US trade and account deficits are continuing to grow
September 18, 2006
US trade and account deficits are continuing to grow signaling an impending dollar depreciation, which combined with the Fed decision on interest rates tomorrow, should prove to be explosive for precious metals prices. The US government is also dragging back out protectionist rhetoric regarding the Chinese failure to revalue the Yuan. There is not an easy answer to the revaluation problem and the solution (via a major revaluation or protectionist policies) will not be dollar positive, conversely being quite positive for precious metals prices moving forward.
We've got some big gold centric news in the next two days...first, we'll get an update on Central Bank gold sales info on Tuesday. Currently, there are close to 145 tonnes (4.6 million oz) of gold that can be sold in the next 7 days, depending on what information is in the sales figures on Tuesday. The figures are updated on a week lag, so the figures on Tuesday update last week's action. We'll probably see a big pickup in sales last week, but a significant amount of tonnes left to be sold this week. We won't know for certain until Tuesday the 26th, but if the sales figures show that the Central Bank sales are 100 or more tonnes short of the sales allowance, this will be a major bull signal to the market.
Combine the missed Central Bank sales quota with the Fed continuing to pause with their announcement on Wednesday afternoon and the Asian seasonal demand perking up, and the next ten days could see a jump in prices in the order of $50-75 per ounce.
U.S. Current-Account Gap Widened to $218.4 Billion
By Joe Richter
Sept. 18 (Bloomberg) -- The U.S. current-account deficit widened more than forecast last quarter to the second-largest on record as the trade gap expanded and more interest was paid to overseas investors, a government report showed.
The $218.4 billion shortfall in the current account, the broadest measure of trade because it includes transfer payments and investment income, followed a revised $213.2 billion first- quarter gap that was larger than initially reported, the Commerce Department said today in Washington.
The growing deficit poses a risk to the economy should investors sour on U.S. assets and diversify to other countries because it may weaken the dollar and push interest rates higher. Growing economies abroad and declining costs of imported energy may help stabilize the deficit and keep that from happening.
"Barring a growth miracle outside the U.S., the current account deficit seems destined to remain quite large," said Joshua Shapiro, chief U.S. economist at Maria Fiorini Ramirez Inc. in New York. "In spite of gloom-and-doom scenarios that have been voiced for years, the U.S. has had no problems attracting the foreign capital needed."
The U.S. needs to attract about $2.4 billion a day to fund the gap, and any shortfall would undermine the value of the dollar. The gap amounted to 6.6 percent of the economy, the same as in the first quarter. It was a record 7 percent of gross domestic product in the final three months of 2005.
Chinese Yuan
The trade gap with China stayed near a record, spurring calls among some U.S. lawmakers for higher tariffs on the Asian nation for currency policies that they say unfairly assist Chinese exports. Senators Charles Schumer of New York and Lindsey Graham of South Carolina yesterday requested a vote before the end of this month on their measure to impose a 27.5 percent duty on Chinese imports.
The two senators said in a statement that they will demand a vote unless China makes a "significant move very soon" to raise the value of its currency, which they argue is as much as 40 percent undervalued, reducing the cost of Chinese goods in world markets and giving Chinese exports an unfair advantage.
Economists expect the U.S. trade deficit to stabilize in coming quarters, helped by a weaker dollar and global growth that will buttress demand for U.S. exports. The dollar has declined about 2.7 percent this year against a basket of currencies of major trading partners.
'Slowdown Continuing'
"We are going to see a little bit of slowdown continuing" in the economy, said Terry McGraw, chief executive officer of McGraw-Hill Cos., the second-largest U.S. educational publisher, in an Sept. 14 interview.
A U.S. economy that's still growing faster than many of its trading partners suggests any improvement will be gradual. The Japanese economy expanded 2.5 percent in the second quarter from the same three months in 2005, compared with 3.6 percent growth in the U.S. during the same 12 months. In Germany, the economy grew 2.4 percent last quarter from a year earlier.
The International Monetary Fund this week warned that the possibility of a "disorderly" drop in the value of the dollar is the biggest risk to world financial markets. The IMF also said the U.S. current account deficit needs to narrow.
"A low-probability but potentially high-cost risk to the global financial system is that a dollar decline could become self-reinforcing and hence disorderly," the IMF said in its Global Financial Stability Report.
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