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Jon Nadler


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From Russia, With $ Love

By Jon Nadler       Printer Friendly Version Bookmark and Share
Jun 15 2009 4:52PM

www.kitco.com

Good Afternoon,

Gold prices resumed their decline as the new trading week got underway, and they were heavily pressured by a renewed push to higher ground ( up to 81.12 on the index) in the US dollar. A  more than $1.50 drop in crude oil prices also helped push gold to lower price territory today. The greenback was clearly aided by highly supportive comments from...Russia. Yes, the same Russia whose leader Medvedev was heard questioning the dollar's reserve status, not that long ago. Says Bloomberg:

"Russian Finance Minister Alexei Kudrin said the dollar is in “good shape,? further affirming that there’s no substitute for the world’s reserve currency. Kudrin rushed to reassure investors of Russia’s confidence in the dollar just days after his boss, President Dmitry Medvedev, questioned its global status, joining China’s central bank Governor Zhou Xiaochuan in suggesting the world may need another benchmark for settling international debts.

“It’s too early to speak of an alternative,? Kudrin said in an interview two days ago in Lecce, Italy, after meeting officials from the Group of Eight nations. Kudrin’s comments underscore the dependence of Brazil, China, Russia, and India on the currency of the U.S., the world’s largest economy and a $2.5 trillion export market. Even as some of their leaders questioned the dollar’s status, the four nations increased foreign reserves by more than $60 billion in May to limit their currencies’ gains and support their exports. They now have combined reserves of $2.8 trillion and are among the largest holders of Treasuries.

The dollar rose the most against the euro since April as Russia’s Finance Minister Alexei Kudrin said his nation has full confidence in the U.S. currency and a drop in stocks encouraged demand for safety.

The greenback advanced versus 14 of its 16 major counterparts after Kudrin said two days ago in an interview following the Group of Eight meeting that it was too early to speak of an alternative to the world’s main reserve currency. The euro fell versus the dollar after the European Central Bank said commercial banks in the 16-nation euro region may lose a further $283 billion by the end of next year.

“The pace of dollar losses is slackening materially,? said Todd Elmer, a currency strategist at Citigroup Inc. in New York. “When you look at the factors that were feeding dollar depreciation, notably the rally in risk appetite and concern over the long-term impact of U.S. policies, it looks like they’ve both run ahead of themselves.?

The dollar climbed as much as 1.9 percent to $1.3756 per euro, the strongest level since May 21, before trading at $1.3794 at 4:06 p.m. in New York, compared with $1.4016 on June 12. The intraday gain in the greenback was the biggest since April 27. The dollar appreciated 0.9 percent to $1.6302 against the pound from $1.6443 and climbed 1.2 percent to 1.0924 Swiss francs from 1.0791."

So, now that we have had Japan and Russia patting the dollar on its back, can China be far behind with a dollar-positive slip of the tongue of one of its own officials?

Just after you were assured by a plethora of doomsday newsletters that the dollar's demise was upon us, a report to be issued today will reveal that international investors actually increased their greenback holdings as of April. By nearly $58 billion more than they sold. This, after the fact that at the end of 2008, the world's dollar reserves were up to 64% of the total - an increase of 1.2% since the middle of the same year. Go figure. Go figure you've been fed some less-than-half-and-more-like-quarter-truths. But, they sure sounded comforting, given May's rallies in commodities.

Copper prices also took a hit today, after perceptions that China's stockpile is turning into quite a pile (and then some) dented speculative enthusiasm. Global equities headed lower on the heels of this weekend's G-8 meeting. The gathering revealed that participants share a common vision. One that includes applying the tourniquet to the liquidity injection and stimulus tubes, and one that also includes siphoning off the excess of financial adrenaline that has been pumped into the global economic patient's veins over the past couple of years. Thus, look for a new installment of "Reversal(s) of Fortune(s)" at an economic theatre near you, come 2010.

New York spot bullion prices kept on track to lower levels throughout the day and were last seen showing a $10.00 drop, quoted at $928.20 per ounce following an earlier dip to $924.90. Gold has broken support that was reported to be present at near $933 and it could now be headed to lower levels, should the perception that various central banks are not about to pull the plug and diversify out of dollars gain traction with the trade.

Silver fell quite a bit harder than gold this Monday, losing three-quarters of a dollar, and was seen drifting at $14.06 per ounce. Platinum dropped a whopping $45 to $1205.00 and palladium declined $9 to $242.00 during the session's late afternoon hours.

