Archive | Currency and Precious Metals

Dollar slips as investors await retail sales data

The U.S. dollar fell versus major rivals Friday, with the euro breaking through important chart resistance after a stronger-than-expected rise in industrial output.

Japanese yen also strengthened versus the dollar, after initially losing ground in Asian hours after Japanese Prime Minister Yukio Hatoyama told parliament the yen was too strong.

The dollar index (DXY 79.83, -0.50, -0.62%) , which measures the U.S. unit against a trade-weighted basket of six major currencies, slipped to 79.806 from 80.542 late Thursday.

But U.S. retail sales data for February is likely to be the main event, said strategists at Brown Brothers Harriman. The data, due for release at 8:30 a.m. Eastern, is expected to show no change in February after a 0.5% increase in January, according to the median forecast of economists surveyed by MarketWatch. See Economic Preview.

The BBH strategists said risks run to a stronger-than-expected rise on retail data given weekly retailer reports over recent days, as well as the stronger-than-expected February jobs report released last week and firm ISM surveys.

Traders will also be watching consumer confidence and business inventories data set for release later in the day.

The euro rose to $1.3779, up from $1.3680 late Thursday, and the British pound was changed hands at $1.5168, compared with $1.5063. The dollar traded at 90.35 Japanese yen, down from 90.50 yen in late North American trading Thursday. Get live yen quotes and currency charts.

The euro traded as high as $1.3796, taking out resistance at the $1.3770 to hit its highest level versus the dollar since mid-February. The single currency got a boost from data showing industrial production in the 16-nation euro zone posted a record 1.7% monthly jump in January. Read about the euro-zone industrial production data.

Despite ongoing strikes in Greece, ideas that the Greek government’s austerity measures and vague commitments by European leaders to provide support for Athens have soothed worries over the country’s ability to meet its debt obligations, said Michael Hewson, analyst at CMC Markets.

The euro, meanwhile, dropped to a one-month low versus the Swiss currency at 1.4578 francs as traders appeared to test the Swiss National Bank’s resolve to prevent a rapid appreciation of the franc versus the single currency. The euro traded at 1.4597 francs in recent action, a loss of 0.1%.

The SNB on Thursday reiterated its commitment to stemming “excessive” appreciation of the franc. Read about the SNB’s intervention pledge.

Canadian dollar strengthened versus its U.S. counterpart after data showed Canada’s jobless rate fell to its lowest level since April 2009.

Canada’s statistics agency said the unemployment rate fell to 8.2% in February from 8.3% in January, while a net 20,900 new jobs were created. The U.S. dollar changed hands at C$1.0175, a fall of 0.6%.

The yen weakened in Asian trade, with the dollar changing hands at 90.67 yen, after Hatoyama said during a session of the Upper House budget committee Friday that overseas financial crises “have brought about a strong yen that we don’t believe reflects the fact that Japan’s economic and industrial conditions aren’t strong enough,” according to Dow Jones Newswires.

Hatoyama said, “I think we need to take firm steps against such yen strength,” but didn’t specify any steps. Explicit references by top leaders to the currency’s strength are uncommon.

Also Friday, a report in Japanese business daily Nikkei said the Bank of Japan’s discussions on additional monetary easing at a two-day policy board meeting starting Tuesday will likely focus on a proposal to double the scale of a lending facility introduced in December. See full story on BOJ easing report.

Meanwhile, analysts warned that the yen could see strength in coming weeks as Japanese companies begin repatriating overseas earnings ahead of the end of the fiscal year in March

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Hyperinflation is the least of our worries

Gold is hitting all-time highs amid growing fears of inflation.

Although the U.S. economy is still struggling with unemployment at about 10%, deeply indebted consumers, and millions of homeowners under water on their mortgages, many investors are worried about the return of that old bugaboo from the 1970s, inflation.

But some well-known investment gurus go further still: They say the U.S. is on the brink of hyperinflation, out-of-control price increases of astonishing magnitude.
Isolationism Grows in America

President Obama faces lots of problems executing his new Afghanistan strategy, not the least of which is a growing isolationist trend in the American public. Executive Washington Editor Jerry Seib explains.

Why? To solve the financial crisis, Federal Reserve chairman Ben Bernanke has driven interest rates to zero and spent trillions of dollars to buy mortgages and other debt. That, and the growing US deficit, will force the Fed to run the printing presses all out, leading prices to spiral out of control. Just like in Weimar Germany. Or Zimbabwe.

The proponents of this view include Peter Schiff of Euro Pacific Capital and Marc Faber, editor of the Gloom Boom & Doom Report.

They have been dead right about some thing — the rise of emerging markets, the U.S. housing and debt bubble, and the commodities boom.

But about this, they are just about as wrong as can be.

Not that there won’t be inflation — I think that’s coming, although not until we see more signs of life in the economy.

But hyperinflation? Here’s what Dr. Faber told me in a video interview in late October at The World MoneyShow London, where he was a keynote speaker: “When the economy goes into recession, you have larger government spending and larger deficits,…and that gets bigger and bigger, and combined with expansionary monetary policy,…it’s usually a recipe in the long run for inflation.” Watch the video with Faber here.

“Eventually,” he continued, “the problems will be larger and larger and the stimulus won’t work. Germany post-First World War didn’t have any inflation in 1918, in 1919 a little, and by 1923 it had hyperinflation. It happens very quickly.”

Yes, it does — but very rarely. Professor Steve H. Hanke of Johns Hopkins University has studied hyperinflation throughout modern history, starting with the French Revolution, and he documents only 30 instances of it worldwide since then.

