China, Gold and Reserve Currencies

In case you missed it, gold looks to be declining again (USD per troy ounce):

But let’s keep some perspective:

The Biggest Risk To The World Economy

No, it’s not European debt; rather it’s Chinese deflation (excerpt):

Chinese monetary policy failure

“Fed tapering” seems to be repeated in every single story in the financial media over the last couple of days. However, I am afraid that the financial media – as often is the case – is overly US centric. We might want to look at another central bank than the Fed. We should instead pay some (a lot!) of attention to the People’s Bank of China (PBoC)...

...It seems to me that the PBoC is just continuing the excessive tightening and that seems to be the real culprit behind the stream of bad economic data we have got out of China recently. It looks like Chinese monetary policy failure.

So yes, Bernanke might have a communication problem, but at the moment it seems like the biggest monetary policy failure is Chinese rather than American.

The article Lars quotes shows some pretty worrying developments in the Chinese interbank market – rates have spiked, indicating a liquidity crunch that the PBoC is not accommodating.

To corroborate this info, watch gold…I’ve always felt the runup in gold prices this past decade was more a story of Chinese (and Indian) monetary policy than the Fed’s. As of yesterday, spot gold is at its lowest level since January 2011 – today’s price has fallen to levels not seen since September 2010, before recovering a bit.

That aside, this is not good news for anybody, especially commodity exporting nations such as Malaysia. I’m afraid weakness in the Ringgit is going to be much more persistent that I expected, and growth harder to come by.

The Gold Bubble: End Game In Sight?

This week’s collapse in the price of gold was no more than I expected, and no less than I feared. I’ve never bought into the rationalisation of gold as an inflation hedge, or gold as a good investment.

My biggest worry with gold was that, as in the Genneva case last year, ordinary Malaysian investors were going to be caught in a bursting asset bubble, holding assets worth considerably less than they paid for. So far, that worry is slowly being realised – based on the current price, if you had bought gold anytime in Ringgit terms over the last two and a half years or so, you would’ve likely have lost money:

You’d still be in the black if you’d bought before that, but for how much longer is an open question.

When Is A Return Not A Return?

When investing in an international commodity, it really, really matters what currency you’re investing in. Exhibit one (excerpt):

Gold outshines equity, other asset class

NEW DELHI: Gold has witnessed a golden era in terms of returns to investors amid its skyrocketing prices as compared with the share market, which has given negative returns on investments in the last three years, a study revealed.

Gold And Central Bank Fiscal Stimulus

I don’t know about you, but I don’t think I’d want to be taking investment advice from someone who doesn’t appear to know what he’s talking about (excerpt; emphasis added):

Is it time to buy gold?

PETALING JAYA: Now is the time to invest in gold as its price is consolidating and likely to climb over the next few years, according to one expert of the commodity.

“Gold reached US$1,900 (RM6,042) last year but has fallen to US$1,600 now. This is a purely periodic correction,” said Dar Wong, a trader and veteran financial consultant who was the guest speaker at Tomei Consolidated Bhd's GoldSilver2U.com seminar…

…Gold, considered a safe haven in times of economic upheaval, has slipped some 15% since peaking at US$1,900.20 last September at the height of the eurozone crisis, but is up 2.7% for the year at yesterday's spot prices…

…He opined that this would come from two sources: inflation, which would force the hand of central banks to ease interest rates, and US monetary policy.

“Gold is traded in US dollars. Should the Federal Reserve decide on more fiscal stimulus, the weaker US dollar will push gold to new heights.

“From my studies, when the United States elects a new president after the third quarter, whoever gets the job will most likely put in a quantitative easing policy to consolidate his position. That will result in higher gold prices.”

Central banks, he added, had little choice in the current global scenario other than to loosen the reigns on fiscal policy.

The Gold Standard: Pros and Cons

No, I’m not writing about it, but BBC 4 Radio yesterday aired a program examining the arguments for and against the gold standard. You can listen to it here, or read the accompanying article.

Gold, Quantitative Easing, And Property Prices In Malaysia

I read this over the weekend:

Applying the brakes – made for the short term – can be dangerous
FOOD FOR THOUGHT
By DATUK ALAN TONG

...Recently there has been a proposal to raise the floor price of properties for foreigners from RM500,000 to RM1mil to curb or control the prices of houses from increasing too fast. This proposal is on top of the other “cooling off” measures such as the 70% housing loan policy for purchase of a third property, the increase of real property gains tax from 5% to 10% imposed on properties sold within two years of the sale and purchase agreement, and the new ruling on housing loan limits based on net income rather than gross.

