Wednesday 22 December 2010

Global trade is brisk?

The Baltic Dry is a composite index of shipping rates for various bulk goods. When global trade is brisk, the cost of transporting goods (as reflected in this index) is high, and conversely when trade is quiet the index is low. Looking at the chart of $BDI today, below, we can clearly see that global trade is still very much on the ropes since 2008.

You can also look at a chart of many commodities today and see there are high spot prices pretty much across the board. This is something of a divergence, and to me it suggests the high commodity prices are only high due to speculators bidding up paper prices for commodities, with a view towards the upcoming high inflation that they see as a result of rampant currency issuance by the world's Central Banks (most notably the US Fed, but by no means exclusively).

The actual physical demand for the commodities, according to the $BDI, just does not seem to be there. This ought to be implying commodity price deflation, rather than inflation.

Tuesday 21 December 2010

Santa Wen Is Coming To Town

Oh! You better watch out,
You better not cry,
You better not pout,
I'm telling you why:

Santa Wen is coming to town!

He's making a list,
He's checking it twice,
He's gonna find out
who's naughty or nice.

Santa Wen is coming to town!

He sees you when you're sleeping,
He knows when you're awake.
He knows when you've been bad or good,
So be good for goodness sake!

So...You better watch out,
You better not cry
You better not pout,
I'm telling you why.

Santa Wen is coming to town.

Merry Christmas, and an Interesting New Year!

Monday 20 December 2010

Is the SDR a diversionary tactic to forestall financial Armageddon?

I was recently musing that I could perhaps see the SDR becoming the world’s trading numéraire, but that it felt likely that this would only come about after a global rebalancing of currencies. Looking into the SDR in more detail took me a way off track into the wilderness, where I had no idea I might find myself. I found myself all of a sudden staring at the Islamic Dinar!

The reason I ended up at this seemingly unlikely place was I stumbled into a site on the web which stated that 1 Islamic Dinar = 1 IMF SDR. This I found an intriguing detail, but since this site was just a blog I figured I should dig a little deeper and see if I could find an “official looking” source to back that claim up. At first, all of the sites I could find on Google were what I considered to be ”unofficial” sources. But then, eventually, I found what I considered to be an “official” source: the Islamic Trade Finance Corporation (a Member of Islamic Development Bank Group).[1]

Now, an Islamic Dinar is very clearly and specifically a coin of fixed gold content: 4.25g of 22 carat gold, to be exact. [2]

The composition and value of an IMF SDR is determined by consensus at five year intervals, and we can see that the Islamic Development Bank group must be agreeing with other Central Banks that 1 SDR shall be deemed equal in value to 1 Islamic Dinar, at the time of negotiation at least.

So, right now the thought I am brought to is... are SDRs being set up as the way the Islamic states who endorse the Islamic Dinar[3] can receive payments from other, non-Islamic states in SDR denomination, and redeem them for the equivalent weight of gold, perhaps through the Bank for International Settlements? 3.89725g of gold per SDR, according to the definition of an Islamic Dinar being 4.25g of 22 carat (91.7%) gold.

Is the SDR the way that The West will continue to get paid in paper, while The East get the gold that they really have wanted all along? Is it the way that the paper global currency system can be sustained a while longer, beyond the now very obviously flawed US$? With the world’s wealth continuing to drain away to The East but at a diminished pace than if nations the world over were to be paid in gold from tomorrow, or worse, the global economy were brought to a paralysed standstill in want of gold to settle all global trade imbalances?

This thought has now changed my opinion, to put the SDR ahead of global rebalancing, rather than after. In fact, I am now seeing it as perhaps the proposed means to defer that rebalancing a while longer, enabling business as usual for The West, and more time to accumulate gold for The East. But how long can this additional sticking plaster solution last? Another 40 year cycle? Is the Mahdi[4] due, but not until about 2050 or so..? That’s a lot longer than I was thinking to wait and tough it out...


Monday 13 December 2010

To silver, or not to silver? That is the question...

I have been pondering a lot in recent months on the silver/gold question. I myself liked silver for some time, but more recently I have come to a personal decision that I should dishoard most of my silver holding, replacing it by increasing the gold holding; a process that is by now substantially completed.

I thought it might be interesting and educational, for myself and also I hope for others, to solicit some discussion on this topic, since many people are very passionate about silver, and if they have compelling and indisputable reasons then I am always open to changing my mind (again :-) ).

So, at the risk of possibly inciting a riot now, here is a quick and very short starting list of "some reasons for believing gold is the ultimate wealth preserver, while silver is not"...

