prime), as approximately $2.2 trillion. The gold/dollar ratio would be 1/8.461 or a gold price of $8,461 per ounce under this definition of the money supply.
Clearly, no matter what definition of money is used to restore a gold backed dollar, the price of gold will have to be adjusted upward by a factor of at least six or more from today to reflect the enormous deprecation of the dollar since the FED was created nearly a hundred years ago.
The revaluation of the dollar will not happen because Ben Bernanke, chairman of the Federal Reserve and Timothy Geithner, U.S. Treasury Secretary embrace hard money principles and realize 100% reserves are necessary for the banking system to function as a reliable financial intermediary. The restoration of a gold backed dollar will occur when dollar holders lose confidence in the purchasing power of the greenback. The sooner the next great money and banking reforms are implemented, the less chance there will be for a global monetary debacle, given the trillions of dollars the FED and other central banks have created in the past six months. In the meantime, load up on the yellow metal. It is your best insurance policy against Obama, Congress, Bernanke, and Geithner.
[ TOP ]
China admits to building up stockpile of gold
By Alfred Cang and Tom Miles
National Post
April 24, 2009
China revealed on Friday that it had secretly raised its gold reserves by three-quarters since 2003, increasing its holdings to 1,054 tonnes - or a pot worth about US$30.9-billion - and confirming years of speculation it had been buying.
Hu Xiaolian, head of the State Administration of Foreign Exchange, told Xinhua news agency in an interview that the country's reserves had risen by 454 tonnes ...
The confirmation of its surreptitious stockpiling is likely to fuel market talk about Beijing's ability to buy secretly and its ambitions for spending its nearly US$2-trillion pile of savings. And not just in gold: copper and other metals markets are booming thanks to China's barely-visible hand.
Speculation has gathered speed over the last year, since the tumbling dollar has threatened to weaken China's buying power - and give it yet more reason to diversify into gold, oil and metals.
... China's holding of gold would be worth around US$30.9-billion at current prices.
That accounts for only about 1.6% of China's total foreign exchange holdings and is little more than one-tenth of the value of the U.S. gold reserve, the world's biggest. It also means gold has slipped as a share of China's total reserves from about 2%, based on end-2003 prices.
Only six countries hold more than 1,000 tonnes, and China is ranked fifth....
Several gold market participants said they thought China had bought on the international market, helping to absorb hundreds of tonnes sold off by central banks and the International Monetary Fund in recent years.
"China has been buying via government channels from South Africa, Russia and South America," said Ellison Chu, director of precious metals at Standard Bank in Hong Kong....
Hu said China recently reported the change in its gold holdings to the International Monetary Fund and would include the latest change in central bank reports and balance of payment statistics....
Gold market participants said the news signalled likely further buying by China.
"The comments indicate that China will buy more gold as reserve to improve its foreign reserve portfolio. This is a trend," said Yao Haiqiao, president of Longgold Asset Management.
Hou Huimin, vice general secretary of the China Gold Association, said China should build its reserves to 5,000 tonnes.
"It's not a matter of a few hundred, or 1,000 tonnes. China should hold more because of its new international status, and because of the financial crisis," he said.
"The financial crisis means the U.S. dollar value is changing fast, and it may retreat from being the international reserve currency. If that happens, whoever holds gold will be at an advantage."
[ TOP ]
Cue The Helicopters, Dollar Devaluation Is Here
By Frank Beck
Forbes
March 24, 2009
In my Forbes.com column on Dec. 9, 2008, "Dollar Devaluation To Fix The Great Recession," I suggested that the government consider an overnight devaluation of the dollar as a fix to sagging asset prices....
I still contend that we are headed for a massive dollar devaluation, regardless of the means--whether it is planned and accomplished by central banks, or by the markets reacting to huge government money printing that force the devaluation....
In early December, Treasury Secretary Henry Paulson traveled to Beijing to encourage the Chinese to strengthen their currency (devalue the dollar versus the Chinese renminbi). Our Federal Reserve chairman, Ben Bernanke, then surprised most everyone by effectively moving the Fed funds rate to 0%, another move to devalue the dollar. Coming next, a new Bretton Woods?
The G-20 met in November, scheduled another meeting for April and in the weeks following the November meeting, physical gold all but disappeared. Are central banks buying gold in preparation?
In normal times, you might expect a global financial meltdown to cause a tidal wave of foreign currency exchanged for dollars. But this time, the dollar has rallied less than 20% against the highs of the euro and has actually lost more than 20% against the yen while staying flat against the Chinese renminbi. If that is the best the dollar can do at the height of panic, I expect that you will see it gradually lose its luster until either the central bankers, or the markets, push it off the cliff....
