By Peter Schiff
Aug 3 2007 3:04PM
www.themarkettraders.com
Amid the recent stock market weakness, the pundits are virtually unanimous in their claims that good underlying economic fundamentals are being trumped by irrational fear. However, if investors understood just how bad the fundamentals for the U.S. economy really are, they would dump stocks even faster. So, contrary to the rhetoric, it is not that investors are being too fearful, but that they are being too complacent.
During the recent stock market rally investors ignored some very disturbing underlying economic fundamentals. Therefore, the current weakness in the market is not in conflict with the fundamentals, but completely consistent with them. Unfortunately for the overall economy, the re-assertion of fundamentals is not exclusive to the stock market. Here is a look at what will likely happen to other asset classes and our economy should investors refuse to blindly follow the Pied Pipers of Wall Street:
Gold and gold stocks
Rather than trading in tandem with other assets (as they recently have), gold and gold stocks will diverge, registering their largest gains on days when general stock prices fall. Currently, liquidity is driving all markets simultaneously. However, when those seeking liquidity realize that gold is its ultimate form, they will embrace it and shun paper alternatives. When that happens, gold stocks should shine even brighter than the metal itself.
The dollar
Once foreign and domestic holders of greenbacks understand the severity of the risks facing the U.S. economy, they will dump dollars hand-over-fist. As the value of the dollar falls, interest rates and consumer prices will rise. This will compound the problems in the housing and mortgage markets, as well as for the overall U.S. economy, engendering even more dollar selling.
Bonds
For now, U.S. Treasury bonds have benefited from the so-called "flight to quality". Once investors realize that Treasuries can not protect them against the falling dollar, safe haven money will flee Treasuries as well. As interest rates rise, the problems for our economy will only intensify. If the Fed reduces short-term rates to cushion the blow, Treasuries will come under even greater selling pressure. So in effect, any attempt by the Fed to reduce interest rates to bolster housing will backfire, as rising long-term yields will only put additional nails in the housing coffin.
Real Estate
When reality sets in, housing prices will collapse. Today’s announcement that Wells Fargo is raising rates on prime jumbo mortgages (a significant percentage of California homes fall into that category) to 8% from 6 7/8%, will help accelerate this process. As potential home buyers will once again be required to fully document their incomes, provide 20% down payments, and pay 8% annually on fully amortized mortgages, home affordability will be out of the question unless prices fall sharply.
The U.S. economy
When real estate prices collapse, trillions of dollars of home equity will be wiped out, with disastrous repercussions for an American economy addicted to consumer spending. Though many consumers will see their home equity vanish, their mortgage debt, much of which will become more burdensome once adjustable rates reset much higher, will remain. Flat broke and facing rising mortgage payments, as well as higher gas and food prices, consumers will severely pull back on discretionary spending. As millions lose their jobs as a result of this retrenchment, the recession will kick into high gear, causing even greater damage to the real estate market, the dollar, bonds, and the economy, resulting in even more safe haven flows moving into gold.
For a more in depth analysis of the tenuous position of the Americana economy and U.S. dollar denominated investments, read my new book “Crash Proof: How to Profit from the Coming Economic Collapse.” Click here to order a copy today.
More importantly, don’t wait for reality to set in. Protect your wealth and preserve your purchasing power before it’s too late. Download my free research report on the powerful case for investing in foreign equities available at www.researchreportone.com , and subscribe to my free, on-line investment newsletter at http://www.europac.net/newsletter/newsletter.asp
****
President
Euro Pacific Capital, Inc.
10 Corbin Drive, Suite B
Darien, Ct. 06820
phone 203-662-9700
toll free 888-377-3722
email schiff@europac.net
web www.europac.net
Friday, August 3, 2007
Thursday, August 2, 2007
It's Different This Time Isn't It? Read this
By Roger Wiegand
Aug 2 2007 10:48AM
www.tradertracks.com
“We have noticed during our current updating markets review some newer pressures not on the trading table in previous precious metals rallies. Tremendous computing power and imposition of the Plunge Protection Team’s smothering trading blanket is screwing up cycles and time. Also, gold and silver stocks must now share investment cash with ETF funds.
