What Bull? Dow Is Down 83% In Terms of Gold.

By Dr. Steve Sjuggerud

 

"I had no idea how bad it was," my friend Richard Smith told me after crunching the numbers...

Richard (founder of the excellent TradeStops) should know about crunching numbers... He has a Ph.D. in "mathematical systems theory." I'm not sure what that Ph.D. actually means, but I do know Richard is able to take a massive pile of numbers and find a simple way to tell me what they mean. Here's his simple conclusion:

The entire rally in the DJIA from 2003 to the peak in 2008 was actually a continuous decline when priced in gold... Even the super-rally in stocks over the last six months is nothing more than a very weak bounce off the bottom.

The simplest way to ask the big question is like this: How many ounces of gold does it take to buy the Dow Jones Industrial Average (DJIA) Richard answers:

From a peak of nearly 42 ounces of gold to buy a share of the DJIA earlier this decade, we made it down to a low of almost seven ounces in March 2009. That is a decline in the "value" of the DJIA of 83%.

The implications are scary...

Sure, the man on the street feels good when he sees stock prices are up, gold is up, oil is up, etc. It feels like things are getting better. But it's not the truth...

The truth is the value of the dollar is going down fast. People want to believe differently. They want to believe the creation of money at a record pace by our government is creating wealth. But you don't create wealth on a printing press.

The government's simple goal was to reignite the U.S. real estate market. If you cut rates to zero and make money available, home prices can't fall any more – or so the government thought. The government didn't realize the low rates and money "printing" would lead to higher prices in everything BUT real estate.

A few years ago (summer of 2005), you would have needed 550 ounces of gold to buy an average house. Today, you need more like 150 ounces of gold. That is a 73% decline in the "value" of real estate.

You'll hear on the evening news that home prices are down by, say, one-third nationwide. But on TV, they never account for the destruction in the dollar. In terms of gold, home prices are down by more than 70%... Wow!

Yes, it takes more dollars to buy gold, oil, and the stock market lately. But don't kid yourself... Don't feel better... You are not any richer. The dollar is just dramatically weaker.

Sizing things up in terms of gold is one clear way to see it.

The significance of the IMF-RBI gold sales

Much has been written in the last two days about the surprising purchase by the RBI (Reserve Bank of India) of some 200 tonnes of gold bullion, valued at about $6.7 billion, from the IMF (International Monetary Fund).

Why the Rise in the Gold Price is Different this Time.

For over more than 18 months we have watched the gold price churn below $1,000 and in the process forming three tops, before breaking out to above $1,050 in early October 2009. Why will it not fall back to well below $1,000 and possibly as far as $850 this time?

Technical Picture
Peter has given a great deal of detail below, in this issue and has warned, precisely, of the various support and resistance levels to watch out for. This information is critical for you, the subscriber, so as to help in your buying and selling considerations.

The U.S. $
For many months now too, while traders played the gold price against the U.S. $ the gold price has been precise in its inverse correlation to the $. We believe that this has mistakenly led commentators to place far too much emphasis on the $, as the inverse measure of gold.

We say this because the moves occurred at a time when many facets of the gold market were absent from the gold market, such as investment demand, low jewelry demand and central bank demand. Traders held sway over the gold price and it is they that decided that the moves of the $: € decided the price of gold. This lacked a reasonable basis to it. Why should the gold price be tied to the €? Such a relationship implies that the $ in isolation, is the most important factor in the gold market. We counter that and say, yes COMEX is a U.S. market and such traders do have enormous pricing power, but when the full force of all sides of the gold market come into play, COMEX diminishes in importance, just as the waves of the sea are of less important than tides are, to where the sea will climb on the shoreline.

Yes, the state of the $ is important in pricing gold and it is the ‘hub’ of the currency world, but to gaze at it alone is to ignore the much bigger world of gold in its entirety, acting together in synthesis, in deciding the gold price.

This is amply demonstrated by the fact that the U.S. $ is sitting not far off the same place, against the €, as it was when gold was just below $1,000. We now foresee a larger de-coupling from the $ by gold, as we move forward. Yes, the waves of the $ will ebb and flow and continue to cause traders to move the gold price against the $ as before, but the tide of investment demand and other factors in the gold market will flow and dominate these moves over time.

Why Different this Time?