...are you wondering why central bankers would want the dollar to devalue? Wouldn't that be bad for export countries like China or Japan? In a way it would....
On the other hand, if you want to sell some of your exports, it might be reasonable to keep your best customers alive, even if it means selling to them at somewhat thinner margins. China is still building its domestic market, but it is growing quickly, so they can take a small lump or two on exports. A stronger renminbi will allow China to buy oil and other necessary commodities at a relatively cheaper price, offsetting some of the price reduction. And with another billion people to incorporate, they will still be the cheapest manufacturer of many products for many years to come.
If that were not enough, consider China's good fortune. For years, China has invested heavily in U.S. Treasury bonds while its currency and global inflation have grown at a much higher pace than the interest rate they received. It was simply a cost of doing business while growing an economy. In the last couple of months, that "cost of doing business" has turned into a huge profit opportunity, at the handiest of times. As worldwide panic set in, the money that flowed into the dollar was concentrated in Treasuries. By mid-November, the 30-year was priced at more than 40% over par value--a $1,000 bond was selling for over $1,400! If you wanted some money for your own stimulus plan, and you wanted to keep your customer on life support by devaluing the dollar, you simply could not ask for a more fortunate event.
I am constantly amazed that so few reporters ask the question, "Where is the money to bailout banks, Fannie Mae, Freddie Mac, homeowners, the auto industry, not to mention for a pork-filled stimulus bill going to come from?" The answer, of course, is simple. The government has a printing press, and the result will be that our currency must and will decline.
With the devaluation of the dollar, asset prices will re-inflate. Real estate will again be worth more than the underlying mortgages. Everything from your parents' Oldsmobile to gold and stocks will rise in value relative to the dollar, but debt remains the same....
The weaker dollar will make U.S. manufacturers more competitive overseas, bringing more (nominal) money to more American families. At the same time, it means stronger consumers for foreign goods. Interest rates will rise, giving fixed-income investors a better return.
You just cannot be 100% cash in this environment. It is not a safe investment, and it is not diversified....
The chances of an aggressive money-printing program may be greater than you want to believe....
The world wants inflation, and I think we are about to get it. When we get it, you will see gold, stocks, real estate and other assets re-inflate....
[ TOP ]
U.N. panel says world should ditch dollar
By Jeremy Gaunt
Reuters
March 18, 2009
A U.N. panel will next week recommend that the world ditch the dollar as its reserve currency in favor of a shared basket of currencies, a member of the panel said on Wednesday, adding to pressure on the dollar.
Currency specialist Avinash Persaud, a member of the panel of experts, told a Reuters Funds Summit in Luxembourg that the proposal was to create something like the old Ecu, or European currency unit, that was a hard-traded, weighted basket.
Persaud, chairman of consultants Intelligence Capital and a former currency chief at JPMorgan, said the recommendation would be one of a number delivered to the United Nations on March 25 by the U.N. Commission of Experts on International Financial Reform.
"It is a good moment to move to a shared reserve currency," he said....
Some analysts said news of the U.N. panel's recommendation extended dollar losses because it fed into concerns about the future of the greenback as the main global reserve currency, raising the chances of central bank sales of dollar holdings....
Russia is also planning to propose the creation of a new reserve currency, to be issued by international financial institutions, at the April G20 meeting, according to the text of its proposals published on Monday.
It has significantly reduced the dollar's share in its own reserves in recent years.
GOOD TIME
Persaud said that the United States was concerned that holding the reserve currency made it impossible to run policy, while the rest of world was also unhappy with the generally declining dollar....
"Today the Americans complain that when the world wants to save, it means a deficit. A shared (reserve) would reduce the possibility of global imbalances."
Persaud said the panel had been looking at using something like an expanded Special Drawing Right, originally created by the International Monetary Fund in 1969 but now used mainly as an accounting unit within similar organizations....
Persaud said there were two main reasons why policymakers might consider such a move, one being the current desire for a change from the dollar.
The other reason, he said, was the success of the euro, which incorporated a number of currencies but roughly speaking held on to the stability of the old German deutschemark compared with, say, the Greek drachma.
Persaud has long argued that the dollar would give way to the Chinese yuan as a global reserve currency within decades.
A shared reserve currency might negate this move, he said, but he believed that China would still like to take on the role.