What constitutes hyperinflation? An inflation rate of 50%. A month.

The very worst hyperinflations in world history saw inflation of 207% a day in post-World War II Hungary (the monthly figure almost can’t be measured), 79.6 billion percent in Zimbabwe last year, and 313 million percent in Yugoslavia during the Balkan wars of the early 1990s. The U.S. came close during the Revolutionary and Civil wars, but never hit the magic 50% number.

“Hyperinflation is such a rare event, it’s really a hyped kind of thing,” Hanke told me. “The idea is kind of fantastic and a headline grabber.”

Hanke, who believes we’re entering a period of stagflation similar to the 1970s, points out that the consumer price index rose by more than 10% only three times that decade.

Getting from there to hyperinflation takes a lot more–war, civil strife, weak institutions, and evil or incompetent leaders. It’s not just the volume of money printed but who controls the press.

Post-World War I Germany was a fragile republic that replaced the deposed Kaiser Wilhelm II.

“Fear and hatred ruled the day,” writes University of Cambridge historian Richard J. Evans in his book The Coming of the Third Reich. “Gun battles, assassinations, riots, massacres, and civil unrest denied Germans the stability in which a new democratic order could flourish.”

Most importantly, Germany was forced to pay out onerous reparations to the victorious Allies, along with surrendering chunks of territory. Increased payment demands started the quick descent into hyperinflation, as the government fired up the printing presses to pay out far more than it had.

“In Germany, prices had reached a billion times their prewar level…,” writes Evans. “The descent into chaos–economic, social, political, moral–seemed to be total.”

Only a U.S.-brokered 1923 deal to cut reparations and the introduction of a new currency brought the hyperinflation to an end.

Chaos was the watchword in Zimbabwe, too, a country run by dictator Robert Mugabe. He had expropriated land from white farmers and spent hundreds of millions of dollars in a war in Congo, while inflation rose and his people’s standard of living deteriorated.

As prices soared, Zimbabweans abandoned their own currencies for the U.S. dollar and South African rand. The government eventually allowed people to use those currencies, as well as a revalued Zimbabwean dollar, among other measures.

So, really, how can anyone compare the U.S. with these sorry examples? Actually Faber did. Zimbabwe was “run by a money printer, Mr. Mugabe, a mentor of Mr. Bernanke,” he told a conference in Asia earlier this year. Read Wall Street Journal blog item about the conference.

The Federal Reserve, Treasury Department, and other government departments and agencies have indeed set aside up to $9.7 trillion to end the financial crisis and stimulate the economy, Bloomberg News reported earlier this year.

Nearly two-thirds of that money has come in the form of loans and guarantees, however. Some banks that got money from the Troubled Asset Relief Program are paying it back. Read more about Bank of America paying back its TARP money.

Meanwhile, the Fed has said it will stop buying mortgages by the end of March, when it will own $1.25 trillion worth. Assets held by the Fed now total $2.2 trillion, double what they were before the crisis hit.

The monetary base — total cash and bank reserves in the economy — is nearly $2 trillion. But growth of the broader M2 has slowed dramatically, and it now stands at only 4.2 times the monetary base, according to Prof. Hanke — from nine times before the crisis, he says.

That’s critical, because the velocity of money, not its sheer amount, matters most. “It’s the bang you get for your buck,” says Hanke. You can have all the dead leaves in the world piled up on your lawn, but you can’t start a fire until you light a match.

As long as lending remains dormant — and it’s been shrinking, according to Ian Shepherdson, chief U.S. economist for High Frequency Economics — fears of inflation will remain just that: fears.

“If the Fed wasn’t buying mortgages with both hands, Mr. Shepherdson estimates, the money supply would be falling 1% a month,” wrote Gretchen Morgenson of the New York Times last week. Read New York Times story on the feeble recovery.

Hmm, doesn’t a falling money supply signify deflation, not inflation?

As I said, I do expect some inflation down the road. Although I think Ben Bernanke will surprise a lot of people by how quickly he and the Fed raise rates at the first hint of a real recovery, there’s too much money sloshing around to fend off inflation entirely. And future U.S. deficits are a huge wild card.

But hyperinflation? Weimar Germany? Slobodan Milosevic’s Yugoslavia? Robert Mugabe’s Zimbabwe? Come on, people, please — get a grip.

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Gold hits record above $1,217 an ounce on strong demand

Gold futures climbed to a new record high above $1,217 an ounce Wednesday, buoyed by strong demand from investors amid worries about the U.S. dollar’s continued weakness.

“As long as these drivers, i.e., the softer U.S. dollar, lower interest rates, reduced risk aversion and benign equity markets, remain at play, the upward trend in commodities should continue,” said analysts at Commerzbank AG in a note.

Gold and the U.S. dollar have had a strong inverse relationship. The precious metal is seen as an investment that can hold its value in contrast to the greenback’s continued devaluation.

In currencies trading, the dollar rebounded slightly against some of its major rivals Wednesday. But overall, the greenback still remains weak.

The dollar index (DXY 74.50, +0.13, +0.18%) , which tracks the greenback’s performance against a basket of other major currencies, edged up to 74.399. The index has dropped more than 8% this year.

In Asia Wednesday, investors bet on upbeat prospects for gold miners, fueling a rally among related shares in Australia and China. See story on prospects for Asia’s gold-miner stocks.

On Tuesday, gold futures gained 1.5%, as the dollar weakened and Barrick Gold Corp. (ABX 47.28, +1.21, +2.63%) (CA:ABX 48.20, 0.00, 0.00%) said it eliminated its gold hedges ahead of schedule and now has full leverage to gold prices.