Actual mining production shortages will not go away. Inflation for the producing miners is becoming a heavy load. The end game is inevitable but the getting there can be confusing.” -Traderrog
In recent trading days, gold and silver shares have been trending quite a bit with the big index stock markets.
While cold logic tells us our PM positions ought to trade opposite weakening mainstream stock sectors it’s not happening yet.
Precious metals seem to trade inversely with the U.S. Dollar but not always. As liquidity and credit dries-up in the aftermath of subprime, derivatives and other junky bonds, major market shifts have begun.
At this time of year, the general stock market has normally been through a spring correction and follows with two months of choppy nothingness as dealers and brokers are mostly absent for beach time and fun in the sun. Crazy bond markets, we suspect have spoiled more than a few vacations this year.
It’s just plain slow out there now but smarter traders not on holiday are busy with homework separating the wheat and chaff on their junior shares.
With so many from which to choose, how do we find the good stuff and run from the others? In our weekly newsletter we offer trading ideas with stocks of all price and trading sizes, along with futures, commodities and spreads.
While there are a variety of available trading tools they do not work well all the time. Traditional annual and semi-annual cycles are still built into the game but now we have more powerful variables.
An abundance of trading and investment cash created more juniors than we would normally see when money is dear.
World-wide cash printing causing inflation is beginning to bite mining operators affecting everything from fuel, to parts, and labor. In some cases the cost per ounce for production has risen 50% or more over the past 18 months.
Trading junior shares has become increasingly volatile. We think volumes are more erratic with folks moving in and out of positions faster and more often.
Even the best technical analysis will not always be accurate as the market manipulators arrive to shake the trees when their key trading components get sick and need propping attention. This then affects most every sector including gold and silver.
Credit derivatives have been abused to the extent nobody knows or really understands the final outcome. However, understanding trillions have been originated with no one on the other side of the trade this scares the you-know-what out of those with enough sense to understand what can transpire.
We are convinced the peaking of major stock markets has arrived. The larger trends are broken and for now it’s only a matter of time for the main selling event.
Big global banks and broker-dealers over extended into the stratosphere. The shorter term-intermediate cycles of 90-120 days seem to replicate 1987. Watching these global and investment banks closely we see they reflect trouble ahead.
Japan has been busy doing the same wild stuff as we see in America. Throwing cheap piles of money at the world for next to nothing (1/2%) and printing Yen at the speed of light.
Worse still, they, along with China have been buyers of last resort for USA bonds and notes hardly worth more than the paper they are printed on. We are not certain at this point which is weaker; the Yen or the U.S. Dollar.
Violence and unrest along with terrible weapons availability for naughty people keeps politicians and armies awake at night. China, Russia and the USA are selling billions in war machine tools. Eventually, somebody will use this stuff.
Oil markets are at higher risk as a result of geography, politics and now religion. Oil traded yesterday with a new record high for that date on the New York Mercantile Exchange. Product scarcity is part of it but so is growing inflation.
Hedge and LBO funds temporarily own way too much cash used for over and under investing (shorting) a host of market sectors. We are seeing some markets careen from highs to lows so fast new trading records appear. These fund guys have been buying ETF gold and when they get cornered on other non-performing assets, they sell the good stuff (gold) to pay for their messes in other markets.
The PPT Plunge Protection Team ordinarily uses these tools to redirect markets:
They sell gold futures, buy dollars, sell Euros, and buy S&P and Dow futures. This removes gold as a flight to safety threat and props the sick junk that needs to either shrink or die financially speaking.
Where Does This Leave Us PM Traders?
We cannot change the trading world but must just learn to deal with it. Junior PM shares offer a great deal of upside but they are going to get beaten around a bit before we find the finish line and cash in our chips.
Senior PM shares have more staying power and market exposure but less upside potential. Shear size requires a lot of buying to make them move significantly.
The few good ones however, are a good choice for part of your portfolio especially very large accounts. We had a good long run with senior stock options but general market volatility and PPT interference caused option seller’s to overprice their products taking away our odds.
Futures’ trading in gold and silver is risky without proper trade management. With expert controls, many times it can be safer then stocks due to high liquidity permitting easy entrance and exits. Spreads and fairly priced options are also good tools. We’ve helped silver traders with outstanding results in this fast market.
Technical analysis works when applied with experience and a handful of proven indicators. Fundamental trading including buy and hold is still beneficial but the time requirement is longer and the outcome is usually better with a larger trade list.
