Can gold survive a Chinese bust? Strong dollar for 2011?

[nero3]

I read they increased their gold imports fivefold in 2010, while the GLD ETF have had a rather bleak increase in 2010 compared to earlier years in terms of the relative increase in their gold holdings

[jpatter666]

Re: Can gold survive a Chinese bust? Strong dollar for 2011?

I read they increased their gold imports fivefold in 2010, while the GLD ETF have had a rather bleak increase in 2010 compared to earlier years in terms of the relative increase in their gold holdings

Not sure where you are going here Nero. China is one of the biggest gold producers as well. So far as importing gold, the government itself has been encouraging people to buy it directly. I'm not sure if the average Chinese citizen has access to the various gold ETFs that are out there.

So far as busts go, take your pick! Euro implosion, China RE hard landing, Japan *finally* going drain the drain after circling for two decades. Or the Big Kahuna -- a US $ bust.

Any of them would cause a major commodity crash -- so far as gold is concerned it might dip initially on liquidity concerns, but then IMO it's perception. Is the crash perceived as local to that particular currency region or is it the gunshot that starts the final crash of fiat currencies.

If the later, gold could explode upwards (as could nearly everything else, but gold for certain).

I still maintain a fairly decent-sized $ position because I believe if the dominoes fall, the $ will be the last one. That sucks for the rest of the world because honestly the $ should be *first* but no one said life or the market had to be fair.

[FRED]

Re: Can gold survive a Chinese bust? Strong dollar for 2011?

Not sure where you are going here Nero. China is one of the biggest gold producers as well. So far as importing gold, the government itself has been encouraging people to buy it directly. I'm not sure if the average Chinese citizen has access to the various gold ETFs that are out there.

So far as busts go, take your pick! Euro implosion, China RE hard landing, Japan *finally* going drain the drain after circling for two decades. Or the Big Kahuna -- a US $ bust.

Any of them would cause a major commodity crash -- so far as gold is concerned it might dip initially on liquidity concerns, but then IMO it's perception. Is the crash perceived as local to that particular currency region or is it the gunshot that starts the final crash of fiat currencies.

If the later, gold could explode upwards (as could nearly everything else, but gold for certain).

I still maintain a fairly decent-sized $ position because I believe if the dominoes fall, the $ will be the last one. That sucks for the rest of the world because honestly the $ should be *first* but no one said life or the market had to be fair.

Here we filter out the Bullhorn's call-of-the-day noise, whether it be about gold, houses, stocks, or bonds. We try to teach guests how to not think about markets the way the Bullhorn wants us to think, in terms of a string of disconnected and unrelated events.

It's all about the process.

What is the process and where are we in it?

We have been buried deep for weeks in a crazily complex project that we refer to internally as KaPoom Theory Version 3.0. If we don't go nuts trying, we plan to publish it tomorrow or Wednesday. Here's a hint.

[ThePythonicCow]

Re: Can gold survive a Chinese bust? Strong dollar for 2011?

I like how the Gold Price (_--) stops its upward climb in March-April 2014, just when the Interest Rates (_--) fall below Inflation (_--).

I am surprised (but have no reason to doubt) how long this all takes to unfold. If someone had told me (as likely Metalman will remind us someone did so tell us) in 2008 that this would take several years to get to the next major crisis period, I would not have believed them.

[FRED]

Re: Can gold survive a Chinese bust? Strong dollar for 2011?

I like how the Gold Price (_--) stops its upward climb in March-April 2014, just when the Interest Rates (_--) fall below Inflation (_--).

I am surprised (but have no reason to doubt) how long this all takes to unfold. If someone had told me (as likely Metalman will remind us someone did so tell us) in 2008 that this would take several years to get to the next major crisis period, I would not have believed them.

Good thing it all takes so long because at this rate it'll be KaPoom Theory version 21.0 before we get it right.

Here's how it went down in Argentina.

A bond and currency crisis is a long and complex process. The devil's in the details.