Gold “is swept along by increasing systemic risk appetite, longer-term inflation concerns and diversification from the dollar, with $1,250 the next likely target,” said James Moore, an analyst at, in a note to clients.

“Barrick’s announcement yesterday is an indication of producers’ confidence in gold prices going forward and potentially could trigger further sharp price gains in the short term,” Moore said.

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Gold hits new high on India talk, weaker dollar

Gold futures climbed to a new record above $1,183 an ounce Wednesday, getting a fresh head of steam after a report that India is open to buying more gold from the International Monetary Fund drew even more investors into the bullion market.
Dollar Falls Under Y88 For First Time 10 Months

The dollar fell under Y88 for the first time in 10 months and could continue to fall as US real yields decline, Japanese risk appetite wanes and the country’s current account surplus grows once again.

In addition, the dollar fell against other major currencies, further boosting gold’s appeal as a hedge against inflation. Meanwhile, holdings in the biggest gold exchange-traded funds rose again.

Climbing for the ninth straight session, gold for December delivery rose as high as $1,183.20 an ounce. The contract was last up $14.50, or 1.2%, at $1,180.30 an ounce.

“In addition to a weaker U.S. dollar, disappointing U.S. economic data and inflation fears attracted further investors to the gold market,” said Carsten Fritsch, analyst at Commerzbank, in a note. “It is being speculated that India may again buy gold from the IMF.

India’s Financial Chronicle newspaper reported that the nation’s central bank may buy the 201.3 tons of gold the IMF is selling on terms now being negotiated.

Early this month, India bought 200 metric tons of gold for $6.7 billion. That was almost half the total sales volume of 403.3 metric tons that the IMF’s executive board approved in September.

The December gold contract has gained 13% this month and has established a string of record highs. The contract only recorded one losing session in this month’s trading.

“Gold looks set to remain strong, with the metal potentially looking to challenge $1,200 an ounce, as the Fed’s inflation comments yesterday prompt further investor diversification into gold and tangible assets,” said James Moore, analyst at, in a note to clients.

Holdings in SPDR Gold Shares (GLD 115.61, +0.88, +0.77%) , the biggest gold exchange-traded fund, rose nearly 1 metric ton to stand at 1,122.37 metric tons as of Wednesday, up for a second session. Holdings now are at the highest level seen since late June.

In currencies, the dollar index (DXY 74.54, -0.53, -0.71%) fell 0.7% to 74.546. A weaker dollar tends to push up dollar-denominated commodities prices. Read more on the dollar’s latest weakness.

“Combine that with the slide in the U.S. dollar back below 75.00 and the same old factors are kicking in: strong investment demand coupled with fears of inflation,” said Darin Newsom, senior analyst at Telvent DTN.

In other metals trading, silver for December delivery rose 1% to $18.63 an ounce, while December palladium added 1.4% to $374.40 an ounce and January platinum gained 2% to $1,472.40 an ounce.

December copper also rose, up 0.9% to $3.141 a pound.

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New gold bugs making gold investments mainstream

Gold has long been favored by a fringe of the investment world, but this year some of the world’s leading hedge-fund managers have loaded up on the precious metal amid concern government efforts to avoid another Great Depression that could undermine major currencies and fuel rampant inflation.

“I have never been a gold bug,” Paul Tudor Jones, chairman of hedge-fund giant Tudor Investment Corp., wrote in an Oct. 15 letter to investors. “It is just an asset that, like everything else in life, has its time and place. And now is that time.”

Tudor has been building positions in gold and other precious metals in recent months and they now represent the firm’s largest commodities exposure, he noted.

Now or never
Gold has long been favored by a fringe of the investment world, but this year some of the world’s leading hedge fund managers have loaded up on the precious metal. Why gold and why now?

John Paulson’s Paulson & Co., one of the world’s largest hedge fund firms that made billions betting against subprime mortgages, is launching a new gold fund Jan. 1 and became the largest holder of the SPDR Gold Shares exchange-traded fund (GLD 114.65, +1.71, +1.51%) this year.

Greenlight Capital, run by David Einhorn, reversed a long-time aversion to gold, while Kyle Bass’s Hayman Advisors LP held more than 15% of its portfolio in gold and other precious metals earlier this year. Eton Park Capital, headed by former Goldman Sachs (GS 171.69, +1.68, +0.99%) trader Eric Mindich, has also got in on the act.

“I can’t remember in 20 years so many respected investors focused on a single strategy,” said Bradley Alford of Alpha Capital Management, which invests in hedge funds. “Some of these people are icons of the industry with at least 15-year track records. It’s a losing proposition to bet against guys like that. They aren’t billionaires because they make bad bets.”

It’s not only hedge funds. Managers of mutual funds and insurance company portfolios are often limited in how much gold they can buy, but these investors have been purchasing the metal for their personal accounts, according to Ed Yardeni, president of Yardeni Research.

“A surprising number of level-headed folks, who I have known over the years, are confessing to me that they’ve become gold bugs,” he said. “They’re starting to give more respect to what was for a long time considered the lunatic fringe.”

The original gold bugs have been fans of the metal for decades. They yearn for the past, when the so-called Gold Standard was the central cog of the world’s currency system. A similar system known as the Bretton Woods Agreement tied the U.S. dollar, and all currencies pegged to the dollar, to the price of gold. When the system broke down in 1971, there was no longer a limit on the amount of money that could be printed by governments.