As we wrote last week, while the facts of the article in the Independent [British] newspaper, informing the market that France, China, Russia and select Persian Gulf oil producers were going to price oil in a ‘new’ currency were denied, the market is convinced that this will happen in time, even if it takes another decade. The reaction in the gold market was to bring in new investment demand via bullion itself, to prompt heavier central bank selling, to slow scrap sales and to cause traders to add some more gold to their holdings.

On top of the consolidation phase the gold price has been going through over the last 18+ months, this was a breakout pointing to an end of that phase. Now it sits on top of the $1,000 level, which forms a huge support to the price.

Watershed for the Monetary System

This showed a tipping of the see-saw against confidence in the monetary system. It was due to the realization that very little is going to be done to effectively reform the currency world and bring back stability to these markets. More than that, it was the realization that world governments just don’t have the real political will to ensure a stable world currency system. There are just too many conflicts of interest for them to do so.

Meanwhile, the system decays on a broad front. The very fact that the hub of the currency world, the U.S. $ is losing favor so quickly sends out a bigger warning to investors and the global economy. Just take a look at what central banks have been doing in the last few months.

Foreign currency holdings grew by $413 billion last quarter, the most since at least 2003, to $7.3 trillion. Nations that report currency breakdowns put 63% of this new money into the € and Yen in April, May, and June. That’s the highest percentage in any quarter with more than an $80 billion increase. Until now China has expressed concern about the behavior of the $ alongside other nations but were hesitant to act like this, because of the damage it would do to the exchange rate of the $. Now the realization of the fact that the $ will weaken is prompting action.

Imagine if oil was priced in a ‘basket of currencies, that diversification would be unstoppable and the $ would face a major crisis. Now, it is only a question of when.

Some commentators are saying gold is rising because of inflation fears, but inflation is not likely to accelerate until the global recovery is strong and deflation has evaporated. And yet gold is rising.

What concerns foreign holders of the $ is its exchange rate. This means far more than U.S. goods getting cheaper and European goods getting more expensive, it means the future worth of the $ in terms of all other currencies.

e.g. If Europe sells goods to China, it prices them in the U.S. $. The buyer and seller need to price those goods in a way that allows them to budget correctly and be able to pay correctly and make their profit on the deal. If the U.S. $ [which has nothing to do with the underlying transaction] falls, then Europe gets less Euros to pay the supplier. This gives a great incentive not to use the $ in these transactions. If that trend takes off, then the $ will be used less, globally, and cause an excess of dollars to float around the system, taking it even lower. The dollar’s 37% share of new reserves fell from about a 63% average since 1999.

The point for gold is that even central banks are wary of the U.S. $ and consequently expect uncertainty to spread like the plague through other dependent currencies, as they try to keep their exports competitive in the world market. Despite it being money in earlier times only, gold remains the only money that can be exchanged when confidence is lost and still hold its value. This reality is rapidly rushing at us and is why gold is rising in price.

Need to Quantify?

Among financial professionals the need to quantify, to measure, to relate is insatiable. Look back across the last few years of the gold market. Gold was thought to move against oil. This was dropped when the facts showed differently. Gold was thought to be anti-inflationary. While it has these properties, the price is rising in the absence of inflation at the moment. Growth or the lack thereof was tied to gold’s performance, but when deflation hit and gold held its price that was dropped too. In general the gold price was thought to be a tied into something in the U.S. alone. Is this because of the myopic view of U.S. markets or is it really a reality? Clearly, Europe and the rest of the world are involved in the gold market too. In fact 90% of the world’s bullion is dealt in London!

So we have to counter this hunger to quantify and recognize that there are a huge number of times in our lives and our markets when reason and measurability are absent. The gold market is reflecting one of those times right now. When emotions creep in, many such professionals go into denial, until they can find something else to measure that emotion against. By that time the damage has often been done. The point of the Independent newspaper report was that it precipitated pent-up emotion against the U.S. $. Now the $ will be seen in that negative light, not as a strong currency dominating world currencies. It is moving to pariah status if it keeps on this road. It is too late for political ‘spin’.

When the Titanic sank, there was a point in time, when the ‘unsinkable’ ship in the passenger’s minds, changed to a sinking ship. The breakout in the gold price was just such a point in time.

yen dollar The Price of the $?

What has happened imperceptibly is a change in measuring value. Until now, everything was measured in the U.S. $. It was the ultimate measure of value for over half a century. With uncertainty, led by global central banks, other measures of value are now needed. Where can they be found, amongst other currencies?

