gold and the us$

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    From today's South China Morning Post.

    Wednesday, January 7, 2004

    Finally, gold shines after false dawns

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    It might be a new year, but it seems there is no change in last year's dominating trend. The US dollar plummeting against a range of currencies and gold effortlessly taking out new multi-year highs. It seems a long time since we heard the familiar refrain - a flight to quality and the US dollar - in the same breath. Gold bugs, or bulls, have long been a breed apart, as unfashionable as fanatical in their belief that gold will be the next big thing.

    A series of false dawns during two long decades of gold-price falls in the 1980s and 1990s meant their faith was sorely tested. The second coming, however, was sweet as gold has now risen 65 per cent in the past three years.

    Gold bulls are happy, but tell us this is only the beginning of a long-term rise as US-dollar assets are increasingly shunned. And with the yellow metal at a 15-year high of US$428, financial advisers are joining hedge funds in recommending this new asset class.

    Some sceptical commentators inevitably urge caution. A supply-demand imbalance could still reorder gold's advance. Another potential wild card is the possibility of large sales by central banks. For now, an Opec-like agreement sets certain limits on gold sales, but it will have to be renewed before September.

    What could upset the perceived supply-and-demand status quo is renewed interest in gold as an investment.

    Gold is still different from most other commodities (silver excepted) in that its demand can include a currency dimension due to its ability to act as a store of value. The past two years have seen a strong inverse relationship develop as each fall in the dollar has been matched by gold gains.

    Gold and the dollar have been linked before, but that was three decades ago under the Bretton Woods Exchange Rate system. Back then, dollars and gold were convertible at US$35 an ounce. This meant the availability of gold provided a cap on the creation of new money. But since leaving this standard, the US dollar alone has been king as an international reserve currency. And he who is king makes the rules.

    Recently, the concern has been that the huge supply of new money created by the US government, with its twin deficits and low interest rates, will end in tears for the dollar. Create or print too much of anything and its value ultimately declines. Gold, in contrast, cannot be issued by decree, but must be mined - which limits its supply.

    Historically, gold's allure has been dulled as it pays no interest, but this has been overlooked by investors as the opportunity cost is now low because the US is keeping interest rates at 45-year lows.

    But as a range of currencies such as the euro, Australian dollar and the South African rand also make strong gains against the greenback, dollar weakness, rather than gold strength, looks to be the dominant story.

    Gold's gains have been marginal in many of these currencies.

    It is worth keeping an eye on whether gold will start making significant gains in these currencies as well.

    But in Hong Kong, with our US dollar currency peg, gold's gains feel as real as the dollar's decline in our pocket. These sentiments will also be shared on the mainland, where gold investments have recently been rekindled after a 50-year hiatus.

    For now, the dollar seems to have few friends and as the US government gives tacit approval to its fall, gold increasingly looks to make sense.

    Email Craig Stephen at [email protected]

    Wednesday, January 7, 2004

    Comments on Fed rates put pressure on dollar US currency falls to record low after official says there is little need to tighten monetary policy because of tame inflation

    BLOOMBERG and REUTERS in London and Tokyo
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    The US dollar fell to a record low against the euro in London yesterday after Atlanta Federal Reserve president Jack Guynn's suggestion on Monday that America's central bank was not about to raise interest rates from a four-decade low. Mr Guynn said the United States economy might grow as much as 4 per cent this year and there was little sign of a "significant" increase in inflation that would lead to higher interest rates.

    "The weakness of the US dollar is exactly what the Fed and the US administration like and want to continue," said Peter Clay, a currency strategist at ABN Amro Holding in Sydney. "Any time a Fed official comes out and says `time is on our side' regarding rates, it is going to weigh on the dollar."

    The dollar was at $1.2763 against the euro in London afternoon trade yesterday, its lowest level since the single currency's launch five years ago, from $1.2659 at New York's close on Monday.

    Mr Clay said the dollar could fall to $1.30 per euro and 102 yen in the next few weeks.

    Against the yen, the greenback was at 106.20 yen from 106.23 previously, after the Bank of Japan sold yen to buy dollars for a second day, said traders at banks that deal with the bank.