1991-94 Argentina enjoys strong economic growth and the currency board is
considered highly successful.
1995 Following Mexico’s December 1994 peso devaluation, capital flows out
of emerging markets. Argentina’s GDP declines by 2.8%.
May 1995 President Menem is reelected President after convincing Congress to
change electoral laws that prohibit a second term.
1995-1999 The U.S. dollar experiences a prolonged period of real appreciation,
resulting in similar appreciation of the Argentine peso relative to its trading
partners.
1996-1997 Renewed period of Argentine economic growth (5.5% in 1996, 8.1% in
1997), but current account deficit and debt measures worsen.
July 1997 East Asian financial crisis begins.
1998 Financial crisis moves to Russia and then Brazil. Argentina enters
prolonged recession in third quarter (still in effect) and unemployment
begins to rise.
1999
January Brazil, facing its own financial crisis, devalues its currency, hurting
Argentine exports, 30% of which were traded with Brazil.
September The Argentine Congress passes the Fiscal Responsibility Law, committing
to large reductions in both federal and provincial government spending.
October 24 Fernando de la Rua of the Radical Civic Union (UCR), the opposition
coalition candidate, running on a platform to end corruption (under
Menem) and the recession, defeats Peronist candidate Eduardo Duhalde
for President.
December 10 De la Rua is inaugurated President of Argentina and shortly thereafter
seeks assistance from the IMF.
2000
March 10 The IMF agrees to three-year $7.2 billion stand-by arrangement with
Argentina conditioned on a strict fiscal adjustment and the assumption of
3.5% GDP growth in 2000 (actual growth was 0.5%).
May 29 The government announces $1 billion in budget cuts in hopes that fiscal
responsibility will bring renewed confidence to economy.
CRS-3
September 15 The IMF concludes an Article IV Consultation, the required annual
comprehensive review of member country economies.
October 6 Vice President Carlos Alvarez resigns over de la Rua’s decision not to
replace two cabinet members linked to a recent Senate bribery scandal.
December 18 The de la Rua government announces a $40 billion multilateral assistance
package organized by IMF (see below).
2001
January 12 Argentina’s continued poor economic performance prompts the IMF to
augment the March 10, 2000 agreement by $7.0 billion as part of a $40
billion assistance package involving the Inter-American Development
Bank, the World Bank, Spain, and private lenders. The agreement
assumes GDP will grow at a rate of 2.5% in 2001 (versus actual decline of
5.0%).
March 19 Domingo Cavallo, Minister of Economy under Menem and architect of the
currency board ten years earlier, replaces Ricardo Lopez Murphy, who
resigns as Minister of Economy.
June 16-17 The de la Rua government announces a $29.5 billion voluntary debt
restructuring in which short-term debt is exchanged for new debt with
longer maturities and higher interest rates.
June 19 The peso exchange rate for merchandise trade is priced at a 50/50 dollareuro
peg, effectively allowing a 7% devaluation for foreign trade in hopes
of improving Argentina’s international competitiveness. Many analysts
raise concern over the effects on the credibility of the convertibility regime.
July 10 Cavallo announces a plan to balance budget, but the markets react
negatively, expressing lack of confidence.
July 19 Unions call a nationwide strike to protest government austerity plan.
July 29 The Argentine Congress passes “Zero Deficit Law,” requiring a balanced
budget by the fourth quarter of 2001.
September 7 Based on Argentina’s commitment to implement the “Zero Deficit Law”
immediately, the IMF augments its March 10, 2000 agreement for a second
time, increasing lending commitment by another $7.2 billion.
October The use of provincial bonds as “scrip” to pay public salaries becomes more
widespread as federal revenue transfers decline.
October 14 The opposition Peronist Party wins control of both chambers of Congress
in mid-term elections.
CRS-4
November 6 Argentina conducts a second debt swap, exchanging $60 billion of bonds
with an average interest rate of 11-12% for extended maturity notes
carrying only7% interest rate. International bond rating agencies consider
it an effective default.
November 30 A run on the banks begins, with central bank reserves falling by $2 billion
in one day. President de la Rua imposes $1,000 per month limitation on