The ailments hitting the U.S. $ can affect other currencies, all of which are controlled ultimately by their central banks and governments. If the U.S. Administration can’t hold financial confidence why should any other currency do so? The road down for the $ will eventually lead to something that cannot be debauched by governments. The actions of the Chinese and Russian central banks, tells us that they trust a ‘basket of currencies’ [which minimize the impact of any individual government] and, to some extent, gold.

For years now we have said a day will come when the gold price won’t be say $1,000, but that $1,000 will be worth an ounce of gold. We’ve arrived.


Courtesy financial sense

Gold price reaches $1,000 landmark

Evening Standard, This is Money writers and Reuters 13 March 2008, 3:53pm

The price of gold soared to a record high of $1,000-an-ounce today, fuelled by a weakening dollar, strong demand and the rising cost of oil.

Demand for gold has surged in recent months as investors seek out safehavens for their money in the wake of the credit crunch and market turmoil.

It has also become cheaper for foreign investors as a result of the falling dollar, which has crashed against currencies around the world.

Ross Norman, of TheBullionDesk.com, forecast gold to hit $1,250-an-ounce before the end of the year. Oil also hit a record $110.7 a barrel today.

In early January 2008, gold prices cleared the 1980 record highs of $875 in benchmark futures and $850 in spot, and they are up around 20% this year.

After adjusting for inflation, the 1980 high was $2,079 an ounce at 2006 prices, while the real average price in 1980 has been calculated at $1,503, according to precious metals consultancy GFMS Ltd.

Gold is often used as a hedge against fluctuations in the US dollar, the world's main trading currency. If the dollar appreciates, the dollar gold price falls, while a fall in the dollar relative to the other main currencies produces a rise in the gold price.

A key area of demand is from emerging market central banks including Russia, South Africa and Argentina. China is also looking to diversify the huge foreign currency reserves away from the weakening dollar, with gold a consideration.

Even a small increase in China's percentage of gold reserves would cause a huge increase in demand. Asia - particularly India - and the Middle East are seeing large increases in domestic jewellery demand as disposable income increases.

But while demand is robust, supply is another issue – the supply of mined gold has been stagnant. A lack of new mines opening offset against the decline in gold production has meant a drop in supply.

Metals Stocks : Gold falls on stronger dollar, jobs data; copper also down .

By Moming Zhou, MarketWatch - Jul 2, 2009

NEW YORK (MarketWatch) -- Gold futures fell Thursday, moving below $930 an ounce as the U.S. dollar strengthened against most of its rivals after a disappointing U.S. jobs report, reducing gold's appeal as an investment alternative.

The dollar rose after the Labor Department reported Thursday nonfarm payrolls shrank by 467,000 in June, higher than the 325,000 decline expected by economists surveyed by MarketWatch. Other metals also moved lower.

August gold was last down $12.50, or 1.3%, at $928.80 an ounce on the Comex division of the New York Mercantile Exchange. The loss came on the heels of gold's 1.5% gain Wednesday.

"The U.S. dollar was seen benefiting from" the jobs data, said Jon Nadler, senior analyst at Kitco Metals Inc. "Thus, gold unwound the bulk of yesterday's gains."

With Thursday's loss, gold futures are heading for a weekly loss of more than 1%. Trading is closed Friday in observance of the Independence Day holiday.

In currencies trading, the dollar index /quotes/comstock/11j!i1:dx\y (DXY 80.18, +0.55, +0.68%) climbed above 80. See Currencies.

The Labor Department report also showed the unemployment rate ticked higher to 9.5% in June, the highest since August 1983. See Economic Report.

The jobs data weighed on copper prices. September copper futures, the most active contract, fell 5.65 cents, or 2.4%, to $2.2745 a pound. The front-month July contract lost 5.85 cents, or 2.5%, to $2.2565. Copper is heading for a weekly loss of about 1.6%.

In other metals Thursday, September silver lost 38.5 cents, or 2.8%, to $13.375 an ounce, October platinum fell $17.60, or 1.5%, to $1187.50 an ounce, and September palladium dropped $6.85, or 2.7%, to $248 an ounce.

In exchange-traded funds, holdings in the SPDR Gold Trust /quotes/comstock/13*!gld/quotes/nls/gld (GLD 91.40, -0.99, -1.07%) , the biggest gold ETF, stood at 1,120.55 metric tons Wednesday, unchanged from a day earlier, according to data from the fund.