Geopolitics continued to lend a modicum of support to bullion, as the Iranian "elections" appear to be headed for some kind of probe by officials, and as Mr. Kim over in Korea appears hell-bent on building doomsday toys. Countervailing these tensions, statements by Israel that it could live with a demilitarized Palestinian state on its border. The US supports the statement, while Palestine's Mr. Abbas -predictably-does not endorse it.

Crude oil prices eased back to near $71 per barrel early on Monday, also sideswiped by the rise in the US currency. Back(side) on the saddle took on a whole new meaning on Sunday. In case you missed it (and it was hard to do so) the World Naked Bike Ride took place around the world yesterday. Its objective? Protesting the world's dependency on oil. Buck-nekkid riders in some 30 countries around the globe took to the streets wearing only helmets (and some, not even those) and called for an end to being hooked on dino juice.

By the way, NO dice on pictures - we thought we would spare you from the nude photo section this morning. (There was an 87-year old man on his bike out there, you know...) And, no, we do not think this morning's dip in oil has much to do with the ride. It does show however, that the addiction is on a growing number of people's minds.

Something else on people's minds (as well as of their leaders, evidently) is the dependence on stimuli and what to do about the situation, as the world emerges from the credit crisis cave and risks prompt overheating from the fallout. Here is Bloomberg's take on the Lecce, Italy meeting. It has had the inflationist camp hurrying back to the "Weimar" drawing board for a quick adjustment, overnight. Same as the "Dollar is Dead" nihilists, for that matter.

"Financial chiefs from the Group of Eight industrialized nations yesterday offered their most optimistic assessment yet of the global crisis, noting encouraging signs of economic stabilization and calling for an "exit strategy" the policies that have been used to stimulate growth around the world.

Following two days of meetings in Lecce, Italy, the eight finance ministers -- including U.S. Treasury Secretary Timothy F. Geithner and his counterparts from Britain, France, Germany, Italy, Canada, Japan and Russia -- also agreed to create "a set of common principles and standards governing the conduct of international business and finance."

The strategy for obtaining those goals, they said in a communique, would be known going forward as "the Lecce Framework," with the objective of identifying and filling in the regulatory gaps that helped cause the current crisis. Geithner, in particular, called on international banking regulators to this year map out better ways to "quickly resolve failures of cross-border financial firms."

In Europe, officials have already moved to adopt new measures for more rigorous oversight of rating agencies and companies selling securitized assets. Geithner pledged the United States would offer its own broad proposals for "more conservative standards" when it unveils a much-anticipated reform plan to overhaul domestic financial regulation later this week.

Treasury officials said yesterday that plan will include measures to set tougher capital standards and oversight for banks, better coordinate oversight of global financial institutions, and improve monitoring and transparency in global derivatives markets. "Because risk does not respect borders, we will put forward several international proposals in our reform package to help raise standards globally," Geithner said in Lecce yesterday.

Financial chiefs expressed cautious optimism on the global economy, pointing to the recent rebound in stock markets and a bout of encouraging economic data. Signs of a bottoming out of the crisis are particularly strong in the United States and China. Officials said, however, that significant risks remain.

The World Bank last week projected the global economy would contract by 3 percent this year, significantly worse than earlier estimates. Many nations in Europe are mired in deeper recessions than the one in the United States and have moved more slowly to clean up their financial systems. Europe has yet to put many of its banks through the kind of "stress test" the United States conducted, and analysts are concerned about another wave of bank failures in Europe, which could hinder a global economic recovery.

Yet, economic signs of life were sufficient for the financial chiefs yesterday to focus on how to wind down massive fiscal and monetary actions worldwide, and to ask the International Monetary Fund to help come up with a plan. Germany, in particular, sounded an alarm over the run-up in already-high deficits from Japan to Britain to the United States, as well as the easy monetary policies of low interest rates and tax cuts seen in some nations.

Although the officials agreed on both the need to continue government spending sprees as warranted, as well as the need to ramp them down as economies improve, there was an important difference of emphasis. The United States and Britain, for instance, appeared to play up calls for "sustained" spending to ensure a recovery, while Germany and other countries highlighted the need to return to fiscal prudence as fast as possible.

"It is interesting that France and Germany, which face prospects of very weak recoveries, continue to be most vocal in cautioning against the risks of stimulus measures," said Eswar Prasad, senior fellow at the Brookings Institution. "

Until later,

Back to Dollar-watch. Or, in Kudrin-speak: "Wot. Do Ve Hev Anozer Chois?"

Jon Nadler
Senior Analyst
Kitco Bullion Dealers Montreal

 

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