dollar

The gearing of total world money and credit on today’s monetary base is forty times, but this is after a rapid expansion of the Fed’s balance sheet in recent years. Compared with the Fed’s monetary base before the Lehman crisis, world money is now nearly 180 times geared, which leaves very little room for continuing stability.
It may be too early to say this inverse pyramid is toppling over, because it is not yet fully confirmed by money flows between bond markets. However in the last few days Eurozone government bond yields have started rising. So far it can be argued that they have been over-valued and a correction is overdue.
But if this new trend is fuelled by international banks liquidating non-US bond positions, we will certainly have a problem.

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The current strength in the dollar has brought a new dose of uncertainty to precious metal prices. For the moment, it has been more a case of weakness in major currencies, particularly the euro yen and pound, rather than dollar strength. If signs develop of bigger shifts in favour of the dollar, markets could be signalling a greater degree of currency instability, leading the Fed to contemplate how to counteract the deflationary effect on domestic US prices.   This should generally be positive for gold after the current period of uncertainty.
Silver’s open interest is growing strongly as the bears increase their shorts. The preliminary figures for yesterday take open interest to a new record level:

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Why does it matter if the gold price is rigged?
It behoves those of us who argue the economics of sound money to try to make the answer as intelligible as possible without sounding like a committed capitalist and a conspiracy theorist to boot, so here goes…

gold bottom

Gold and silver had a bad week, with gold falling $25 to a low of $1262 by the Comex close Thursday, and silver by $0.50.  Friday morning UK-time prices opened a little better on overnight physical demand, no doubt stimulated by those lower prices. The background to this poor performance was dollar strength relative to weak currencies, with the yen, euro and pound all declining sharply.
It feels like the market is drained of all positive sentiment, which is reflected in the very low level of open interest in the futures market.   These conditions are more consistent with a market that is bottoming out than one that is about to fall sharply.   Meanwhile retail demand seems to be stabilising, with growing interest for coins in the west, and weekly physical deliveries in Shanghai have quietly doubled over the last two months.
Demand for physical gold has the stealthy effect of increasing the gearing of the shorts in the paper markets.

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The pattern of trading in precious metals changed for the better this past week.
August is a notoriously poor trading month, with traders in the northern hemisphere on holiday, or at least not thinking about markets.
September is wake-up time, and statistically the best month for gold.
Will this be the pattern this year?

China gold

There will be a defining geopolitical event next month when India, Pakistan, Iran and Mongolia become full members of the Shanghai Cooperation Organisation (SCO). This will increase the population of SCO members to an estimated 3.05 billion. We should care about this because it is the intention of the SCO to do away with the US dollar for trade settlement.

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Gold drifted lower this week, with the price undermined by lack of interest on low volume and a slightly more hawkish tone in the FOMC minutes released on Wednesday.
The chart below, of gold and open interest on Comex, shows how the price has declined while open interest has hardly budged from its historically low level.

The West’s power & influence is on the wane.
It is clearly not in the interests of the long-standing members of the EU to escalate a sanctions and financial conflict with Russia.  The European Central Bank will have almost certainly discussed contingency plans with the major regional central banks in the Eurozone, because the banking system might have to make available special credit and financing facilities, i.e. a rescue from a financial crisis if NATO goes much further down the sanctions route.
This is why politicians are walking on eggshells, paying lip-service to America and the scared Eastern fringe members of NATO while hoping this goes no further.
So long as this is the case it is clear that NATO members are powerless to stop Russia from wresting control of all or parts of Ukraine from the government in Kiev. Putin knows this; unfortunately it is not clear to us that the American government does

Besides what the Fed is doing by printing money, there is another big threat to the dollar, warns Alasdair Macleod. Countries in Asia are banding together in order to rid themselves of using the dollar in international trade.

There is a thing called the Shanghai Cooperation Organization, an agreement principally between China and Russia, whereby they tie up the whole of Asia as their backyard.   Other members are the countries north of Tibet, Tajikistan, Kyrgyzstan, Uzbekistan, and so on.
In or soon after September, four new members will join – India, Pakistan, Iran, and Mongolia.  That’s almost half the world’s population. The objective of the SCO is basically to settle international trades between these countries without using the dollar.

