GOLD MARKET LIKELY TO SEE A SOFTENING

Image via Wikipedia

-------------------------------------

SINGAPORE - The gold market will likely see a softening in the next two months as the impact of the massive gold selling by the International Monetary Fund (IMF) sinks in.

The IMF said on Wednesday that its second phase sale of 191.3 tons of gold will "shortly" be underway. The move is in a bid to reduce its dependence on lending revenue.

"In the short term of one to two months, there will be a bearish impact on gold prices because of the large quantity being offered," said Mr Wong Eng Soon, investment analyst at trading firm Phillip Futures.

At Wednesday's market price of US$1,120 ($1,548) an ounce, the gold to be sold by IMF would be worth nearly $9.7 billion.

To avoid disruption of the gold market, IMF said the sale would be conducted in stages and would be based on market prices.

On Thursday, spot gold price fell close to 1.8 percent to the lowest level of US$1,100.22 per ounce.

Gold futures for April delivery also dropped 1.7 per cent or US$18.50 to US$1,101 an ounce.

Analysts, however, do not see gold prices falling below US$1,065 per ounce. They said gold would recover to the US$1,200 reference level it had reached early December last year.

If there is a correction in prices, the drop in investor demand will be picked up by demand in the jewellery and industrial sectors, they said.

"Big players like the institutions may take this chance to increase their holdings. Also, India and China are the two largest consumers of gold and their economic recovery will continue strong demand for the commodity," said Mr Wong.

Central banks may also take the opportunity to increase their gold allocation; thus, providing a more bullish long-term prospect for gold.

"Net purchasing by central banks in recent quarters combined with the constraints in mine supply and stable level of recycling activity continue to make gold an ideal portfolio diversifier," said Mr Aram Shishmanian, chief executive officer of the World Gold Council (WGC).

Meanwhile, analysts reactions are mixed if this new sale might replicate the negative impact the first phase sale of 212 tons of gold had on the Australian dollar and oil prices.

WGC managing director Albert Cheng said: "Australian Dollar is more of a proxy to commodities because of its economy is hugely supported by the performance of commodities in general."

From TODAY, Monday, 22-Feb-2010

----------

Related articles by Zemanta

• Gold: investor demand remains strong as price hovers around 1100/oz (telegraph.co.uk)
• Dollar's latest fall lifts boost commodity prices (seattletimes.nwsource.com)
• Gold keeps on surging, hits new high of $1,119 (sfgate.com)
• All Investment Roads Lead to Commodities (seekingalpha.com)
• After the gold rush (money.cnn.com)
• Booming Precious Metal Prices Drive Gold Rush (abcnews.go.com)
• Bargains Still Abound in a Few Gold Miners (seekingalpha.com)
• Gold nears $1,100, extends gains as dollar weakens (seattletimes.nwsource.com)
• "Spinning the IMF Gold Sales" and related posts (goldnews.bullionvault.com)
• Gold: fundamentals remain strong, says World Gold Council (telegraph.co.uk)

CHINA TIGHTENS BANK LENDING RULES

Image via Wikipedia

---------------------------------

BEIJING - Banking regulators in China have ordered institutions to tighten controls on risk and carefully scrutinise borrowers' ability to pay their debts in a new step to rein in lending.

The government order comes as Beijing tries to prevent excessive lending that it says could lead to financial problems while ensuring adequate credit to keep the economic recovery on track.

Chinese leaders are worried that a stimulus-driven torrent of lending is fuelling a dangerous bubble in stock and real estate prices. Beijing has ordered banks to set aside additional reserves and to keep lending stable, but the central bank has avoided raising interest rates, which might slow growth.

The China Banking Regulatory Commission said in a statement that it issued two regulations to increase risk management on personal and working capital loans.

The rules took effect on Feb 12.

The regulation on working capital loans stated that banks must calculate borrowers' actual needs and also consider their cash flow, liabilities, repayment abilities and other factors when assessing loan applications.

On personal lending, the regulation says that borrowers may not obtain loans if they do not specify what the money is to be used for.