  1. Silver demand today comes predominantly from manufacturers. It is positively correlated to economic demand; it does well when there is strong consumer demand for the products it is used in. This is one of the reasons cited by silverbugs to justify future massive price rises they anticipate - its scarcity value. However, if (when?) the economic demand for those products dries up, perhaps brought on by the very same high inflation that the silverbugs foresee coming down the pike, industrial demand for silver will dwindle along with that. Silver is used in desirable consumer products, but I don't think it's in anything quite as necessary as, say, food or energy? That is the largest part of the current buyers -- who steps into their shoes to buoy demand for silver, when the manufacturers leave the market as a result of sluggish global demand? There is no significant industrial demand for gold; it is uncorrelated to global economic performance. If/when the global consumer economy contracts significantly, there will be no disappearance of industrial demand for gold -- there is only really investment demand, even in the form of jewelry the purchase is fundamentally an investment by the buyer. If (when) the global economy takes a bath, the desire for gold is likely to only increase, in my opinion.

  2. Silver is the poor man's gold. The massive investors of this world, the Central Banks (CBs) and Sovereign Wealth Funds (SWFs) of current account surplus countries, do not add silver to their reserves in any meaningful degree. They keep gold in their reserves, but not much, if any, silver. If industrial demand for silver should fall, these giant potential buyers are not going to suddenly step into the shoes left empty by the manufacturers of this world, I strongly suspect. There are reasons that they do not keep silver...

  3. Silver is a "necessary" commodity. Many products that people need and/or desire contain silver, and in many of those applications there is no substitute for using silver. This means that it would be deemed totally unacceptable to hoard silver, because it treads on the toes of consumers the world over. Imagine CBs or SWFs decided to hoard, say, wheat or corn? These are similarly necessary commodities, and hoarding of them would distort the supply/demand balance, speculatively increasing the price and impinging on consumers. There would be uproar. These foodstuff examples are intentionally selected to emphasise the principle -- clearly I am not attempting to say that silver is as necessary to human existance as wheat or corn! But the principle I am illustrating is the same, albeit to a significantly lesser degree. The reason gold has been selected over the millenia as "money", is specifically that it impinges on nobody if you choose to hoard it. The price can rise as high as is necessary to clear the supply/demand balance, and nobody would be hurt. In fact, unlike any other "commodity", the higher the price of gold goes the better people like it! This is simply not the case for silver.

  4. Silver is actually not that rare to find, relative to gold. There are very few silver mines in operation today, with most silver mined as a by-product of mining other industrial metals. This is not due to there being little silver to mine in the world, but because the economics of mining silver mean that it is in most instances not economically viable to dig it up. Getting it as a by-product of some other activity is a bonus to the miners pulling out copper etc, it is an afterthought as far as they are concerned and they are not especially bothered how much they get for it. If the price were to significantly rise, it would mean that many more silver mines become economically viable, and the supply will ramp up to meet demand (bringing the price back into balance). There is plenty of silver to mine, just not at today's prices. This is quite unlike the case for gold, there are plenty of mines digging up only gold in the world today. When the price rises, I daresay more gold mines might become viable and there could be an increase in supply as a result, but I think you will find that the ability to respond in this way to higher prices is much less than is the case for silver.

  5. Similarly, because silver is a part of many consumer products, as the prices rises it becomes increasingly viable to recover the silver from products at the end of their life, increasing the scrap supply. Since gold is not used to any significant degree in consumer products, that avenue for increased scrap recovery will not be available. Gold is held pretty much only for monetary purposes, and it will only be returned to the market at a price that people believe it is fully, or more likely over, valued. Given the on-going, by-design debasement of paper currencies, any thinking person should understand that there is no time that paper is better than gold, unless you want to spend your wealth immediately. So, if gold should some day become significantly overvalued then perhaps yes, it might be dishoarded until the price comes back to whatever is deemed to be fair value. But I don't think this significant perception of overvaluation is very likely to happen to be honest.

Do you have counter-comments to any of the above? Or perhaps further reasons that you would like to add to the list? This is just a short and hastily-compiled list that I have knocked up really for the sake of stimulating the debate! :->

Wednesday 8 December 2010

If the Dollar fails, how can the Euro not fail along with it?

Inquisitive minds are wondering how anyone could possibly think the € might survive if (when) the $ fails — surely it must be taken down with the ship, along with everyone else, right?

I thought it might be interesting to play a quick game of 'pass the bomb'... here are the rules of this game, as I see them:

  1. National Central Bank (NCB) holds mostly US$ in its international forex reserves, a little other currencies perhaps, and some amount of gold.
  2. NCB wishes to find a way to dispose of excessive holding of US$, without simplistic sell-US$/buy-own-currency trades on forex markets. Excessive strength in its own currency would kill its exports, helping to sink the local economy.
  3. European Central Bank (ECB) holds gold and some foreign currencies including US$. It issues its own currency, the euro, which is backed by these aforementioned reserves. The gold component percentage of the reserves expands as the market price of gold rises (and falls if the market price drops), as witnessed quarterly in its accounts on the website.
  4. ECB can issue new euros to buy gold from NCB. Euro supply is increased (euro value decreases), but there is an offsetting increase in ECB gold reserves to balance that dilution (euro value increases again). Confidence is fully maintained in the ECB's currency, in spite of the increased number of euros, through the also increased gold reserves.
  5. NCB has more euros in its reserves, lower percentage of currency reserves are in US$ now. But NCB's gold reserves are also lower... hmm... bummer!
  6. NCB is free to sell US$ and buy gold. Even lower percentage of currency reserves are in US$ now, and restored holding of gold in NCB reserves again. Yay!
  7. Eurozone total ECB+NCB's gold reserves net increased, exposure to US$ reserves net decreased. Euro retains valuation against gold.
  8. Supply/demand balance of US$/gold now out of whack, US$ valuation against gold declines as a result of this supply/demand dynamic. Ergo, $:€ exchange rate declines too. Euro is by this stage net stronger, against Dollar. NCB is net up on the deal.
  9. If NCB was able to obtain gold from the market OK, keep going back to (2), otherwise...
  10. Boom! Strong Dollar Policy game over. Freegold reset.

