Gold Knows What No One Knows!
April Fools day usually
arrives on April 1st, but the day for the European Central
Bank chief Jean “Tricky” Trichet, to play dirty
tricks came on April 6th, and left over zealous Euro bulls
licking their wounds. Expectations of an ECB rate hike to
2.75% on May 4th, seems like a slam dunk, with the Euro M3
money supply exploding at an annualized rate of 8% in February,
way above the ECB's 4.5% reference level for stable inflation,
and European bank loans to the private sector expanding at
a 10.3% clip, the fastest rate in over six years.
Such a potent cocktail is fueling takeover mania
across Europe, where mergers and buyouts doubled to $454 billion
in the first quarter from the same period a year earlier,
after a whopping $1.03 trillion of deals in 2005. “Tricky”
Trichet and his cohorts at the ECB are holding down borrowing
costs in the Euro zone by expanding the Euro money supply
to meet strong loan demand, in a brazen effort to lift European
stock and real estate markets higher.
With demand for cheap long-term credit rising
strongly in Germany, questions must be asked about whether
the low level of global interest rates are appropriate, said
the future ECB chief economist Juergen Stark on March 28th.
"We are dealing with a global wave of liquidity today.
One must ask oneself whether key interest rates are sending
the correct signal here. This development is unsustainable,"
Other ECB policymakers were barking loudly last
week whipping the Euro bulls into a buying frenzy. "There
are risks to price stability and among those are second-round
effects," said Spain’s central banker Jose Manuel
Gonzalez-Paramo. "The ECB is concerned principally about
price stability, and if monetary aggregates showed dynamic
growth and if asset prices rise, that would be a concern,"
Luxembourg central bank governor Yves Mersch
was more explicit, and indicated that the ECB's work was not
done. "Where we still have to walk the talk is to deliver
on price stability to bring about inflation that is close
to but below 2 percent. That is also part of walking the talk,
to be faithful to what we say,” he said.
But when the moment of truth arrived for the
ECB to walk the talk on April 6th, “Tricky” Trichet
pulled the rug from under the Euro, and in the process, created
a lot of ill will towards the 12-nation common currency. "The
present high probability which is given for an increase of
rates in our next meeting does not correspond to the present
sentiment of the Governing Council," sending the Euro
tumbling against the US and Canadian dollars and the British
But the gold market remained defiant, hovering
just below 500 Euros per ounce, even after global bond yields
moved swiftly higher. Euro traders are learning the hard way,
what gold traders have known to be true for quite some time.
Central bankers can not be trusted to preserve the purchasing
power of paper money. Gold knows what no one knows!
Explosive Euro M3 money supply combined with
double digit Euro loan growth calls for immediate rate hikes
on the order of a half-percent. However, at his April Fools
Day press conference, Trichet said the ECB would not be bullied
by futures traders on the Frankfurt Eurex who were pricing
in a 100% probability of a quarter-point ECB rate in May.
Instead, Trichet will stick to a snail’s pace of lifting
rates in baby steps every three months.
Trichet indicated that a handful of economic
reports, such as a large 0.5% jump in Euro zone producer prices
in March to an annualized 5.4% rate, were certainly no reason
for the bank's Governing Council to rush into action. Instead,
the ECB wants to remain comfortably behind the inflation curve
to stimulate corporate profits, and prevent an unraveling
the EuroStoxx-600 rally that it worked so hard to engineer.
Trichet’s endless brainwashing about his
self-proclaimed vigilance against inflation falls on deaf
ears in the gold market these days. "We are still, and
will continue to be credible, as we were at the first day,"
he told leading bankers at the Institute of International
Finance on March 30th. "Our anchoring of inflationary
expectations remain impeccable because markets know we are
very, very serious when we are speaking of preserving and
maintaining price stability,” he said, even as gold
moved in on 500 Euros /oz, and is up 48% against the Euro
from a year ago.
But Trichet’s audience is the investment
banking community which is reaping huge profits from merger
mania in Europe, which in turn, needs the daily injection
of cheap money to keep business executives in the mood to
buy other companies. European exporters prefer a weaker Euro,
so the ECB is aiming for a sweet spot of $1.20, which can
keep foreign sales buoyant to the Far East and the US, yet
help to hold down the cost of dollar denominated raw material
and crude oil imports.
