-->Die Chinesen sitzen am Hebel - alleine

US DOLLAR IMPLOSION - PART II
By Alf Field

In June 2002 I published an article entitled"The Coming US Dollar Implosion". At that time the Euro was US$ 0.96 and the US Dollar Index 108. The figures today (3rd Dec 2003) are Euro = US$1.20 and a US Dollar index of just under 90. The Euro has gained 25%. The US Dollar index has declined 17%.

As Winston Churchill might have put it, in regard to the US Dollar:"We have reached the End of the Beginning and are about to enter the Beginning of the End". What has taken place during the past 17 months has been no more than Part I of the US$ implosion. We are set to start Part II.

During the past 17 months the US Dollar has declined moderately against most European currencies, and by even more against the currencies of commodity producers such as South Africa, Australia, Canada, and New Zealand. Elementary economics teaches that when a country's currency depreciates, that country's trade deficit will gradually diminish. Yet, despite a two year slide in the Dollar, there has so far been no decline in the US trade deficit. Why the exception?

The answer lies in the countervailing actions adopted by some of America's Asian trading partners. Those with the largest surpluses, mainly Japan and China, have been intervening in the markets to slow the appreciation of their currencies against the Dollar in an effort to protect their export industries. China, which today enjoys the largest surplus of all America's trading partners, linked its currency directly to the US Dollar. Despite rising opposition from the US Government, China's currency strategy continues unabated.

Before condemning the Chinese, it is important to understand what is happening in their country. The Industrial Revolution in the UK and Europe in the 18th and 19th centuries totally transformed their economies from agricultural dependency to economies reliant on industry and commerce. People moved off the land into the towns. Jobs in the new industries were poorly paid, but they at least provided a living.

China appears to be going through a similar experience. They are enjoying their own Industrial Revolution that is rapidly transforming what was previously an agrarian economy into one witnessing a massive build up in its industrial and commercial infrastructure. China currently has the lowest cost labour force in the world. They are therefore being inundated with an influx of US manufacturers. Some transfer existing operations, lock, stock and barrel. Others have closed down out-of-date facilities back home only to establish brand new plants in China. To this growing pool may be added factories controlled by indigenous Chinese entrepreneurs.

With wages in Asia being a tiny fraction of those paid to workers in western countries, the trend of moving manufacturing and services to Asia - especially to China and India - is bound to accelerate. Adding to America's nightmare is a Chinese cultural and business strategy that places great emphasis on the distant future. This persuades the nation to endure short-term pain in the interests of achieving long-term goals.

What seems to be happening is the following. The Chinese view the US as their main export market, hence the solid link between their own currency and the Dollar. China has been earning massive Dollar surpluses from its trade with the US. They re-invest those surpluses back into US Treasury Bonds. By recycling their dollars back into the system, they play a key role in keeping US interest rates artificially low. This in turn holds America's economic recovery on track.

China must know that it is selling real goods to the USA and being paid in pieces of paper that will ultimately be worth a lot less.

The Chinese understand they will one day have to take a loss on their dollar reserves, but this is the price that they are willing to pay to maintain the existing order. The longer they perpetuate the system, the faster their industrial infrastructure will grow and the greater the number of Chinese finding jobs. A fall in the value of their accumulated foreign reserves is a price they are prepared to pay in the interests of laying a foundation for their country's long-term growth.

China is happy to see the status quo continue. It will only change if the US takes unilateral action when the US tires of losing jobs and services to Asia. The political pressure is certainly building. American voters are becoming increasingly aware jobs are disappearing as factories close. The subcontracting of service work is going to India where there is a culture of speaking English.

A sign that groundswell opposition is having an impact was evidenced by President Bush's recent tour of Asia. He requested Asian countries to allow their currencies to appreciate against the Dollar. Unsurprisingly his appeals went unheard. Back in Washington, the Democrats have been pushing to levy a 27.5% tariff on Chinese goods imported into the US"to protect our jobs".

These are all signs in the wind that this particular trade arrangement is coming to an end. Sooner or later the USA will be forced to take some form of unilateral action to terminate the relationship. The side effects will be extremely damaging. Their action will signal that the game is over. It will also confirm the end of the US Dollar as a reserve currency, triggering Part II of the US Dollar Implosion.

When China understands that the game is over, the time will have arrived for them to dispose of their US Treasury Bonds, effectively switching out of Dollars into something safer like the Euro (the only viable paper reserve asset) - and into gold, which will soon become the reserve asset of choice. In recent years China has steadily been building up the gold component of their country's foreign reserves. This trend will soon accelerate.