[ TOP ]
At G20, Kremlin to Pitch New Currency
By Ira Iosebashvili
The Moscow Times
March 17, 2009
The Kremlin published its priorities Monday for an upcoming meeting of the G20, calling for the creation of a supranational reserve currency to be issued by international institutions as part of a reform of the global financial system.
The International Monetary Fund should investigate the possible creation of a new reserve currency, widening the list of reserve currencies or using its already existing Special Drawing Rights, or SDRs, as a "superreserve currency accepted by the whole of the international community," the Kremlin said in a statement issued on its web site. The SDR is an international reserve asset, created by the IMF in 1969 to supplement the existing official reserves of member countries....
Nazarbayev's proposal did, however, garner support from at least one prominent source -- Columbia University professor Robert Mundell, who was awarded the Nobel Prize in 1999 for his role in creating the euro. Speaking at the same conference with Nazarbayev, he said the idea had "great promise...."
[ TOP ]
US$6,948 gold would support greenback
By Peter Koven
Financial Post
March 13, 2009
Just how high could the price of gold go? Really high, according to analyst Daniel Brebner and others at UBS Securities. They plotted out a number of scenarios using various levels of strength for inflation and the U. S. dollar, and predicted that gold will not fall below US$500 an ounce between now and 2015, and could rise to US$2,500.
To get there would require inflation at 1970s levels and a weak U.S. dollar, UBS said. The bottom end of the range would require static inflation and a strong U. S. dollar.
There is one other possibility UBS raises: what if a new gold standard was adopted to support currencies, particularly the U. S. dollar? Using the current value of the U. S. monetary base and the country's reported gold holdings, UBS calculated gold would need to be at US$6,948 to support the value of the U. S. dollar.
If China and Japan are included, UBS predicted that the price would be close to US$10,000 an ounce.
The UBS team noted that a gold standard would theoretically bring some confidence back to currencies and stabilize them. But it would create all kinds of problems by removing flexible exchange rates, and they noted that not much headway has been made in this area.
[ TOP ]
UBS: Gold Could Hit $2,500 in Five Years
Reuters
March 10, 2009
Gold could hit $2,500 an ounce in the next five years if the dollar weakens further and inflation volatility continues, a UBS research note showed on Tuesday.
If prospects for deflation/inflation return to levels seen in the 1970s/1980s and the dollar weakens by another 15 percent, a gold price upwards of $2,500 an ounce could be justified, UBS analyst Daniel Brebner told Reuters.
"Perceptions of inflation risk we think are a key driver for gold prices," Brebner said….
[ TOP ]
Why China wants to buy $93 billion worth of gold
CommodityOnline
March 1, 2009
...In China, investors have been rushing to gold following the crash of global markets....
According to analysts, gold can be a very good product for holding its value. But the risks for paper gold and gold futures are nearly 10 times bigger than real gold investment. Buying gold related stocks can also be a risky move.
"Gold is a very solid asset. Buying physical gold does have advantages compared with other investments. Investments in gold-backed financial products and paper gold should be left up to the professionals," says Mark Robinson, a bullion analyst based in Dubai.
According to Robinson, gold investment in China is starting to look like a crowded marketplace. It's being boosted by the rising prices and market demand. And the unpleasant performance of the US stock market, low expectations for the US dollar, as well as investors' concerns over the banking crisis have also pushed up people's need for gold....
...China has nearly $2 trillion in surplus reserves. Beijing's piggy bank is overflowing with money. In fact, at nearly $2 trillion, China has the largest foreign reserves of any country in the history of the planet.
Whereas Washington now has nearly $11.4 trillion in debts, not counting the contingent liabilities of the real estate crisis....
But, over the next few years China is essentially going to corner the world's gold market.
Beijing knows that the dollar's status as a reserve currency is soon going to be history. Just like the pound sterling lost its status as the world's reserve currency in the early 20th century.
And authorities in Beijing also believe that as China rapidly progresses toward superpower economic status, the yuan should be a world-class, stable medium of exchange.
They envision the yuan as a major international currency some day, with as much (or more) status than the US dollar. That's why they're going to back the yuan with gold.
Plus, there's another reason for Beijing to buy more gold as part of China's piggy bank. China has an estimated $1.3 trillion invested in dollar-denominated investments. They can't get out of the dollar quickly. It would destroy the US economy which would have a direct negative impact on China.
So the smart thing to do: Hedge and diversify existing dollar holdings with gold....