European gold traders were a bit slow to recognize
Trichet’s strategy, but finally saw through the smokescreens
in September 2005, when the Euro M3 money supply expanded
at an 8.5% clip, without a protest from the vigilant Trichet.
Jawboning and stepped up gold sales in the fourth quarter
of 2005 failed to keep the yellow metal under sedation, cornering
“Tricky” Trichet, and forcing the ECB into two
baby step rate hikes to 2.50 percent.
Now, the ECB faces a dilemma, because the gold
market in Europe has become more sophisticated, and is pegging
the gold price to the performance of leading Euro equity markets.
So unless the ECB steps up to the plate to tighten its monetary
policy, neither gold nor EuroStoxx blue chips are likely to
give up much ground. And according to Trichet, the ECB wants
to stick to its three month timetable of raising rates, and
refuses to be bullied into a faster track, like the Federal
Across the English Channel, the bankers on Thread-Needle
Street make the ECB look like monetary hawks. The Bank of
England became the first disciple of former Fed chief Alan
Greenspan’s “Asset Targeting” policy in
2001, when it slashed its base rate to 3.50%, in a desperate
effort to cushion the decline of the Footsie-100. Either by
design or fanciful luck, the BOE succeeded in doubling UK
home prices, helping the British economy to avoid a recession
that gripped the Euro zone and the US.
The Bank of England has opened wide the money
spigots, fueling asset inflation in the UK equities markets
and in gold. Housing prices have begun to percolate again,
rising for six consecutive months to stand 5.3% higher from
a year ago. With its manufacturing base moving overseas and
dwindling oil supplies from the North Sea, the UK economy
hinges on asset inflation, much like the US economy.
Official data on March 20th showed UK government
spending and borrowing at the highest levels since Labor took
power in 1997, with a 37 billion pound shortfall for public
sector net borrowing projected for the fiscal year ending
April. UK Exchequer chief Gordon Brown requires a 2.0-2.5%
growth rate for this year and 2.75-3.25% for 2007 to meet
his budget targets.
The Bank of England is accommodating the
UK Treasury’s loan demands by expanding its M4 money
supply 12.2% from a year ago, and keeping borrowing costs
low to prevent a downturn in UK home prices. British traders
turned to gold after the BOE lowered its base rate to 4.50%
in August 2005, when it became obvious that the BOE’s
jawboning about fighting inflation was just empty words.
On February 24th, 2005, the Bank of England’s
Rachel Lomax predicted inflation would rise above its 2% target
and while there “almost always is a case for waiting
to raise interest rates, we need to be pre-emptive against
inflation. Any weakness in consumer spending is likely to
be temporary. There is very little slack in the UK economy,”
suggesting that growth would feed through to faster inflation.
But a BOE rate hike never materialized. Instead,
the UK central bank lowered its base rate six months later
in August 2005, to prevent a downturn in British home prices
and consumer spending. That triggered a gold rally from 220
pounds to 340 pounds per ounce, and natural resource and oil
stocks led the Footsie-100 above the psychological 600-mark.
Super easy money in the UK has also nurtured $350 billion
of takeover deals over the past 15-months, much to the delight
of UK bankers.
The Bank of England has never really understood
the psychology of the gold market. The BOE dumped two-thirds
of its gold, or 415 tons, between 1999 and 2001 at an average
price below $300 per ounce. But what is more surprising, the
gnomes of Zurich, stationed at the Swiss National Bank made
the same blunder, by selling half of the Swiss gold reserves,
or 1300 tons, between May 2000 and May 2005.
Overall, the SNB gold sales amounted to 21.1
billion Swiss francs, at an average selling price of $351.40
per ounce. Soon after the SNB’s final gold sale in May
2005, the price of gold climbed by nearly 50% over the next
eleven months to 760 francs per ounce, to reflect a 50% loss
of gold behind the Swiss currency. The collapse of the Swiss
franc in relation to gold, puts into question the psychological
status of the Swiss franc as a safe haven currency.