Holdings in the iShare Silver Trust /quotes/comstock/13*!slv/quotes/nls/slv (SLV 13.18, -0.37, -2.72%) , the largest silver ETF, stood at 8,724.86 metric tons Wednesday, unchanged for the 11th session in a row.

In other economic news, orders for U.S.-made factory goods rose by the biggest amount in close to a year in May, climbing 1.2% on a big jump in orders for transportation equipment, the Commerce Department reported Thursday. See Economic Report.

Moming Zhou is a MarketWatch reporter based in New York.

Why Gold Will Rise to at Least $6,000 per Ounce

By Dr. Murray Sabrin | May 26 2009

In November 2003, a month before the 90th anniversary of the creation of the Federal Reserve, I spoke to a group of money managers and bond traders in south Florida about the Federal Reserve’s nine decade legacy. At that time the price of gold was approximately $380 per ounce. I informed the attendees that gold was the most undervalued asset on the planet. Nearly six years later, gold has nearly tripled in price and may have been the best performing asset class in the world since then, and one of the best investments in this decade.

Hopefully, the money managers who heard my remarks about the evolution of our monetary system took my advice for their clients’ sake and added gold to their personal portfolios as well. But then again, gold was so out of favor as an asset class by Wall Street a few years ago, it would not be surprising that the attendees ignored my advice and did not add the yellow metal to their portfolios.

With gold currently trading at $950 per ounce, where will the price of gold be six years from now? Conceivably, much higher than any current forecast. How high? Later in this essay, I will explain how returning to a “hard money” dollar and a sound banking system will require a gold price of at least $6,000 per ounce and possibly much higher

Before we hypothesize a future price of gold, it is imperative we understand the current financial crisis and the need to abolish fractional reserve banking, paper money and central banking. In other words, for the American economy—and the global economy-- to enjoy sustainable prosperity we need to inject a heavy dose of free enterprise in our money and banking systems.

This is easier said than done. The political and financial elites of America want to maintain the status quo, namely, the creation of money out-of-thin air, artificially low interest rates, and massive bailouts engineered by the FED and the U.S. Treasury.

Nevertheless, the financial meltdown of the 21st century has been well documented in two outstanding books of the past year, William Fleckenstein’s Greenspan Bubbles and Thomas Woods’ Meltdown. If you have not read them both, they should be on the top on your summer reading list. Both authors place the blame for the back-to-back bubbles, the dotcom bust and the housing collapse, squarely on the Federal Reserve’s easy money polices under Fed chairman Alan Greenspan.

In a nutshell, easy money drives down interest rates, which in turn set into motion feverish activity and speculation in sector or sectors of the economy that benefit from the flow of new money from the FED. The excess credit propels prices higher for common stocks, real estate, commodities, etc. When the FED “tightens” credit to rein in the overheated economy, the inevitable correction sets in. Bankruptcies soar, unemployment rises, stock prices drop precipitously, and state and local governments face huge revenue shortfalls as income and sales tax revenues drop. In other words, the unsustainable boom appears to create a perpetual “party” in the economy, only to be exposed as a period of “false” prosperity.

The booms and busts of the past two decades are textbook examples of the financial and economic crises caused by central banking. Of all the schools of thought, only the Austrian School of Economics explains how waves of boom and bust are inevitable if central bankers try to substitute credit created out-of-thin air for genuine savings. Working in the same tradition, economist Jesus Huerta de Soto in his monumental survey of world economic history (Money, Bank Credit and Economic Cycles), explains how economic fluctuations are the result of bank credit expansion prior to the establishment of central banking and how business cycles have unfolded since the creation of the first central bank in England (1692).

To prevent further boom-bust cycles, the following changes in the U.S. monetary/banking system should be implemented ASAP. These would require banks to restructure along the following guidelines.

• All demand deposits would be backed by 100% reserves. In other words, fractional reserve banking would be prohibited as a violation of property rights. This would eliminate the bank run, because banks would have all the money in reserves to meet depositors’ requests for cash. This reform would be potentially deflationary since the banking system would have to contract the amount of money and credit in the current inflationary system to restore 100% reserve banking.
  
  
• Banks would offer time deposits from one day to 30 years or more. This would provide a pool of real savings for banks so they could perform their role as financial intermediaries without government protection and intervention.
  