    "We will act as needed to counter speculative movement," Zembei Mizoguchi, Japan's vice-finance minister, said in Tokyo. "There is a need for us to respond to this with determination."

    The Japanese central bank sold yen after it rose to about 106.09, the strongest since September 2000, the traders said.

    "We'd be the other side of 100 if it weren't for the Bank of Japan's intervention in the past few months," said Adam Cole, a currency strategist at Credit Agricole Indosuez in London.

    Demand for the dollar has dwindled as interest rates in the US stay lower than in Europe, discouraging some international investors from buying debt sold to finance a record US budget deficit.

    The Fed's benchmark rate, at a 45-year low of 1 per cent, is half that of the European Central Bank.

    The yield on the 1.875 per cent US Treasury note maturing in December next year, more sensitive than longer-maturity debt to changes in the central bank's rate, was 1.92 per cent, compared with 2.58 per cent for the German note of similar maturity.

    US Treasury Secretary John Snow said last month the currency's drop had been "orderly". While he and US President George Bush regularly endorse a "strong dollar", they say they want markets, not governments, to set exchange rates.

    "The best thing for the Bush administration to do: just let the dollar fall," said Michael Rosenberg, the global head of foreign exchange research at Deutsche Bank. "A weaker dollar is going to make US industry more competitive. This is good news for the US economy."

    Deutsche Bank expects the dollar to drop to $1.30 to the euro and 99 yen in 12 months.

    The dollar has fallen 18 per cent against the euro in the past 12 months. Mr Rosenberg described the decline as "relatively orderly".

    Any gain in the yen to beyond 106 per dollar may stall on speculation Japan will sell its currency to prevent a stronger yen from undermining the nation's economic recovery.

    "It's just a matter of time before the yen gains to above 106," said Tohru Sasaki, a currency strategist with JP Morgan Chase in Tokyo. "That will probably prompt Japanese authorities to step up efforts to protect 105."

    Japan spent a record 20.1 trillion yen last year through December 26 to stem the yen's rise because a stronger local currency erodes the value of overseas sales of exporters when earnings are converted into yen.

    Japan Business Federation chairman Hiroshi Okuda said it was vital for Japanese firms exporting to the US that the dollar stayed above 105 yen. However, Mr Okuda, also chairman of Toyota Motor, said the overall impact of a weak dollar could be mitigated for Japanese companies exporting to both the US and Europe by the appreciation of the euro.

    Two other top business leaders, Kakutaro Kitashiro, chairman of the Japan Association of Corporate Executives, and Nobuo Yamaguchi, chairman of the Japan Chamber of Commerce and Industry, said the dollar-yen rate was near the limit that Japanese exporters could endure.

    Earlier, Toyota president Fujio Cho said he felt the yen was "a bit too strong" in light of Japan's economic fundamentals and he was concerned that a further appreciation could hamper Japan's economic recovery.

    "The current dollar level of around 106 yen could already be harsh for Japanese industries. I think a dollar-yen level of around 110 yen can be seen as comfortable for industries in general," Mr Cho said.

    Yoichi Morishita, the chairman of Matsushita Electric Industrial, said the yen was coming closer to "a danger zone".

    "If the dollar falls to 105 yen, that would be worrisome," Mr Morishita said. "Still, its direct impact on industry may be eased as Japanese firms have expanded their overseas production."

    Sony Corp chief executive Nobuyuki Idei said he expected the yen to remain firm for some time.

    "Since I became president in 1995, there have been times when the dollar-yen rate was at 78, so we can't be surprised if the rate goes to the 90-95 yen level," Mr Idei said.

    Sony, which generates nearly 70 per cent of its revenue overseas, lowered its assumed dollar exchange rate in October to 110 yen for the six months to March 31 from its previous estimate of 115 yen.

    Mr Idei saw some positive aspects, however. "It's not such a bad thing for the Japanese economy for the yen to be strong. Broadly speaking, a strong yen means foreign money will flow into Japan and that might help stock prices."
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