There is no doubt that the introduced “cooling off” measures have reduced the buying spree of properties. However, the intended objective of these measures to control the price of properties has yet to be seen. Introducing measures without critically identifying the root cause of the increasing property prices may instead create situations that would not be beneficial to the industry as explained by the theory of Risk Homeostasis.

So, what determines rising prices?

Government Spending, Deficits and Inflations: Confusion Reigns Part II

It’s not just Malaysians confused over government spending – big time fund managers are pretty foggy about the notion too (excerpt):

Gold Bulls Expand as Billionaire Paulson Says Buy: Commodities

Feb. 17 (Bloomberg) -- Gold traders are getting more bullish after billionaire hedge-fund manager John Paulson told investors it’s time to buy the metal as protection against inflation caused by government spending…

Selling Gold

The price of gold has been defying gravity for years now. There’s no doubt that some of it is due to fundamental factors, as before this run-up, it had been stuck in a 20 year bear market and was probably undervalued: new supply has been declining for years, and the rapid economic development of India and China brought millions of new buyers. It also helped to have a massive financial crisis, which bolsters gold’s attraction as a safe haven.

But what shouldn’t be lost is the role and activities of the World Gold Council, which played a key role in making gold easier to invest in and has been unceasingly promoting gold as an alternative investment.

The Best Long Term Investment?

(H/T Bloomberg/Businessweek)

Weighing Gold

At The Economist’s Free Exchange blog, A.D. tries to figure out whether gold is in a bubble (excerpt):

Turning gold into dross

WHILE equity and bond markets have remained relatively sanguine regarding the impasse in negotiations on America's debt ceiling, gold nevertheless achieved another (nominal) high today, at $1,622. That’s one more milestone in an extraordinary run that began over a decade ago. As of Monday, gold’s 10-year annualised real return was 16.8%. By comparison, American stocks managed a return of just 14.8% during the 1990s, in a roaring bull market.

Gold Fever

Articles like this really get my goat (if you’ll pardon the pun). From the Sunday Star (excerpts):

Gold fever rages on

The practice of investing in gold is slowly gaining momentum in Malaysia.

THERE'S a lot of talk about gold these days. More Malaysians are investing in the precious metal and even criminals seem to have caught on to the gold bug…

…Over the last year, the price of gold has risen approximately 23%; and in the last three years it has risen 98%. While unrest in the Middle East and the situation in Japan are cited for record gold prices in recent months, shaky financial systems are the main reasons why the price of gold has been shooting up over the years.

Emas Dan Perak

Sorry, couldn’t resist the pun (for those not familiar with Bahasa Malaysia, the title reads “Gold and Silver”).

The Perak state government appears to be pushing ahead with plans to issue dirhams and dinars:

Perak to launch gold dinars next month

IPOH: The Perak Government will launch gold dinar and dirham currencies next month in a move to diversify its reserves.

State executive councillor Datuk Mohamad Zahir Khalid said the state government was working with the Kuwait Finance House (KFH) to introduce the currencies as the finance company has vast experience in handling the currencies.

He added the currency to be introduced by Perak would be very different from that introduced by the Kelantan Government before.

Talking Dinars

I was invited to this public lecture yesterday (and would have loved to have gone), but couldn’t make it:

Islamic Gold Dinar: Myths & Reality

Recently, there has been a well-publicised campaign about the re-introduction of the Islamic Gold Dinar. The proponents of this idea, the denarists, advocate that this country as well as the whole Islamic world “urgently” return to the Islamic gold dinar. They argue that if this return is achieved, nearly all the ills of modern economies would be solved. In short, what the denarists are doing is to propose an essentially historical system for the future.

INCEIF and the Association of Chartered Islamic Finance Professionals (ACIFP) invite you to a Public Lecture by Prof. Dr. Murat Cizakca, a Professor of Comparative Economic History at INCEIF. He will present a thorough analysis of gold /silver coinage systems in history.

The Dark Side Of Gold

Bloomberg/Businessweek has been running a series of articles over the past couple of weeks looking at the human costs of gold’s popularity. They’ve now brought together these articles and some associated graphics and videos on a single portal.

