Can the G20 Halt The Gold Bull Run?
Julian D.W. Phillips, October 14th, 2009
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This is a snippet from a recent issue of the Gold Forecaster with Subscriber-only parts excluded.
The G-20 meeting last week was hoped to be a watershed for the global economy. It was hoped that accepted that there has to be a global solution to the financial crisis that triggered the credit crunch and the worldwide recession. Those solutions had to include the full cooperation of other key governments, including China, before we could hope for a sound recovery of the global economy. If we have more superficial statements with no real action, expect yet another crisis as confidence is lost, not only in currencies, but in global money systems. You all know the old adage, "Cheat me once, shame on you cheat me twice, shame on me." Just how much ‘spin' can the globe take, before losing heart?
So where are we now?
The gold price has shattered overhead resistance, which is now support at $1,032, reaching $1,065 and due to consolidate now [Subscribers will be told at what levels].
Investment demand [Europe and Asia for bullion itself] is growing. Physical demand is coming in from India as the wedding season takes off, but at lower levels than seen in past years. Speculative demand rose taking the net speculative long position to new record highs in line with the gold price. So there is no wavering in the confidence in gold, even after the G-20 meeting. As the G-20 meeting progressed and the statements came from the conference, the inclination of the gold price was to struggle to hold ground and we saw it slip from $1,017 to $992. The $ itself appeared to hold ground in the $1.46: €1 zone, which ground it has since lost. What did this mean? A look at the results of the G-20 should point the way forward.
As only politicians can do, the ‘spin' to come from the conference, pointed to a solution and an air of renewed confidence. But did this bear examination?
After Mr. Geithner, the Fed Chairman's massive issuance of new money through Quantitative Easing a major fear has and is that any withdrawal of this money will renew deflation at a more destructive rate. "We will avoid any premature withdrawal of the stimulus," said the G20 communiqué assuring us that worldwide this money will stay in place. With the Fed having stated that interest rates are not going to be lifted for some time to come the U.S. $ is now the "Carry Trade" [borrowing in a currency with low interest rates and lending into a country with high interest rates] of choice. Previously it was the Yen, but the Yen kept on rising and taking away profits from the transactions. With the $ likely to fall, the $ now allows borrowers a currency that is going to be cheaper to repay leaving interest rate profits intact. So, while the attempt to resuscitate economic growth through the stimuli, the key global reserve currency is weakening against the bulk of the world's other currencies. This is gold positive.
While the ‘carry trade' will enjoy the weakness of the U.S. $, the $ will be protected by its very size and only be allowed to fall gradually [no brutal drops], other $ dependent currencies will not fare so well. It appears more than likely that Britain's Pound Sterling is headed for a "brutal collapse". We have talked about Capital and Exchange Controls for some time now, so brace up for these in the U.K. This will bring U.K. investors streaming into gold.
Another part of the communiqué stated, "We will adopt policies needed to lay the foundation for strong, sustained, and balanced global growth." Perhaps we misunderstood something here. We thought that this planning had been going on for some large number of months and that this conference was going to reveal these policies? There is little to rely on here. What we do know is that China is not going to allow itself to pay for past U.S. mistakes in any reformations, so we foresee at least some conflict of interest to prevent such an objective. Nothing solid here, again gold positive!
The communiqué called for "global architecture that meets the needs of the 21st century." Sounds inspiring but with the International Monetary Fund being put forward as the body that will monitor nation's progress and possibly provide the new global reserve currency in the form of Special Drawing Rights [this failed before] nothing was done to re-distribute voting shares within the body. China will certainly not go along with a body where the U.S. has the final say on resolutions the I.M.F. makes [85% of members votes are needed to pass any resolution, the U.S. has 16.83% of the body's votes] . With the economic power of the East rising rapidly and the developed world facing a potential lurch back down into a deeper recession [depression?] this matter has to be addressed before a start is made on a ‘global architecture to meet the needs of the 21st century.' Until this issue is properly addressed, no progress will be made on a reformed global monetary system. At the moment the issue is not expected to be addressed until early 2011 by the Fund's 186 member countries.
