As the value of US dollar continues to spiral downwards, the price of crude oil and gold continue to rally. The dollar index hit 76.40 last week while WTI crude oil touched $105 a barrel, Brent crude oil broke through $115 a barrel and the price of gold made a new all-time record high as it touched $1440 an ounce.
The EUR/USD surged sharply higher last week and breached the 1.4000 level after the ECB President, Jean-Claude Trichet, signalled that a rate increase may be possible as soon as April. While the ECB left the main refinancing rate unchanged at 1%, Trichet signalled that an ‘increase of interest rates in the next meeting is possible’ and ‘strong vigilance is warranted’. Also, the reference that interest rates are ‘appropriate’ was taken out from the press statement.
Despite some positive economic data from the US, the US dollar was mostly softer against most of the European majors last. Both ISM manufacturing and non-manufacturing indices rose to 7-year highs in February. Non–farm payrolls unexpectedly increased by 192,000 in February and the US unemployment rate slipped to 8.9% in February from 9% in the prior month. Yet the dollar failed to respond to this positive news.
While mainstream media tell us that the US economy is showing dramatic improvement -corporate profits are up and the stock market is soaring, unemployment seems to be dropping-according to newly released numbers, more than 44 million Americans are now on food stamps. That is a new all-time record and that number is 13.1% higher than it was just one year ago. While the US Labour Department report that the unemployment is down, according to Gallup, unemployment in the US actually rose 10.3% at the end of February.
The US trade deficit continues to grow and in 2010 the trade deficit was almost 33% larger than it was in 2009. And, it is expected to grow even further in 2011. In addition, the US national debt continues to increase and it is projected that the federal budget deficit for this fiscal year will be another new all-time high record of some 1.65 trillion dollars.
The loose monetary policy of the US Federal Reserve as well as heightened geo-political tensions in the Middle East and North Africa remained the main driving force in crude oil’s rally. At the time of writing, April crude was trading at $106 a barrel for WTI and $116 for Brent crude.
Although the prices of gold and oil don’t exactly mirror one another, there is no question that oil prices do affect gold prices. If oil prices rise or fall sharply, investors can expect a corresponding reaction in gold prices, often with a lag. In this particular instance, the price of gold has not really responded to the higher prices of oil.
The focus this week will turn to Friday’s scheduled “day of rage” in Saudi Arabia on Friday. Protests took place on Friday in an oil producing area by Shiite demonstrators, but it is believed that it is unlikely that oil production will be affected, as production facilities are heavily guarded.
Bernanke downplayed the significance of the recent surge in oil prices, and made it clear that he would keep QE2 until expiry in June. Bernanke also said that the recent surge in commodity prices “not yet pose a significant risk” and “oil prices alone would probably not be enough to make us respond.”
What was amazing last week was the latest news on Chinese domestic gold demand. In a report by Bloomberg, according to Peter Hickson, the global commodities strategist for gold-focused Swiss Bank, UBS, Chinese gold demand was a staggering 200 tons in the first two months of this year! Only a couple of months ago reports showed that Chinese gold imports in the first 10 months of 2010 totalled 209 tons, itself a 500% increase on the previous year. It now seems that demand by individuals is reaching almost frightening levels. Not only is jewellery demand seen as being up by 70% year on year, but investment demand (coins and bars as opposed to jewellery, which has been the main outlet for gold purchases in the past) is also coming on strongly from virtually nothing a couple of years ago to a WGC estimate of close on 180 tonnes in 2010. If the pace of growth continues investment demand alone could reach as much as 300 tonnes in 2011!
If the Chinese Central Bank is absorbing domestic production, as many believe then total Chinese demand this year could soar past India’s. The potential is almost beyond belief. According to the report, there is evidence that China is positioning itself to make the yuan at least a part of any new reserve currency package which might replace the still-declining U.S. dollar in global trade. There is the strong suggestion that it needs to build its gold reserves as backing for this at least to levels approaching those of the biggest European Central Banks, which suggests a doubling of Chinese gold reserves at the very least in a relatively short space of time. At the moment the value of gold held by the Chinese Central Bank accounts for less than 2% of total foreign reserves which are now estimated at around $2.6 trillion. It is possible that the country will announce another revaluation of its reserves in the near future, even though it tends to be cagey about such announcements as it knows any significant increase will affect the global gold price and while it may be soaking up excess gold it still wants to buy it at what it may see as bargain prices!
While some Western economists balk at the idea of the Chinese yuan becoming a major global currency, the Bank of India is already offering a trade settlement facility between the rupee and the Chinese RMB.
“We are the first Indian bank to offer real-time settlement facility in RMB to Indian exporters and importers. It will be save a lot of time because settlement in US dollars usually takes three working days,” Arun Kumar Arora, BoI’s chief executive in Hong Kong, said during a recent visit to meeting regulators in Beijing.
Indian buyers are at present making payments in US dollars, and they often have to convert rupee into the US currency for the purpose. The US dollars will no more be the intermediary currency as the BOI is offering direct settlement between the rupee and the Chinese money.
Chinese exporters want their money in the local currency, which is regarded as more stable compared to the US dollar. They are also in a position to have their way because Indian buyers do not have an alternative source of low-cost goods, sources said.
In my newsletter The Delaire Report dated March 01, 2010 I stated the following: “While some Wall Street’s analysts claim China is in a bubble, I don’t buy this at all. In fact, I am sure China’s GDP growth will continue at 9% if not more. As China continues to transform itself into a major economic power, demand for gold, and silver for that matter, will continue to increase. It is estimated that by the year 2025 China will have more than 200 cities with a population of more than one million. And in 20 years, China’s cities will have added 350 million people. That is more than the entire population of the United States. As this new consumer class emerges, the demand for gold jewellery will only increase. But, in addition, the Chinese have a good understanding of the value of gold as an investment, and this new demand is going to have a positive effect on gold.”
If you don’t yet own some physical gold, it is time to include some gold bullion in your investment portfolio.
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.
For more information go to: www.lakeshoretrading.co.za
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.