Paul: According to Frank Venneroso all the major plyers except the hedge funds now want reflation in Asia and a weaker dollar. Balance of power shifting our way.
The Gold Market ú Short Covering
The Official Sector
1 ) We have received two more reports of a central bank buyer.
2 ) Last week Cheryl Strauss Einhorn said in Barrons:
The immediate future is not brighter. No one knows what will happen to, and who has control over, the remaining 12,000 tonnes of
gold---roughly equal to five years' mine production---held by the 11 member participants in European economic and monetary union that
may be excluded from the ECB's reserves.
Jean Claude Trichet, the head of the Bank of France and designated successor to ECB head Wim Duisenberg, has made the following
comments:
PARIS, June 18 ( Reuters ) - The planned transfer of gold reserves to the European Central Bank represents an important signal on the
need for central banks to hold gold, the Bank of France said in its annual report released on Thursday. It said that the main holders of
gold had not changed their view on the need for gold to make up a part of the central bank reserves as a guarantee in the international
financial system. "Neither the U.S. Federal Reserve, not the German Bundesbank, not the Bank of Italy, nor of course the Bank of
France pan to sell the precious metal," it said.
3 ) Regarding IMF gold sales, the following statements have been made:
WASHINGTON, June 15 ( Reuters ) - .Ideas floated in the past have included selling some of the IMF gold reserves, although the
sources said this idea had not been raised recently. "I do not think gold sales are an easy way out, rather they could send the wrong
signals to the markets and the general public, signaling that the fund is in effect selling the family silver," a second monetary source said.
The first source put it more bluntly. "We could not get a consensus for gold sales at this stage." He said. IMF gold reserves total 103.4
million fine ounces.
Last year the IMF did not bring up the issue of gold sales. We believe that France has joined Germany in opposing such sales. France
and Germany can effectively block any such sales.
The Deflation Trade in Gold
Hedge funds are very short gold owing to a belief that the Asian crisis will deepen and throw the world into deflation. We noted last
week that, barring a bursting of the US stock market bubble, the outlook for the G-7 economies was fairly positive. China is poised to
grow. The odds are that South East Asia should stabilize. Therefore, the odds do not favor global deflation. If European gold sales and
South East Asian liquidations abate---which we believe is happening---the gold price will rise. We stated that, if deflation expectations
are not fulfilled, the gold price will rise sharply on a covering of the deflation trade in gold.
Every one has feared that further yen depreciation might force China to devalue and deepen the Asian crisis. As expected ( see our recent
notes on the yen ) , threats of devaluation from China prior to Clinton's visit brought foreign policy considerations to bear on Treasury
policy toward the yen. More and more signs of an erosion in US competitiveness, US trade, and US corporate profit margins arising out
of the devaluation of the Asian currencies and the decline in their economies also brought US commercial considerations to bear on US
Treasury policy toward the yen. This has caused Secretary Rubin to change his policy and intervene on behalf of the yen.
The marketplace believes that such intervention will not work because the fundamentals have not changed. The markets regard a weak
Japanese economy, alleged Japanese policy paralysis, Japanese/US interest rate differentials, and the crisis in the south East Asian
economies as the only fundamentals that are relevant to the yen/dollar exchange rate. In fact, Japan and Asia have a massive competitive
advantage relative to the US. They are earning huge and growing current account surpluses. The US is suffering a huge and worsening
current account deficit. Asia is the locus of the largest forex reserves in the world. Japan is the largest creditor nation in the world. These
too are fundamentals that are relevant to the yen/dollar exchange rate. It is our guess that intervention will succeed in stabilizing the yen
because of these recently ignored fundamentals.
All of the major powers now want stabilization and reflation in Asia. US commercial interests that are losing competitiveness and profits
want a lower dollar and global reflation, especially in Asia. The US stock market, faced with growing earnings disappointments, wants
the same. Europe, where domestic demand is growing nicely but trade is eroding with Asia, wants reflation in Asia. Japan wants
reflation. Its policy makers are not as indecisive as the markets and media claim: there is already a large front loaded fiscal stimulus
program underway; the monetary base in growing very rapidly and the BOJ is considering yet more rapid expansion; and substantial (
$100 billion plus ) funds have been earmarked for a second half bank bailout. China's move to claim leadership in Asia will provoke
Japanese foreign policy as well as US foreign policy to respond to South East Asia's cries for currency stability and regional reflation.
The political forces at work now all want currency stability and reflation in Asia. The only players with an interest in deflation are hedge
funds. Actions are now being taken to restore stability in Asia. Short of a bursting of the US stock market bubble, the G-7 economies
and China are already set up to grow in the coming quarters. That is most of the global economy. Last week we said that the odds
favored that the deflation trade will be frustrated and the funds would eventually back track on their current positions, including their
short side deflation theme trade in gold. The rise in the gold price this past week was probably due mostly to such short covering. Open
interest data suggests that the funds remain short. Speculators do not believe in the current changes in trend: despite a 10 point move in
the yen, the bullish consensus was only 15% Friday morning. It is our guess that the funds still believe the yen will fall fast and far and
that Asia will drag the world into global deflation. |