Gold bugs hung on grimly as prices dropped in the ’80s and ’90s amid quelled inflation and roaring stock markets. But gold prices began climbing at the start of this decade, when the Federal Reserve slashed interest rates to revive the U.S. economy in the wake of the dot-com bust.

“A surprising number of level-headed folks … are confessing to me that they’ve become gold bugs. They’re starting to give more respect to what was for a long time considered the lunatic fringe.”

— Ed Yardeni

That helped fuel a housing and credit market boom that came crashing down last year, triggering a global financial crisis and the worst recession since the Great Depression.

The Federal Reserve, headed by Ben Bernanke, responded by slashing interest rates to almost zero and spending more than $1 trillion buying long-term U.S. Treasury bonds and mortgage-backed securities and other debts from collapsed housing giants Fannie Mae (FNM 1.03, +0.01, +0.98%) and Freddie Mac (FRE 1.15, +0.01, +0.88%) . See latest on Fed’s efforts.

That’s stabilized the economy, but some leading hedge fund managers worry about the long-term consequences of this so-called quantitative easing and are using gold to protect themselves.
‘Grandpa Ben’

“The Fed is making loans collateralized by toxic waste and has now begun a policy called ‘quantitative easing’ — a fancy term for ‘printing money,’” Greenlight’s Einhorn wrote in a January letter to investors.

David Einhorn of Greenlight Capital, Inc.

Printing so much new money will cut the value of the U.S. dollar, which could fuel rapid inflation. In such an environment, the solidity of gold could shine.

“If the chairman of the Fed is determined to debase the currency, he will succeed,” Einhorn added. “Our instinct is that gold will do well either way: deflation will lead to further steps to debase the currency, while inflation speaks for itself.”

Einhorn initially invested in the Market Vectors Gold Miners ETF (GDX 52.37, +1.55, +3.05%) , which tracks shares of gold-mining companies. He’d also bought call options on gold, as well as buying the metal directly, according to Greenlight’s January investor letter, a copy of which was obtained by MarketWatch.

Since Einhorn launched Greenlight in 1996, he’s shunned gold and other broad economy-based trades in favor of tracking down under-valued and over-priced stocks.

“We never thought we would ever buy gold or gold stocks,” Einhorn wrote in January, recounting the lesson he learnt from his grandfather’s obsession with the precious metal.

“David’s grandfather Benjamin was a gold bug,” Einhorn recalled. “From the time David was 10, Grandpa Ben took every opportunity to tell David about the problems with fiat currencies and the coming inflation and advised that the only sensible thing to do was to buy gold and gold stocks.”

Einhorn’s grandfather followed his own advice for the last 30 years of his life and lost money.

“Being a patient investor is one thing. Being ‘wrong’ for three decades is quite another,” Einhorn noted.
‘Grandma Cookie’

However, Greenlight Capital lost more than 15% last year — its first ever annual loss — as the global financial crisis rocked the hedge fund industry. Einhorn had rightly warned of the demise of Lehman Brothers (LEHMQ 0.11, -0.01, -5.04%) before it happened, but he underestimated the broader impact of such an event.
What’s driving gold higher?

Frank Holmes, CEO of U.S. Global Investors, tells MarketWatch’s Laura Mandaro that it’s possible for gold to top $2,300 an ounce.

“The lesson that I have learned is that it isn’t reasonable to be agnostic about the big picture,” he said during an Oct. 19 speech at the Value Investing Congress in New York.

At the same conference four years earlier, Einhorn advocated his Grandma Cookie’s approach of investing in stocks like Nike (NKE 63.92, +0.36, +0.57%) , IBM (IBM 127.55, +0.59, +0.47%) , McDonald’s (MCD 64.39, +0.42, +0.66%) and Walgreens (WAG 39.15, +0.18, +0.46%) , over his Grandpa’s holdings of bullion and gold stocks.

“I explained how Grandma Cookie had been right for the last 30 years and would probably be right for the next thirty,” Einhorn said. “However, the recent crisis has changed my view.”

Gold should do “fine” until policymakers and politicians show more monetary and fiscal restraint. The metal will likely do “very well” if there’s a sovereign debt default or currency crisis, he added. See how Einhorn is betting on a possible currency death spiral.

Einhorn said last month that he moved all his positions into physical gold because it’s a cheaper, more-certain and more-liquid way of investing in the metal. Read about options for worried gold investors.
Physical delivery

Hayman Advisors, a Dallas, Tex.-based hedge fund firm run by Kyle Bass, became another proponent of holding physical gold this year.

Most precious-metal investing has historically been done via paper futures contracts on COMEX, part of the New York Mercantile Exchange, owned by CME Group (CME 326.97, +3.98, +1.23%) .

However, Hayman expects more demand for physical delivery of precious metals. That could cause problems because there are only enough inventories in COMEX warehouses to supply 15% to 30% of open interest on futures and options contracts, the firm explained in a presentation to investors earlier this year.

“It is prudent to focus efforts on obtaining physical delivery of metals backing paper contracts ‘while supplies last,’” Hayman wrote in its presentation, a copy of which was obtained by MarketWatch.
Faster Monopoly

Bass, Einhorn and others are holding gold because they’re concerned that a damaging bout of inflation will be triggered by the efforts of several central banks to stabilize economies by pumping lots of new money into the global financial system.

Hedge fund director John Alfred Paulson, president of Paulson & Co Inc.

Excluding Japan, the world’s major currencies have experienced money supply growth of 15% to 55% in the past three years, Bass estimated in an Oct. 2 letter to investors.

The Hayman managing partner compared the efforts to a game of Monopoly in which the banker decides money is too tight, the “velocity” of the game is slowing down, or a few players are about to go broke.