It is possible that China may eventually revalue their currency, the Remnimbi. In the meantime, the result of confrontation will be to tip the US, and therefore the world economy, into recession. US interest rates will rise rapidly as the Chinese dump their Treasury Bonds, causing havoc in the US real estate market. The Chinese economy will not be unaffected and may well dip into recession simultaneously. Recently constructed factories in China may fall on hard times. Those that have been financed through debt could go to the wall. Chinese entrepreneurs will pick up these factories for cents in the dollar.

Part II of the Dollar implosion will differ substantially from Part I. If the US-China economic relationship changes or ceases, the effect on commodity prices could be immediate and dramatic."Commodity" currencies may then no longer look quite as attractive as they do at present. In the face of spreading recession, the prices of most commodities would decline, severely denting the attractiveness of the currencies of commodity producers. This could cause a severe reaction to events of the past two years in which the Australian dollar has risen 50%, from 48c to 72c; the South African Rand that is up almost 100%, from 8c to 15.5c; and the New Zealand dollar that has risen 60%, from 40c to 64c.

The feature of Part II of the US Dollar Implosion will be a recognition that even presently popular commodity currencies are mere paper, ultimately no different to the Dollar itself. There will be an awareness that, unlike the 1930's when competitive currency devaluations were made"by decree"; we are now in an era of competitive currency creation or printing. The country with the fastest growth of currency creation will have a short term trade advantage as their currency depreciates against competitive nations. As investors withdraw from the erstwhile favoured currencies, they will have a problem deciding where to invest their funds. This is when gold will be seen as a viable alternative.

There will therefore be a growing awareness and recognition of the vastly more attractive reserve asset role that gold must and will play in the future. This recognition is the fuel that will fire a rocket under the price of gold, driving it to substantial new highs in terms of ALL currencies.

SILVER

In past crises, the wealthy have protected themselves buy purchasing gold and gold related assets. Ordinary people, by far the greater number, could rarely afford to buy gold. Being far cheaper, they have previously had to buy silver. This metal became the poor man's choice as an asset to protect their savings. Silver has so far lagged gold in the early stages of this bull market, but that situation seems about to change.

Throughout recorded history the average relationship between silver and gold has been 15oz silver to 1oz gold. The ratio at present is a far higher 75:1 ($400/$5.30). This is massively out of line. If gold were to double to $800 per oz, it would not be unreasonable to expect the silver/gold ratio to decline sharply, possibly as low as 40:1. With gold at $800, this would position silver at $20.

Thus a 100% increase in the price of gold could possibly be accompanied by a simultaneous 400% increase (perhaps more) in the price of silver. This offers significant opportunities both in silver bullion and silver mining shares.

The above graph of the price of silver has been borrowed from an excellent recent article by Dan Norcini entitled"A Technical Look at Silver - Update".

What is quite clear from the graph is that silver's 22-year bear market down trend has come to an end. As Dan Norcini says, a new bull market in silver has been born. It is difficult to argue against this contention and I have no intention of doing so. A silver price above $6.80 would complete a fabulous head-and-shoulders base formation. With this as a foundation, it would be possible to project a very large rise in the price of silver for the future.

Alf Field

3 December 2003

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-->Ich war neugierig auf die Quelle und habe durch googeln den Autor dort gefunden, wenn auch nicht diesen Kommentar.


Aber interessanterweise gabs dort auch einen sehr"netten" Artikel von dem Herrn, den ich hier im Board auch durch Suchen nicht gefunden habe, es geht über Gold-Leasing von der Bundesbank die Deutsche Bank über die Kleinigkeit von 1200 Tonnen, die letztes Jahr angeblich"abgeschrieben" werden mussten. Aber lies selber:





German Gold"Sales"?


By Alf Field
April 22 2002

What's going on?

The German Central Bank has made 3 announcements over the past couple of weeks about selling some of its gold reserves. The latest one even suggests converting some of the proceeds into equities! This is the country where the fathers and grandfathers of the current generation suffered the hyperinflation of the Weimar Republic in 1923, when a loaf of bread cost more than a million Reichsmarks and the currency was wiped out. This is the country with one of the largest gold reserves in Europe. This is the country that was one of the prime movers behind the Washington agreement of 26 September 1999 between 15 European Central Banks aimed at limiting Central Bank gold sales and gold leasing arrangements for 5 years. As Alice in Wonderland might have said:"It gets curiouser and curiouser". What is going on?