Please try our new blockbuster game, Strong Euro Policy.

Mirror, mirror, on the wall... who are the 'richest' of them all?

This (link below) is, I think, an interesting set of data from the CIA. It ranks 156 countries of the world by their reserves of foreign currencies and gold.

I note the UK is 25th on this list, right below Turkey, Denmark, Poland and Iran, who also are not in the top 20.

The top 5 may hold some interesting surprises for many, or more accurately I would think interesting absenses.

If you wanted to break out how much of a country's reserves are gold from the data linked above, rather than foreign currencies, my friend Patrick rather handily provided a link this morning to a germane article on Zero Hedge.
(Thanks, Patrick ;-) )

Monday 6 December 2010

The Joy Of Stats

This video, I think, displays the positives made possible through paper credit. Much of the time we focus only on the negatives. It's not ALL bad.

(h/t Mish)

Thursday 2 December 2010

What is the targetted 2% inflation rate going to do to your purchasing power?

So why is 2% per year the "targetted rate" of the Central Banks? The short and sweet answer is that it'll quite quickly be eaten away, as the numbers above demonstrate. Fast enough you are encouraged not to hoard your cash in the bank, but will circulate it back out into the economy by "buying stuff" from others working in the economy alongside you. So you all will keep each other busy and in paying jobs. Not so fast that everyone might think "I must dump this money fast because it will be worthless by next year", but at the same time the average person should be able to subconsciously realise that keeping the cash forever is not the best use of it.

I have used euros for the denomination above, because the ECB only has a mandate to achieve 2% (or slightly below) inflation over a medium term horizon. In the Eurozone, they've done a pretty good job of maintaining 1.9% average inflation since the inception of the euro. In the UK in the course of the last few years we have seen CPI inflation anything from below 0% (deflation) to over 3%. This is why we have had an unstable business environment in the UK while economic activity has pretty much remained stable in the core Eurozone economies. This is why more and more countries are looking at the euro and thinking they'd like to be a part of it, most recently Russia.

The euro is the antidote to the natural fiscal problems that are a consequence of Democracy in combination with a locally-controlled paper currency. The politicians in the Eurozone can and will point at the euro as the reason they can no longer use public sector debt to satisfy voter's desires for something-for-nothing-today that will be paid for by someone-else-tomorrow. In the long term, that is a good thing in my opinion. Voters don't understand what they have been asking the politicians to do, it is not in their own best long term interests to continue borrowing from their own future. Look at the world today — we have reached "yesterday's" "tomorrow". In Europe this is being faced up to and dealt with. Elsewhere the attempts are to once again defer today's and yesterday's costs until yet another tomorrow, when it will cost even more still than it would today. Some day, yesterday simply must be paid for by someone today.

How big of a debt mountain has the UK got to climb today?

I thought it might be interesting, since I haven't found it anywhere else so far, to take a quick look at the gap between the UK M0 and M4 monetary aggregates of today. The bank, handily, publishes a series of recent data on these things, going back a couple of years -- not as good as a real long-term picture of what they've been up to, but definitely better than no data at all!

I had to get the "notes and coin" and "bank reserves" numbers and put them back together to get old-school M0, since they split these two numbers out in 2006 for better or for worse (or just to blur the monetary trail, perhaps?). Then I put the M4 numbers behind that reassembled M0 aggregate, on a graph. You can see it for yourself just a little way below here.

The thing I was interested to see visually, the reason I have decided to do this today and put it "out there" for anyone else who might also be interested, is how much of the UK's broad money supply (M4 - cash plus bank credit) is actually just hot air credit (banker promises based on money they don't have) and how much is cash (the stuff we could all take out of the ATMs and spend). The red M4 area towering over the black M0 "cash" monetary base, is the spoils of the Magic Never-Never Tree of Money that we have all collectively borrowed from the future over the last few decades since the Seventies. We've spent this money, and as you can see on the graph it is still trending up, but have yet to pay it off (which would show the gap between red and black contracting). It's money that doesn't really exist yet, but will need to some day, unless much of these current debts are to be defaulted on.

In order to bridge this gap, either the "printing presses" at the BoE are going to have to "run white hot" for some time, leading to the likelihood of an inflationary fire running through the economy, or much of this credit is going to be destroyed through defaults, leading to a deflationary holocaust. Interesting times we live in.

Click the image to see a larger version

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