We expect some selling, some accidents and some surprises over the next 90 days.
Weak traders will falter and sell, lying back in the weeds to lick their wounds. Normally, when this happens, your favorite markets take-off in a huge rally and you are out of the game.
Trader Tracks has been preparing and finalizing an updated trading plan to deal with these variables. These new market changes and affectations will not change the outcome. We know the final answer. It’s just the getting there that is more worrisome this time around. It is different this time but not in the way most think. -Traderrog
Roger Wiegand
Aug 2 2007 10:48AM
www.tradertracks.com
“We have noticed during our current updating markets review some newer pressures not on the trading table in previous precious metals rallies. Tremendous computing power and imposition of the Plunge Protection Team’s smothering trading blanket is screwing up cycles and time. Also, gold and silver stocks must now share investment cash with ETF funds.
Actual mining production shortages will not go away. Inflation for the producing miners is becoming a heavy load. The end game is inevitable but the getting there can be confusing.” -Traderrog
In recent trading days, gold and silver shares have been trending quite a bit with the big index stock markets.
While cold logic tells us our PM positions ought to trade opposite weakening mainstream stock sectors it’s not happening yet.
Precious metals seem to trade inversely with the U.S. Dollar but not always. As liquidity and credit dries-up in the aftermath of subprime, derivatives and other junky bonds, major market shifts have begun.
At this time of year, the general stock market has normally been through a spring correction and follows with two months of choppy nothingness as dealers and brokers are mostly absent for beach time and fun in the sun. Crazy bond markets, we suspect have spoiled more than a few vacations this year.
It’s just plain slow out there now but smarter traders not on holiday are busy with homework separating the wheat and chaff on their junior shares.
With so many from which to choose, how do we find the good stuff and run from the others? In our weekly newsletter we offer trading ideas with stocks of all price and trading sizes, along with futures, commodities and spreads.
While there are a variety of available trading tools they do not work well all the time. Traditional annual and semi-annual cycles are still built into the game but now we have more powerful variables.
An abundance of trading and investment cash created more juniors than we would normally see when money is dear.
World-wide cash printing causing inflation is beginning to bite mining operators affecting everything from fuel, to parts, and labor. In some cases the cost per ounce for production has risen 50% or more over the past 18 months.
Trading junior shares has become increasingly volatile. We think volumes are more erratic with folks moving in and out of positions faster and more often.
Even the best technical analysis will not always be accurate as the market manipulators arrive to shake the trees when their key trading components get sick and need propping attention. This then affects most every sector including gold and silver.
Credit derivatives have been abused to the extent nobody knows or really understands the final outcome. However, understanding trillions have been originated with no one on the other side of the trade this scares the you-know-what out of those with enough sense to understand what can transpire.
We are convinced the peaking of major stock markets has arrived. The larger trends are broken and for now it’s only a matter of time for the main selling event.
Big global banks and broker-dealers over extended into the stratosphere. The shorter term-intermediate cycles of 90-120 days seem to replicate 1987. Watching these global and investment banks closely we see they reflect trouble ahead.
Japan has been busy doing the same wild stuff as we see in America. Throwing cheap piles of money at the world for next to nothing (1/2%) and printing Yen at the speed of light.
Worse still, they, along with China have been buyers of last resort for USA bonds and notes hardly worth more than the paper they are printed on. We are not certain at this point which is weaker; the Yen or the U.S. Dollar.
Violence and unrest along with terrible weapons availability for naughty people keeps politicians and armies awake at night. China, Russia and the USA are selling billions in war machine tools. Eventually, somebody will use this stuff.
Oil markets are at higher risk as a result of geography, politics and now religion. Oil traded yesterday with a new record high for that date on the New York Mercantile Exchange. Product scarcity is part of it but so is growing inflation.
Hedge and LBO funds temporarily own way too much cash used for over and under investing (shorting) a host of market sectors. We are seeing some markets careen from highs to lows so fast new trading records appear. These fund guys have been buying ETF gold and when they get cornered on other non-performing assets, they sell the good stuff (gold) to pay for their messes in other markets.