personal bank withdrawals.
December 1 Protests begin over bank withdrawal limitations.
December 5 The IMF withholds $1.24 billion loan installment, citing Argentina’s
repeated inability to meet fiscal targets.
December 7 Argentina announces it can no longer guarantee payment on foreign debt.
December 13 The government announces that the unemployment rate reaches near
record high of 18%. Unions call nationwide strike.
December 14 Supermarket looting begins.
December 19 Rioting spreads to major cities over deep budget cuts. The government
declares a state of siege. Minister of Economy Domingo Cavallo resigns.
December 20 President de la Rua resigns in the wake of continued rioting, leaving 28
people dead.
December 21 Congress accepts President de la Rua’s resignation. Senate President
Ramon Puerta is named provisional president for 48 hours.
December 23 Congress appoints San Luis Governor Adolfo Rodriguez Saa as interim
president until elections can be held in March 2002.
December 26 The liquidity standards for banks are relaxed. Rodriguez Saa announces
a new economic plan based on: 1) suspension of payments on public debt;
2) new jobs creation program; and 3) creation of new currency (the
Argentino) to begin circulating in January 2002 and not to be convertible
to the U.S. dollar.
December 30 President Rodriguez Saa resigns after continued rioting and loss of party
support. Senate leader Puerta resigns to avoid second appointment as
interim president. No immediate successor emerges to take over the
Presidency.
December 31 The Argentine Congress selects Peronist Senator Eduardo Duhalde to
complete December 2003 Presidential term.
CRS-5
2002
January 1 Senator Duhalde sworn in as President. He blames Argentina’s economic
problems on the free-market system and vows to change economic course.
Except for debt moratorium, new economic policies are unclear.
January 6 After the Argentine Congress passes necessary legislation, President
Duhalde announces the end of the currency board and a plan to devalue the
peso by 29% (to 1.4 to the dollar) for major foreign commercial
transactions, with a floating rate for all other transactions. Other elements
of economic plan include: converting all debts up to $100,000 to pesos
(passing on devaluation cost to creditors); capital and bank account
controls; a new tax on oil to compensate creditors for the losses that will
ensue; renegotiating public debt, and a balanced budget.
January 10 Government announces it will “guarantee” dollar deposits, but to curtail
bank runs, the $1,000 (1,500 peso) limit on monthly withdrawals is
maintained and all checking and savings accounts with balances exceeding
$10,000 and $3,000, respectively, will be converted to certificates of
deposit and remain frozen for at least one year. Smaller deposits have the
option of earlier withdrawal by moving to peso denominated accounts at
the 1.4 exchange rate.
January 11 The government extends the bank holiday two extra days, while the foreign
currency market opens for first time in three weeks. The peso falls
immediately to 1.7 per dollar.
January 15 The peso falls as low as 2.05 to the dollar in active trading.
January 16 The IMF approves request for one-year extension on $936 million payment
due January 17, keeping Argentina from falling into arrears.
January 17 The government announces that dollar denominated loans exceeding
$100,000 will be converted to pesos at 1.4 for fixed rate, deepening the
balance sheet mismatch of banks.
January 19-20 Duhalde reverses his decision to guarantee dollar deposits, which will be
converted to pesos at some undefined devalued exchange rate.
January 23 The Argentine Senate passes bankruptcy law that would use capital
controls to restrict payment of foreign private debt payments through
December 2003.
January 28-29 Foreign Minister Carlos Ruckauf visits with Bush Cabinet members to
appeal for political and financial support (including IMF assistance) as
protests continue in Argentina.
January 30 IMF team meets with Argentine officials, who declare intention to adopt
a floating exchange rate in near future. Argentina’s Chamber of Deputies
CRS-6
passes controversial bankruptcy law, stripping it of the Senate provision
prohibiting foreign debt payments, but other capital controls remain in
effect. It retains language allowing conversion of dollar denominated debt
below $100,000 to pesos at 1-to-1 rate (benefitting debtors) and
suspending creditor action on loan debt defaults for 180 days.