“In God-like fashion (with a little ecclesiastical white-out), the central banker decides to add two more banks of money to the game that are distributed to the participants,” Bass wrote. “Under this scenario, did the real value of anything change? Does the bartering for property increase or decrease prices? Did each unit of money become worth more or less?”
Reserve multiplier

Quantitative easing by the Fed has pumped roughly $1.2 trillion into the U.S. financial system this year. But M1 money supply, the most liquid measure of money outside of tangible currency, has only increased a seasonally adjusted $73.2 billion, Hayman said, citing Fed data.

This hides the potential for a massive increase in money supply that could be unleashed from bank reserves, the firm added.

The foundation of money supply is the monetary base of an economy, which consists of tangible currency and reserves that banks are required to hold against customer deposits.

The reserve requirement is usually about 10%. This means banks can lend out 90 cents for every dollar they get in deposits. That money often ends up in another bank account, and 81 cents of this is re-lent, and so on, Hayman explained.

Banks usually lend as much as possible, but since the collapse of Lehman last year they’ve been hoarding excess cash. As the Fed’s quantitative easing picked up steam this year, the extra money has piled up in bank reserves, rather than flowing out into the economy.

Excess reserves in the U.S. banking system stood at an unprecedented $855 billion recently, up from $2 billion a year earlier, according to Hayman.

If banks decide they’re comfortable enough to lend out these extra reserves, “it would not increase the money supply by $855 billion; rather it would increase the money supply by some multiple of that,” as the money is deposited again and re-lent over and over, Hayman wrote.

This so-called banking reserve multiplier has historically been at least seven times, which suggests that the money supply could balloon by about $6 trillion, Hayman estimated.

“Do you trust the Federal Reserve et al. to select the precise timing of when to withdraw the money from the system, such that a recovery is sustained and inflation does not take hold?” Hayman wrote. “We believe the market, in its forward-looking nature, does not.”
20% under-valued

But what if gold prices already reflect concern about future inflation?

The precious metal is storable and portable and has been universally accepted as a medium of exchange for over 5,000 years, outlasting governments, fiat money systems and the rise of other metals and minerals, according to Paul Tudor Jones of Tudor Investment Corp.

“These somewhat esoteric descriptions of gold’s value do not help in evaluating if gold is cheap or expensive,” Jones added in letter to investors last month.

Compared to the long-term average of M2 money supply in the G-20 countries, gold is cheap. It should also increase in value as it becomes scarcer relative to a growing supply of printed currencies, Jones explained.

If gold prices are adjusted for inflation, the price is still a long way below records hit 25 years ago. Depending on which inflation measure is used, the peak is between $1,600 and $2,400 per ounce, he wrote.

Tudor’s proprietary model, which takes into account inflation, M2 growth and real rates, suggests gold is 20% under-valued over the next 24 months, Jones concluded.
Supply and demand

Jones also reckons old-fashioned supply and demand could drive gold prices higher too.

Despite a three-fold jump in spending on metal exploration in the past decade, new gold mine production has stagnated at 80 million troy ounces, he noted.

“They just aren’t making that much of it anymore,” Jones wrote. “Any incremental demand for gold must be met through sales from current owners.”

Some of that extra demand may come from investors in ETFs. These securities have flourished in recent years by giving investors who previously struggled to invest in gold an easier way of getting into the precious metal, Jones said.

By the end of 2009, ETFs will hold 3% of available supplies, making them the sixth-largest holder of gold in the world. That may only be the start, according to Tudor.

“With only $50 billion in total assets of listed, physically-backed ETFs as of October 14th, there is huge scope for increased flow,” Jones wrote. “The private-wealth universe of trillions of dollars is under-exposed to gold and now can readily get exposure.”

Tudor also expects central banks, which have been net sellers of gold for many years, to become net buyers during the second half of 2009, a “remarkable” turnaround for a market that’s used to absorbing big sales from this official sector.

The large, developed countries of the G-7 already have roughly 35% of their reserves in gold, but the remaining members of the G-20 only have 3.5% of reserves in the precious metal, Tudor estimated.

These 13 countries, which include China and India, have seen a $2.2 trillion surge in reserves in the past five years, making up well over half of the increase in global reserves during that period, Tudor said.

Almost that entire surge has been in paper currency or debt backed by paper currencies, the hedge fund firm noted.

If non-G-7 countries in the G-20 lifted gold holdings to 10% of their reserves, they would need to buy 370 million troy ounces, or 20% of current above-ground supplies. If they lifted holdings to 35% of reserves, they could need to buy 1.3 billion troy ounces, or 35% of above-ground supplies, Tudor estimated.

“There is huge potential for more buy-side interest to emerge from central banks,” Jones wrote in his Oct. 15 letter to investors.

Indeed, India’s central bank bought 200 tons of gold bullion from the International Monetary Fund in the final two weeks of October. See story on India’s gold purchase.

“The scope for increased investment demand over the coming years is much stronger than the potential from new supply,” Jones wrote. “As a result, incremental new demand must buy gold from current holders… We doubt the transfer of gold from current holders to its new owners will occur at, or near, current prices.”
Gold M&A

Paulson & Co., which made billions of dollars betting against mortgage-related securities before the housing bust, is starting a new fund Jan. 1 that will invest in gold stocks and gold-related derivatives. John Paulson, who heads the firm, will invest a chunk of his own money in the vehicle, according to a person familiar with the matter.

Paulson told investors recently that the rally in gold has only just begun, according to The Wall Street Journal, which noted that Paulson is putting $250 million of his own money in the new fund.

