Even the media now treats G-20 meetings as either non-events or highlights the emptiness of their concluding resolutions.   We shouldn’t continue to look to them for real change or commitment.   But this weekend’s meeting produced more than expected in the statement that was made that nations had agreed to not continue ‘competitive devaluations’.   The only nation admitting to such practices is Japan.   As markets opened on Monday the Yen rose against the dollar to a new 15-year high at 80.2 before falling back to 81.29 ahead of New York’s opening bell.   All eyes are on the Yen to see what really is important to Japan, international interests or national ones.  

China was not party to such statements as it has a Yuan level that it considers right at the moment [after putting national interests ahead of international ones].   The meeting didn’t let the U.S. get away with it either and pointed out that quantitative easing is an indirect means of devaluing an exchange rate.   And so it is.   With U.S. citizens in difficult financial straits buying the cheaper adequate imported goods, much of the new money to be printed will flow out of the dollar to other parts of the world, not least to earn more interest than charged sitting in emerging nation’s government bonds.   So here we are at the same place as last week, but with a few more good intentions.   What has come out since that meeting is that the U.S. and China are appearing confrontational.  

The gold market expressed its disdain of the intentions issued by the G-20 by taking the gold price back to $1,345 at the morning Fix.   We’ve seen $1,380 and the drop off last week was sudden.   The dollar fell this morning back to $1.40 before pulling back to the $1.387 area when New York opened.

 

WHAT NEXT?

To remove currency crises from our future the global currency markets need global cooperation sufficient to overrule national interests.   That’s not happening and won’t happen in our opinion, so we expect more falls in the U.S. dollar once Q.E.2 kicks in.   We look around the world for reasons to change the fundamental picture for gold and can’t find any.   We do see some saying it is time to sell gold.   We know of one fund that has shorted gold.   So our search for reasons to sell is sincere.   With that in mind, these are some of the questions we are asking: -

  • Has uncertainty and instability changed leaving us confident and certain of a stable future?
  • Have the nations agreed a sound, effective, currency system that caters for local national problems on the Balance of Payments front?
  • Have they agreed systems that effectively enforce this system, so that it is in national interests to subject themselves to that system?
  • Has the global economy in all its major parts returned to real growth where economic imbalances are removed?
  • Are we certain that the Sovereign Debt crises are over?
  • Do we expect the shift in world wealth and power to Asia to be smooth and trouble free?
  • Have the votes at the I.M.F. been changed to fully accommodate India and China’s proportion of economic power or will the U.S. remain in charge irrespective of such changes??
  • Have central banks turned away from gold confident and fully reliant on global currencies.

If your answers are ‘yes’ to these then it is time to sell your gold.  

One of the dangers in today’s world is that emotion can replace reason very easily.   Our own troubles can engender such hopes that we lose balance and decide based on our emotions, to our cost.   That’s why we prefer to use the process called extrapolation.   This is where your take the values, trends and activities of today and project them forward to paint the investment scene of tomorrow.   What are these?

 

WHAT’S HAPPENING NOW THAT DICTATES TOMORROW?

The G-20 meeting this weekend was useful in that it showed us that a real desire to agree with each other  just isn’t there.  

The U.S. is understandably clinging to its leverage over world affairs wanting to change other nations, but unable to change its own economic and currency situation.   There are efforts there, but these have proved inadequate to date.   The Fed has expressed its fear that more QE is needed to bring about not just a real recovery, but to prevent a slide into deflation that will make it nigh on impossible to get out of once it gains momentum.  

On the political front the U.S. is approaching an emasculation of power so that it won’t be able to take sufficiently strong action to pull itself out of its hole.   And if the mid-term elections do result in this it will be so for two more years.   It’s these next two years in which the developed world needs to take strong action to stay sound, as Asia rises in economic power and importance.   As it stands now the developed world can’t take such actions.   It’s not just about the dollar and the currency world becoming stable again, it’s about huge readjustments being made as wealth and power move east.   The currency system is facing major strains and changes of interests and exchange rates during this time.   Without cooperative action by the world’s governments only friction will ensue.   And that is what lies ahead if we extend today to tomorrow.

As to a sound global currency system ahead we find it difficult to see that in today’s events.   The Yuan and perhaps the Rupee have to gain greater positions in the world money system.   It is clear that China should be able to raise its leverage inside the I.M.F. to at least the same level of voting power as Europe.   The U.S. should relinquish its deciding vote and be capable of being overruled.   Is that likely?   Unless the I.M.F. sees such changes, there will be no effective body that can arbitrate the structural changes that have begun already in the world economy and world monetary system.   And that is what lies ahead if we extend today to tomorrow.

Have the nations of the world accepted that the changes that lie ahead of us all are so large that international interests must take first place in such a way that overall all national interests can be protected and no individual nation establish precedence?   Unfortunately not!   The world’s political systems are designed to cater for national interests irrespective of the impact on international ones.    It is the nature of democracy and the nature of holding onto power even where no democracy exists.   That won’t change.   So we see a picture of nations bumping into each other’s interests rather like musical chairs, where some nations just can’t find a chair.

As to growth, with China and other poorer nations able to supply goods at far cheaper levels than the developed world, either wages must drop to Asia’s levels or the developed world must put up blocks to their entrance into their world.   Unless they do, developed world currencies will sag even as Asia’s want to rise.   China is gaining so much from holding the Yuan down and building surpluses that it won’t change until it is ready to promote the Yuan to a global reserve currency that it controls and price its goods in the Yuan only.  That process is well along now and could be tomorrow’s reality in 2011.   Currency crises will proliferate then, with the dollar and the euro in the spotlight.   And that is what lies ahead if we extend today to tomorrow.

Have the austerity measures been sufficient to resolve Sovereign Debt crises?   Giving the Eurozone nations the benefit of the doubt we accept that they may succeed [despite the belief in some quarters that Greece will default in three years time and the U.K. looks like tipping back into recession].   It may be at the cost of more double-dip recessions in other countries or worse, but that’s not the point.   The point is that the U.S. is just about at the top of the list of nations that are over-borrowed.   What austerity measure have they undertaken or will undertake?   We have to wait and see if such measure will be successful where applied.   What of nations that are over-borrowed and are doing nothing about it.   We need strong actions alongside strong growth world-wide before we can gain confidence that such crises will go away.  We can’t see it.   And that is what lies ahead if we extend today to tomorrow.

Have central banks reaffirmed their confidence in the currency system we now have and continued to sell gold reserves, completely reliant of currencies?   What we have seen are central banks turning from selling 500 tonnes a year to buying 500 tonnes [at least] a year, as they realize that gold is badly needed when currencies fail.   And more of that is what lies ahead if we extend today to tomorrow.

Clearly then we see no reason to believe that gold has peaked.   It’s not about a technical picture dictating support and resistances it’s about a globally changing and broadening market that is altering the parameters of the technical picture.   With investors like central banks uninterested in price, only acquiring gold at any price, how can the technical picture dominate?

Julian Phillips is a long-term analyst of the gold and silver markets and is the principal contributor to Global Watch – Gold Forecaster – www.goldforecaster.com