  
• FDIC insurance would be eliminated. Banks and depositors would operate in a free market. Savers would determine how much risk they want to incur and lend their funds to banks based on their time horizons.
  
  
• Permanent bank capital—preferred and common stockholders—would be the foundation of a free enterprise banking system. Risk of default would be allocated among shareholders and savers.
  
  
• The Federal Reserve would be abolished and would no longer manipulate short-term interest rates and be the lender of last resort. The FED’s track record of the past century should convince any objective observer and analyst that it has been a failure. The dollar’s purchasing power has fallen by more than 95% since the FED was created and the business cycle is still with us.
  
  
• The dollar will once again be defined as a weight of gold. What should the ratio be between the supply of dollars and the 260,000,000 ounces of gold held by the Federal Reserve?

There are several ways to revalue the dollar in terms of gold and make the U.S. dollar a hard money once again. This would create a 100% gold dollar. Americans as well as foreigners are used to conducting their exchanges dollars so the goal is to regain the confidence of dollar holders by ending the devaluation of the dollar.

1. All currency and demand deposits and other forms of money would be convertible into gold. That would mean all forms of money that people are familiar with would “backed” by gold. Inasmuch as there about $1.6 trillion of this form of money outstanding that would be backed by about 260,000,000 million ounces of gold held by the Federal Reserve, the price of gold or more accurately the value of the dollar would be 1/6,153 of an ounce of gold. In other words, the price of gold would be $6,153 per ounce.
   
   
2. According the Rothbard/Salerno definition of the “True Money Supply,” the current amount of dollars in the economy that functions as the general medium of exchange is about $5.5 trillion. Based on this approach, the FED’s 260,000,000 ounces of gold would have a dollar/ratio of 1/21,153, or the price of gold would be $21,153 per ounce. Before you mortgage the house and sell the kids to make more than twenty times your money, another economist challenges the Rothbard/Salerno definition of the true money supply.
   
   
3. Economist Frank Shostak in his essay on the money supply, argues that savings deposits should be removed from the definition of money because they are a credit deposit rather than a demand deposit. Based on the Shostak approach, investment manager Mike Shedlock calculates M’, (M Prime), as approximately $2.2 trillion. The gold/dollar ratio would be 1/8.461 or a gold price of $8,461 per ounce under this definition of the money supply.

Clearly, no matter what definition of money is used to restore a gold backed dollar, the price of gold will have to be adjusted upward by a factor of at least six or more from today to reflect the enormous deprecation of the dollar since the FED was created nearly a hundred years ago.

The revaluation of the dollar will not happen because Ben Bernanke, chairman of the Federal Reserve and Timothy Geithner, U.S. Treasury Secretary embrace hard money principles and realize 100% reserves are necessary for the banking system to function as a reliable financial intermediary. The restoration of a gold backed dollar will occur when dollar holders lose confidence in the purchasing power of the greenback. The sooner the next great money and banking reforms are implemented, the less chance there will be for a global monetary debacle, given the trillions of dollars the FED and other central banks have created in the past six months. In the meantime, load up on the yellow metal. It is your best insurance policy against Obama, Congress, Bernanke, and Geithner.

Zimbabwe gold output plunges by nearly 50%

Fri May 29, 2009 | AFP

HARARE – Zimbabwe's gold production fell by 49 percent last year due to an adverse operating environment and lack of working capital, the Chamber of Mines announced on Friday.

"During the year 3,576 kilogrammes was produced compared to 7,017 kilogrammes reported in 2007, a decline of 49 percent," according to the Chamber of Mines annual report.

"The performance of the Zimbabwean mining industry in 2008 is best described as dismal and gloomy," said David Murangari, Chamber of Mines president, at organisation's annual general meeting.

Prime Minister Tsvangirai who also attended the meeting, however, said the mining sector presented the country with the most immediate opportunity to attract significant investment.

The "government has a window of opportunity to prepare a conducive policy environment by mid 2010... that could see Zimbabwe's mineral sector attracting between six billion (US) dollars and 16 billion (US) dollars in exploration and mine development investment during 2011-2018 period," he said.

The report said the major cause of the decline in production was the restricted working capital for production.

"Most mines operated under extremely difficult macro-economic conditions for the first nine months of the year. Most importantly, there is dire need for recapitalisation of the industry... the current world recession was something that we in Zimbabwe had not anticipated," said Murangari.

