Despite promises of cooperation by G20 members, currencies are going to remain very volatile and gold is going to move higher
Only a few weeks ago, members of the G-20 met to resolve the worlds' currency problems. Looking back we can now see how ineffective these meetings have become and instead of trying to control and manipulate the international currency markets, politicians should abstain from trying to exert their influence on these markets. Many of these political figures have probably never traded a currency contract in their lives and thus do not have the appropriate knowledge or experience to voice their opinions. (Who would you rather fly with? A pilot that has had 1000 hours on a simulator, but who has never flown, or one that has had 200 hours of practical experience). And, while these politicians and central bankers hold hands and smile for the cameras, and pledge their co-operation and assistance nothing could be further than the truth. They are all behaving in their own country's self-interests.
After the G20 failed to reach any consensus on currency issues and trade imbalances, President Obama accused China of deliberately keeping its currency undervalued saying the renminbi "is undervalued … and China spends enormous amounts of money intervening in the market to keep it undervalued." However nothing was said about the US Fed's $600 billion "quantitative easing" plan which according to Bernanke has nothing to do with monetizing debt and the purpose is to bring down interest rates which are already close to zero.
Even before the start of the G20, Germany's finance minister, Wolfgang Schauble called U.S. policy "clueless," while foreign ministers from China and France (among others) questioned the wisdom of QE2. And, aadding fuel to an already heated debate over the U.S. Federal Reserve's bond-buying spree to revive the economy, former Fed Chairman Alan Greenspan said the United States was pursuing a policy of weakening the dollar.
Frankly I don't think the US has a case when it comes to debating the debasement of currencies. And, in a recent GATA publication, Michael Pento, senior economist at Euro Pacific Capital, said. "The U.S. is the No. 1 currency manipulator on the planet." He also said. "We print up a lot of dollars" and "we can consume more than we produce because of that." But that policy makes for a "chronically weak" dollar and puts America at the mercy of its foreign creditors, Pento says, restating a warning about the risks of a true dollar crash and skyrocketing interest rates if we don't change course, soon.
It won't happen overnight, but China is plotting its own exit strategy by slowing rolling its Treasury holdings into the short end of the curve, he says, suggesting other foreign investors will follow suit.
Once again the G-20 meeting was probably nothing more than a waste of time as efforts to resolve currency and trade imbalances floundered. China rejected policy prescriptions that fault its exchange rate regime and directed criticism at monetary easing in the U.S. "Don't make other people take the medicine for your disease," Yu Jianhua, a director general at China's Ministry of Commerce, told reporters in Seoul late yesterday. "Quantitative easing will have a very big impact on developing countries including China."
"The Chinese can't help but think this is just a way of continuing to point the finger at China," said Neil Mackinnon, an economist at VTB Capital Inc. in London and a former Treasury official. "It doesn't look as if we're going to see anything specific or substantive that will address global imbalances."
The Group of Twenty (G-20, G20, Group of Twenty) is a group of finance ministers and central bank governors from 20 economies: 19 countries plus the European Union, which is represented by the President of the European Council and by the European Central Bank. Their heads of government have also periodically attended the summits since their initial meeting in 2008. Collectively, the G-20 economies comprise 85% of global gross national product, 80% of world trade (including EU intra-trade) and two-thirds of the world population.
The G-20 was proposed by former Canadian Finance Minister Paul Martin (later, Prime Minister) for cooperation and consultation on matters pertaining to the international financial system. It studies, reviews, and promotes discussion (among key industrial and emerging market countries) of policy issues pertaining to the promotion of international financial stability, and seeks to address issues that go beyond the responsibilities of any one organization.
On September 25, 2009 the G-20 leaders announced that the group will replace the G8 as the main economic council of wealthy nations. The Group of Eight (G8, and formerly the G6 or Group of Six and also the G7 or Group of Seven) was a forum, created by France in 1975, for governments of six countries in the world: France, Germany, Italy, Japan, USA and UK. In 1976, Canada joined the group (thus creating the G7). In 1997, the group added Russia thus becoming the G8. In addition, the European Union is represented within the G8, but cannot host or chair.
Current members of the G20 include Argentina, Australia, Brazil, Canada, China, European Union, France, Germany, India, Indonesia, Italy, Japan, Mexico, Russia, Saudi Arabia, South Africa, South Korea, Turkey, United Kingdom and the United States.