Chinese leaders have warned banks repeatedly to keep lending stable this year and avoid financing real estate and industrial projects that are not needed due to fears they might fuel inflation or leave banks burdened with bad debts if poorly planned projects fail.

Banks were ordered on Feb 12 to increase reserves by half a percentage point - to 16.5 per cent for large lenders and to 14.5 per cent for smaller institutions.

The government reported earlier this month that January bank lending rocketed to 1.4 trillion yuan ($290 billion) - nearly one-fifth of the planned 2010 total. AP

From TODAY, Monday, 22-Feb-2010

----------

Related articles by Zemanta

• China tightens bank lending rules (seattletimes.nwsource.com)
• China Regulator Said to Tell Lenders to Curb Third Mortgages (businessweek.com)
• China Tells Banks to Restrict Loans to Local Governments (nytimes.com)
• China to Slow Lending Amid Bubble Worries (nytimes.com)
• Big banks may offer clues on economy (financialpost.com)
• China Construction Bank Sets Lower Loan Quota (online.wsj.com)
• China's January Inflation Eases to 1.5 Percent (abcnews.go.com)
• China Property Price Gains Unsustainable, S&P Says (Update1) (businessweek.com)
• China tightens bank lending rules (sfgate.com)
• China Tightens Bank Lending Rules (abcnews.go.com)

FED CHIEF HAS SOME EXPLAINING TO DO

Image via Wikipedia

-----------------------------------

WASHINGTON - US Federal Reserve chief Ben Bernanke (picture) is expected to shed light this week on the central bank's sudden decision to hike an emergency bank-lending rate, triggering speculation on monetary tightening.

Mr Bernanke is scheduled to appear before the financial committee of the House of Representatives on Wednesday and the Senate banking panel the next day, where his testimony will be closely scrutinised by jittery markets.

The Fed's increase on Friday of the discount rate, the interest it charges on emergency loans to banks, rattled stock markets. Investors feared the central bank might be moving faster than anticipated to withdraw critical support measures for the US economy, as it recovered from a brutal recession.

It was the first major action by the Fed to remove some of the unprecedented monetary easing measures; and also the first tinkering of interest rates by a central bank from the Group of Seven industrialised nations after emerging from recession, analysts said.

The markets were particularly concerned that the central bank was setting the stage for tightening the more significant federal funds rate, the benchmark interest rate that banks charge each other for loans now at virtually zero per cent.

"Hopefully, chairman Ben Bernanke's testimony to Congress (this) week will shed some important new light on the Fed's policy intentions," said Mr Brian Bethune, chief US financial economist of IHS Global Insight.

"It is indeed puzzling as to why the Fed made this move and announcement out of cycle with its meeting dates for 2010."

Although many had expected the Fed to raise the discount rate, considering the waning interest from banks for the short-term loan facility, the timing caught many by surprise, especially coming well ahead of the central bank's March 16 policy meeting.

If the Fed was laying the groundwork for dismantling the easy money policy critical to accelerating the US recovery, it appeared premature, analysts said.

The US economy expanded by a strong 5.7 per cent in the final 2009 quarter after 2.2 per cent growth in the preceding quarter, but unemployment near double digits is expected to persist for some time in the face of lagging job growth.

In addition, the latest consumer price data for January showed tame inflation, underscoring weak demand and still-fragile recovery from a recession that began in December 2007 and has cost more than seven million jobs.

"In some ways the timing of the Fed move is peculiar since growth is not exactly building in a clear way," said Mr Robert Brusca, chief economist at FAO Economics.

The economy "has been so weak for so long that if there is backsliding the possibility that economic weakness turns to financial catastrophe again is quite high", he added.