Just to up its reserves to 5% in gold, Beijing would have to purchase $93 billion worth of bullion. That could easily send the yellow metal skyrocketing to more than $2,000 an ounce.
[ TOP ]
North America: Morning Market Memo
A daily snapshot of market moving developments
By David Rosenberg
Bank of America/Merrill Lynch
February 18, 2009
...In a New York speech last night, Alan Greenspan stated that the US government is not doing enough - indeed, the resources may not be there - to solve this "once-in-a-century event". He added that "until we can stabilize the asset side of bank balance sheets, this crisis will not come to a close ... unfortunately, the prospect of stable home prices remains many months in the future". We have been of that view for quite some time. The former Fed Chairman also seems to be of the view that nationalizing the banks is the only solution to "restore the flow of credit". At this stage, it is a view that is tough to debate; and this is gaining some momentum in Washington too (see "Nationalization Gains Currency with Republicans" in today's Financial Times)....
As we have said time and again, we like gold because (i) it is a hedge against global instability (oh yes - see "Buy American Policy Now Low as Critics Fear Global Reaction" on the front page f the IBD); (ii) it is a hedge against deflation since that condition triggers financial market setbacks and (iii) it is inversely correlated to global short-term interest rates and there is a race right now towards 0%.... Bullion is trading at a 7- month high and for good reason: it's called supply and demand. Production is down 4% YoY while fiat currencies globally are being created at a double digit rate by the world's central banks, and we see that according to the World Gold Council, even with the recession in India, gold demand soared 26% YoY in the fourth quarter.... There has been a round of profit-taking this morning but you do not have to be a chartist to know that this is a significant bull market. And as for all the talk of a 'gold bubble', it would take a nearly 625% surge in gold to over $6000/oz and a flat stock market to actually get the ratio of the two asset classes back to where it was three decades ago when in fact, bullion was in an unsustainable bubble phase....
[ TOP ]
Will Gold Reach $5000 an Ounce?
Seeking Alpha
By Mark O'Byrne
February 12, 2009
...Gold to Reach $5000/oz According to Respected Goldcorp Founder
The respected founder of Goldcorp (GG), Rob McEwen told Bloomberg how he sees gold rising to as high as $5,000/oz in the next four years. Goldcorp is the second largest gold mining company in the world by market capitalization.
As governments increase the money supply to combat recession, bullion will more than double to $2,000 an ounce by the end of next year. "Politicians around the world are listening to cries from their electorates and they're giving money to all callers," McEwen said yesterday.
McEwen has more than $100 million in gold investments and said he also has a "big, big" holding in bullion. McEwen said he started buying bullion in August 2007, at the beginning of the subprime mortgage crisis. "I realized we had reached an inflection point regarding money," McEwen said. "It was all about protecting money, and gold served that purpose."
The recent trend of fiat currencies falling vis a vis gold looks set to continue for the foreseeable future. McEwen's bold prediction looks outlandish now (as did predictions of gold at over $1,000/oz in 2001) but given the confluence of extremely strong fundamentals, gold will likely rise to levels in the coming years that seem unfathomable today.
[ TOP ]
Willem Buiter warns of massive dollar collapse
Americans must prepare themselves for a massive collapse in the dollar as investors around the world dump their US assets, a former Bank of England policymaker has warned.
By Edmund Conway
Telegraph
January 6, 2009
..."The past eight years of imperial overstretch, hubris and domestic and international abuse of power...has left the US materially weakened financially, economically, politically and morally," he said. "Even the most hard-nosed, Guantanamo Bay-indifferent potential foreign investor in the US must recognise that its financial system has collapsed."
He said investors would, rightly, suspect that the US would have to generate major inflation to whittle away its debt and this dollar collapse means that the US has less leeway for major spending plans than politicians realise.
[ TOP ]
Gold & Precious Metals Weekly
North American Precious Metals Weekly
Merrill Lynch
December 23, 2008
...Gold is a function of risk, currency and commodity prices
On December 16, 2008, our Chief Commodity Strategist, Francisco Blanch, published his outlook for gold (Commodity Strategist, 16 December 2008). As the ultimate mean to store value over thousands of years, the price of gold can reflect many macro variables at once. For the most part, however, Mr. Blanch believes three variables alone go a long way in explaining the fluctuations in the price of gold: risk, currency and commodity prices. While there is a clear danger in oversimplifying, Mr. Blanch' analysis suggests that gold is sometimes a currency, sometimes a commodity and sometimes a store of value. Thus, the elusive question is figuring out which market gold will track next....