First, here is the latest Press announcement:

Frankfurt, April 11 (AFP) - The Bundesbank wants to be able to sell some of its gold reserves after 2004 once an agreement between European central banks limiting annual sales expires, the German central bank's president Ernst Welteke said on Thursday."I think that we will have to have the option to sell some gold when the agreement expires in 2004," Welteke said at the bank's annual news conference.
* * *
Under an agreement dated September 26, 1999, the 15 central banks of the European Union undertook to limit any gold sales to 400 tonnes per year or a total 2,000 over five years until 2004.
But any gold sales by the Bundesbank after that date would be very small, Welteke said.
Last month, the central bank chief had said in a newspaper interview that the Bundesbank was considering selling a small part of its vast gold reserves for shares.
"We must consider in the medium term if can't convert some of our gold -- a small volume and without pressurising the market -- into securities," Welteke told the daily Frankfurter Allgemeine Zeitung at the time.
The bank was thinking not only of bonds, but"on a share deposit with a good mixture of blue chip shares and shares listed on the Euro-stoxx-50," he said.
The aim of such a move would be to manage the bank's portfolio of gold and currency reserves more efficiently in the future, he said.
The Bundesbank has some 3,500 tonnes of gold worth some 35 billion euros and a further 50 billion euros in foreign currency reserves, the newspaper said.

I-Net Bridge, Tel: +27-11-280-064

What is strange about these announcements?

Allow me to indulge in a little fantasy and postulate a thesis that might explain this strange conundrum. I stress that I have no evidence that either proves or disproves this thesis. It is all conjecture on my part, but for what it is worth, here it is.

Assume that Deutsche Bank, the large German-based world-wide banking group (and/or a group of German banks) have been involved over the past several years in leasing gold from the Deutsche Bundesbank, the German Central Bank. Assume that about a third of the German gold reserves, say about 1,200 tonnes, have been leased to these banks at a lease fee of say 1% per annum. Assume that the banks sold this gold into the market. Now 1,200 tonnes is 42.2 million ounces, which at $300 per ounce is worth a cool $12.66 billion.

Continuing with the assumptions, the banks must have protected themselves by purchasing call options on gold to cover themselves against the risk of the gold price rising sharply. The balance of the $12.66 billion they invested in whatever way they saw fit, but presumably in a way that ensured themselves of a decent profit margin. For each 1% of margin that the banks were able to achieve, their profit would be about $126 million for each year that the transaction lasted.

So far, so good. But call options have time limits. Assume that the old call options have now all expired. To keep the gold leasing transactions going, the German group of banks needs to purchase new call options on 1,200 tonnes of gold to protect their positions against a sharp gold price rise. With the gold price now in an established up trend, such call options may not be available. Or the German bankers may not be happy with the credit worthiness of the counter parties that are prepared to sell call options on gold. Nothing worse than buying reinsurance and then have the reinsurer go belly up. Either way, assume that the banks find that they cannot buy satisfactory protection.

What to do? One way of closing the transaction is to go into the bullion market and buy 1,200 tonnes of gold. This is not an attractive option at the present time because the gold bullion market is trending upwards quite nicely and an order to buy 1,200 tonnes would send the price ballistic. If the gold price doubles from $300 to $600 per ounce with the banks exposed, the German group would be looking down the barrel at a loss of $12.66 billion. This may be sufficient to send some of them into insolvency.

The banking group has to find some way out of the leasing transaction with the Deutsche Bundesbank, so they call on their friendly Central Banker to tell him:"Sorry mate, you have a problem." This is banker-speak for the old adage that if you borrow $1,000 from the bank and can't repay it, you have a problem. If you borrow $100 million from the bank and can't repay it, the bank has a problem. In this case it is the Central Bank that has the problem. They are not going to get their gold back.

The Central Bank is between a rock and a hard place. They haven't told the German public that they have been leasing out such large quantities of gold. Now they are going to have to admit that a large chunk of the country's gold reserves are gone, something that will not sit happily with the German public. The outcome of this little confrontation is that the Central Bank agrees that it will have to convert the leasing transaction into a fully-fledged sale of 1,200 tonnes of gold to the group of banks.

The next problem is that the group of banks does not have $12.66 billion in cash to pay the Bundesbank for the gold. They have invested it in a range of securities, including bonds and equities. More problems. The German DAX index is down 40% from its peak of two years ago and most of these positions are underwater. Worse still, imagine what would happen to the stock and bond markets if they were hit by concerted selling of some $12.66 billion worth of securities.

So the Bundesbank finally bites the bullet. It accepts that the gold has gone, that the debtor banks cannot pay, so they will have to accept whatever they can get. They agree to take the bonds and equities in part settlement for the gold that has disappeared. The next step in this saga: issue some announcements to soften up the public for the forthcoming"sale" of the country's gold reserves in exchange for bonds and equities!

A far-fetched fantasy or a dose of reality? I leave it to your judgment.
If any readers have any comments or information that they would like to pass on to the author, he can be contacted by email at: ajfield@attglobal.net
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Wenn DAS wirklich stimmen sollte und ein Drittel des Deutschen Goldschatzes von diesen Harikiri-Bankern verzockt
<ul> ~ Original</ul>