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Global Dollar Paranoia Building Gold Demand

By Eric Pratt      Printer Friendly Version Bookmark and Share
Mar 27 2009 10:17AM

Yesterday after Treasury Secretary inadvertently waxed supportive of the idea that he was open to China's suggestion of moving toward a currency system linked to the International Monetary Fund's Strategic Drawing Rights. gold spiked and the dollar dove as markets reacted swiftly. Geithner soon thereafter came back to assure viewers that the U.S. Dollar was going to remain the reserve currency for “the foreseeable future”.

Special Drawing Rights are a basket of currencies comprised of the dollar, the yen and the euro. G20 leaders argued in favor of SDRs replacing the dollar as reserve currency initially at the G20 special meeting in New York and Washington last year.

The suddenness and violence of the market spasm (gold shot up $20 in less than a minute while the dollar lost one and a half cents) is evidence of what’s in store for gold and the dollar should the trend in U.S. economic news continue unfavorably in the macro view.

The recent strength in equities as a result of Obama’s anticipated budget and Geithner’s plans to pluck distressed assets from the balance sheets of troubled banks with the help of private equity appears to have petered out as the market  decides that these developments are not so positive after all. 

Compounding fears of central banks’ inability to continue to print money ad nauseum is news today of the failure of the UK bond auction for the first time since 2002.

U.K Bonds, known colloquially as ‘gilts’ slumped after slumped after the London-based Debt Management Office, which manages bond auctions on behalf of the Treasury, said investors bid for 1.63 billion pounds of the 40-year securities. The UK was planning to sell up to 146.6 billion pounds in debt this year, a proposition now in serious doubt.

To make matters even worse, The U.S. Treasury's auction of $34-billion saw higher-than-forecast yields in  five-year notes, which raised concerns about the U.S. government’s ability to lower interest rates.

These developments point to a broader trend where good news has a short-lived positive effect against the ongoing overwhelmingly negative news still emerging from most nations on the economic front. Despite the uncertainty in bond and currency markets, investors have yet to move decisively into gold. Forecasts however, do point to a rise by as much as 20% in demand for bullion, which would put sales at 52-53 million ounces for 2009.

So does this mean, as many journalist-analysts predict, that the bottom is in for equities and commodities, and a market recovery is underway?  

Or is this the end of another sucker’s bear market rally that will see new lows in the Dow and S&P, in juxtaposition to new highs for gold and silver?

Some are firmly convinced that the tummy-rubbing feel-good speeches from Geithner, Bernanke and Obama have been about used up in terms of credibility, and the market is poised for the next leg down as all the rosy pictures painted by the team fail to materialize. Earnings announcements for Q109 are just around the corner, and the outlook is anything but positive.

J.P. Morgan analyst Steve Shepherd has joined the growing consensus that expects gold prices to remain strong for years to come.

"We expect increased investment demand to make up for any losses from traditional jewelry markets in India, China and the Middle East to underpin gold prices," he wrote.

“ETF’s continue to attract record inflows of capital,” said James West, publisher of the Midas Letter. “With the bond markets weakening, increased skepticism over the U.S. ability to manage its cost o debt by buying treasurys will accrue favorably to gold-denominated assets and other precious metals. Silver especially has some catching up to the gold price ahead of it,” he said.

When asked about  gold mining stocks, Mr. West said, “The value and leverage to the gold price among junior gold mining companies with near term production assets are the greatest opportunity out there right now for risk tolerant portfolios. Everybody expected the Fed’s starting to finance its own debt with imaginary dollars would take gold to the moon over night. The market will take time to absorb this information, and as more treasury auctions in the U.S. and Gilt auctions in the U.K. fail, the writing will increasingly be on the wall.”

Gold prices were little changed on Thursday as the dollar recovered, with investors keepingtheir eyes peeled for signs of risk appetite as Asian shares hit their highest level in 11 weeks.

The world's largest gold-backed exchange-traded fund, the SPDR Gold Trust GLD, said its holdings remained at 1,124.99 tonnes on March 25, unchanged from the record hit the previous day. The previous record was 1,114.60 tonnes marked on March 20.

Eric Pratt
Thursday, March 26, 2009



Eric Pratt is the Metals Editor at He can be reached at