Bernanke is likely to sound "cautiously upbeat on growth and inflation" in his congressional testimony and focus on the "exit" strategy for the radical measures introduced to haul the world's largest economy from recession, said Mr Fabio Fois, an economist at Barclays Capital. AFP

From TODAY, Monday, 22-Feb-2010

----------

Related articles by Zemanta

• Bernanke says rates to stay low for long time (financialpost.com)
• Bernanke Says 'Nascent' Recovery Still Requires Low Rates (businessweek.com)
• Bernanke Testimony: The First Look (blogs.wsj.com)
• Dollar slides on Bernanke's testimony (money.cnn.com)
• Fed's Bernanke faces multiple perils (msnbc.msn.com)
• Ben Bernanke expects rates to stay low for a long time (telegraph.co.uk)
• Bernanke Says Fed Actively Ramping Up Bank Supervision (blogs.wsj.com)
• "Federal Reserve chairman pledges low interest rates for long-term" and related posts (financemarkets.co.uk)
• Skeptical lawmakers to press Fed chief on jobs (msnbc.msn.com)
• Bernanke: Low Rates Still Needed (online.wsj.com)

Survey shows big Japanese firms less pessimistic

Posted: 22 June 2009 1324 hrs

File picture of a share prices board in Tokyo

TOKYO: Japan's large companies were less pessimistic about the economy in the year's second quarter than they were during the previous three-month period, a government survey has shown.

The large company business sentiment index on current conditions was at minus 22.4 in the second quarter against minus 51.3 in January-March, according to a joint survey by the Ministry of Finance and the Cabinet Office.

The index is calculated by taking the percentage of companies that see an improvement in the economy and subtracting from that the percentage of companies that say the economy is getting worse.

The outlook index for big companies stood at minus 2.6 for July-September last year, and at plus 8.7 for the October-December period.

The recent improvement raised expectations that the Bank of Japan's closely watched "Tankan" business confidence survey, due on July 1, may also point towards a bottoming-out of Japan's worst recession since World War II.

The Nikkei financial daily reported on Sunday that the Tankan survey by the central bank would likely show the first improvement in sentiment in two-and-a-half years among major manufacturers.

The index in January-March slumped to a record low of minus 58, as the world's second biggest economy slid deeper into recession.

But it is forecast to recover to minus 41 for the April-June quarter, the daily said, citing estimates by 25 private research bodies.

Official data have shown Japan's economy, Asia's biggest, shrank at an annualised 14.2 per cent in the first quarter of 2009, its worst rate on record.

- AFP/yb

From ChannelNewsAsia.com; see the source article here.

Related articles by Zemanta

• Decline in world economy moderating: IMF (financialpost.com)
• Pedometer Makes You a Character in a Samurai Storyline [Fitness] (gizmodo.com)
• Iceland at risk of a 'junk' credit rating (telegraph.co.uk)

Stock markets in the ‘yin phase’

BUSINESS COMMENT

Carl Stick

ACCORDING to Chinese philosophy, yin (shadow) and yang (light) are complementary energies that form a universe. It is a convenient mythology that has, over time, been used to help smooth the many paradoxes associated with modern life.

In recent years, it has been applied to understanding of the nature of economic and business cycles. The conclusions may have implications for how we, as investors, steer through torrid times.

The main proponent of this theory is Mr Richard Koo, chief economist of the Nomura Research Institute, and well known for his examination of "Japan's Great Recession", from 1990 to 2005.

Mr Koo believes economies and companies operate within yin and yang phases. During "lighter" yang phases, both focus on growth and "profit maximisation" (driving up the share price); in "darker" yin phases, this emphasis shifts to "debt minimisation" (reducing debt levels), at which point the economy falls into a "balance sheet recession". Under these conditions, asset prices plummet, pushing corporate and personal balance sheets underwater — this is where we find ourselves today.

Mr Koo's theory is contentious because it challenges conventional wisdom about recessions and how to tackle them. It states that monetary and fiscal stimuli are ineffectual if used at the wrong point in the cycle.

Mr Koo proposes more fiscal stimuli are required during a yin phase, when borrowers are few, and looser monetary policy during a yang phase, when borrowers are abundant. Any contortion and the cycle collapses.