As any policy decisions or even recommendations made at their last meeting have now become nothing more than a forgotten memory, the focus is on the crisis in the Eurozone. In fact I believe it is going to get even worse. I use a simple indicator. Listen to what any central banker or leader has to say. And, you know for sure the opposite is going to happen. Right now, I am watching Spain and believe that the situation there is far worse than reported in any media.
During the last two weeks as borrowing costs for Ireland, Portugal and Spain soared, spreads on Italian and Belgian bonds jumped to a post-EMU. Monday November 29, was the worst single day since the launch of monetary union. The euro fell sharply to a two-month low of 1.3064 against the dollar. Yields on 10-year Italian bonds jumped 21 basis points to 4.61%, threatening to shift the crisis to a new level. Italy's public debt is more than 2 trillion euros, the worlds' third-largest after the United States and Japan.
"Unless the fiscally-strained euro area countries can convince markets that they will be on a sustainable fiscal path by 2013 — which looks unlikely to us — peripheral bond markets are likely to remain under strain, in particular Portugal," was the view from Citi European Economics.
Economic and Monetary Affairs Commissioner Olli Rehn warned that "the turbulence in sovereign debt markets (highlights) the need for robust policy action" — the morning after Ireland became the second joint EU-International Monetary Fund Eurozone bailout of the year.
The Commission also trimmed its forecast for Spain's economic growth next year to 0.7% from 0.8%. That is barely half the 1.3% growth Madrid hopes to record after a contraction of 0.2% according to the Commission's latest forecast. Slower growth makes managing deficits much more difficult and unlikely to trim the high levels of unemployment. Currently the rate of unemployment in Spain is above 20%.
Spain's economy is larger than those of Ireland, Greece and Portugal combined, and if it spirals into a debt crisis despite progress in trimming its budget deficit, a bailout would strain the European Union's safety net. And, another source of concern is Spain's large exposure to Portugal, which is seen as the next euro zone trouble spot. Spanish banks had a $108 billion exposure to Portugal at the end of March, according to Bank of International Settlements data.
Spain's government faces a bond redemption at the end of April of 15.5 billion euros in competition with the banks, which are also looking to refinance around 35 billion euros, according to analysts at Barclays Capital. "We are concerned that tapping the markets for more than 50 billion euros in March and April represents a substantial level of execution risk," the analysts said in a note, adding the situation would worsen in 2012.
Despite the latest quarter showing a contracting economy and a 20% unemployment, the Spanish Prime Minister, Zapatero expects Spain to see growth in the coming year. Zapatero also denied rumours of potential real estate write-downs.
"[Our banking system] is definitely healthy," Zapatero said. "It's not only healthy and well-capitalized, it's done its homework … and on top of that, it will be one of the most attractive financial systems for investments." The moment Zapatero said this I knew the financial system in Spain is in a mess. The last time a political leader stated that all was well in his country and that a bailout was not needed, the truth soon revealed the opposite.
As I try to devise an index for these "misleading" statements made by politicians, political leaders, finance ministers and central bankers, I strongly recommend investors ignore any short-term fluctuations in the gold price and use any dips as a buying opportunity. While politicians come and go, gold's value as a store of wealth never changes.
Recently, although the price of gold failed to break through the resistance (R1) at $1425, the primary trend remains firmly intact. For the moment gold prices have signaled a neutral direction, but with an upward bias.
About the author
David Levenstein is a leading expert on investing in precious metals . Although he began trading silver through the LME in 1980, over the years he has dealt with gold, silver, platinum and palladium. He has traded and invested in bullion, bullion coins, mining shares, exchange traded funds, as well as futures for his personal account as well as for clients.
His articles and commentaries on precious metals have been published in dozens of newspapers, publications and websites both locally as well as internationally. He has been a featured guest on numerous radio and TV shows, and is a regular guest on JSE Direct, a premier radio business channel in South Africa. The largest gold refinery in the world use his daily and weekly commentaries on gold.
David has lived and worked in Johannesburg, Los Angeles, London, Hong Kong, Bangkok, and Bali.
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Information contained herein has been obtained from sources believed to be reliable, but there is no guarantee as to completeness or accuracy. Any opinions expressed herein are statements of our judgment as of this date and are subject to change without notice.