The John Brimelow Report
Indian CB joins $ disgruntlement squad: Washington in trouble?
Friday, March 11, 2005
Indian ex-duty premiums: AM $6.87, PM $6.41, with world gold at $441.20 and $440.15. Adequate for legal imports. The rupee closed at an import-facilitating one month high.
India joined the procession of Asian states making noises about diversifying FX Reserve holdings away from the Dollar. (Many would no doubt be surprised to learn that the country’s FX reserves are the sixth biggest in the world.) Reuters reports:
BOMBAY, March 11 (Reuters)
India's reserves, the sixth largest in the world, are at a record high of $135.66 billion, and Reserve Bank of India Governor Yaga Venugopal Reddy told reporters diversification was being discussed at the central bank.
"Yes it is being discussed. We are always discussing. It's a continuous process," Reddy said. "It is an ongoing debate with all central banks…
(JB emphasis)
Reuters goes on to report that Lehman has issued to report asserting that the Chinese are already well underway on diversification:
"Lehman Brothers has examined China's $206.6 billion increase in reserves last year in conjunction with currency market movements and Beijing's disclosure that it spent $195 billion on foreign exchange intervention in 2004.
The bank concludes that China reduced the proportion of its reserves held in dollars to 76 percent at the end of 2004 from 82 percent a year earlier."
-***-
Obviously this kind of story is not helpful for the dollar – but it is for gold.
TOCOM continues uninterested. Volume fell 19% to the equivalent of 12,161 Comex lots, the active contract closed unchanged, world gold went out 50c below the NY close, and open interest was static (up 156 Comex equivalent to equal 98,943 Comex contracts). (NY yesterday traded 67,727 contracts, a shocking 44% above the estimate; open interest edged up 769 lots to 303,062.)
Yesterday, of course gold once again underperformed the dynamic commodities sector. Mitsui-London noted:
"Gold was firmer with some fund buying on the back of the weaker USD, although one or two banks selling at just under 443 and keeping a lid on it"
Standard London found the action peculiar:
"COMEX opened at its session low before being levitated higher to the day’s high of 442.60 bid. Throughout the day, it seemed like it was traded for size as it moved around by jumping erratically…With gold having breeched above $439, a previous chart point in the medium-term charts and not running higher, is like turning on the car engine, applying pressure on the accelerator with the gears in neutral…"
UBS (which today raised its 2005 estimated prices for many commodities not including gold) thinks it sees the problem:
"…speculators. Positions remain lower than at recent peaks deterred, we believe, by the risk of negative news about potential IMF gold sales. While we do not expect any gold sales from the IMF - nor probably a revaluation - these headlines will deter speculative longs from entering the market in any size until this issue is resolved"
Many would agree that fear of Central Bank selling – not just IMF gold, either – has severely intimidated Western investors. UBS may well be using a euphemism, of course.
With estimated volume today a heavy 62,000 by 1PM, half of which has traded since 11 AM with gold moving sideways, some might even suggest that actual Central Bank selling is the problem. Who would want to short into these conditions on a Friday afternoon?
While waiting for a resolution of this problem, gold’s friends can draw some comfort from the degree of conviction expressed by intelligent Dollar bears. The Gartman Letter today displays the fervor of its recent conversion, worrying about Central Bank FX diversification:
"we do find it more and more disconcerting that Japan, China, S. Korea and a few other Asian nations find themselves with a staggering sum of US government debt (dollars)… We do not fear that they shall turn to become sellers of US debt and/or dollars, but we do fear that they may not be the buyers that they were in the past…
it takes a mere lack of buying to send at market down. We fear the lack of buying... and that is a fear far large enough!
we are a bit dismayed by the results of yesterday's 10 year note auction. The bid/coverage and other aspects of the auction were fine, but we did find it a bit
disconcerting that the so-called "Indirect Bidders," amongst which are the world's foreign central banks, bought only 11% of the total $9 billion at auction. This is down from last month's 29% foreign "take…"
The more consistent Bridgewater Associates is even more outspoken in today’s "Daily Observations":
The Break Down of The Dollar System:
"As you know, we believe that the U.S. is moving toward a balance-of-payments/debt crisis that is similar in its dynamic to the dollar/debt crisis of 1968-71 that led to the break-up of the Bretton Woods monetary system."
"Due to the Chinese peg, Asian monetary policy has basically been locked into a dollar system…This Asian dollar monetary system is now just about to self-destruct. Asian central banks have wracked up unprecedented amounts of dollars, just as Europe and Japan took in excessive amounts of dollars as the Bretton Woods system neared collapse in the early 70’s. In the early 70’s, France first, and then other countries, started to peel off the dollar standard and started to ask the Fed for gold instead of dollars. The result was inevitable as the race for the dollar door began. In the last couple of weeks the exact same dynamic began anew as Korea, then China and Thursday Japan, all expressed their interest in diversifying their dollar holdings. The race to the door is likely about to begin."
With these sorts of ideas about, the current decline of the dollar could get interesting. MarketVane’s Bullish Consensus for the Dollar Index was 27% last night, the lowest this year: but it spent all last November between 20% and 23%.
The noted gold bear plays the contrary opinion card. He continues to take comfort from the (amazing) complete lack of flow into the ETFs
JB
