Gold drivers 2004
Eric Hommelberg
1 Weak Dollar
1.1 Others on the Dollar & Current Account Deficit
- Warren Buffet,Sir John Templeton, George Soros
- Robert Rubin, IMF, Lyndon LaRouche
1.2 US Dollar impact on price of Gold
2 Negative Real Interest Rates
3 Decline of Gold Supply
3.1 Raising the Alarm Bells
3.2 Future Outlook of Gold Supply
4 Increase Demand for Gold
4.1 Producer dehedging
4.2 Introduction ETF's for Gold
4.3 Deregulation of Chinese Gold Market
4.4 Increase demand for Industrial Gold
5 Covering Short positions
5.1 GATA
5.2 Blanchard vs JPMorgan/Barrick Lawsuit
6 Recognition for Gold as Money
6.1 FED/ECB statements on Gold's Monetary role
6.2 Gold's comeback into the Monetary System
6.3 Private remonetization of Gold
7 Flee from Equities to Real Assets
7.1 Diversifying Portfolios into Gold gaining credence
7.2 Japanese Gold Rush coming ?
Summary
1. Weak Dollar :
1.1 Others on the Dollar decline & US Current Account Deficit
Any currency which faces a Current Account Deficit approaching 5% of GDP is in trouble. The estimates for the US Current Account Deficit for 2004 do suggest that it will head to higher levels only ! It seems that the frequency of high ranking Economist warnings is increasing rapidly.
First let's review some of the warnings last quarter 2003
The Economist :
US Current Account Deficit is headed in all probability to an historic 7% of GDP in 2004.
"IMF draft sees potential for more dollar depreciation"
"MILAN, Aug 27 (Reuters) - The International Monetary Fund sees further potential for a depreciation of the U.S. dollar due to the high U.S. current account deficit, according to a draft IMF report obtained by Reuters."
Stephen Roach
Warning Shot, August 1, 2003
There comes a point in every current account deterioration when enough is enough -- when foreign investors demand a premium to keep funding a saving-short economy. History tells us that such a breaking point usually occurs when the current account deficit hits 5% of GDP. That's the threshold that typically triggers the classic current account adjustment process -- characterized by a weaker currency, higher real interest rates, and slower domestic demand that sparks a rebuilding of national saving (see Caroline L. Freund, "Current Account Adjustment in Industrialized Countries," Board of Governors of the Federal Reserve System International Finance Discussion paper #692, December 2000).
Sir John Templeton
Herald Tribune October 14, 2003
Templeton feeling bearish
The legendary investor predicts the U.S. dollar will lose 40 percent of its value.
Sir John, who founded the highly successful Templeton Growth Fund and Templeton World Fund, believes the dollar will lose 40 percent of its value against foreign currencies in the coming months, especially the Japanese Yen and Chinese Yuan.
Warren Buffet
The Capital Times November 3, 2003
Buffett says he is losing faith in the soundness of U.S. currency as an investment vehicle because the United States is running a huge trade deficit -- close to $500 billion, and rising rapidly -- that is causing income to flow out of the country at such a rapid rate that it will soon become unsustainable. In the November edition of Fortune magazine, Buffett warns that the rapidly mounting U.S. trade deficit could lead to a dramatic plunge in the value of the dollar and a host of additional economic consequences that could add up to disaster for American families.
Stephen Roach
Morgan Stanley's Roach Says U.S. Dollar to Drop 20%
Nov. 5 (Bloomberg) -- The U.S. dollar will probably drop a further 20 percent on a trade-weighted basis in the next two years because the world's largest economy may falter, said Stephen Roach, chief economist at Morgan Stanley.
``My guess is that it's got another 20 percent to go,'' Roach told reporters after a presentation at the Morgan Stanley Asia Pacific Summit in Singapore. ``The risk is that it could be in a shorter time period, which could be very disruptive.''
The dollar's index, which measures the currency against a basket of currencies of the country's six major trading partners, traded at 93.29 at 3:57 p.m. local time in Singapore. The currency has declined about 15 percent on a trade-weighted basis the past 18 months. The dollar may fall because U.S. economic growth, which expanded at a 7.2 percent pace in the three months ended Sept. 30, will probably slow in coming months, deterring investment in assets denominated in the U.S. currency, he said.
END.
During the first month of 2004 more strong warnings surfaced regarding dollar-troubles ahead compared to last quarter of 2003.