Mr Koo's depiction of Japan's recession is one derived from a balance-sheet recession perspective. He argues that the lesson to be learnt from this period is the redundancy of monetary policy.

His conclusion, that governments must spend their way out of recession and worry about budgetary imbalances later is contentious. Nevertheless, if we are suffering from a global variant of this asset crunch, we must all view leverage more critically.

A balance sheet recession occurs when asset prices plunge, leaving indebted entities technically bankrupt. On a corporate level, this transforms the indebted business from its normal function of profit maximisation to one where its overarching strategy is paying down debt and diverting cash flows away from future growth.

In monetary terms, if the business opts to pay debt rather than increase borrowing, cash remains within the banking system, and looser monetary policy has a negligible impact. It does not matter how low the cost of borrowing becomes if there remains a falling demand for debt.

We are seeing evidence of this today. Central bank money supply has grown, but broader money supply — money created through loans — is lagging. In other words, the "multiplier effect" — the expansion of commercial bank money into the real world — is modest and reflects the banks' desire to hoard capital. This is the essence of Mr Koo's warning.

We believe this warning has not been heeded by the market, as evidenced by the equity rally from the fearful lows in March.

Despite the shift in sentiment, it is unlikely that our willingness to spend will be maintained as unemployment rises, and we choose, instead, to repair our personal balance sheets.

Recently, American investor Jeremy Grantham presented the future as a "long, boring period where making fortunes is harder, and investors value safety and steady gains rather than razzle-dazzle".

The spring bounce looks more "dazzle" than steady. He does, however, hit upon the key for investing now: We should be investing in the reliable entities that have consistently generated equity returns, without resorting to debt to maximise results.

Cash-rich businesses do not have the dilemmas of their indebted brethren; they can invest the money they earn back into the business, compounding earnings growth, year–on-year. In a yin environment, this represents a crucial advantage.

The yin part of the cycle can take years to work through.

There is an evolutionary aspect to Mr Koo's theory, however. Human ego ultimately dictates the fear associated with the yin phase, and the overconfidence that will induce the bubbles in the yang. These precepts are nothing new, but identifying this particular cyclicality should help investors tailor their strategies.

The best investment returns of tomorrow will be generated by businesses with the strongest balance sheets today — in this respect, cash is king. Such investments remain our focus.

Carl Stick manages the Rathbone Income Fund and is a director of Rathbone Unit Trust Management. This article was published in The Daily Telegraph on Friday.

From TODAY, Business – Monday, 01-Jun-2009

Related articles by Zemanta

• Stock market: 'We're in the yin phase' (telegraph.co.uk)

Dollar wobbles as euro lifted by economic outlook

Posted: 29 May 2009 0557 hrs

NEW YORK - The dollar traded mixed while the euro gained ground Thursday as signs of improving economic conditions prompted renewed risk appetite among investors.

At 2100 GMT, the European single currency was quoted at 1.3943 dollars, up from 1.3868 dollars late Wednesday.

The dollar rose to 96.77 yen from 95.28 yen.

Joel Kruger at Forex Capital Markets said the US dollar was "under pressure on the back of stable equity prices and very good euro demand."

The dollar weakened after data showed an unexpectedly strong 1.9 percent increase in US durable goods new orders in April and new US unemployment claims fell to 623,000 in the past week, a better reading than forecasted by most analysts.

"The dollar has not been trading at a championship level lately with it hitting lows not seen since last fall against most major currencies over the past few days," PNC Bank analysts said.

"Ironically it is the positive tone surrounding recent US releases -- another way of saying data has stopped getting worse -- which has investors chasing higher yields elsewhere."

Euro buying was boosted after a European Union survey showed business and consumer confidence in the eurozone rose in May for the second consecutive month following an almost two-year slide.

"The confidence data suggest that both businesses and consumers are becoming more upbeat over recovery prospects following the major stimulative action and banking support measures that have been enacted both by central banks and governments," said IHS Global Insight economist Howard Archer.

"Sharply lower inflation is also clearly supporting consumer sentiment, although the upside is being limited by heightened and still rising unemployment fears."