Paulson has already been building gold positions in the firm’s current funds. The firm, which oversees more than $25 billion, recently held 31.5 million shares in the SPDR Gold Trust (GLD 114.75, +1.81, +1.60%) , the largest ETF backed by bullion. The stake was worth $3.1 billion on Sept. 30, according to a recent regulatory filing.

Paulson has his roots in merger arbitrage — a strategy in which traders bet on the outcomes of mergers and acquisitions. So he may also be betting on more deals in the gold-mining industry.

Paulson’s firm held a $1.75 billion stake in AngloGold Ashanti (AU 45.45, +1.49, +3.39%) at the end of September, a position it initially bought from diversified miner Anglo American (UK:AAL 2,588, +57.00, +2.25%) in March.

The firm also owned shares of Kinross Gold Corp. (KGC 19.70, +0.56, +2.93%) worth $668 million and stock in Gold Fields Ltd. (GFI 14.86, +0.22, +1.50%) worth $317 million as of Sept. 30, regulatory filings show.

Rather than allowing such gold positions to become a larger and larger part of Paulson’s main hedge funds, the firm decided to create a new vehicle to focus on the strategy, the person familiar with the matter said on condition of anonymity.

Paulson took a similar approach as the firm’s subprime trades grew earlier this decade. The Paulson Credit Opportunities fund was launched to focus on the strategy. It generated returns of almost 600% in 2007 as the housing market began to crash and mortgage-related securities collapsed.

Eric Mindich’s Eton Park hedge fund firm has also taken stakes this year in gold-mining companies including AngloGold Ashanti, Gold Fields and Harmony Gold (HMY 10.80, +0.21, +1.98%) . Eton Park also held shares and call options on the SPDR Gold Trust at the end of June, according to regulatory filings.
Gold share classes

Paulson has also offered a share class denominated in gold, tapping into investor concern about holding paper currencies.

Other hedge fund firms, including Christian Baha’s Superfund and Osmium Capital Management Ltd., run by former ABN Amro trader Chris Kuchanny, also launched new share classes denominated in gold this year. See full story.

The idea is that investors get the same returns generated by the underlying hedge fund, but those returns are denominated in troy ounces of gold, rather than in U.S. dollars, euros or pounds. If such currencies lose value, the hedge fund gains may be preserved.

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Gold keeps hitting highs, and some say this will continue

NEW YORK (MarketWatch) — Gold grinds to new highs — but the gold bugs are still optimistic.

On Friday evening, Australia’s The Privateer headlined the link to its (free) long-term US$ Gold 5 x 3 Point and Figure chart: “Latest update November 13, 2009 — Gold closes above $1,115.00 — new all time high.” See gold chart.

And very handsome it looks too. Significantly, the uptrend line which marked the top of gold’s run in March, 2008 is still safely far away.

Gold bugs are particularly excited because, since the beginning of September, gold has also been rising in other currencies — not as much, but quite significantly. This is now very easy to follow because the Montreal coin dealer Kitco makes available free charts comparing US-dollar gold to gold expressed in the U.S. Dollar Index futures /quotes/comstock/11j!i:dxy0 (DXY 75.05, -0.09, -0.12%) , a six-currency basket excluding the dollar. This enabled Kitco to say after Friday’s close that the $16.20 gain seen in their day was $5.90 due to U.S. dollar weakness and $10.30 due to a rise in non-dollar terms.

What happens next?

Peter Eliades of Stockmarket Cycles is unhappy, noting on Saturday morning:

“Gold has had an upside projection to between 1111-1131 for several months and has now moved well into that projection window. That suggests it could be reaching a top here. As we noted yesterday, however, the Fidelity Select Gold Fund has an equivalent upside projection between 52.17-56.40 and the CBOE gold index /quotes/comstock/20m!i:gox (GOX 218.82, +5.74, +2.69%) has an equivalent projection to between 241.45-256.40. Unfortunately, those two projections do not align with the projections for the metal itself.”

The issue which bothers Eliades is that gold shares lag far behind. (CBOE gold index is an equity composite.) The major gold share indices were higher in early 2007 — gold is up over 60%! To some observers, this is very ominous.

But The Privateer argues that this past correction in gold, from mid-March 2008 to late September 2009, “was longer lasting and deeper than its predecessor. So far, Gold has only broken out of that correction for six weeks. After Gold broke out of the first correction in Mid September 2007, it roared higher for the next six MONTHS.”

This gives The Privateer confidence.

The Le Metropole Café, as usual, relies heavily on what local gold premiums say about physical market conditions:

“The first thing to be stressed is that the physical market is in a profoundly different posture than in Q1 2009. Then regular buyers like Turkey, Vietnam and even India were exporting. Now to varying degrees they are buyers. … India’s return to the bid because of the rupee move noted here on Friday may have been decisive in the NY session’s Bear rout, and of course Vietnam premiums as last reported over $30 are crying out for gold supplies.”

Le Metropole Café maintains Vietnam now imports a similar amount of gold to China. See Web site.

The Aden Forecast this weekend came up with a powerful variant of this argument. It deployed a chart of the “Monthly Average Annualized Increase in Gold 2001-8″ which clearly shows that November, December and January have emerged as very buoyant months — November and January averaging over 30% and December just under 30% (annualized, remember).

This fits in with the Le Metropole Café theory — it’s the annual Indian wedding season. That’s a tough pattern to break.

The Aden Forecast suggests that gold could reach $1,200 on this move, and that the gold bull market could continue for seven to eight years.