IMF sees risk of disorderly U.S. dollar drop
Reuters, 01.07.04, 4:02 PM ET
WASHINGTON, Jan 7 (Reuters) - Large and growing U.S. budget and current account deficits raise the risk of an abrupt drop in the value of the dollar, which could hit U.S. and global economic growth, the IMF said on Wednesday.
www.forbes.com/markets/newswire/2004/01/07/rtr1201770.html
Rubin warns against growing U.S. deficits
By T.K.Maloy, UPI Deputy Business Editor
WASHINGTON, Jan. 13 (UPI) -- The U.S. federal budget is on an unsustainable path, and in the absence of any significant policy changes, federal deficits could total around $5 trillion over the next decade, former Treasury Secretary Robert Rubin said Tuesday.
http://washingtontimes.com/upi-breaking/20040113-031325-3828r.htm
END.
Just one week earlier Robert Rubin issued similar warnings at the American Economic Association (AEA) conference in San Diego the first week of January.
"The U.S. Federal budget is on an unsustainable path," Rubin observed, warning that the "scale of the nation's projected budgetary imbalances is now so large that the risk of severe adverse consequences must be taken very seriously." These consequences "may well be far larger and occur more suddenly" than analysts expect.
The dire warning got people's attention, as Rubin knew it would. "Mr. Rubin has formally joined the coalition of the shrill," wrote Paul Krugman in a column in the Jan. 6 New York Times. When the "legendary" Rubin, known for his calm in the face of crisis, warns of looming catastrophe, it's time to pay attention, Krugman suggested.
END.
Lyndon LaRouche
Democratic President pre-candidate Lyndon LaRouche seems to agree with Robert Rubin's statements. LaRouche has said repeatedly:
"The global financial system is hopelessly bankrupt, overloaded with far more debt than can ever be paid back, and must be put through the equivalent of a bankruptcy proceeding. The system cannot be saved through minor adjustments in policies and procedures, nor through hyperinflation. The system is bankrupt, now, and the solution begins with that admission. That is the standard to measure all policies."
www.larouchepub.com/other/2004/3103rubin_warns.html
END.
Investment Guru George Soros isn't very optimistic about the dollar either :
Soros tips US dollar will fall further
By Michael Mckee, January 27, 2004
GEORGE Soros, who once made $US1 billion ($1.3 billion) betting on a drop in the British pound, said the US dollar may extend its decline in 2004 even as stocks rise.
http://finance.news.com.au/common/story_page/0,4057,8505217%255E14305,00.html
END.
So what did we see during the first month of this year ? Yes indeed, many more warnings regarding a possible sharp decline in the dollar. Some analysts even argue that the dollar could have declined already to much lower levels today if the Japanese authorities wouldn't have been so kind to finance the US debt by purchasing large amounts of dollars in order to protect their own export business.
Richard Russell :
Feb 3, 2004
"The Bank of Japan spent $167 billion in 2003 and $67 billion just in January 2004 to buy dollar and thus "pressure" the dollar higher against the yen." Good Lord, how much does Japan have to spend to keep the dollar higher and the yen lower? I think the dollar-yen action shows how inherently WEAK the dollar is. Of course, the latest estimates of a 2005 US budget deficit of over half a trillion dollars doesn't help the dollar. Talk about being "out-of-control," you're seeing it now in the US budget deficit. If you're one of our "overseas friends," you've got to have guts, faith, and a strong stomach to hold dollars."
Bill Gross (Managing Director PIMCO)
Investment Outlook Feb 2004
www.pimco.com/LeftNav/Late+Breaking+Commentary/IO/2004/IO_02_04.htm
"But folks, all blame aside, I must tell you in advance that this story or movie does not have a happy ending. In terms of timing it may not be high noon, but High Noon it will be in terms of an ultimate outcome. Because in a finance-based economy that depends on more and more low cost money in order to thrive, the game ends when either the "more and more" or the "low cost" modifiers are replaced with "less" or "higher cost.""
"Who could argue that if debt as a % of GDP were still at 1980s levels as shown in the chart, that our consumption of things, our purchases of homes, our investment in technology, or our current government deficits would not be much smaller and our economic growth much lower. We are hooked on debt; we are a finance-based economy.
And so? Why not just keep on going. So far so good the New Agers would claim. What's wrong with 400% of GDP or 500% of GDP? What's wrong with dropping it from helicopters if we have to as good Ben Bernanke has suggested? Well, let me tell you what's wrong. Debt levels and debt ratios have limits. When and if interest rates do go up, the servicing costs of an accelerating debt economy eventually bite the hand of its master."
"My point is that at some point on this seemingly never ending ascent of debt/GDP, someone will say "no más." Maybe it'll be PIMCO and PIMCO think-alikes; maybe it'll be foreign holders of bonds grown tired of currency/inflationary erosion of principal; maybe it'll be risk takers in high yield/emerging market/levered hedge funds scared to death from a future LTCM crisis. Hard to tell, but I'm telling you it'll happen, helicopter or no helicopter and with it will come an economic slowdown/recession unseen since at least the early 1980s when Volcker began his vigil. High noon"
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