I’m not going to comment on this, but worth a look if you’re interested in the gold market.

Scott Sumner On Gold

This is the first commentary on the gold market that actually made sense to me:

About those high gold prices

...As far as I know there is really only one respectable argument that inflation expectations are approaching dangerous levels in the US. We know that 5 year TIPS spreads are low, and we know that the near to medium term consensus inflation forecast is low. We know actual inflation is low and falling. But then there are those gold prices.

I’ve never been convinced that the high gold prices were signaling US inflation fears…

...I seem to recall someone pointing out that Asian gold demand couldn’t be the problem, because the totals were fairly stable. But that confuses shifts in demand with movements along a demand curve. When world output is falling, it is necessarily true that total quantity demand will also fall. If you confuse demand and quantity demanded, it will never look like higher demand is pushing up prices when output is declining...

Perak Catches The Gold Disease

I didn’t catch the original announcement, but here’s the follow-up:

Dinar not for trading

IPOH: The gold dinar and silver dirham currency to be introduced by the Perak state government is not meant to be used for trading but only for investment purposes, said Mentri Besar Datuk Seri Dr Zambry Abdul Kadir.

“The plan to introduce the dinar and dirham was made because many people prefer to keep the currency as they feel the value will increase.

“That is the basis of introducing the dinar and dirham,” he told reporters after chairing the state exco meeting here yesterday.

He added that Perak would have no problem cooperating with Kelantan, which was attempting to use the gold dinar and silver dirham in all its transactions, including for paying civil servants’ salaries.

At least they have the sense not to try to use it as a medium of exchange.

World Bank President Calling For A New Gold Standard? Say It Ain’t So!

Oh, to be a fly on the wall in the World Bank’s press office:

Call to bring back gold standard

World Bank says it can serve as an anchor to guide global currency movements

SINGAPORE: World Bank president Robert Zoellick has called on bickering G-20 nations to bring gold back into the global monetary system as an anchor to guide currency movements.

Ahead of a G-20 summit this week in Seoul, Zoellick wrote in yesterday’s Financial Times that an updated gold standard could contribute to retooling the world economy at a time of tensions over currencies and US monetary policy.

There He Goes Again…

Tun Dr Mahathir on free markets, regulation and gold:

Dr M: Banking, finance need to be regulated

…Former prime minister Tun Dr Mahathir Mohamad said governments must continue to oversee the regulation of banks and financial institutions.

“Unless the Government oversees and limits the ability for the market to abuse (the banking systems) then, of course, we are going to have this kind of (global economic) crisis…

…“This idea of a free market has become almost like a religion. You cannot question it, even when it fails,” he said…

…“And the abuses became rampant because of the idea that governments must not interfere with the financial market. (That) the market it seems would regulate itself,” he explained.

He urged for the gold dinar to be institutionalised as the standard against which all currencies were measured for the sake of stability.

“It’s something tangible and something that has value anywhere in the world,” he said.

However, he said the gold dinar system, if implemented, should only be used for settlements of international trade…

…“The US dollar has got no value whatsoever. It’s got no backing, no reserve. But we accept it as if it has some value and because we accept it, it has value,” he said.

Currency Wars Part VI

From the Forex Blog:

Currency War Devalues all Currencies…Except for Gold

Then there are those that believe all currencies will suffer, and that even the currencies that are still rising are actually depreciating in real terms (due to inflation). Those who harbor such beliefs will often try to short the entire currency market, usually by betting on commodities or heavy metals, of which Gold is probably the most prominent.

The price of Gold has risen more than 20% this year (in USD terms). Its backers claim that it is the ultimate store of value (where this derives from is unclear), and defend its lack of utility and inability to accrue interest by arguing that its appreciation is more than enough of a reason to own it. When you look at the performance of gold over the last five years, you begin to wonder if maybe they have a point.

I’m kinda busy this morning so I’ll forbear commenting on this issue…again. But I will add that the best academic guess for when the gold market will reverse is when interest rates start rising again in the developed world. Since the Fed is committed to keeping rates low “…for an extended period”, that might be 2-3 years down the road.

In the meantime, gold is likely to continue to increase in USD terms - $2000? $3000? Your guess is as good as mine. There’s certainly no other fundamental reason for buying gold.