The PPT Plunge Protection Team ordinarily uses these tools to redirect markets:
They sell gold futures, buy dollars, sell Euros, and buy S&P and Dow futures. This removes gold as a flight to safety threat and props the sick junk that needs to either shrink or die financially speaking.
Where Does This Leave Us PM Traders?
We cannot change the trading world but must just learn to deal with it. Junior PM shares offer a great deal of upside but they are going to get beaten around a bit before we find the finish line and cash in our chips.
Senior PM shares have more staying power and market exposure but less upside potential. Shear size requires a lot of buying to make them move significantly.
The few good ones however, are a good choice for part of your portfolio especially very large accounts. We had a good long run with senior stock options but general market volatility and PPT interference caused option seller’s to overprice their products taking away our odds.
Futures’ trading in gold and silver is risky without proper trade management. With expert controls, many times it can be safer then stocks due to high liquidity permitting easy entrance and exits. Spreads and fairly priced options are also good tools. We’ve helped silver traders with outstanding results in this fast market.
Technical analysis works when applied with experience and a handful of proven indicators. Fundamental trading including buy and hold is still beneficial but the time requirement is longer and the outcome is usually better with a larger trade list.
We expect some selling, some accidents and some surprises over the next 90 days.
Weak traders will falter and sell, lying back in the weeds to lick their wounds. Normally, when this happens, your favorite markets take-off in a huge rally and you are out of the game.
Trader Tracks has been preparing and finalizing an updated trading plan to deal with these variables. These new market changes and affectations will not change the outcome. We know the final answer. It’s just the getting there that is more worrisome this time around. It is different this time but not in the way most think. -Traderrog
Roger Wiegand
Wednesday, August 1, 2007
Looking back to the 'crash of 1987'
By Peter Degraaf
Jul 27 2007 4:55PM
www.stockcharts.com
“History does not always repeat, but sometimes it rhymes.” Mark Twain.
A lot of traders and investors are asking the question: “Is it too early to buy, or should I expect more volatility like we saw during the past few days?”
Sometimes, by looking at the past, we can find some clues as to what might happen during similar situations in the present.
The first chart is that of the S&P index performance during the past 12 months.
Charts compliments of www.stockcharts.com
Featured is the S&P daily bar chart. Last week I warned my subscribers (see red arrow), that the S&P and DOW were due for a nasty setback, as the three supporting indicators were flashing warning signs (red dashed lines). The green arrows point to the spots where I now expect this correction to find near-term support.
Let’s take a look next to see what we can learn from a similar situation 20 years ago.
Featured is a chart that compares the 1987 S&P to the 1987 - 30 year bond price ($SPX:$USB), while the 1987 S&P index itself is in the lower box.
A good time to buy the DOW is when this ‘combination index’ is near the 200DMA. A good time to sell is when this chart shows a wide divergence from the 200DMA. The red arrow was a warning sign to the stock market “look out below”. The next chart takes a closer look.
Featured is a close-up of the previous chart. In 1987 those who watched this ‘index combination’ ($SPX:$USB) on a daily basis would have seen on Oct 15 and Oct 16 that it was time to bail out (red arrows), thereby avoiding most of the carnage.
Let’s apply this lesson to today’s chart formation.
Featured is the 2007 - 3 months chart of the ‘comparison index’ that compares the S&P index to the 30 year bond price (SPX:USB) Although I had been warning my subscribers for weeks that the S&P was overbought, on the 23rd and 24th I was able to issue my sternest warnings yet, (red arrows).
Conclusion: You don’t need me, all you need to do is start using this chart pattern as part of your system. BUY GENERIC STOCKS (DOW, S&P etc.) WHEN THIS COMBINATION INDEX IS NEAR THE 200 DMA, AND SELL WHEN IT GETS TOO FAR ABOVE IT!
Let’s take a look at how gold fared in 1987.
Featured is the chart that compares the 1987 S&P index (bottom) to the 1987 gold price at top). Gold initially rose in price, then dropped. Six weeks later gold was higher (blue dashed line, while the S&P (bottom chart), was still on the floor (red dashed line).
Featured is the current gold price chart. While we don’t know what the future holds, we can determine where the support for gold is at present. Support is indicated at $650., (green arrow), the 50DMA and 200DMA are in positive alignment, and both are rising. That is bullish.
The RSI and MACD indicators both have room to move up, along with the gold price.
