Strength in Weakness

The two biggest members of the former Communist/Red/Central Planning club yesterday finalised a deal yesterday to send 300,000 barrels a day of Russian oil to the Chinese city of Daqing for the next twenty years. It’s a $26 billion loan-for-oil agreement that comes with an actual oil pipeline between eastern Siberia and north-east China.

Why wasn’t this story front page news? Because gold is making new highs and oil is not. Oil is a jilted commodity at the moment. Traders remember what it did to them in 2008 after the bubble popped. But if you’re a contrarian, you want to pay attention to the stories that are not making headlines. Hence, oil.

But first, gold. Old yeller is off its USD highs this morning. Late last night, wide awake from the jet lag, we puzzled over whether now is the right time to buy gold in Australia (coins and/or bullion and/or shares). The strong Aussie dollar mentioned yesterday has capped gold’s rise when denominated in Aussie dollars.

Should 2008 repeat itself in some way, the USD would rally against the Aussie and the Aussie gold price should approach its high of just over $1,500. But will that happen? It’s a known unknown.

For all the known unknowns and unknown unknowns regarding gold and Australia, you may want to come to the gold show in Sydney, November 9th and 10th. You’ll be hearing more about it soon. But our friend Dr. Marcus Matthew from the Gold Standard Institute has taken last year’s gold show and made it bigger, better, and shorter, with an emphasis on investing in gold shares. It’s also in Sydney, which is more convenient than Canberra.

If you haven’t sorted out whether gold shares or gold coins or gold bullion should be part of your investment strategy, you still have time to think about it and do something, if that’s what you decide. One reason you have time is that one of the strength’s of gold’s current move is that central banks are buying it instead of selling it.

This was something we mentioned in our remarks at the Gold Standard Institute show last year; the remonetisation of gold in the world’s financial system. In fact, in January of 2009 we wrote the following:

It’s not rash speculation to suggest that central banks will prefer to hold on to their gold this year – rather like the increasing (if small) number of private individuals – instead of selling it. As competitive currency devaluations sweep the globe in an all-out effort to fight asset deflation and recession, we think gold will become much more desirable as a reserve asset worth owning, not selling for cash.

“European Central Banks Halt Gold Sales,” reports yesterday’s Financial Times. The article referred to the European Central Gold Bank Agreement (the same agreement we discussed in 2009). That agreement was designed to control the amount of gold being sold onto the market by European Central Banks. The ceiling for annual sales between September of 2009 and September of 2010 was 400 tonnes of gold.

Last year’s agreement expired last week. But Europe’s central banks sold only 6.2 tonnes of their gold. Sales fell by 92% from last year. Banks know what real money is. And they’re not selling their gold anymore. They’re buying it.

Maybe central bankers are buying gold because their respective finance ministers are actively trashing local cash. “We’re in the midst of an international currency war, a general weakening of currency,” says Brazil’s Finance Minister Guido Mantega in today’s Financial Times. Exporting nations are trying to boost competitiveness by keeping their currencies cheap and the price of their exports low.

It’s a strange old world when you improve your economic strength by weakening your currency. Japan and other Asian exporters (dependant on credit-financed consumption in North America) have been doing it for years. But maybe not everyone got the memo from the stock market in 2008 than the global credit bubble has popped.

You have to wonder if the strong Aussie dollar will hurt the competitiveness of Aussie exporters. It will probably hurt some a lot more than others. By “others” we mean commodity exporters. For now, any rebound in global mining investment has not led to a huge new production increases in the key commodities produced by Australia (iron ore and coal). The strong dollar isn’t hurting a bit.

But Chris Richardson from Access Economics warns us not to take the high terms of trade and commodity boom for granted. “Australia’s fiscal finances, both short and long term, are hostage to the fate of commodity prices, and hence to China’s strength,'” he recently wrote. He added that Australia’s Federal budget depends on high commodity prices to end the deficit.

“The return to surplus trumpeted in the official forecasts is a pure punt that China and India will keep growing faster than the world’s miners will keep digging deeper,” Richardson says. “The budget used to be stodgy and boring and responding to a whole range of economic indicators. Now its health or otherwise is very narrowly based on coal or iron ore prices, and that’s a very fickle thing to rely on for fiscal health.”

Yes it is.

Dan Denning
for Markets and Money

Dan Denning
Dan Denning examines the geopolitical and economic events that can affect your investments domestically. He raises the questions you need to answer, in order to survive financially in these turbulent times.

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For Japan, its strong currency is not only due to its export oriented industry but also due to recent Chinese purchases of yen. It seems a double-win for the Chinese – diversify away from US dollars while weakening the competition.


Who said the world’s citizenry were dumb?

The executive that control and get paid by the nanny state that’s who?

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