Gold sector earnings during the first six months of the year also declined to 62.1 million US dollars compared to 93.5 million dollars earned the previous year.

Although gold sector earnings have declined, platinum production increased by 8.5 percent in 2008 compared to 2007.

Annual platinum production increased from 5,085.74 kilogrammes in 2007 to 5,495.10 kilogrammes in 2008.

The Only Two Reasons to Own Gold

By The Mogambo Guru

05/25/09 Tampa Bay, Florida I always get a real kick out of hearing that “the consumer is 70 percent of the economy,” mostly because it gives me a chance to heap ridicule and scorn on whoever said it, and I say that the consumer is 100 percent of the economy!

One CAN say that, with or without the heaping of ridicule and/or scorn, but at least with an arrogant and smug authority that comes from 100 percent certitude, that “The Mogambo is 100 percent certain that the consumer is 100 Freaking Percent (100FP) of the economy!”

I make this Bold Mogambo Assertion (BMA) for two reasons. First, I hope that by debunking this silly “the consumer is 70 percent of the economy” crapola, I will win a Nobel Prize or some other award that has a cash-award component of the prize winnings, perhaps one that has a LARGE cash-award component.

My argument is that the ultimate consumer pays the price for everything by buying and consuming, for instance, a frozen pizza or delicious candy bars, and maybe something nice to drink, knowing that a slice of the purchase price is used to pay back creditors and producers for the use of capital, labor and land invested in producing these – and more! – delicious ‘ready-to-eat’ snacks and treats of high caloric content, of which the sugary, chocolaty and salty varieties I find particularly good. Yum!

And speaking of spending, I was surprised to see that the current-account balance of the USA has collapsed to $673.3 billion in the last 12 months, down from its high of over $800 billion, and the trade balance has fallen to $730.4 billion in the last year, which is down about 20 percent from its high of a couple of years ago, too.

And while the 12.8 percent fall in industrial production in the last year seems like bad news for us Americans, it is worse by whole orders of magnitude other places. Japan has industrial production down 34.2 percent over the last 12 months, and in the euro area it is down by 20.2 percent.

Just when I thought I would go berserk at such horrific economic news, I see John Stepek at Money Morning newsletter had a subhead that caught my eye, which was “Three sound reasons to own gold.”

I admit that I did not read the article, but as far as I know, there are only two good reasons to own gold; to preserve wealth when prices are stable, and to make a lot of fiat wealth when your government acts so stupid as to create, or allow to be created, excess money and credit that eventually destroys the currency, especially when undertaken so as to enlarge the size of government, like now, which makes the problem of inflation worse because those more government weenies have a bigger incentive to save their own phony-baloney jobs, but can only make things worse.

Like, I said, I did not read the article because I am lazy, but the advice to buy gold is the lesson of the last 4,500 years of governments acting irresponsibly when given control of a fiat currency with which they could create as much money as they wished; inflation in prices inevitably caused chaos, misery, starvation and revolution.

I tried to explain to the employees that inflation in prices was essentially just a mismatch between gains in income, if any, versus gains in prices that must be paid with that income, which I hoped would prove to be a valuable insight when I then told them how I was slashing their salaries by a lousy 5 percent, and if they did not like it, then they could all go to hell because we are on our way to bankruptcy anyway.

I was going to suggest that the lesson, which they would immediately grasp if they were not so stupid, is to immediately buy as much gold, silver and oil as they could, but they were not in the mood to hear good advice gleaned from history, and instead wanted to whine about their puny pay cuts.

If they were not so stupid, they would see that buying gold now would easily make up for their meager income reductions, and if they had been buying gold, silver and oil all along, they would be miles ahead!

Whee! This investing stuff is easy!

Until next time,

The Mogambo Guru
for The Daily Reckoning

Of gold reserves, US dollars, yuan and a new global currency

GOLD prices leapt with the recent announcement by the Chinese government of an increase in its gold reserves to 1,054 tons.

The disclosure - an IMF requirement - caused a general reappraisal of gold's relevance as a reserve asset by central bankers.

The Chinese government is not in the habit of releasing figures detailing its gold reserves - the last time such figures were disclosed was in 2003 when holdings stood at 600 tons.

