Steady as She Goes
Silver and gold did not hit new lows yesterday even though the U.S. dollar made a fresh high before falling back. No doubt crude oil had something to do with this as hurricane worries in the Gulf of Mexico put a weather premium back into black gold. But, crude oil didn’t seem to have a lot to do with the gorgeous bottoming pattern that au/ag exhibited after Asian markets closed yesterday. Even if yesterday doesn’t mark the actual final bottom (yesterday’s rally started from $13.00 silver and $807 gold) — something I suspect might be true based on the dollar and oil not having reached exhaustion — this is the type of pattern to look for when we suspect one might be forming.
Speaking of Asian markets, I am hearing more and more chatter that indeed the Far East was a major source of the recent U.S. dollar buying binge. I’ve already speculated about this but I see more confirmation each day. If I get a chance, I’ll try to put together some references. In the meantime, if any of you have already gathered evidence to support this contention, please post links in the comments section below.
Please note that any post with more than 2 links requires manual moderation on my part (which can take a day or two). This is an automatic spam filter (I guess spam comments often have more than 2 links). Oh yeah, please don’t post any spam as I will block your IP if the spamming starts to get bad (only a couple so far). In any case, you can always post several comments back to back if you have more than 2 links.
Here is why I think it is important to know from where the U.S. dollar buying is coming. One, it can give us a hint as to how long it will last. Two, it can give us a signal when it is over. Three, it can put things into perspective (are au/ag headed for a bear market?)
If the U.S. dollar buying is coming primarily out of Asia, it could be the result of Chinese currency intervention. Assuming Chinese exports are starting to fall as the global economy slows down, Chinese domestic production is also starting to slow, and Chinese inflation is soaring, the Chinese have good reason to buy the U.S. dollar in an attempt to devalue the Renminbi. At the same time, they also have good reason to dump commodities (especially those they might have accumulated in excess during the past few years). Many have wondered how U.S. Treasuries have been able to hold up in this fiscal environment: Chinese buying provides the answer. Finally, I will even give a nod to the conspiratorial angle by pointing out that China has often been suspected of playing a much larger role in the silver markets than it has admitted. There is simply no way to tell how much silver China has in stockpiles. It could be millions of ounces. It could be none. Or it could be a billion ounces or more. Thus, it cannot be ruled out if China is dumping commodities that it might be dumping a relatively larger portion of the one commodity in which it has a relatively larger stake. While I don’t view this as likely, it could certainly explain why silver has sold off so dramatically.
Should the above Chinese theory prove to be the case, it is actually quite positive for gold and silver since there is always a finite limit to currency intervention. For one, it gets more and more expensive. Moreover, it usually proves itself to be futile rather quickly. We might, however, see it appear and disappear a few times over the next several months as each intervention phase is given a chance to work before a new one is embarked upon. What would constitute an intervention “working” and thus being complete? Simply that the Chinese are hitting growth and inflation targets. Conversely, the alleged intervention could be abandoned as useless if the targets are being badly missed. I suppose a gold and silver optimist might look at that as a coin with two heads.
Tom,
China dumping commodities with “good reason”? Yeah, maybe to take a profit, but that would be a roundabout way to support the dollar. Buying the dollar is more like it, but there is a severe limit to that kind of dollar support. They must first create yuan to buy dollar, and that means yuan inflation.
Selling silver as a “commodity” is a stretch for the Chinese. They need something to back their inflating paper money. If they sold silver, it would have been to undermine the gold price, thus helping to break the dollar bear psychology, and they wouldn’t have to sell very much to depress the thin silver market. They really wouldn’t have to sell any physical-just dump some paper on the futures market, knowing they could cover with physical if they had to.
If you believe that the central banks act in a coordinated manner to keep their fiat currencies in line with each, does that make you a believer in conspiracy theories? I think not. It’s pretty obvious that the massive “injections” of credit by the central banks that have taken place over the last year (around $1 trillion) haven’t solved the credit/liquidity crisis. But they must keep the inflation game going, especially before the American November elections. A crash must be prevented to allow the financial industry friendly Republicans a chance to retain some power.
I just can’t see this as the end of the game for precious metals. Market manipulators would have us believe so, and they can engender a long enough price decline to make it look like the end, but inflation rages on, and the precious metals are one of the few assets that protects idle capital in an inflationary environment.