It’s not just members of the SCO, either, that could eschew the dollar.  The Middle East, for example, now principally sends exports to China and India, so there’s no pressing reason to use the dollar there.
If they succeed, the whole Asian continent, at some point in the future, will be off the dollar
They’ll use their own currencies, gold, or something else.  That’s a very big change, and I don’t think people fully appreciate what that means for the dollar.”

dollarAll commodities and near-commodities are priced internationally in dollars, and the dollar is used for over 80% of cross-border trade settlements. Consequently the dollar is the base currency for all countries’ foreign reserves, giving it its reserve status.
However, there are now challenges to the dollar’s hegemony, with Russia, China as well as the other members, dialog-partners and associates of the Shanghai Cooperation Organisation (SCO), taking deliberate steps towards doing away with the dollar entirely for pan-Asian trade.
Recent developments setting up a rival to the IMF by the BRICS nations is part of this challenge.
If you follow the geopolitics, you might reasonably conclude that the dollar’s dominance has peaked and is now declining.
The SCO appears to believe there can be a transition away from the dollar, an idea that could turn out to be dangerously wrong at a time of great but generally unrecognised currency fragility.
At the heart of the issue there is a worrying lack of distinction between the dollar’s reserve function and its function as the monetary standard from when it replaced gold in 1971.
To fully appreciate the importance of the dollar as the standard for all other currencies, we must review the monetary history behind how and why the dollar replaced gold, and the implications for today.

Alasdair MacleodThe new daily silver fix regime has begun.   It will be run on the Chicago Mercantile Exchange’s platform (the Comex people), and supervised by Thompson Reuters.   For the first six months access to the fix for observers will be free, so we can all see how it works.
This is a welcome advance on the old silver fix, where bullion banks negotiate the price in secret.   This should be positive in the longer-term, because market transparency tends to lead to wider institutional and public participation.   We are a long way from a fully transparent market, but at least the veil of dealing secrecy is being lifted a little.
Imagine you are running a hedge fund. You don’t deal in gold or silver because the physical market is too opaque.   Now we have a visible auction process in silver, which you can watch on-line. You can monitor it for a week or two to get better a feel for how much money is required to move the price.   It’s not just you, everyone else is also getting interested. Now you can assess your dealing risk far better and will be prepared to deal.   And you look forward to the gold market becoming more transparent as well.
We are seeing a very important change in bullion markets to the disadvantage of dealers who hide behind OTC opacity.

The EndMr. Macleod joined The Daily Coin to discuss the silver fix transformation. 
With the London fix now officially history, are we about to see a period of unprecedented volatility in the silver market? 
On China Macleod states: The more we sell our gold down, at a cheap price, and the more China buys it, the more that’s going to turn out to be the biggest wealth transfer we’ve ever seen in history, from West to East.”
The greatest transfer of wealth in history.  Let that sink in for a moment.   

Keep-CalmAt the end of July global equity bull markets had a moment of doubt, falling three or four per cent.
In the seven trading days up to 1st August the S&P500 fell 3.8%, and we are not out of the woods yet.
At the same time the Russell 2000, an index of small-cap US companies fell an exceptional 9%, and more worryingly it looks like it has lost bullish momentum as shown in the chart below.
This indicates a possible double-top formation in the making.

falling-bearPrecious metals periodically suffer from coordinated bear raids as the commercial shorts try to level their books. That appeared to be the case in recent weeks when the gold price was sold down from $1345 to $1280 last Friday. 
This week gold enjoyed a sharp recovery from the bear raid.
The remaining bulls are obviously resolute, indicated by the sharp upturn in open interest on an equally sharp price gain to $1320 Friday morning.   The signs elsewhere are not good for the shorts either, with physical demand in London appearing to have caught that market on the hop as well.
In conclusion, it won’t take much to squeeze the remaining shorts and drive the price materially higher.

June’s FMQ components have now been released by the St Louis Fed, and it stands at a record $13.132 trillion. As can be seen in the chart above, it is $5.48 trillion more than an extension of the pre-Lehman crisis exponential growth trend.
The chart confirms that tapering seems to be having little or no effect on money markets and therefore the growth rate of fiat currency.
Still believe the Fed is really tapering QE?