Capital controls eyed as global currency wars escalate

By Ambrose Evans-Pritchard:

Stimulus leaking out of the West's stagnant economies is flooding into emerging markets, playing havoc with their currencies and economies.

Brazil, Mexico, Peru, Colombia, Korea, Taiwan, South Africa, Russia and even Poland are either intervening directly in the exchange markets to prevent their currencies rising too far, or examining what options they have to stem disruptive inflows.

Peter Attard Montalto from Nomura said quantitative easing by the US Federal Reserve and other central banks is incubating serious conflict. "It is forcing money into emerging market bond funds, and to a lesser extent equity funds. There has truly been a wall of money entering many countries," he said.

"I worry that we are on the cusp of a competitive race to the bottom as country after country feels they need to keep up."

Brazil's finance minister Guido Mantega has complained repeatedly over the past month that his country is facing a "currency war" as funds flood the local bond market to take advantage of yields of 11pc, vastly higher than anything on offer in the West.

"We're in the midst of an international currency war. This threatens us because it takes away our competitiveness. Advanced countries are seeking to devalue their currencies," he said, pointing the finger at America, Europe and Japan. He is mulling moves to tax short-term debt investments.

Goldman Sachs said net inflows have been running at annual rate of $520bn (£329bn) in Asia over the last 15 months, and $74bn in Latin America. Intervention to stop it creates all kinds of problems so the next step may be "direct capital controls", the bank warned.

Brazil's real has been one of the world's strongest currencies over the past two years, aggravating a current account deficit nearing 2.5pc of GDP. The overvalued exchange rate endangers Brazil's industry, especially companies that compete with Chinese imports. The real has appreciated to 1.7 to the dollar from 2.6 in late 2008, and by almost the same amount against China's yuan.

"Everybody is worried that global growth is fading and they are trying to use exchange rates to protect exports. Brazil has watched as the Asians intervened and feels it can't stand by," said Ian Stannard, a currency expert at BNP Paribas.

Brazil has used taxes to slow the capital inflows but the allure of super-yields and the country's status as a grain, iron ore, and commodity powerhouse have proved irresistible. It is a textbook case of the "resources curse" that can afflict commodity producers.

A $67bn share issue by Petrobras has been a fresh magnet for funds, forcing the central bank to buy an estimated $1bn of foreign bonds each day over the past two weeks. Such action is hard to "sterilise" and can it fuel inflation.

Japan has begun intervening to stop the yen appreciating to heartburn levels for Toyota, Sharp, Sony and other exporters. A strong yen risks tipping the country deeper into deflation.

Switzerland spent 80bn francs in one month to stem capital flight from the euro, only to be defeated by the force of the exchange markets, leaving its central bank nursing huge losses.

Stephen Lewis from Monument Securities said the Fed is playing a risky game toying with more QE. There are already signs of investor flight into commodities. The danger is a repeat of the spike in 2008, which was a contributory cause of the Great Recession. "Further QE at this point may prove self-defeating," he said.

Meanwhile, Dominique Strauss-Kahn, managing director of the International Monetary Fund, tried to play down the fears of a currency war, saying he did not think there was “a big risk” despite “what has been written”.

Gold a Bubble? - Not Even Close

By Jonathan Kosares:

With the number of financial bubbles inflating and bursting over the past decade and a half, it isn't surprising that financial analysts have their "bubble-dar" honed and active. What is surprising though is the large number who have resoundingly dubbed the gold market as "the next big bubble." But is it? Most gold owners reject claims that gold is in a bubble, but they might not be sure exactly why. The most concrete and convincing evidence against gold being in a bubble, though, is right in front of us.

In the last 15 years, there have been two generally acknowledged, easily quantifiable bubbles: NASDAQ's tech bubble in 1999, and the briefer Crude Oil bubble in 2008. (Many would say housing was also a major bubble, but doing so may prove erroneous. Extreme home value loss is limited to certain areas of the country, and is not nearly as conclusive as the tech stock and oil collapses.)

Two characteristics are consistently present in the formation of a bubble. The first is magnitude, and the second is velocity. Long-term advances in prices do not necessarily represent a bubble just because of the duration, and neither does volatility as long as it is within a reasonable range. However, when prices rise sharply in a short period of time, and then drop sharply in an equally short period of time, one can reasonably conclude a bubble formed, and then burst. In other words, when magnitude and velocity combine to cause extreme volatility, that market likely is in a bubble.

Market bubbles defined
This study seeks to define exactly the level of volatility that separates a bubble from a non-bubble. One effective method for quantifying price volatility is to compare the daily price performance of a market against its 200-day moving average......read on

How Realistic is $5000 Gold?

Chris Mack
www.FinancialArticleSummariesToday.com

Taking into account 11 key measurements based on historical movements and price ratios, gold is likely to exceed $5,000 and silver is likely to exceed $200 within the next 5 years. If silver reverts to its historical ratio of 16 to 1 with gold, then it could rise even higher. Let me explain.

