Next Impetus for Gold

From the early months of 2002, the key currency movement associated with the rise in gold has been the euro. Clearly, gold and the USDollar compete for primacy. When investors shied away from the world reserve currency and its linked Treasury bonds, they paid less attention to capital flows and sought interest rate differentials, but with a certain liquidity requirement. The euro has the liquidity, without question. The Euro Central Bank had offered a right fine carry trade during all those months where the US short rates were stuck in the mud at 1.0% and the long Eurobonds offered almost 4% yield. Those days are gone. The euro currency has become the first victim of the competing currency wars. The Eurozone economy is a victim of its own currency appreciation, a success in some queer circles by those who favor inflation as a policy and harbor disdain for European unwillingness to inflate. One should keep in mind that in six of the last 12 months reported, the US bilateral trade deficit with the European Union is over $10 billion. The capital flows will help to offer the euro some stability in the face of the rate differential which favors the USDollar nowadays.

STAGE #1 LED BY EUROPE

Von Mises warned of casualties in entire economies from currency warfare. The EU has suffered and is now weakened. Its euro currency can no longer compete against the USDollar, nor compete as a gold alternative. As a result, gold will rise in euro denomination, not so much from vigor or strength in gold demand, but more from euro weakness and impending debasement of the euro itself. The EU member nations are certain to stimulate their economies, invite wider asset bubbles, and encourage their flagging economies by whatever means, even if those methods mimic the discredited, fraudulent, heretical devices employed as principal driving forces in the US Economy. Namely, monetary inflation and unbridled credit growth in all their infamous glory. The gold alternative has been evident in Europe in recent months. The technical chart is very bullish for gold in euro terms. A breakout is upon us. A pullback to the breakout point, much like a diver on a springboard, is followed by a leap.

STAGE #2 LED BY ASIA

About three years ago, several conversations can be recalled with friends of mine. A train of evolutionary advance was clear to me. Gold could not simply take the mantle from the USDollar. First the euro rises, then the Asians rise, then gold leads uniformly, in that order. Too much had to happen along the way, a path to destruction. The currency wars would have to play out, to unfold, to wreck their havoc. The USDollar would give ground to the euro currency in the first round. That is done. The USDollar would give ground to the Asian currencys in the second round. That has yet to begin, but with the advent of the Chinese yuan currency revaluation, we might indeed be at that doorstep.

The Japanese yen has been engineered not to rise, by force, executed by the Bank of Japan (which some believe takes orders from the US Federal Reserve). As pointed out frequently in the Hat Trick Letter, the USFed is tied to JPMorgan in the rescue of the former's underwater hedge book. Of course, just a rumor. JPMorgan has merged in some sense with giant Sumitomo Bank in Japan, with $1.5 billion cash dowry bestowed upon JPM two years ago in a marriage of titans. Thus the link between the USFed and Bank of Japan. A legless JPM married an acne-scarred Sumitomo in order to enable potential control of the Japanese giant banks from New York City puppeteer strings. Regardless, by holding fort in preventing a yen currency rise, Japan has finally shot itself in the foot. While Europe lost its export trade, Japan incurred higher energy costs. The untold story about the Japanese economy is that Japan has been harmed by the Chinese resurgence of manufacturing outsourcing, just like the US Economy was harmed in the 1980 and 1990 decade by the rise of Japan and the entire Pacific Rim of Asian Tigers (Taiwan, Hong Kong, South Korea, Singapore). So without a rising yen, the Japanese have suffered rising energy costs in unhedged fashion. The technical chart is very bullish for gold in yen terms. A breakout is upon us. A pullback to the breakout point, much like a diver on a springboard, is followed by a leap.

THE TRIGGERS

Next we will see many triggers for gold. Do not look to Europe any longer. In the currency warfare parlance, the Eurozone has been laid waste temporarily. Gold must seek a better alternative. Gold will next move up from Asian impetus. Since early 2005, Asians have been noticeably absent in foreign accumulation of USTBonds. China and Japan are most prominent among the flatliners, although they continue to hold a large sum of our toilet paper called Treasury bonds. The big increases in USTBond foreign holdings are evident in France, Norway, the United Kingdom, and South Korea, up to the month of May. See the details by nation. http://www.treas.gov/tic/mfh.txt

Trade war with China is high on my list for gold triggers. So is the upcoming, highly anticipated upward revaluation of the Chinese yuan currency. Each will be disruptive in its own way. Trade war is ratcheting up slowly and inexorably. China has been rebuffed in their acquisition of Noranda for copper supply. They are in the process of being rebuffed in their acquisition of Unocal for energy supply. Many are their energy contracts, for supply and production investment, with both Russia and Iran. Such is the quiet on the eastern front. Expect growing hostility between the USA and China in coming months. Congressional testimony just last week was highly charged, somewhat vitriolic, with charges of domination, fascism, communist monopoly, and attempts to supplant the USA from the geopolitical stage. This is a far cry from the wondrous cooperation as the US from 2002 to 2004 found low-cost solutions across the Pacific Ocean. My analysis has long called low-cost pursuits an exercise in domestic liquidation, unemployment, and bankruptcy. The yuan regime adjustment is expected to be smooth. It will not be smooth, but rather open the door to disorder. If trade war is the vise, then yuan regime revaluation is the arm to twist the vise. In the ensuing squeeze, wholly cheered by mindless USGovt politicians, GOLD WILL RISE.

The USGovt officials seem eager for China to lift the value of their yuan currency. As though that will make an iota of difference in narrowing the bilateral China trade deficit. Over the last 12 months, that deficit has averaged $15.0 billion per month. With a higher valued yuan, China will give themselves an instant discount on all imported oil, natural gas, coal, copper, silver, iron, cement, lumber, and chemicals. The discount will be roughly 80% to 90% of the yuan change, save shipping costs. The rise in US retail shopping shrines (malls) will be roughly 15% to 20% of the yuan change, the proportion of value added by Chinese labor. Wall Street analysts have only begun to come around and recognize the extremely limited potential change to the trade deficit from a currency shift. So why pursue it? My answer is to show China that Washington DC carries the leader baton, the stick, and calls the shots. Look for WalMart prices to rise no more than 2% on Chinese items. Look for no change in the bilateral trade deficit. But but but… look for extreme changes to China's willingness to play the insane Bretton Woods Plastic Accord game any longer. In 1985, the Plaza Accord called for a concerted climb in the USDollar with foreign central bank assistance. The Plastic Accord (aka Bretton Woods II) is the informally maintained insanity of Asian credit supply for profligate consumption, counter-productive tax reform, highly leveraged retail financing, and housing speculation inside the United States. China, via the trade war and the simultaneous political pressure to alter its yuan currency regime, will react badly. The Plastic Accord is at risk, nay doomed.

FOR THE NEXT IMPETUS TO GOLD AND ITS NEXT MAJOR WAVE UP IN PRICE, LOOK EAST TO ASIA.

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Jim Willie CB is a statistical analyst in marketing research and retail forecasting. He holds a PhD in Statistics. His career has stretched over 23 years. He aspires to thrive in the financial editor world, unencumbered by the limitations of economic credentials. Visit his free website to find articles from topflight authors at www.GoldenJackass.com.