The European Commission's economic sentiment indicator for the 16-nation bloc rose 2.1 points from April to 69.3 points. Last month, the figure was 67.2 points, a rise of 2.5, its first advance since May 2007.

In late New York trade, the dollar slipped to 1.0838 Swiss francs from 1.0890 late Wednesday.

The pound fell to 1.5943 dollars from 1.5984. - AFP /ls

From ChannelNewsAsia.com; see the source article here.

Related articles by Zemanta

• Europe's moment of truth (guardian.co.uk)
• Greece extends ban on genetically modified corn (cbc.ca)
• Europe Looks to Tighten Banking Supervision (nytimes.com)
• European Union Looks to Tighten Banking Supervision (nytimes.com)

A chance to replenish reserves

BUSINESS ANALYSIS

Rosalind Mathieson

THE recent slide in the US dollar against Asian currencies provides central banks in the region with the opportunity to do some quick replenishing of their foreign exchange reserves.

Buying the US dollar now means central banks can put some gas back in the tank for what could be a dollar renewal in the later part of the year — which may require the authorities in Asia to then sell the greenback to protect their local currencies.

And, of course, US dollar buying right now fulfils another aim, namely to keep a lid on emerging market Asian currencies in order to rekindle export demand.

There is the perception that foreign exchange reserves in Asia have been badly run down in the past year or so. Reserves are actually not as low as some people might think, but they have certainly been depleted by the heavy volatility in currency markets and the ongoing presence of a large speculative contingent.

Indeed, HSBC currency strategist Daniel Hui in a recent report estimated that regional reserves, ex-China, have fallen by a fifth in the past year.

Some central banks are already stepping up their US dollar buying, with those in South Korea, Hong Kong and Thailand spotted of late. The Monetary Authority of Singapore is also likely to have been keeping a lid on the Singapore dollar in order to maintain the currency's undisclosed price band.

US dollar weakness may persist in the near term for several reasons. One is that concerns have been brought front-and-centre of late about the US fiscal position, and the heavy amount of debt being taken onto the government's books.

Another is that some of the data from Asia have been showing a bit of resilience — though the emphasis there should be on the "bit" — and this, coupled with a rise in stock markets, has stoked a measure of risk appetite. Inflows have risen to emerging markets, pushing up stocks and currencies alike.

But central banks will want to avoid that going too far. Financial markets and economies alike are still very vulnerable, the recovery indicators are patchy and mild, and for some there is still the sense the worst is it not over for Asia or Europe.

So buying the US dollar now has a dual impact. It prevents Asian currencies from rising too quickly, and it allows central banks to put more ammunition in their arsenals should there be further economic or financial headwinds ahead.

Asian central banks are notoriously paranoid about depleting their reserves, having worked so hard to build them up since the previous financial crisis. They are very keen to make sure the coffers don't get whittled down again. That means "smoothing" operations to buy the greenback are likely to continue, and intervention could pick up in the coming months across Asia as a whole.

That should leave traders a little wary about pushing Asian currencies too high in the near term. The gains are momentum-based, not structural. Dow Jones

From TODAYOnline.com, Business – Wednesday, 27-May-2009; see the source article here.

Related articles by Zemanta

• Asian Markets Tumble on Fears About U.S. Consumer Spending (nytimes.com)
• Russia's waning appetite for dollars (blogs.cfr.org)
• World stocks fall sharply after Wall Street tumble (ctv.ca)
• Asian Stocks Gain on Renewed Confidence in Global Economy (nytimes.com)
• Dollar Rises as Asian Markets Flutter (nytimes.com)
• FTSE 100 loses gains as global rally fades (telegraph.co.uk)
• Asian markets tumble amid U.S. retail sales slide (cbc.ca)
• Roubini Global Economics: How severely will Asia be affected by the global recession? (investmentpostcards.com)

Next stage of the crisis

Edmund Conway

Think we are on the road to recovery, that economies and financial systems are now back in rude health, that interest rate cuts and quantitative easing are likely to push us out of recession and generate another boom? Not so fast.

