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Jon Nadler

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The Not-So-Good Old Days...

By Jon Nadler       Printer Friendly Version Bookmark and Share
Nov 11 2010 10:02AM

Following a volatile midweek session, precious metals regained upward momentum during the overnight hours, mainly on Irish debt-related apprehensions and despite a strengthening US dollar. Gold prices opened with a $6.20 per ounce gain at $1,409.60 and would have been up more like $15 had the dollar not made some gain this morning.

Silver advanced 32 cents to open at $27.46 despite rising signs that a top may imminently be forming and that bulls have run out of breath. Platinum gained another $20 on the open, starting the Thursday session off at $1,756.00 while palladium marched in lockstep, adding its own $20 to values and opening at $718.00 the troy ounce.

Amid such parabolic price gains (palladium, for example has gained 75% ytd), South African producers did the logical (and profitable) thing; they rushed 46% more ounces of all noble metals to the markets in September. Wonder if Russia will be far behind in ‘suddenly’ being able to effect some PGM group metals shipments. Rhodium rose $40 and reached the $2,350.00 mark but it still has some ‘catching up’ to do as it has not enjoyed ‘attention’ from the ETF mania.

In the background, black gold was up 20 cents (at $88.02) and the greenback retook the 78 mark on the trade-weighted index as the euro took a couple of selling hits and approached its lowest level in about one month against it. The common currency was being buffeted by winds of worry about the stall in Spain’s economy and about Ireland’s ability to repay its debt. Thus, “somehow,? just one week after the Fed was largely seen as lighting the “fatal fuse? under the American currency, the dollar managed its best/longest run since August (the time when Mr. Bernanke alluded to what was to come last Thursday) and rose for a fifth session in a row.

This is not to say that the rebound in the dollar has everyone smiling; not when one considers that the currency bounced back from nearly the lows seen one year ago on the same index. In fact, none other than former Fed boss Alan Greenspan accused his successors of pursuing a ‘deliberate’ policy to weaken the world’s reserve currency. Yes, China is recalcitrant on letting its own currency gain in value, but the Greenspan ‘angle’ is that the current imbalance is largely an ‘engineered’ one- and perhaps not all that good in the long-run.

Treasury boss Geithner retorted that Mr. Greenspan did not accurately describe that which is actually taking place and reassured viewers on CNBC that the US administration is not pursuing an active undermining of the greenback “as a tool to gain competitive advantage? or in order to grow the economy. Just as well, since a global poll conducted by Bloomberg (1,030 investors took part) reveals that fully three-quarters of respondents do not believe that the latest iteration of QE will have little or no effect on joblessness and/or US GDP.

G-20 present in Seoul delegates strained to come up with an enhanced version of the promises for currency stability they made in October. The better part of a lengthy “Seoul-searching? session was spent by only two men discussing [wish one were a Korean fly on the wall] “something? that is at the core of the unbalanced global situation. The two men were Mr. Obama and Mr. Hu Jintao. You get the gist of this.

And yet, the vicious circle continues to roll on; the world needs the US to grow, and grow faster. The US (well, at least the Fed) believes that growth comes from accommodative policy (for now) and that tightening can wait. The world then sees a lower dollar, an influx on unwanted capital, and a need to ‘compete’ with correspondingly weak(er) currencies in order to keep other economies afloat. Nobody seems to be winning.

At the end of the day, not much is expected out of the Seoul summit. Our own PM, Mr. Harper stated that he does not have any certainty over whether or not an agreement will be cobbled together by the evening conclusion of the meeting. Interesting quiz question: Who is the US’s largest trading partner? If you hurried to reply that it is China, think again. Hint: Ask Mr. Harper.

As for China, well, the heat is on. The heat of higher-than-desirable inflation, that is. All of this means, that “fire-fighting? strategies will also soon be on display, courtesy of the PBOC. Yesterday, the central bank hiked its reserve requirements and forced the country’s banks to put more money aside as opposed to handing it out in the form of loans (with which speculators have run property and other prices amok). Lost in the news (but not in translation) is the fact that China is showing a decline (!) in imports for certain commodities. Imports of copper, iron ore, and oil caved in during the month of October.

Perhaps this was the result of a larger-than-normal level of inflows in September, perhaps it was not. Some analysts expect the resumption of such stronger patterns and ‘good times’ to last until sometime in 2011; mainly on the heels of the Fed’s accommodation. We would say that it would be highly advisable to keep that magnifying glass squarely over the import spreadsheets of China. In the interim, headline would have us believe that –at least this morning- gold is rising because of Chinese inflation. Yes, perhaps, but the PBOC is not the Fed, is not the ECB. And even those two are looking at 2011 as the turning point in policy.

Much ado followed World Bank President Zoellick’s so-called ‘proposal’ to perhaps include gold into a revamped form of global monetary peg, given current turmoil and uncertainty. Camps are forming, battle lines are being drawn, forum chatter is ablaze with flamers (on both sides), and…economists, well, they bring logic to the table with “on the other hand? types of analyses. One such academic is Nouriel Roubini. According to whom, the re-adoption of a gold standard is unworkable.

Speaking on CNBC the other day, Professor Roubini flat-out stated that "A fixed exchange regime, even if it is not a gold standard… that world just doesn't work, because in that world, monetary policy by definition instead of being countercyclical becomes pro-cyclical. Suppose you have a fixed exchange rate just exacerbates the business cycle." "

NetNet reporter Ash Bennington details that “although he is best known as an economist who challenges conventional views, Roubini pretty well lines-up the consensus view of mainstream economics on the gold standard or fixed exchange rate regimes: "You have the opposite of what any optimal rule about monetary policy will tell you." Basically, fixed rate regimes inhibit the ability of banks to provide their “lender of last resort? support role to an economy when most needed. In so many words, the “good old days? were anything but “good.?  

This is borne out by the more than 22 recessions (some harsher than what took place in 1929-1941) the US experienced before WWII. See, for example, the “original? Great Depression (aka “The Long Depression?) that plagued the European and US economies from 1873 to 1896. The gold standard is generally thought to have its origins in the early 1700’s.

UC Berkeley Prof. Barry Eichengreen has blamed the “dragging out? of the Great Depression 2.0 on the fact that the gold standard was then in force. Economic theorists would concur that –under such a rigid standard- monetary policy would essentially be determined by the rate of gold production. Variations in the amount of gold that can be mined at any particular time (where are the ‘peak gold’ adherents when you need them?) could cause inflation if there is an output increase, or deflation if there is a decrease in same.

"When you had a traditional gold standard, boom and bust with severe swings in economic activity were the norm—really big ones. It was only once we moved to fiat money that central banks were able to smooth the business cycle, and make it less volatile, as we did during the financial economic crisis," Prof. Roubini said.

We say, hold that personal “gold standard? of your own, and remain on it. Let central banks do what they might (while not forgetting that they, too, have their own ‘reserve’ stash of the stuff) –chances are they will steer a course away from rocky shores. Hoping for a crash upon said rocks is not in anyone’s best interest. Never has been.

Jon Nadler
Senior Analyst
Kitco Bullion Dealers Montreal



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