Just a hunch on my part, but don’t be surprised if you see $20-$22 silver in February of 2009.
I have always wondered why China doesn’t produce silver bullion coins. Those few Panda coins are only for collectors while I think they could easily produce large amounts of bullion coins and probably sell them for less than Eagles and Maples.
Gold has reached that level of 834 again where the slide on August 14th began. Silver, platinum and palladium are still 6 (PT) to 10 (PD) percent lower than two weeks ago. That’s the real mystery for me at the moment. Why are all white metals so weak compared to gold?
Silver was weak on Wednesday due to September contract selling before first notice day. Hands up who added on to their position? Today it’s to the moon, December is over 14 as buy stops get hit. Fasten your seat belts.
This might shed some light.
US, Europe, Japan planned March dlr rescue -NikkeiReuters, Wednesday August 27 2008 (Updates with reaction from U.S. Treasury department, analyst comment) )
NEW YORK, Aug 27 (Reuters) - The United States, Europe and Japan had planned to intervene and rescue a weak U.S. dollar in March, business newspaper Nikkei reported on Wednesday.
Officials from the U.S. Treasury Department, Japan’s Finance Ministry, and the European Central Bank reportedly drew up a currency contingency plan to be undertaken over the March 15-16 weekend, Nikkei reported, citing sources familiar with the situation.
The monetary officials also agreed on a framework for coordinating dollar-buying intervention, the report said.
The officials did not specify an exchange rate for initiating the dollar rescue plan, but in the event of a free-fall, they all agreed to aggressively buy the greenback and sell yen and euros, according to Nikkei.
Under the intervention framework, Japan was to supply the yen necessary for the underlying currency swaps. The plan also called for using a previously established swap mechanism between the United States and Europe.
No coordinated intervention took place, however, as the dollar began recovering shortly after U.S. authorities brokered the buyout of Bear Stearns by JPMorgan Chase & Co.
As measured by the U.S. dollar index, the currency hit bottom on March 17, the first market day following the Bear Stearns deal announcement. It retested those lows in April and again in July, but is now nearly 9 percent stronger against the basket of major currencies included in the index.
A U.S. Treasury spokeswoman declined to comment on the report. The Federal Reserve also declined to comment.
A spokeswoman for the ECB said she had no immediate comment, but said the central bank would talk about the situation in the morning.
Overall, analysts said that even though a rescue plan never took place, the fact that global monetary officials showed concern for a weak dollar was significant.
“If anything, the fact that officials recognized the concern about the dollar’s decline seems somewhat supportive for the dollar as maybe benign neglect was not so neglectful,” said Marc Chandler, head of global FX strategy at Brown Brothers Harriman in New York.
“At the end of the day, however, President Bush is still set to be the first American president since at least the break-up of Bretton Woods that has not authorized intervention in the FX market, and given the recent price action the distinction looks relatively safe.”
The United States, Europe and Japan have not intervened together in the currency market since September 2000. Japan’s last intervention was in March 2004. (Reporting by Gertrude Chavez-Dreyfuss; Editing by Leslie Adler)
China shorts silver/gold while they prop up the dollar, Arabs too. But they know they’ll need to hedge their $s with gold/silver and they can’t buy Euros anymore as the ECB says no on that $1.60 us is the cap for the Euro. So after they push the market lower and flush out the weak longs/specs they’ll be accumulating their only true $ reserve hedge at lower prices and can avoid pushing it too high like over $1k/$20 oz. and igniting big $ selling. Note that the sell offs in silver/gold were during early Asian and early London Trading. The size of the bank short positions fits CB, SWF type activity. Maybe CITI is the proxy for the Arabs? Perhaps the big spike in short positions by the US banks was a takeover of the selling attack on PM by these entities? Does this make any sense?
For those who haven’t seen Pritchard.
Regarding the intermediate strength of the USD????.
Here is a stance taken by Ambrose Pritchard:
Beijing swells dollar reserves through stealth
Last Updated: 3:24pm BST 26/08/2008
Rule changes for commercial banks are acting as cover for exchange rate intervention, writes Ambrose Evans-Pritchard
http://tinyurl.com/6dlcqw
?China has resorted to stealth intervention in the currency markets to amass US dollars, using indirect means to hold down the yuan and ease the pain for its struggling exporters as the global slowdown engulfs the economy?..?
http://www.resourceinvestor.com/pebble.asp?relid=45538