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Gold taps record as U.S. joblessness hits 10%

Gold futures finished at a record Friday, after earlier tapping $1,100 an ounce, as news that the U.S. unemployment rate topped 10.2% in October lifted expectations the Federal Reserve will keep interest rates near zero well into next year, pressuring the dollar.

Gold for November delivery rose $6.40, or 0.6%, to end at $1,095.10 an ounce, the highest closing level for a front-month contract.

The more-actively traded December contract gained $6.40, or 0.6%, to $1,095.70. December gold earlier hit a record intraday high of $1,101.90 on the Comex division of the New York Mercantile Exchange.

Industrial metals, such as copper, however, moved lower. Copper fell fractionally with the December contract ending at $2.94 a pound.

“With unemployment at 10%, the implications for Fed policy is that they have their hands tied and cannot defend the dollar,” said Joe Foster, manager of the Van Eck International Investors Gold Fund.

“We’re going to see lots of new records going forward,” he said. “By year end, it wouldn’t surprise me to [see gold] test $1,200 and then $1,300 by early next year before we see some consolidation.”

The U.S. economy shed 190,000 jobs last month, lifting the unemployment rate above the 10% mark for the first time in 26 years, the Labor Department said. The report also revised statistics for September and August.

Economists surveyed by MarketWatch, were looking for a decline in nonfarm payrolls of 150,000 and for the unemployment rate to rise to 9.9%. See full story.

The dollar index (DXY 75.79, +0.05, +0.07%) , which measures the U.S. unit against a basket of six major currencies, slumped to 75.648, down 0.2% on the day.

Bets that the Federal Reserve will eventually lift interest rates from near zero fell slightly after the report. Fed fund futures indicated traders pared bets the Fed would raise its target rate by mid-2010 to 0.31%, compared to a 0.33% rate before the data.

On Wednesday, the Fed left its target rate in a range of between 0% and 0.25%, and repeated its commitment to keep rates low for the foreseeable future, citing slack in the economy and little reason to worry about inflation.

“With today’s [economic] numbers, we see that interest rates are still contracting and that quantitative easing is still in place for the foreseeable future,” said Stephen Flood, executive director at GoldCore. “The move to $1,100 signals a continued global move to safe harbor investments.”

The exceptionally low rates have fueled a dollar carry trade, whereby investors borrow dollars to invest in riskier assets, such as stocks and commodities, including gold.

On Wall Street, the Dow Jones Industrials Average (INDU 9,998, -7.56, -0.08%) rebounded from early weakness, to gain 10 points in afternoon trade. The S&P 500 Index (SPX 1,066, -0.14, -0.01%) was up 0.2%.

The SPDR Gold Trust (GLD 107.39, +0.41, +0.39%) , the biggest gold exchange-traded fund, bucked the trend, rising 0.4%.

Also providing support for gold are expectations of more purchase by central banks. On Monday, the Reserve Bank of India surprised markets by purchasing 200 tons of gold from the International Monetary Fund, nearly half of the 403.3 tons the IMF plans to sell over the coming years.

“India was a surprise,” Foster said. “We knew that China and Russia were buyers but to have India jump into this is very positive for gold. Many central bankers are worried about the dollar, so they’re looking at alternatives.”

In other metals action, silver for December delivery fell 3 cents, or 0.2%, to $17.38 an ounce, while January platinum slumped $14.70, or 1%, to $1,348.20 an ounce.

December palladium fell $1.15, or 0.3%, to $330.70 an ounce

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CIT files for bankruptcy protection after rescues fail

SAN FRANCISCO (MarketWatch) — CIT Group Inc., in one of the biggest corporate bankruptcies ever, filed for Chapter 11 protection in New York on Sunday.

CIT (CIT 0.72, -0.23, -24.21%) , a major lender to small and midsize businesses, has struggled to avoid collapse since the recession triggered billions of dollars in loan losses and the financial crisis cut the company off from its main source of financing.

“The decision to proceed with our plan of reorganization will allow CIT to continue to provide funding to our small business and middle market customers, two sectors that remain vitally important to the U.S. economy,” Chairman and CEO Jeffrey M. Peek said in a statement.

With roughly $60 billion in assets, CIT’s filing is probably the fourth-largest bankruptcy in U.S. history, ranking between General Motors (MTLQQ 0.59, -0.02, -3.28%) and Enron. The bankruptcy of Lehman Brothers (LEHMQ 0.12, -0.01, -6.92%) , which collapsed last year, was the biggest.

CIT asked the U.S. government for a bailout earlier this year, but despite the company’s large business-lending operations, it wasn’t deemed too big to fail. See story on government rejecting CIT.

That contrasts with other financial-services companies like American International Group (AIG 33.62, -2.63, -7.26%) , Citigroup (C 4.09, -0.22, -5.10%) and Bank of America (BAC 14.58, -1.15, -7.31%) , which have received more than $100 billion of government support since last year.

In October, CIT unveiled two different reorganization plans. One involved exchanging some debt, while the other was a voluntary pre-packaged bankruptcy restructuring. On Friday, activist investor Carl Icahn, a big CIT debt holder, said he was voting for the pre-packaged reorganization plan. That made such a filing more likely. See story on CIT’s agreement with Icahn.

CIT was hit hard by the global financial crisis in two main ways. As the economy ground to a halt and unemployment surged, more of the company’s loans went bad and it reported billions of dollars in losses over multiple quarters.

More importantly, CIT was one of the largest nonbank lenders in the world, a big part of the so-called shadow banking system that collapsed when the financial crisis erupted last year.

