Outlook: The data today is the usual Thursday jobless claims. Some analysts try to make gold out of this straw, but to little influence. Last time (Dec 17), Trading Economics reports “The 4-week moving average… fell by 6,250 to 221,750. Meanwhile, continuing claims inched lower by 6,000 to 1,672,000 thousand in the week ending December 3rd.” This is evidence of a labor shortage and not what the Fed wants to see.
In the FX world, we see some wild reversals on the 240-minute charts that then get reversed themselves, or not. The euro had a dandy one yesterday, as did the GBP, AUD and CAD. There seems to be a small tendency to short squeeze the dollar, resulting in a better dollar outcome that might well be transitory. With contracting average true ranges and the Bollinger bands in a tight squeeze, two things—you can’t make much gain either way and the risk of loss is high. Time to retire for a few days.
Big Tidbit: The FT has a lengthy gold story that sings the same old refrain—people in general and central banks in particular and specifically the central banks in China and Russia, are buying gold to reduce dependence on the dollar. When it’s central banks, that reduces the proportion of reserves held in dollars.
Let’s take note that since it’s the IMF that keeps track of reserves and both China and Russia are members, we should expect to see big changes in their reported reserves—but no, it’s not visible. Both countries lie through their teeth to everyone, including the IMF, so official data is of little value. But looking at data from other interested parties is highly risky, and the FT does not dwell on that.
In addition, and this is a biggie, you can’t buy soybeans or a tank with gold. For that you need dollars. Granted, gold is fairly liquid but to say gold allows a government to reduce dependence on the dollar (and the dollar will lose world weight) is silly. The original purpose of official reserves is to be able to buy food and arms fast in the event of an emergency. For that you need instant liquidity and the dollar provides that.
A secondary purpose arose with globalization of financial markets so to soybeans and tanks, we can add using dollar reserves as collateral to borrow from the Fed for one crisis or another. The Swiss just did this a few weeks ago and it supposedly was not to help Credit Suisse.
The point—take everything that follows from the FT with a heaping of salt. Here goes: “Central banks are scooping up gold at the fastest pace since 1967, with analysts pinning China and Russia as big buyers in an indication that some nations are keen to diversify their reserves away from the dollar.”
The World Gold Council reports demand “has outstripped any annual amount in the past 55 years. Last month’s estimates are also far larger than central banks’ official reported figures, sparking speculation in the industry over the identity of the buyers and their motivations.” One other interested party claims it’s because “the geopolitical backdrop is one of mistrust, doubt and uncertainty” after the US and its allies froze Russia’s dollar reserves.”
Okay, so don’t invade another country and break every international treaty you have signed, and the West won’t grab your assets.
To go from the silly to the ridiculous: “The last time this level of buying was seen marked a historical turning point for the global monetary system. In 1967, European central banks bought massive volumes of gold from the US, leading to a run on the price and the collapse of the London Gold Pool of reserves. That hastened the eventual demise of the Bretton Woods System that tied the value of the US dollar to the precious metal.”
Yeah, and France demanded the US ship physical gold held in reserve in the US back to France, bitching about the US’ “extraordinary privilege” of issuing the benchmark bonds as the reserve currency holder and getting cheaper rates as a result. But no other country had the size to offer the same benchmark. The US dollar remained the primary reserve currency and Pres Nixon just took the dollar off the gold standard, which bothered no one except purists and the French.
You can deduce the volumes from the chart. “Last month the WCG estimated the world’s official financial institutions have bought 673 tonnes. And in the third quarter alone central banks bought almost 400 tonnes of gold, the largest three-month binge since quarterly records began in 2000. The conservative estimates from the WGC outstrips the reported purchases to the IMF and by individual central banks, which stands at 333 tonnes in the nine months to September.
“Officially, the buying in the third quarter was led by Turkey at 31 tonnes, taking gold to about 29 per cent of its total reserves. Uzbekistan followed with 26 tonnes, while in July Qatar made its largest monthly acquisition on record since 1967.”
Note that two of these counties are major oil suppliers. Both China and Russia deny they are accumulating gold reserves. “Some in the industry speculate Middle Eastern governments are using fossil fuel export revenues to buy gold, most likely through sovereign wealth funds.”
For the FT to buy into this story is kind of sad and discloses an anti-American bias. Here’s how it closes: “The coming months will test whether record central bank buying was an opportunistic spurt as gold prices fell, or a more structural shift.”
Structural? What’s structural is the ban and cap on Russian oil. That motivates buyers from the Middle East, India and China to act as middlemen and use gold to keep the revenues from the US and European banking system in any currency lest they get caught and their money appropriated. That’s it. If there is also some reserve diversification going on, it’s small potatoes compared to the oil feint.
“Even with prices having since recovered to about $1,800 per troy ounce, few are willing to bet the trend towards diversification of central bank reserves will change course any time soon. Bernard Dahdah, senior commodities analyst at Natixis, the French investment bank, said deglobalisation and geopolitical tensions meant the drive by central banks outside of the west to diversify away from the US dollar was ‘a trend that won’t change for a decade at least.’”
Golly, where have we heard that before? The FT’s chart is nice but it’s NOT an official IMF chart. And the official IMF data will always exclude private sector gold holdings because it gets its data from governments. Those private sector gold holdings arise from middlemen, black market and otherwise, who are buying Russian oil and selling in on. They fear actual money, whether dollars or euros, getting appropriated if they get caught, hence the gold. They pay fees for the vaults where their gold is stored and insurance costs, but the fear of expropriation must be high. Local banks and governments are, of course, complicit. But the US and EU are not going after them. Let ‘em have gold, which offers no yield and is expensive to hold.
This is an excerpt from “The Rockefeller Morning Briefing,” which is far larger (about 10 pages). The Briefing has been published every day for over 25 years and represents experienced analysis and insight. The report offers deep background and is not intended to guide FX trading. Rockefeller produces other reports (in spot and futures) for trading purposes.
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