Sure, many of the major Western banks have been rescued from full-scale implosion after governments took drastic measures to shore up their capital and ensure their survival. But the mountain of debt that poisoned the financial system has not disappeared overnight. Instead, it has been shifted from the private sector onto the public sector balance sheet. Britain, for example, has taken on hundreds of billions of pounds of bank debt and stands behind potentially trillions of dollars of contingent liabilities.

If the first stage of the crisis was the financial implosion and the second the economic crunch, the third stage is where governments start to topple under the weight of this debt. If 2008 was a year of private sector bankruptcies, 2009 and 2010, it goes, will be the years of government insolvency.

That, at least, is the horror story. It was one underlined by Standard and Poor’s (S&P) decision to change the outlook on Britain’s debt from “stable” to “negative”. While the United Kingdom still clings on to its prized AAA rating, it now stands a very real chance of losing it within two years. Questionable as are the credentials of the agencies following the financial crisis, the significance should not be underestimated. A cut in S&P’s ratings would reflect a considered opinion that the UK may default for the first time in its history.

If Japan’s experience in 2001 is anything to go by, it would also trigger an instant exodus of cash from foreign investors, since many of their reserve managers are obliged to invest the vast bulk of their cash in AAA-rated currencies.

But in spite of all this potential fire and brimstone, the reaction from financial markets in the wake of the S&P announcement last Thursday was hardly dramatic.

Indeed, so far as markets were concerned, a couple of disastrous headlines for the government — the S&P decision and the International Monetary Fund’s verdict on the management of the economy the previous day — were no more a concern than the latest nasty set of economic output or employment data.

Still, capital markets are unpredictable. As emerging markets — which have suffered sudden crises as international investors abandoned ship — know to their cost, creditors can turn on a sixpence. Foreign investors hold around a third of UK debt — most of it in the short-term gilt market. Unlike Japan, which had a massive savings glut when it lost its AAA-rating, the UK is directly vulnerable if their central banks and sovereign wealth funds turn a cold shoulder on sterling.

As things stand, the UK is the first of the major G7 economies to have been put on watch during this crisis (Japan is already AA). Were it the only country under real threat of downgrade, it would be easy to make baleful predictions about the impact.

However, the economic crisis has touched every nation. The UK is likely to be joined by other countries as the full scale of the downturn becomes apparent and more financial skeletons are pulled from the sub-prime closet.

So while we may suspect this is how the next stage of the financial crisis will look, it is harder to grasp which countries, or for that matter, which businesses or investments will benefit and which will suffer.

Central banks are likely to invest some of their cash in commodities such as gold and oil; tangible assets will become more desirable. For governments, survival is based on relative rather than absolute strengths. Countries that provide the most feasible and sensible fiscal plans are likely to thrive as they garner investment and support, while those that churn public money while failing to mend their financial systems are the most likely to suffer.

For in the final stage of this crisis, those countries that recover and start to flourish will be those that face up soonest to the new period of fiscal austerity that must last for the next decade.

This is an abridged version of a commentary that was published in The Daily Telegraph yesterday.

From TODAYOnline.com, Business – Monday, 25-May-2009; see the source article here.

Related articles by Zemanta

• The (almost) $2.5 trillionaire ... (blogs.cfr.org)
• China goes global (guardian.co.uk)
• Secrets from the Treasury's Survey: It looks like China bought a lot of equities just before the stock market tumbled (blogs.cfr.org)
• Why the Norwegian Krone is the World's Safest Currency (time.com)
• Trichet: Global Economy at Turning Point (blogs.wsj.com)
• Canada to push IMF assessments, trade at G20 (financialpost.com)
• Canada to push IMF assessments, trade at G20 (canada.com)
• Print Money: U.S. Injecting Billions Into Foreign Central Banks (via FriendFeed) (yzerfonteinchronicles.blogspot.com)
• Flaherty to attend weekend G7 meetings in Italy (ctv.ca)