Currency and precious metals movements will be influenced by an ECB interest rate hike
December 4, 2006
There aren't going to be a lot of economic data points to move the market around this week until we get the US jobs data on Friday, but in the meantime, plenty of traders are going to be repositioning assets with the US Dollar index looking increasingly less sturdy as each week passes. This should push gold up to $680 before we encounter additional resistance at those levels.
In the meantime, currency and precious metals movements will be influenced by an ECB interest rate hike this week and more news coming out of China as Hank Paulson takes his trip to China to begin discussions on how to facilitate an orderly dollar depreciation and revaluation of the yuan. Along with currency news, I've appended below two articles on overall gold consumption by Chinese citizens, which is expected to continue rising over the next year (remember, gold ownership was just legalized in China in 2004 and the distribution system is just beginning to get set up), and another article from a Chinese economist calling for increasing the country's strategic gold reserves.
China's gold consumption may rise 17% - report
www.miningweekly.co.za
Chinese gold consumption is expected to rise 17% this year, news service Bloomberg quoted China Gold Association chair Cheng Fumin as saying.
China is the world's third biggest consumer of the precious metal and is expected to use 350 metric tons this year, up from 300 tons in 2005, owing to an increase in demand for bullion as an investment, Fumin said.
U.S. believed happy with decline of dollar if it's 'orderly'
By Jitendra Joshi
Agence France-Presse
Sunday, December 3, 2006
The US administration appears unfazed as the dollar plummets on currency markets, giving a helpful trade boost during an economic slowdown, analysts believe.
But a danger lies in the dollar falling so far that it unleashes inflation, sparking retaliation by the Federal Reserve.
The Treasury has expressed no concern as the euro has hit 20-month highs above 1.33 dollars. The greenback is at 14-year lows against the British pound, although the US unit has held its own to the Japanese yen.
Treasury Secretary Henry Paulson's mantra is that "a strong dollar is clearly in the nation's interest" and that its value must be set on open markets. That public stand will not change, pundits say. "If the dollar's decline becomes disorderly, if it was flying out of the window, the administration would get very concerned," said Wachovia global economist Jay Bryson.
"Not only the dollar would be going down, long-term interest rates would be spiking up and that would trigger a recession here. But as long as it remains orderly, the administration will take a position of benign neglect," he said.
University of Maryland business professor Peter Morici said "the administration would like a weaker dollar against the (Chinese) yuan, and that would likely pull it down against other Asian currencies too". Morici, a trenchant critic of Chinese trade policies, said a more realistic dollar-yuan rate would redress some of the greenback's decline to the euro.
But he added: "The administration is speaking out of two sides of its mouth. It can't have a devaluation against the yuan, (South Korean) won, yen and other Asian currencies and a strong dollar. It can't have its cake and eat it too."
China should increase gold holdings
Dec.4 2006, People's Daily Online
China's foreign exchange reserves have become a thorny issue for the government. Experts around the world have suggested ways in which China might address the surplus of foreign exchange reserves. However, many of these simply involve consuming the excess which could easily lead to inflation. Any attempt to address the excess of foreign exchange reserves should incorporate a fundamental economic restructuring and an adjustment of the RMB exchange rate formation mechanism, which will be a long and slow process. In the process the government can pursue some complementary policies to reduce its huge foreign currency reserves. The author believes that raising gold holdings should be one of government's strategic choices. ....
China's Central Bank says that China has 600 tons of gold holdings, equal to about 19.29 million ounces. This figure has not changed since December 2002. China's gold reserves account for only 1.3 percent of its total foreign exchange reserves, far lower than the 3 percent that is standard in other countries. With the rapid growth of foreign exchange reserves, which now exceed US$1 trillion, the ratio of gold in China's foreign exchange reserves is even lower. In the long term, China should raise its gold holdings. The price of gold has rebounded since April 2001 and a record high was set in May 2006 ¨C US$725 per ounce. Currently an ounce of gold sells for approximately US$625. The price of gold has fluctuated but overall it remains high. If China adopts a long-term strategic approach, accurately predict the market price of gold and purchase gold in a timely and reasonable manner, it can preserve and increase the value of gold, improve the reserve structure, and create a solid foundation for the internationalization of the RMB in the future.
By People's Daily Online; The author, Gao Jie, is an Associate Professor at the School of Finance in the University of International Business and Economics
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