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
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
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," he said.
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 pound.
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
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 Reserve.
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
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
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
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 purchases.
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,"
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 prices.”
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
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
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 cannot cross.
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
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
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
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 Kuwait.
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," he said.
“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 Hormuz.
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
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
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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