Mr. Blanch sees gold increasing further in three stages
Departing from this framework of analysis, Mr. Blanch expects gold prices to move up to $1,500/oz in three steps. With the outburst of the credit crisis last August, we entered into the first step, where gold started to reflect the rising premia. The second stage is expected to be primarily be about USD weakness. Finally, as global currency markets stabilize, the third stage in the appreciation gold will be driven by a recovery in energy prices, in Mr. Blanch' view.
The first stage is about flight to the safety of gold
Despite the recent coordinated measures across the world to calm the markets, the global liquidity crisis is nowhere near its end. The market is currently pricing UK 5Y sovereign CDS spreads at 114.3 bps and US 5Y spreads at 65.9 bps levels above the CDS spreads on certain corporate names. In contrast, gold remains one of the few liquid assets that bears no credit, inflation, FX or political risk. With 3M US T-bill rates having been auctioned at a 0.005% rate a week ago, the opportunity cost of holding physical gold became virtually zero. Moreover, with higher gold lease rates, gold is even trading in parity with moneymarket rates and increasing its appeal relative to holding cash. This all suggests that flight-to-safety will still be the main driver of gold prices for some months to come and gold could revert back to $1000/oz in the process.
The second stage is primarily about USD weakness
In Mr Blanch's view, gold will develop a stronger trading link to the currency world as risk premia on money stabilize. Then, as the United States has taken on too much debt relative to its output, the USD will likely weaken to reflect the excess money supply relative to domestic output. The weaker dollar could then help gold break through $1200/oz.
The USD could loose its reserve currency status
The recent strength of the USD has been largely based on the fact that "safe haven" assets such as US Treasuries are denominated in USD. However, this is likely to revert if we are successful in avoiding a deep global depression. Governments around the world are trying very hard to allow for a transfer of private sector assets into public hands, although there is no guarantee that the private sector assets taken by the governments will prove profitable in the future. While the recent measures are largely meant to offset the private sector credit contraction, we expect them to have severe fiscal consequences in the long run. The accumulation of public
debt could have a long lasting negative impact on future economic growth. It is still uncertain how governments will be able to service this increased debt, but higher inflation is not an unlikely scenario with a direct consequence to all major currencies, especially the USD.
Deflation now, inflation later to support gold prices
It may prove difficult to engineer a U-turn on money supply growth when economic growth starts to pick up again. There is a good chance, in Mr. Blanch's view, that the monetary easing we are seeing now will overshoot. Consequently, the world may be facing serious inflationary pressures later if the current policies are successful in avoiding deflation. In fact, inflation may be exactly the much needed medicine for the whole crises, in Mr. Blanch's view. As the recession persists, falling home prices will reduce consumers' wealth and their ability to obtain credit to maintain their level of consumption. Deteriorating consumer loans are bad enough news for the financial system but lower prospects for consumption and investment should force further reductions in corporate loan values as well. This feedback mechanism may end up triggering consecutive rounds of bank recapitalizations. In Mr. Blanch's view, moderate inflation in the next couple of years may be the easiest way to help consumers, banks and corporates in their deleveraging process. With high enough inflation, nominal house prices do not need to decline at all and non-indexed loans will lose their value without having to be formally written down. Higher inflation is, in Mr. Blanch's view, a compelling and easy solution to stop this vicious cycle and one that governments around the world are unlikely to ignore.
Gold will keep being a mean of storing value
Rising global inflation is a very likely outcome of the current easing of monetary policy and the fiscal burden imposed by the crises. A surge in global inflation will seriously diminish the ability of major currencies to serve as a mean of storing value. In this environment, gold prices are likely to appreciate against all major currencies. Ultimately, as money supply growth goes back to previous levels, we should see a renewed demand for real assets such as gold.
The third stage is a recovery in energy prices
The current global bank bailout is inflationary, and will likely result in more money chasing the same barrels. In turn, the combination of higher cost of money and higher input cost inflation could force oil back up to $150/bbl. As we expect gold to maintain its long-run relationship with other commodities, gold prices could well push higher to $1500/oz.
Gold should maintain its long-run link to other commodities
Four of the five largest holders of oil and gas reserves in the world have closed their doors to investment since 2000, severely curbing global energy supply growth prospects over the next ten years. With the ongoing upward shift in the cost of money, oil investors could well require a much higher IRR than 10%. The lack of investment in supply infrastructure has been the major force behind the current commodity super-cycle. As EM economies go back to their long-term growth trends, they will do so in an environment with severe supply bottlenecks. Gold prices have not increased by nearly as much as the nominal expansion of EM economies such as Russia and India suggests. In fact, even considering the recent sell-off in commodities, gold prices are still cheap relative to oil prices. In our view, gold prices could appreciate strongly in order to keep their long-run historical relationship to other commodity prices.