The SNB lifted its target band for the three-month
Swiss franc Libor rate to 0.75% to 1.75% from 0.50% to 1.50%
on March 16th, its second rate hike in three months, aiming
for the mid-point 1.25%, within the new target band. The SNB
is following the lead of ECB, with both banks sticking to
three month intervals between rate hikes, to keep the Euro
/Swiss franc exchange rate in a stable range.
The SNB will tighten rates gradually, said SNB
member Philipp Hildebrand on March 23rd. "The fact is
that from today's point of view we are in a situation to conduct
a cautious approximation of rates towards neutrality, thanks
to a favorable inflationary development and still well-anchored
inflationary expectations," said Hildebrand, attempting
to brainwash the financial media while ignoring the 50% devaluation
of the Swiss franc versus gold.
"If the economic development continues
as expected, the SNB will continue its adjustment of the monetary
policy course gradually so that price stability is insured
in the medium term. Even after raising the target band of
the three-month franc Libor by 25 basis points the National
Bank supports the upswing,” Hildebrand noted.
However, the Swiss franc will remain a low interest
rate currency that hedge funds can utilize for funding operations
in gold, silver, crude oil, copper, and zinc, the premier
leaders of the “Commodity Super Cycle”.
In the Far East, the Bank of Japan announced
on March 9th that is would begin to dismantle to ultra easy
money policy, by draining 26 trillion yen ($220 billion) from
the Tokyo money markets in the months ahead. But nobody knows
for sure what time frame the BOJ has planned to lift its overnight
loan rate above zero percent. Instead, BOJ chief Fukui has
gone out of his way to assure Japan’s financial warlords
of the ruling LDP party, that BOJ policy would remain accommodative.
On March 22nd, Fukui said, "It'll take
several months to finish absorbing current account deposits.
We don't plan to cut the amount of outright JGB buying immediately
after those several months." The BOJ buys 1.2 trillion
yen ($10 billion) in long-term JGB’s outright from the
market per month. So while the BOJ is draining yen by refusing
to rollover maturing short-term debt, it is also pumping 1.2
trillion yen into the banking system each month through JGB
Japanese Finance Minister Sadakazu Tanigaki
warned that the recent rises in long-term interest rates could
damage the economy, adding the Japanese economy is still in
mild inflation. Asian Development Bank President Haruhiko
Kuroda urged the BOJ to be “cautious” about further
interest rate increases. “Although the economy has recovered
very strongly, the price situation has not changed much, so
I think the BOJ would be very careful and cautious in executing
its monetary policy.”
Tanigaki said Asian and European financial chiefs
meeting in Vienna on April 9th, were concerned that credit
tightening in advanced countries could hurt the world economy.
"Many of them share the outlook that global growth will
continue amid low inflation," he said. But the financial
officials "consider high crude oil prices, rising interest
rates in advanced economies, global current-account imbalances
and bird flu to be risk factors," he said.
So the Bank of Japan remains under heavy political
pressure to go slow with its tightening campaign, and to keep
yen plentiful and cheap, insulating the Japanese economy and
Nikkei-225 stock index from record high oil prices. Japanese
gold traders understand the scheme that LDP financial warlords
are pursuing, and are pegging the price of gold to the Nikkei-225,
both rivals for investment funds seeking a safe haven from
BOJ monetary inflation.
After hiking the fed funds rate to 4.75% on
March 28th, the Federal Reserve acknowledged that the “Commodity
Super Cycle” might be signaling higher inflation. “Possible
increases in resource utilization, in combination with the
elevated prices of energy and other commodities, have the
potential to add to inflation pressures,” the FOMC said.
Engaging in a battle with the “Commodity Super Cycle”
would represent a 180 degree turn in Bernanke’s thinking
on commodity prices and inflation.
On February 5th, 2004, Bernanke said “rising
commodity prices are a variable of growth rather than inflation.”
As for soaring energy prices, “while a sudden shock
may cause oil prices to rise, there is an equally good chance
that oil prices might go down over the next couple of years.