In recent weeks gold and silver have broken through their multi-month consolidation levels, and investors are wondering where the precious metals are headed. On a short term basis both gold and silver are overbought and due for a correction that may retest the breakout levels of $1,250 on gold and $20 on silver.

$1,500 Gold and $30 Silver By 2011

On a longer term basis, gold is at an all time high and silver is at a 30 year high. These breakout levels were key because they removed any supply of sellers wanting to sell near their previous purchase prices. The result will be a vacuum in price discovery, because virtually any investor in gold and silver now has a profitable trade and the price will have to rise until enough of these investors decide to take gains. Projecting from the size of the consolidation in precious metals the next key level where sellers arise could be near $1,500 gold and $30 silver by 2011.

Gold and Silver Have MUCH Higher to Run

Gold has risen every year for 10 years in a row now, demonstrating a powerful bull market that began in 2000. Since gold bull markets tend to last 15 to 18 years, investors are wondering how much potential the precious metals have in them. Gold and silver have to move substantially higher to revert to their inflation adjusted highs. However further dollar devaluation could multiply the potential gains.

The above analyses are in keeping with the projections of 102 other prognosticators, the majority of whom see gold reaching a parabolic price peak of at least $5,000 (see here for the 102 individuals and their projections and here for comments on Jim Sinclair's $1 million dollar bet that gold will reach $1,650 by January, 2011), and silver going as high as $712 (see here for the rationale for such an extremely high price based on $10,000 gold and here for the reasoning behind James Turk's contention that silver is going to $400 by 2015 and gold to $8,000).

While most of these statistics use the 1980 highs in gold and silver as a proxy, there is much more potential for a greater move in precious metals now because currency and economic imbalances are not confined to the U.S. but are global. If the US dollar is devalued, it is likely that the Euro, Yen and other currencies would also be devalued. While the 1970's bull market in gold and silver was largely driven by U.S. buyers, a panic to buy precious metals within the next 5 years will be driven globally.

As I said in the opening paragraph, "gold is likely to exceed $5,000 and silver is likely to exceed $200 within the next 5 years. If silver reverts to its historical ratio of 16 to 1 with gold, then it could rise even higher."

Given what you have read above would you not agree that you should buy some (or more) gold and/or silver at the first sign of any temporary weakness in price? I certainly think so!

Week 154 of the 2007-2010 Bear Market

By Mark J. Lundeen:

We should always keep in mind that the DJIA is only 30 blue chip companies, so it's not the stock market. But the Dow has told the market's story very well for 125 years.

The "Experts" are making much of the nice rise in the DJIA this week. But I don't see anything to get excited about. For one thing, the Dow has been stuck between its BEV -20% & -30% lines for almost 11 months now. That is a long time for the DJIA to be stuck in a 10% trading range. This is especially so when we consider this is an election year, a time when politicians want happy voters. Nothing makes voters happier than a rising DJIA!

Since 1993, dividend yields have been below 3%, except during the 2008-09 crash when yields spiked up to 4.74%. But who was buying stocks in March 2009? People with more guts than me! The point of the small dividend since 1993 is that people have been buying stocks for capital gains, not income. But since last November, there haven't been any capital gains. Puts on indexes have been losers too. Look at the chart below. With capital gains in the stock market so hard to find, no wonder trading volume is so low.....read in full

How Hyperinflation Really Happens

By Steve Saville:

An article entitled "How Hyperinflation Will Happen" has garnered a lot of attention. According to this article:

"...hyperinflation is not an extension or amplification of inflation. Inflation and hyperinflation are two very distinct animals. They look the same -- because in both cases, the currency loses its purchasing power -- but they are not the same.

Inflation is when the economy overheats: It's when an economy's consumables (labor and commodities) are so in-demand because of economic growth, coupled with an expansionist credit environment, that the consumables rise in price. This forces all goods and services to rise in price as well, so that producers can keep up with costs. It is essentially a demand-driven phenomena.

Hyperinflation is the loss of faith in the currency. Prices rise in a hyperinflationary environment just like in an inflationary environment, but they rise not because people want more money for their labor or for commodities, but because people are trying to get out of the currency. It's not that they want more money -- they want less of the currency: So they will pay anything for a good which is not the currency."

Except for the part about hyperinflation encompassing a loss of faith in the currency, the above is almost completely wrong. In particular, economies don't "overheat", economic growth causes prices to fall rather than rise, and hyperinflation is very much an extension of inflation. The author of the article doesn't even mention money-supply growth. Trying to explain inflation or hyperinflation without reference to growth in the money supply is like trying to explain why the moon orbits the Earth without reference to gravity.

All historical episodes of hyperinflation that we know of -- and we know of many -- have been step-by-step processes set in motion by, and sustained by, increases in the supply of money. After the supply of money grows at a rapid rate for a period of at least a few years, some people conclude that the inflation will be endless. These people act today in anticipation of tomorrow's money-supply-induced price rises. As time goes by, more and more people come to the realisation that the inflation will most likely be endless and begin to act (meaning: buy stuff immediately) in anticipation of future price rises, which eventually leads to the situation where prices are rising much faster than the supply of money.