Some of the damage to the bullish case for gold has been caused by central bank selling during the past few weeks. The positive aspect is that they can only sell it once. In the 1960’s these same central banks (the London Gold Pool), sold tonnes of gold, trying to stop gold from rising above $100./oz. They finally gave up.
Some traders are being spooked by the ’bounce up’ in the US dollar index. The dollar was overdue, especially so close to it’s multi-year support level at 80.00
We should consider ourselves blessed to still be able to buy gold at $650+/oz. Think of those investors in Zimbabwe who have to shell out 3 million Zimbabwean dollars just to buy a gram of gold! Better buy your gold now, for the higher the price goes, the more difficult it will be to obtain the increasing amount of cash that will be required, and the more restrictions the buyer will face. Every year the US Federal government publishes 76,000 pages of new regulations. Some of these regulations will no doubt relate to gold.
We finish this essay with the current XAU, two year, mining stocks chart.
> Most breakouts are tested right after the breakout. This one rose from 130 to 160, and has since given back 50%. It is currently just above the support of the 50DMA and 200DMA. These two moving averages are in positive alignment, and both are rising.
We should soon be able to spot signs that the bottom is in, and the next rise can then take place.
Peter Degraaf
****
Jul 27 2007 4:55PM
www.stockcharts.com
“History does not always repeat, but sometimes it rhymes.” Mark Twain.
A lot of traders and investors are asking the question: “Is it too early to buy, or should I expect more volatility like we saw during the past few days?”
Sometimes, by looking at the past, we can find some clues as to what might happen during similar situations in the present.
The first chart is that of the S&P index performance during the past 12 months.
Charts compliments of www.stockcharts.com
Featured is the S&P daily bar chart. Last week I warned my subscribers (see red arrow), that the S&P and DOW were due for a nasty setback, as the three supporting indicators were flashing warning signs (red dashed lines). The green arrows point to the spots where I now expect this correction to find near-term support.
Let’s take a look next to see what we can learn from a similar situation 20 years ago.
Featured is a chart that compares the 1987 S&P to the 1987 - 30 year bond price ($SPX:$USB), while the 1987 S&P index itself is in the lower box.
A good time to buy the DOW is when this ‘combination index’ is near the 200DMA. A good time to sell is when this chart shows a wide divergence from the 200DMA. The red arrow was a warning sign to the stock market “look out below”. The next chart takes a closer look.
Featured is a close-up of the previous chart. In 1987 those who watched this ‘index combination’ ($SPX:$USB) on a daily basis would have seen on Oct 15 and Oct 16 that it was time to bail out (red arrows), thereby avoiding most of the carnage.
Let’s apply this lesson to today’s chart formation.
Featured is the 2007 - 3 months chart of the ‘comparison index’ that compares the S&P index to the 30 year bond price (SPX:USB) Although I had been warning my subscribers for weeks that the S&P was overbought, on the 23rd and 24th I was able to issue my sternest warnings yet, (red arrows).
Conclusion: You don’t need me, all you need to do is start using this chart pattern as part of your system. BUY GENERIC STOCKS (DOW, S&P etc.) WHEN THIS COMBINATION INDEX IS NEAR THE 200 DMA, AND SELL WHEN IT GETS TOO FAR ABOVE IT!
Let’s take a look at how gold fared in 1987.
Featured is the chart that compares the 1987 S&P index (bottom) to the 1987 gold price at top). Gold initially rose in price, then dropped. Six weeks later gold was higher (blue dashed line, while the S&P (bottom chart), was still on the floor (red dashed line).
Featured is the current gold price chart. While we don’t know what the future holds, we can determine where the support for gold is at present. Support is indicated at $650., (green arrow), the 50DMA and 200DMA are in positive alignment, and both are rising. That is bullish.
The RSI and MACD indicators both have room to move up, along with the gold price.
Some of the damage to the bullish case for gold has been caused by central bank selling during the past few weeks. The positive aspect is that they can only sell it once. In the 1960’s these same central banks (the London Gold Pool), sold tonnes of gold, trying to stop gold from rising above $100./oz. They finally gave up.