Barring some kind of major shock, I personally don’t
find the energy issue crucial to the recovery. I don't expect
inflation at the core level to rise significantly this year
or even in 2005,” Bernanke said.
Then on May 24, 2005, Bernanke again played down worries about
higher energy and commodity prices. “Much of the recent
price gains in energy and commodities reflect the rapid growth
of the Chinese economy. Chinese authorities are now trying
to slow that growth, and should help check the growth of commodity
On October 25th, 2005, the newly appointed Fed
chief Bernanke said that there was little reason to fear that
the sharp rise in energy prices would feed through into wider
inflation. "The evidence seems to be that it is primarily
in energy and some raw materials and has not fed into broader
inflation measures or expectations. My anticipation is that's
the way it's going to stay."
But the Federal Reserve is almost out
of ammunition in its 21-month old battle against gold, silver,
copper, zinc, and crude oil, the premier leaders of the “Commodity
Super Cycle.” Sales of new US homes had the biggest
monthly decline in almost nine years in February and the number
of properties on the market rose, evidence the housing bubble
is deflating after a five-year boom.
New US home sales fell 10.5% to an annual
rate of 1.08 million, the lowest since May 2003, from a revised
1.207 million in January. The number of homes for sale rose
to a record 548,000 from January's 525,000. At the current
sales pace, there were enough new homes on the market to satisfy
demand for the next 6.3 months, the largest amount in more
than a decade. The median selling price of a new home last
month was $230,400, from $243,900 in October.
A gauge of US mortgage applications fell
to the lowest level of the year as home purchases and refinancing
declined. But the Federal Reserve is not about to pull any
nasty tricks like Jean Trichet, and should follow through
on its widely telegraphed quarter-point rate hike to 5.0%
on May 10th. But beyond 5.0%, the Fed would risk killing the
goose that lays the golden eggs for the US economy, the housing
bubble, and that might be a red line that Bernanke & Company
If correct, which central bank would assume
the mantle of fighting gold, silver, crude oil and commodities
rallies with a tighter monetary policy? European and Japanese
central banks are playing a double game, tightening monetary
policy at a snail’s pace, but leaving plenty of Euros
and yen floating in the banking system at negative real interest
rates, in an effort to keep their equity markets afloat.
Memories of the Enron and Worldcom scandals
are fading into the distant past, but there was a time when
Congress demanded greater transparency of accounting records.
But with a slight of hand, the Federal Reserve, under the
leadership of Ben Bernanke announced on November 10th, 2005,
that it would no longer disclose to Americans what it is doing
with the US M3 money supply. Since then, gold has soared $110
per ounce, bumping against the psychological $600 level.
So while the Dow Jones Industrials rally
to 5-year high might look impressive in US dollar terms, the
DJI is in a raging bear market in hard money terms. Last week,
the DJI fell below 19 ounces of gold, or 30% lower than two
years ago. Over the past 6-months, the DJI has plunged by
50% in silver ounces per share. Without the honest transparency
of M3 reporting, all major US assets should be measured in
terms of gold ounces, a de-facto gold standard.
But while gold is matching the performances
of European and Japanese equity benchmarks, and blowing away
the Dow Industrials, the yellow metal is still in a four year
bear market against the crude oil market. Gold has rebounded
from as low as 6.5 barrel of crude oil per ounce, but meeting
resistance at 9.25 barrels this year. Gold might outperform
crude oil, if Arab oil kingdoms in the Persian Gulf decide
to allocate more Petro-dollars to gold, in a flight to safety
from the Ayatollah of Iran.
Countries close to Iran, including Kuwait
and the United Arab Emirates, are focused on Iran's nuclear
weapons program, which "still poses a big worry,"
said Sheik Abdullah bin Zayed Al Nayyan, the foreign minister
of the United Arab Emirates on March 22nd. Iran’s first
nuclear reactor is expected to go online this year, in Bushehr
in southern Iran, just 150 miles across the Persian Gulf from
Iran is seismically unstable, and an
earthquake could cause an accident that would be more disastrous
for Gulf countries than for Iran. "A catastrophe that
kills 200,000 people could mean wiping out half of Bahrain,"
Al Nayyan noted. In addition, any pollution of the Gulf would
shut down the six water desalination plants on the Arab shore.