[jk]

Re: Can gold survive a Chinese bust? Strong dollar for 2011?

fred,
it's interesting to look at that hypothesized future course for gold, inflation and rates and to try to imagine the curves for oil, food, "core" inflation, unemployment, real gdp, and so on. i'm hoping some of these underlying "issues" are addressed when you publish the analysis.

[nero3]

Re: Can gold survive a Chinese bust? Strong dollar for 2011?

Not sure where you are going here Nero. China is one of the biggest gold producers as well. So far as importing gold, the government itself has been encouraging people to buy it directly. I'm not sure if the average Chinese citizen has access to the various gold ETFs that are out there.

So far as busts go, take your pick! Euro implosion, China RE hard landing, Japan *finally* going drain the drain after circling for two decades. Or the Big Kahuna -- a US $ bust.

Any of them would cause a major commodity crash -- so far as gold is concerned it might dip initially on liquidity concerns, but then IMO it's perception. Is the crash perceived as local to that particular currency region or is it the gunshot that starts the final crash of fiat currencies.

If the later, gold could explode upwards (as could nearly everything else, but gold for certain).

I still maintain a fairly decent-sized $ position because I believe if the dominoes fall, the $ will be the last one. That sucks for the rest of the world because honestly the $ should be *first* but no one said life or the market had to be fair.

I don't know the numbers, but given what I saw, maybe imports to China will reach 250 tonnes by the end of 2010, that seems to make up for the slack in ETF buying. It seems gold is mirroring the ETF less than before, and more real physical demand elsewhere. What's interesting about China is that they have a much larger quantity of money. It's like their 5-600 % money supply over the last 9 years is of "high quality RMB", while the relatively modest money supply in the US of around 125 % in broad money is of more "low quality dollars" in the same period. I call it a weak dollar carry trade waiting to blow up. I just can't get over how they can keep having a stronger RMB vs the dollar, while they have expanded credit vs the dollar that much. I'm really doubting the Chinese RMB is undervalued. Maybe I should not be skeptical about China, maybe they have 10 more years before they are like Japan in 1989, but it seems most countries have expanded more credit than the US (for the last 10 years). I live in a country that have benefited from China's hunger for raw materials.
What I see is here that we as well as Australia and Canada have housing bubbles that are still alive and well. In the US it seems people are bullish on our economies and currencies, but I'm skeptical. Our bubble in housing did not burst because inflationary policies in the US benefited commodities and kept pressure in our economy. It seems gold is in the middle of that. From where I stand it seems some of the best value is in the kind of dull US blue-chip stocks of the kind that have not done anything other than going flat for the last 10 years. Wal-Mart and Johnson & Johnson comes to mind. Those stocks are cheap in our currency when I take the increases the companies have had in earnings since 2000 and add the weakness in the dollar (the exchange rate is off 40 %) on-top of that.

[nero3]

Re: Can gold survive a Chinese bust? Strong dollar for 2011?

Iceland: http://www.sedlabanki.is/?pageid=201

[nero3]

Re: Can gold survive a Chinese bust? Strong dollar for 2011?

If the later, gold could explode upwards (as could nearly everything else, but gold for certain).
.

I think there is inflation in the number of people on youtube that are investing their time and energy into posting videos about gold and silver. Some of them made miserable calls about oil and uranium when those things were in bubbles, it seems silver is the hottest. When oil was in a bubble I could feel it from around august 2007 (just from the atmosphere surrounding oil, and our stock exchange, and news about attacks on oil pipelines that sort of stuff and how it affected the speculators), it then took almost a year for it to pop. It seems people are like waiting for your taxi driver or neighbors to go on about how gold have been money for 1000's of years before getting out, but what if it won't reach that level. There are pundits on youtube that even claim that gold can't become a bubble because it is money, so the only bubble is in paper money, but with that attitude (it's like saying any price will be justified), how can they avoid to be holding the bag as many were after the bull-market ending in 1980?

[jpatter666]

Re: Can gold survive a Chinese bust? Strong dollar for 2011?

I think there is inflation in the number of people on youtube that are investing their time and energy into posting videos about gold and silver. Some of them made miserable calls about oil and uranium when those things were in bubbles, it seems silver is the hottest. When oil was in a bubble I could feel it from around august 2007 (just from the atmosphere surrounding oil, and our stock exchange, and news about attacks on oil pipelines that sort of stuff and how it affected the speculators), it then took almost a year for it to pop. It seems people are like waiting for your taxi driver or neighbors to go on about how gold have been money for 1000's of years before getting out, but what if it won't reach that level. There are pundits on youtube that even claim that gold can't become a bubble because it is money, so the only bubble is in paper money, but with that attitude (it's like saying any price will be justified), how can they avoid to be holding the bag as many were after the bull-market ending in 1980?

Heh...I agree and while we did a minor add to our gold position, I haven't done anything to silver which I believe is overbought (and overhyped) at the moment.