Some traders are being spooked by the ’bounce up’ in the US dollar index. The dollar was overdue, especially so close to it’s multi-year support level at 80.00
We should consider ourselves blessed to still be able to buy gold at $650+/oz. Think of those investors in Zimbabwe who have to shell out 3 million Zimbabwean dollars just to buy a gram of gold! Better buy your gold now, for the higher the price goes, the more difficult it will be to obtain the increasing amount of cash that will be required, and the more restrictions the buyer will face. Every year the US Federal government publishes 76,000 pages of new regulations. Some of these regulations will no doubt relate to gold.
We finish this essay with the current XAU, two year, mining stocks chart.
> Most breakouts are tested right after the breakout. This one rose from 130 to 160, and has since given back 50%. It is currently just above the support of the 50DMA and 200DMA. These two moving averages are in positive alignment, and both are rising.
We should soon be able to spot signs that the bottom is in, and the next rise can then take place.
Peter Degraaf
****
Monday, July 30, 2007
Gold positive: Iran Wants Yen From Japan Not the U.S.$ for Oil - Who and What Next?
By Julian D.W. Phillips
Jul 27 2007 3:48PM
www.goldforecaster.com
At the heart of the global monetary system lies the use of the U.S.$ as the currency used to pay for the globe’s oil. Any change in that role has a disproportionate impact on the importance of the $ as well as its value relative to the globe’s other currencies. If the oil producing nations of the world decided to use other currencies for oil payments then the global monetary system itself is undermined, making gold more attractive and long-term a safer place to hold one’s savings.
So when we heard that Iran asked the Japanese refiners to switch to the Yen to pay for all crude oil purchases, after Iran's central bank said it is reducing its holdings of the U.S.$, we realized that this is an undermining blow to the $ and will also contribute to the current fall of the $ in exchange rate values, despite any short-term rally.
Iran wants Yen-based transactions "for any/all of your forthcoming Iranian crude oil liftings," according to a letter sent to Japanese refiners that was signed by Ali A. Arshi, general manager of crude oil marketing and exports in Tehran at the National Iranian Oil Co. The request is for all shipments "effective immediately," according to the letter, dated July 10.
Japan's annual oil imports from Iran costs 1.24 trillion yen ($10.1 billion) against the entire world’s demand for oil of around $2.354 trillion a year. This is not a huge amount of Yen let alone U.S.’, but it is significant in that it is a breakaway from the $ and it is possible to break away.
Now add this to the new policy of the Central bankers of Venezuela, Indonesia, and the United Arab Emirates, which have said they will invest less of their reserves in $ assets because of its weakening prospects.
At what point will they permit the switch to other currencies in payment of oil?
Iran isn't alone in wanting to drop the $ as the oil currency. Russia has been favoring the Ruble payment for the Urals oil export blend in rubles to curb currency risks. The nation plans to open the Energy Stock Exchange in St. Petersburg in the first half of next year to trade oil in rubles, U.B.S.
AG reported June 14. Russia’s ambitions as the major supplier of Europe will have considerably more impact on the $ as well as bring the Ruble into the mainstream of global currencies.
Iran asked the refiners to use the Yen exchange rate quoted at the Bank of Tokyo Mitsubishi on the date oil cargoes are loaded. The use of yen-based letters of credit for oil "has finally been approved" by the Iranian central bank and the NIOC, according to the letter, titled "New payment mechanism for Iranian Crude Oil Cargoes."
Japan imported 1.59 million kiloliters of Iranian crude oil in May, the least since June 2006, according to government data. Only Saudi Arabia and the United Arab Emirates are larger oil suppliers to Japan than Iran.
In addition, but not of nearly so much significance, is the policy of Iran in cutting its U.S.$ reserves to less than 20% of total foreign currency holdings.
Consequently it will buy more Euros and Yen as tensions with the U.S. increase, Central Bank Governor Ebrahim Sheibany said on March 27 2007.
It is important to realize that the content of reserves is not nearly as significant as the daily use of the $ in paying for oil, unless it is in the hands of a nation like China with its [so far] $1.3 trillion, sitting statically in U.S. Treasuries and other $ denominated assets.
If one, for example cut the use of the $ in global transactions in oil by half $1.177 trillion, where will these dollars go? They will be surplus to global requirements. As we all know this amount of unutilized $s is sufficient to swamp the foreign exchanges looking for a place to go. Their eventual path will be to absorb it back into Treasuries, a burden that will hit both the Treasury yields as well as the $ exchange rate, heavily.