A possible military confrontation between Iran and the US
could trigger Shiite-Sunni sectarian tensions across the region.
Yahya Rahim Safavi, commander-in-chief
of the Iranian National Guards, was speaking to state television
on April 5th, during a week of naval war games in which Tehran
announced the successful testing of new weapons, including
missiles and torpedoes. "The Americans should accept
Iran as a great regional power and they should know that sanctions
and military threats are going to be against their interests
and against the interests of some European countries,"
“We regard the presence of America
in Iraq, Afghanistan and the Persian Gulf as a threat, and
we recommend they do not move towards threatening Iran,"
Safavi said. Iran has a commanding position on the north coast
of the Strait of Hormuz, and could still disrupt shipping
of two-fifths of the world's globally traded oil, or 17 million
barrels per day, that passes through the narrow Strait of
The Washington Post said April 9th, no
US military attack appears likely in the short term, but Pentagon
officials are preparing for a possible military option and
using the threat to convince Iranians of the seriousness of
their intentions. Pentagon and CIA planners have been exploring
possible targets, such as Iran's underground uranium enrichment
facility at Natanz and its uranium conversion plant at Isfahan,
both located in central Iran, the report said.
Iran is not about to be cowed by planted stories in the media.
It sounds like the boy crying Wolf. "We regard that planning
for air strikes as psychological warfare stemming from America's
anger and helplessness," replied foreign ministry spokesman
Hamid Reza Asefi. "Sending our file to the UN Security
Council will not make us retreat. During the past 27 years,
we underwent economic sanctions and in spite of that we made
economic, technical and scientific progress," he added.
The Ayatollah Khameni has bought the Chinese
and Russian vetoes of any credible UN sanctions against Iran,
with multi-billion dollar arms deals, construction deals for
nuclear sites, and is dangling a $100 billion deal for development
rights of the Yardavan oil fields before Beijing. Without
the credible threat of economic sanctions against Iran, the
world would either witness a nasty military confrontation
in the Persian Gulf or a nuclear armed Iran in the months
or years ahead.
The Ayatollahs drive for nuclear invincibility
appears to be unstoppable, short of military action. Diplomacy
could drag on for a few more months, to convince a skeptical
public that all measures to avoid war were exhausted. But
Beijing and Moscow are expected to continue blocking the UN
from tough sanctions against Iran, effectively closing the
door for a diplomatic solution.
Venezuela’s Hugo Chavez is a staunch
supporter of the Ayatollah, and is the world's fifth largest
oil exporter. “The US imperialists invaded Iraq looking
for oil and now they are threatening Iran for oil, not because
the Iranians are developing some kind of nuclear bomb,"
Chavez said on March 21st. Chavez could become a wildcard
in the oil market in the event of a US strike against Iran’s
Pension funds poured money into crude oil,
base and precious metals in March, putting the “Commodity
Super Cycle” back on track after a period of consolidation
in February. Copper, which has gained 98% over the last two
years, has zoomed nearly 32% higher so far this year. Zinc
has doubled from a year ago. Crude oil has gained only 10%
since the start of the year, but is up 93% from two years
Copper supplies at the London Metals Exchange
stand at 111,800 tons, or less than three days of global consumption.
Zinc stockpiles have plunged 53% in the past year to 267,650
tons, equal to less than 10 days of global consumption. US
crude oil supplies are at a 7-year high, but only represent
20 days of imports. US oil companies appear to be stockpiling
oil for an uncertain future.
There are about 10,000 hedge funds managing
up to $1.5 trillion in assets around the world, and institutional
investment in commodity index funds has topped $80 billion.
Former Fed chief “Easy” Al Greenspan, was quoted
in January, saying gold’s rally did not reflect heightened
inflation expectations, but rather geo-political tensions
around the world. With the yellow metal bumping up against
the psychological $600 per ounce level, its highest in 25-years,
perhaps Gold knows what no one knows!
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