I think EJ made an interesting point one of his latest comments that gold is NOT money -- it is currency. Central banks hold gold. The IMF holds gold. Obviously TPTB feel gold is worth *something* and that's enough for me to keep some level of position although I have yet to go JTABEB (although given the runup I sometimes wish I had! Enjoy your new Rolls-Royce jtabeb! ;-))

[jk]

Re: Can gold survive a Chinese bust? Strong dollar for 2011?

a friend sent me a "gold is a bubble" piece and asked for my comments. i wrote:

there is no "gold bubble." a bull market is not always a bubble.
ask yourself: does gov't policy promote this investment? does it receive special tax treatment to encourage its rise? [or is it, like gold, taxed at a punitively high rate in excess of the capital gains rate?] is leverage involved most of the time? how many people do you know, personally, who are involved in this investment? do people talk about it at social gatherings?

i also wrote:

eventually it will be time to sell gold. ask yourself:
a. do you trust any other asset to keep its value, let alone appreciate? if so, buy it. if not, wait and hold gold.
b. do you trust the fed and the u.s. gov't to protect the value of your dollars? if so, sell gold.

[nero3]

Re: Can gold survive a Chinese bust? Strong dollar for 2011?

a friend sent me a "gold is a bubble" piece and asked for my comments. i wrote:

there is no "gold bubble." a bull market is not always a bubble.
ask yourself: does gov't policy promote this investment? does it receive special tax treatment to encourage its rise? [or is it, like gold, taxed at a punitively high rate in excess of the capital gains rate?] is leverage involved most of the time? how many people do you know, personally, who are involved in this investment? do people talk about it at social gatherings?

i also wrote:

eventually it will be time to sell gold. ask yourself:
a. do you trust any other asset to keep its value, let alone appreciate? if so, buy it. if not, wait and hold gold.
b. do you trust the fed and the u.s. gov to protect the value of your dollars? if so, sell gold.

Inflation in the money supply they can create. It's just a matter of where the money goes. Could for instance a real bust in China contribute to a boom in the US where interest rates were in the positive territory? It's of course written in the stars for many that the Us market is going to become as cheap relative to gold as in 1980. But what if this were not the case, and it would instead turn around, and just get more expensive relative to gold? That the US market measured in gold became as cheap as in 1990 as it is now, and then turned around and went more expensive? If that was the case the 0 % interest rate policy in the US could contribute to positive real interest rates (assuming that consumer prices fell). With the debt load there is now. It's taken for granted that you need negative real interest rates to stimulate demand, but what if a strong dollar boosted both consumer confidence and demand for credit?
I think it's interesting because both japan and china had problems in the early 1990 and it gave a way to a boom in the US stock market (especially from 1995).


Look at the Citigroup shares in around 1995 when the housing market recovered after a period where China had suffered a huge bust.
http://finance.yahoo.com/echarts?s=C...urce=undefined

Then look at the exchange rate between Japan and the US and look at the similarity to 1995
http://research.stlouisfed.org/fred2...EXJPUS?cid=275

[llanlad2]

Re: Can gold survive a Chinese bust? Strong dollar for 2011?

It's taken for granted that you need negative real interest rates to stimulate demand, but what if a strong dollar boosted both consumer confidence and demand for credit?

I'm pretty sure demand for credit is infinite especially if you have no intention of paying it back. How long you can borrow on those terms is what is being tested presently. Everything is as cheap as it can get already and yet the general public is still debt-ridden.

Lack of debt is what will stimulate demand not negative interest rates. "Negative" interest rates is what exists now for most people. I don't see demand, unless you count demand for gold which does well in a negative interest environment of course.

[FRED]

Re: Can gold survive a Chinese bust? Strong dollar for 2011?

fred,
it's interesting to look at that hypothesized future course for gold, inflation and rates and to try to imagine the curves for oil, food, "core" inflation, unemployment, real gdp, and so on. i'm hoping some of these underlying "issues" are addressed when you publish the analysis.

The scenario is quite vivid and is presaged by recent events.

[WDCRob]

Re: Can gold survive a Chinese bust? Strong dollar for 2011?

Does the substitution of $$/gold in place of ARS/US$ have something to do with your theory that the dollar is de facto backed by 10% gold reserves?

ETA: sorry if that's a really basic Q... still trying to digest that earlier '10%' comment and it looked like there might be a tie in here.