At this point it would still be possible for the central bank to clamp down on the inflationary trend by stopping, or even just slowing, the expansion of the money supply, because rapidly rising prices throughout the economy would result in a money shortage unless the supply of money were given a substantial boost. At the same time, however, the central bank could be under considerable political pressure to accelerate the monetary expansion given that doing otherwise would lead to extreme short-term economic pain. This, in effect, is what happened in Germany during the early-1920s: at every step along the multi-year path from inflation to hyperinflation to the complete collapse of the currency it was deemed by the central bank to be less economically damaging to maintain or accelerate the inflation than to suddenly bring it to an end.

The point we are trying to make is that hyperinflation doesn't just happen 'out of the blue' one day when nobody expects it. Instead, it requires persistently high money-supply growth and evolves over many years due to a gradual increase in the awareness of the population. It is part of a PROCESS and definitely is an extension of inflation, but most episodes of inflation don't lead to hyperinflation because the authorities stop the monetary expansion before it's too late.

Lastly, it should be noted that while most episodes of inflation don't extend to the point where the economy experiences hyperinflation, all paper currencies eventually get inflated to oblivion. The reason is that circumstances finally arise whereby the most politically expedient move is to risk hyperinflation by continuing the monetary inflation way beyond 'normal' limits. In this regard, today's paper currencies won't be exceptions.

Silver - There is Not much of it and we Need it for Everything

Whilst on the topic of Silver I thought I would bring you another video, this time from early 2010. The legendary Stephen Leeb, or as one fan nicknamed him "Leeb the Dweeb" discusses the compelling case for silver, dweeb or not this guy knows his silver.

Silver is Still a Smoking Deal

From Oct 2009 - Robert Kiyosaki talks about Silver and Nixon's crime of '71. It is interesting to look back and see how insightful Robert was, he talks of $15/oz, today silver is almost $22/oz.

Gold Target US$1375

Click on chart for more detail.

Thanks to Jesse for the chart.

Gold hits another record high of $1,308

A good article from the Telegraph, seems they have all become Gold Bugs in the finance section - good for them, they might even become interested in silver one day. But I digress, gold is no where near its peak in the current bull market, the general public, especially the public of anglo-saxon ethnicity, has not even woken up to the fact gold has been the best performing asset class of the last 10yrs - most could not even tell you the price within $300. As to buying physical gold, well they haven't even started.

From the UK Telegraph:

Gold has surged to a new record price of $1,308.90 – the eighth time it has hit a new high in the past two weeks.

During the past year, the price of the yellow metal has risen by about 30pc.

Over the past two decades or so, gold prices have increased more than fivefold from a low of around $250 per ounce in 1999 and have almost doubled since the peak of the global financial crisis in late 2008.

Participants at the start of a two-day precious metals conference in Berlin organised by the London Bullion Market Association (LBMA) forecast on average that the price of would be $1,406 in September 2011.

At last year's LBMA conference in Edinburgh, participants were overly cautious, forecasting that gold would reach $1,181 by this year's gathering.

Adjusted for inflation, however, the price is still well below its all-time peak set in 1980, estimated at around $2,300 in today's money, giving investors hope for more upwards movement.

"Gold is going to continue to rise for the next one to three years because it's bedlam on the global currency markets right now," Josef Kaesmeier, chief economist at German bank Merck Finck, told AFP.

"The United States has an interest in the dollar staying weak, the euro is suffering because of debt problems in southern Europe and the yen is behaving in an inexplicable manner," he said. "The only currency that people want to buy is the yuan, but China doesn't want that. So gold is the only thing left."

The rise has been so strong that European central banks have recently put the brakes on their strategy of the past 20 years to offload their gold reserves in exchange for something offering a better return. It has also drawn new players to the market.

"The attitude towards gold has changed incredibly," said Shayne McGuire from Texas, one of the largest US pension funds, who have emerged as major buyers in recent years. Everyone wants it in their portfolio."

New investment tools like index funds giving buyers greater access to precious metals have also helped make gold "really accessible," McGuire said in Berlin.

But for Merck Finck's Kaesmeier, this is a worrying sign.

"Once pension funds start buying en masse, then I see the risk of a bubble," he said. "I see now that gold has started to become a big issue, front page news. I don't like that.

Graham Birch, the industry veteran who used to manage the BlackRock Gold & General fund, agrees. "If your taxi driver starts telling you to buy gold, you'd better sell it because this means the market has peaked."

Gold Smashes Through the US$1300 Barrier

In the space of 8hrs overnight (Aussie time) gold futures rose over $25. From a low on the London exchange of $1285 it hit a intra-day high of $1310 in NY trading. If the $1300 level holds for the rest of the week it may become the new base. It seems the "China put" is still alive and well.