[ TOP ]
Dollar Devaluation To Fix The Great Recession
Frank Beck
Forbes
December 9, 2008
...Despite the trillions of dollars already expended recapitalizing banks, there is very little, if any, progress to show. Will a few trillion more do the trick? That seems to be the consensus among Congress and the banks. "They are simply too big to let fail," or are they really just too big to save? We can go back to "Plan A" and buy the toxic assets. If so, at what price? What if a few trillion does not remove enough toxic waste from the system or doesn't get credit flowing again and the economy bustling?...
If we are to save bankers, shouldn't we at least distinguish between those who possess the intelligence to renegotiate their loans to workable terms? If we are to save homeowners, should not we first define the term "homeowner?" Perhaps it is not only someone who agreed to and signed a mortgage and is living in a house. Just perhaps, it should also include the stipulation that this individual paid some amount of a down payment: 20%, 5%, a dollar. I can tell you who is not a homeowner. It is not someone who paid zero down and ridiculously low payments for two years; that, my friend, is a renter.
The problem with all these ideas is the money is only directed at those who created or benefited from the problems. Why not attack the situation in a manner that will benefit most everyone, an approach that has been successful before and, when compared to the current course, has little downside?
Here it is. Stand back. World currencies should be devalued overnight.
It can be done on a country-by-country basis, but a coordinated devaluation would work best. A devaluation of 30% would raise the dollar value of all assets by 43%. A $200,000 home with a $230,000 mortgage would become a $286,000 home with the same mortgage. Presto! The homeowner who was $30,000 upside-down now has $56,000 equity and a good reason to make his payments. Both the homeowner and the bank are immediately better-off.
In Pictures: Top Five Infrastructure Buys
It would even benefit those who purchased their homes responsibly, as the value of their homes would rise by the same 43%. The current course of throwing trillions of dollars at the culprits is without any benefit to those who acted responsibly.
Admittedly, this is not a solution without the price of inflation, but the inflation would be short-lived. The current course will ultimately cause massive inflation that cannot be accurately estimated, and it may not even solve the problem.
Currency devaluation proved effective in ending the Great Depression. In 1930, Australia was the first to leave the gold standard, immediately devaluing the aussie by more than 40%, and the economy quickly recovered. New Zealand and Japan followed suit in 1931, each with the same result. By 1933, at least nine major economies had enacted a devaluation of their currency by removing it from the gold standard, all of whom emerged from depression.
In 1933, through a series of gold-related acts, culminating in the Gold Reserve Act of 1934, America realized a dollar devaluation of 41% when the price of gold was adjusted from $20.67 per ounce of gold to $35 per ounce. America, like the others before, had its economy bottom and recover as a result. Of the larger economies, only the French and Italians continued to adhere to the gold standard, and their economies remained depressed until finally, in 1936, they allowed their currencies to devalue, and their economies then recovered.
I see no reason to believe we would have any different result today. Only debt would remain the same. All other assets would immediately be worth more (in nominal terms), whether it be a home, a stock, an ounce of gold or a used car. Bank balance sheets would immediately improve, as many loans would be moved from non-performing to performing status. Banks would be paid with devalued dollars, but they made millions creating the mess. The current use of government stimulus through the creation of dollars will certainly lead to a similar or worse devaluation, so this is likely a net gain for the banks too.
Businesses would instantly become more profitable, and workers' pay would increase, allowing each to pay their debts more easily, even while sending more tax dollars to Washington, without raising tax rates. As assets are sold, the capital gains would send even more taxes to Washington. States and locales would receive more revenue via sales and property tax, improving the fiscal condition of school districts and local governments. The national debt would effectively be reduced by the same 25%, giving future generations a chance. Combine the move with a congressional pledge to only raise the budget by half the devaluation, and we could be on track for a balanced budget and paying down the debt.
As the old Saturday Night Live skit said, "Think of inflation as your friend. Wouldn't you like to wear $1,000 suits and smoke $100 cigars?" I know I would.
Frank Beck is Chief Investment Manager of Capital Financial Group and ProPlayer Investing in Austin, Texas, an affiliate of Partnervest Securities of Santa Barbara, Calif.
[ TOP ]