The rise in gold holdings is substantial. Though this figure represents a 76 percent increase and places China fifth in the list of gold holding nations, it is worth noting that this rise has been spread out over a period of six years.

Moreover, gold holdings represent only 1.5 percent of China's foreign exchange reserves in comparison with some European banks that hold 50 to 60 percent of their foreign exchange reserves as gold.

As a tidal wave of greenbacks looks set to come crashing into the US economy bringing searing inflation in its wake, Beijing has been steadily acquiring gold as a hedge against eventual dollar decline.

And the Chinese government is pushing hard to put the dollar out of its misery as the currency of international trade.

China has already negotiated currency swap deals for bilateral trade with Argentina, Malaysia, South Korea, Belarus and Indonesia as a way of unblocking trade finance and presenting the renminbi (yuan) as an acceptable alternative to the US dollar.

Putting further pressure on the US dollar was the decision at the end G20 summit to grant the IMF US$1 trillion in extra funding with a view to resurrecting the idea of its Special Drawing Rights (SDRs).

SDRs were launched in 1969 when the US dollar was attached to gold as a new international reserve asset class to assist liquidity. They are a supplement - or an alternative - to the US dollar for trade purposes. SDRs are, in effect, a de facto global currency outside the control of any sovereign nation.

Under the IMF constitution, the value of SDRs is fixed according to a basket of four currencies (The US dollar, the euro, the yen and the British pound).

The weighting is determined by the level of exports and the reserves of currency concerned held by IMF members.

The impact on the remnimbi of this new form of international liquidity will be determined largely by whether it is included in the basket of currencies and with what weighting.

The Russian government has proposed regional baskets of currencies so that the central SDR basket could be comprised of a number of regional baskets, each in turn including various local currencies.

However, the role of reserve currency puts upward pressure on the exchange rate by increasing demand for that currency.

For net importers, this is good news, but for net exporters it is a threat to growth as exports get priced out of foreign markets, as China and Japan have already experienced.

There are a number of problems, both political and economic, associated with SDRs but they may represent a temporary palliative to world trade anxieties.

The move away from the US dollar and towards a basket of currencies and perhaps gold as a new international reserve currency - not itself an entirely unproblematic scenario - is the likely outcome.

(The author is counsel of AllBright Law Offices in Shanghai. The views are his own. His e-mail: sbmaguire@allbrightlaw.com.)

Black Gold - rises above US$59 to 6-month high

LONDON, May 12 – Reuters

Oil prices rose more than a dollar today to a six-month high above US$59 (RM212.40) a barrel, boosted partly by a weaker dollar and gains on equity markets.

US crude was up US$1.14 a barrel at US$59.64 a barrel by 1200 GMT (8pm, Malaysian time). It earlier touched US$59.85 a barrel, its highest since November last year. It has risen nearly 20 per cent this month.

London Brent crude was up US$1.16 at US$58.64 a barrel.

“Oil is riding the coat-tails of the equity market bounce for now, largely ignoring the build-up in oil inventories,” said Harry Tchilinguirian, senior oil analyst at BNP Paribas.

“Weakness in oil fundamentals is reflected in elevated inventories, yet the market’s price assessment appears to have brushed this aside.”

The global economic downturn has hit demand for oil, which has created a massive supply overhang.

There is an estimated 100 million barrels of crude oil stored at sea on tankers. US crude inventories are at their highest in 19 years.

But a rally in global equity markets in anticipation that the economic climate might improve has boosted oil despite its bearish supply/demand picture.

The dollar has also played a part.

“The US dollar is slightly weaker which could be spurring a bit of strength,” said Tony Machacek at Bache Commodities Ltd.

Oil, which is priced in dollars, tends to rise when the dollar falls.

The global downturn has pushed oil down from a record high above US$147 a barrel hit in July to a low in December of US$32.40.

Prices have rebounded this year.

US crude is up more than 80 per cent from a January low of US$32.70 a barrel.

Crude oil demand in China, the world's second-largest energy user, provided support for prices with Chinese customs confirming on Tuesday that crude imports in April rose to reach the second-highest daily rate on record.

But the country’s export data proved disappointing.

US oil inventory data due tomorrow is forecast to show a further rise in crude oil stocks.

US crude stockpiles probably rose for the 10th straight time last week, up by 1.2 million barrels. Distillate stocks are likely to have risen by 1.1 million and gasoline stocks by 500,000 barrels, a preliminary Reuters poll showed.