This is why the paths we have described that lie ahead will be so pernicious to the U.S.$. We have ignored the effect on all other $ users, which if brought in more than justify short, medium and long-term investments in gold.
We have just been informed that China is now quoting in the € on export contracts. Has the change begun to spread significantly? If this is common practice in China the $ will come under heavy long-term pressure. We will continue to keep you informed of such $-impacting events.
Please subscribe to: www.GoldForecaster.com for the entire report.
Jul 27 2007 3:48PM
www.goldforecaster.com
At the heart of the global monetary system lies the use of the U.S.$ as the currency used to pay for the globe’s oil. Any change in that role has a disproportionate impact on the importance of the $ as well as its value relative to the globe’s other currencies. If the oil producing nations of the world decided to use other currencies for oil payments then the global monetary system itself is undermined, making gold more attractive and long-term a safer place to hold one’s savings.
So when we heard that Iran asked the Japanese refiners to switch to the Yen to pay for all crude oil purchases, after Iran's central bank said it is reducing its holdings of the U.S.$, we realized that this is an undermining blow to the $ and will also contribute to the current fall of the $ in exchange rate values, despite any short-term rally.
Iran wants Yen-based transactions "for any/all of your forthcoming Iranian crude oil liftings," according to a letter sent to Japanese refiners that was signed by Ali A. Arshi, general manager of crude oil marketing and exports in Tehran at the National Iranian Oil Co. The request is for all shipments "effective immediately," according to the letter, dated July 10.
Japan's annual oil imports from Iran costs 1.24 trillion yen ($10.1 billion) against the entire world’s demand for oil of around $2.354 trillion a year. This is not a huge amount of Yen let alone U.S.’, but it is significant in that it is a breakaway from the $ and it is possible to break away.
Now add this to the new policy of the Central bankers of Venezuela, Indonesia, and the United Arab Emirates, which have said they will invest less of their reserves in $ assets because of its weakening prospects.
At what point will they permit the switch to other currencies in payment of oil?
Iran isn't alone in wanting to drop the $ as the oil currency. Russia has been favoring the Ruble payment for the Urals oil export blend in rubles to curb currency risks. The nation plans to open the Energy Stock Exchange in St. Petersburg in the first half of next year to trade oil in rubles, U.B.S.
AG reported June 14. Russia’s ambitions as the major supplier of Europe will have considerably more impact on the $ as well as bring the Ruble into the mainstream of global currencies.
Iran asked the refiners to use the Yen exchange rate quoted at the Bank of Tokyo Mitsubishi on the date oil cargoes are loaded. The use of yen-based letters of credit for oil "has finally been approved" by the Iranian central bank and the NIOC, according to the letter, titled "New payment mechanism for Iranian Crude Oil Cargoes."
Japan imported 1.59 million kiloliters of Iranian crude oil in May, the least since June 2006, according to government data. Only Saudi Arabia and the United Arab Emirates are larger oil suppliers to Japan than Iran.
In addition, but not of nearly so much significance, is the policy of Iran in cutting its U.S.$ reserves to less than 20% of total foreign currency holdings.
Consequently it will buy more Euros and Yen as tensions with the U.S. increase, Central Bank Governor Ebrahim Sheibany said on March 27 2007.
It is important to realize that the content of reserves is not nearly as significant as the daily use of the $ in paying for oil, unless it is in the hands of a nation like China with its [so far] $1.3 trillion, sitting statically in U.S. Treasuries and other $ denominated assets.
If one, for example cut the use of the $ in global transactions in oil by half $1.177 trillion, where will these dollars go? They will be surplus to global requirements. As we all know this amount of unutilized $s is sufficient to swamp the foreign exchanges looking for a place to go. Their eventual path will be to absorb it back into Treasuries, a burden that will hit both the Treasury yields as well as the $ exchange rate, heavily.
This is why the paths we have described that lie ahead will be so pernicious to the U.S.$. We have ignored the effect on all other $ users, which if brought in more than justify short, medium and long-term investments in gold.
We have just been informed that China is now quoting in the € on export contracts. Has the change begun to spread significantly? If this is common practice in China the $ will come under heavy long-term pressure. We will continue to keep you informed of such $-impacting events.
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