Roughly three-quarters of CIT’s funding came from the unsecured debt market, but the company was shut out of this market as the crisis deepened. Bank deposits, considered a more stable source of money, made up 0% to 5% of CIT’s funding.

CIT became a bank-holding company and got $2.3 billion from the government’s Troubled Asset Relief Program in December. But that didn’t solve its long-term problem: how to borrow money at competitive rates so it could continue lending.

CIT applied for a debt guarantee program run by the Federal Deposit Insurance Corp. but was rejected. Efforts to shift more of its assets to its banking unit, CIT Bank, have also hit hurdles.

CIT’s bankruptcy will likely mean that the Treasury Department loses the $2.3 billion it invested in the company — the biggest loss from TARP so far.

Alistair Barr

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Decline and fall of the U.S. dollar

As the dollar slowly grinds towards all-time lows, there’s been a lot of blustery speech about its fate.

Many economic experts believe this weakness bodes very badly for the country and that government banking authorities should act quickly to prop up the world’s most important currency.

Others welcome the slide as an opportunity to boost our economy with rising exports and the chance to repay our growing debts with cheaper dollars tomorrow.

The reality lies somewhere in the middle of these extremes because of much bigger dynamics driving the dollar’s value. Economic ascendancy around the globe has put the dollar in a major downtrend for decades, populated by periodic swings of renewed strength. Our large trade deficits with countries like China, creating a transfer of wealth overseas, have been fueled both by American consumerism and the “dirty pool” of the Chinese currency peg.

News Hub: Pay Czar Ups Base Salaries

In an unexpected zig, pay czar Kenneth Feinberg increased base salaries at companies he’s overseeing. The News Hub panel discusses.

The U.S.’s role as a strong world leader has always made it first to borrow heavily in times of war, thus running up the debt tab and increasing the supply of dollars when the Federal Reserve must buy Treasury securities, thereby monetizing the debt.

We are just emerging from the worst financial disaster since the Great Depression — a systemic, generational crisis that will demand many years to recover. Wall Street’s irresponsible use of leverage created an enormous, complex housing and credit bubble.

Once popped, it nearly broke the economy, and was destined to take many more enterprises with it before the Treasury and the Fed stepped in with extraordinary liquidity to restore stability and confidence.

Fed’s job to defend the dollar?

The arguments of the “weak dollar is good” camp are, well, weak and short-sighted. Those of the “strong dollar is vital” camp are far more passionate, interesting, and worthy of consideration.

One of my favorite experts on the topic is Larry Kudlow. His “King Dollar” mantra is well-intentioned and correct, to a point. But I also think it is misleading to suggest the dollar’s decline is a new crisis and that the Federal Reserve should be raising interest rates solely for the aims of a new, number-one priority — defending the dollar.

He is not alone here. David Malpass and Steve Forbes have both written good arguments recently with similar views. All three believe that we can have higher interest rates now that won’t harm the economic recovery. Malpass focuses on pro-growth, pro-business tax policy that welcomes investment capital and creates jobs. Forbes wants a return to some type of gold standard, ala Bretton Woods.

Both argue the Fed isn’t doing enough to restore credit markets and encourage bank lending to businesses. It’s hard to argue with low taxes, banks lending, and attracting capital to our shores. But is defending the dollar with higher interest rates and Washington jawboning about a “strong dollar policy” the way to achieve these?

Secret dollar policy

The strong dollar camp believes that the Obama administration is in favor of continuing the Bush-era “weak dollar policy.”

We may never know what the real policy is or was. But the debate eventually begs the question, “Does a Washington dollar policy ever really matter?” The three large forces driving a weaker dollar over the past few decades were not the result of any explicit or secret policy that any economist can identify. They were the result of lots of different policy initiatives and macro economic trends that no single administration could ever control.

The job of the Federal Reserve is to target interest rates and thereby hope to target inflation and growth. To target the dollar and exchange rates is a fool’s game, especially on the heels of this systemic, generational banking crisis. The Fed dropped the ball long ago in not seeing the crisis brewing and now we have to pay for it. The problem with worrying about the relative strength of the dollar now, is that you are only focusing on the symptom of a much larger illness.

The Fed’s biggest concern for the past year has been a deflationary collapse, and rightly so. Many pundits were critical of the actions of Ben Bernanke and Hank Paulson in the heat of the crisis. Few would argue now that they did the wrong things.

The point is that they took action in the middle of many huge unknowns because they knew what a banking collapse looked like. Even with our economy off of life-support, who knows exactly when or how to exit from intensive care? The strong dollar camp wants the patient, still recovering from heart surgery, to compete for the gold in the 100-meter dash just to prove he’s still champ.

Bernanke’s trim tab

While the global economic recovery powers on and lifts all boats, including Uncle Sam’s, the Fed does face some critical timing decisions about the gradual exit from quantitative easing. But Bernanke is well-aware of the landscape and is currently erring on the side of fanning inflation’s flames. Does he need our help in figuring it out? Probably not, but he also likely doesn’t mind all the rhetoric and Monday-morning quarterbacking because it gives him the mood of the market. He can watch the bond vigilantes for clues, listen to the prognosticators and the real money investors, and watch how they all react to one another about market fears and confidence levels.

Bernanke knows there is no short-term fix for the dollar, just as there’s none for U.S. national debt. His best course is the one he’s on: focus on economic stability and liquidity and the dollar will take care of itself in a free market. The U.S. is still the home of innovation and free-flowing capital. Ideas and markets will win the day. And the key to a strong dollar is confidence in those ideas and markets.

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