Saturday, November 29, 2008
The constant devaluation against USD coupled with great economic growth, when things were going good, was manageable although it did give rise to hot inflows, which made returns on your investment one of the best in the world. But the 2008 has brought in a new set of challenges for the Renminbi and thus Chinese government is looking at various aspects of relooking at the managing of currency.
Have a look in the article with the link provided by MS on the changes that might be brought about in Renminbi regime.
Historically, after the gold standard was done away with, USD has been the gold standard for the world. The reason was the sheer dominance & impact of US on global trade and the fiscal and monetary aspects of the trading partners. USD was thus de-facto currency to have of you wanted to trade at global scale, thus fueled the demand for the USD.
However, such is the nature of man-he digs his own grave knowingly. US Fed - helicpoter Ben and along with the Treasury secretary Hank Paulson have shown to the world, they are ready to reinflate the system at all costs. It is but natural, that anything thrown into the market more than what the demand is, leads to reduction in the value of that object. The same is going to happen to USD in the coming months. USD is on a precipice waiting to take a dip into the abyss.
There are two options with Fed, ahead.*
1] Because of the huge influx of USD into the system, US Fed will have to accept that down the road; US would have to deal with huge inflationary pressures in the economy.
2] US Fed instead of letting free market system, letting it devalue USD in a cruel, fast & furious way, handles the devaluation systematically to avoid serious consequences of free market reaction.
Thus, what does it mean for a country like India?
Take a look at our RBI annual report 2007-08, released on the web on August 2008.
As of on June 2008, RBI had gold reserves amounting to 9BN USD (valued at market price).
Assuming that the average market price at that point in June was USD900/ ounce, this amounts to a gold holding - 283 tonnes or 10,000,000 ounces.
FOREX assets were USD302Bn, majority of which are in USD. Out of total USD312Bn of total FOREX reserves, having just USD9Bn worth of gold, is sheer madness.
You can go and check the details at http://rbidocs.rbi.org.in/rdocs/AnnualReport/PDFs/86606.pdf
Never, before in the last 100 years has the world faced economic headwinds of such staggering effects as we have seen in the last 1 year, and would keep on seeing ahead for atleast 1 year or so. Currencies globally are in turmoil with only Yen and USD strengthening due to factors out of the scope of discussion of this post.
Now due to the reasons cited above*, USD is going to be devalued either way, drastically in the coming years. So much so that there is a talk of a new currency replacing USD, called Amero by the last years of Obama administration.
Thus having majority of the FOREX reserves in foreign currency, and that too predominantly in USD is harakiri.
The reason, why i cited the gold holdings above is: in this age of high volatility and uncertainty, gold is one of the assets that has surpassed ages preserving its status as safe haven investment in troubled times. Chinese, having surpassed Japan as the biggest holders of UST bonds, have announced that they will start to diversify their FOREX reserves into gold, and want to take their present gold reserves of 600tonnes to 4000 tonnes. Check out one of the several news articles at link
May be they know something, we dont, because lets accept the fact that they are far more superior businessmen than we are.
As of today, i have not come across any news article stating that RBI intends to increase its gold holding in the near term. Hence, as the USD would go down, Rupee would have serious implications for it, to preserve the trade across the major trading partners, are we going to devalue Re along major currencies. Since no currency has yet emerged as the replacement for USD as global reserve currency, I assume that other world currencies too would have to take the bait.
Incase, Re devalues, then we as citizens of India are going to see a loss of purchasing power over the years. Hard assets will be the investments rising in this scenario going ahead.
Thus as a safe way to retain, even enhance your purchasing power over the next 3-5 years, i would suggest you hold some share of your investments in physical gold only.
And there is a sweatner too.
We are hearing (as mentioned above) from experts a new monetary system. A possibility to returning to gold standard is also being mentioned.
US right now has official gold reserves 8100 tonnes.
Fed balance sheet size is USD2trillion.
Thus if the world would go to the gold standard, all the balance sheet of Fed would have to be backed by the gold holdings they have, thus valuing gold @ a staggering $7000/ ounce.
Against this, in India the gold prices would shoot up to Rs 12lakh for an ounce with the balance sheet at Rs 14.6 trillion and gold holdings of roughly 283 tonnes.
Now the balance sheet size of RBI in 2007-08, rose by a staggering 46% to Rs14.6 trillion. http://www.blogger.com/post-create.g?blogID=5517697057834512009
Going ahead, for you as citizens living in India, buying physical gold might be the way to new found riches in a new age that lies ahead of us.
With that I am finished for the day.
Friday, November 28, 2008
Thursday, November 27, 2008
In normal times, this day might have passed as any other day, but in this era of interventions and manipulations, the contracts on the short side of the trade are much more of what can be delivered.
Thus shorts would look to get out of the trade in case the normal percentage of 2% of people asking for the phyiscal delivery rises dramatically and leads to a spectacular rally in the gold prices.
It has long been known and accepted that COMEX is no longer insync with the phyiscal gold prices in the market, thus GATA and other gold bugs have long been on the crusade to prove the interventions by the PPT - plunge protection team. Today might turn out to be their salvation day, a momenet when people would know - THERE ARE NO FREE MARKETS!
Look out for probable fireworks tonight (IST) at COMEX.
Wednesday, November 26, 2008
Contrary to the current scenario and the popular opinion at present - that deflation is the evil that has to be tackled, down the road around soemwhere begining of 2010, inflationary environment would be the reason for Fed loosing its sleep.
The link in the post has the pdf to the latest on the FOMC meet and their opinion of tackling the current mess the US economy is in. Have a look.
As one of my first posts on this blog, I would not be going much deeper into this topic.
This is analysis by Liz Ann Sonders, Senior VP, Chief Investment strategist, Charles SchwabLiz is vehemently claiming that US entered recession in 2007 and it may be time to look out for signs of reovery. Enjoy the analysis. The link for the same is given below.