The Big Mac index

A WEAK currency, despite its appeal to exporters and politicians, is no free lunch. But it can provide a cheap one. In China, for example, a McDonald’s Big Mac costs just 14.5 yuan on average in Beijing and Shenzhen, the equivalent of $2.18 at market exchange rates. In America, in contrast, the same burger averages $3.71.

That makes China’s yuan one of the most undervalued currencies in the Big Mac index, our gratifyingly simple guide to currency misalignments, updated this week (see chart). The index is based on the idea of purchasing-power parity, which says that a currency’s price should reflect the amount of goods and services it can buy. Since 14.5 yuan can buy as much burger as $3.71, a yuan should be worth $0.26 on the foreign-exchange market. In fact, it costs just $0.15, suggesting that it is undervalued by about 40%.

The tensions caused by such misalignments prompted Brazil’s finance minister, Guido Mantega, to complain last month that his country was a potential casualty of a “currency war”. Perhaps it was something he ate. In Brazil a Big Mac costs the equivalent of $5.26, implying that the real is now overvalued by 42%. The index also suggests that the euro is overvalued by about 29%. And the Swiss, who avoid most wars, are in the thick of this one. Their franc is the most expensive currency on our list. The Japanese are so far the only rich country to intervene directly in the markets to weaken their currency. But according to burgernomics, the yen is only 5% overvalued, not much of a casus belli. More...

Secret gold swap has spooked the market

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The news that a mystery bank has just pawned the family jewels gave traders a jolt – nervous about the sudden transfer of almost 20pc of the world's annual gold production and the possibility of a sell-off.

In a tiny footnote in its annual report, the bank disclosed its unusually large holding of gold, compared with nothing the year before. The disclosure was a large factor in the correction of the gold price this week, which fell below $1,200 for the first time in more than a month.

Concerns hinged on whether the BIS could potentially sell on this vast cache of bullion in the event of a default, flooding the market with liquidity. It appears to have raised $14bn for whoever's been doing the swapping – small fry on the currency markets, but serious liquidity in the gold market.

Denominated in euros, gold has fallen 8pc since the beginning of the month and is now trading at a seven-week low of €937 per troy ounce.

The big gold exchange traded funds (ETFs) – having peaked at record inflows in May – have also been showing net outflows over the past few days.

Meanwhile, economists and gold market-watchers were determined to hunt down which bank is short of cash – curious about who is using their stash of precious metal for what looks suspiciously like a secret bailout. More...

Many Developing Crisis Ahead

The Next Crisis
And the next…and havens
Christopher Laird, PrudentSquirrel.com
With the Asian stock markets stalling, and the US markets insisting on rallying a suspicious 25 points a day with nary a correction in over a year, something is definitely wrong out there. What gives? I cannot believe the US economic prospects are that good right now.

But then again, with the EU markets and the EU itself looking like it’s about to disintegrate, with a new bailout story on Greece that never pans out, and what a failure to bail out Greece will do to the Euro – a Euro crisis alone can tank all markets and cause massive social unrest in the EU with nations starting to bolt as they find staying with the huge budget cuts are politically impossible.

But there are many developing crises right now. What then is the next crisis that will lead to panicky markets again? Surely one is due again. The VIX is at low levels similar to just before the Bear crisis in 2007 and Lehman mega crisis in Fall 2008.

Gold-

The relentless rise in the US stock market is either a head in the sand routine by Funds who have nowhere else to put money, or the central banks are unilaterally supporting the markets with these rather suspicious 25 point rises in the Dow day after day for a year…(a bit of exaggeration but you get the idea). It’s as if some great power has made an edict to relentlessly make the Dow (or your favorite index) rise no matter what to scare financial bears out of the market.

There is a much larger issue here

But there is something much bigger out there driving all this, and unfolding right in front of our eyes – the deconstruction of the entire world economy from its post WW2 US centric consumer model – combined with relentless employment shrinkage and labor arbitrage with Asia. That combination is leaving the Western economies and their accustomed standard of living in tatters, with a very bleak outlook henceforth. Europe especially is vulnerable to depression level forces with youth unemployment age 16 to 24 in Spain for example at 42%! In short, meaningful austerity measures are impossible for the weaker EU countries.

The only outcome must be chaos in the West – economically and socially. That chaos is going to begin soon. It is already showing a few stirs.

Serial crises unavoidable

What the world is presently going through are serial crises each year, roughly two a year since 2007, which rocks currency markets and ultimately rallies gold, which is the one market that seems to prosper in these uncertain times. The commodity markets are more like speculator zones, and I don’t feel these are very good havens because of that.

We did some brief price studies on prices back in 1908 to the present. Even with the gold ‘Manipulation story’ (which is true) gold actually does reflect the price changes of real goods since 1980 and even all the way back to 1908. I picked 1908 because I have data from then on prices and its pre US Federal Reserve. (Example a loaf of bread was 10 cents in 1908-1930 roughly and now is $3. That is 30 times higher. Gold is also roughly 30 times higher).

So even with manipulation, gold is still reflecting the price changes of real goods in the economy pretty accurately. Now of course if gold were to spike it would then start reflecting the massive world central bank public bailouts of all and sundry markets which are on the verge of total collapse (banking, sovereign bonds, and so on). That phase will yet appear when it’s ready.

But getting back to the theme – that of serial crises on the horizon as far as the eye can see…

China has a major problem ahead

And then there is China – and its gigantic construction bubble which is alive and well (way too well) and – is going to be popped by a determined Chinese government. And Even so China certainly is well aware that 60% of their economic growth in recent years is construction related. Did you know that? If China is popping a huge construction bubble that is 60% of their economy then why is everyone talking about using basic commodities as an investment haven? There is a difference between a haven and a speculation. Commodity markets are speculation markets right now. That makes them subject to wild price swings.

All this crisis list is because of one major theme

Everything that is happening in the world – market dangers, sovereign debt crises, labor arbitrage of West to East, government budget overruns of a huge magnitude, currency instability (Euro situation as one example), pressure on China to let the Yuan rise, looming trade wars, and especially social chaos in the West if austerity measures are implemented, falling tax revenues on a nothing less than disastrous scale worldwide (except in China for the moment but that is going to change rapidly) – are all derivatives of the changing of the economic guard from West to East.

So, all the crises we are facing also represent this larger picture – of a changing economic world order from West to East – Asia is rising.

The problems are all compounded in the West and Asia by an age gap (aging gap) of huge magnitude. This age gap is all the baby boomers retiring not only in the West but in Asia too – especially Japan which is on deflationary legs and needs government stimulus – again- to try and replace what all the aging boomers earned and bought. Which isn’t going to work; it hasn’t worked for the last 20 years even when things were pretty good for Japan since 1990…

We can list more looming crises but I think you get the idea.

How do we get from here to there?

Now, the world will transition to some state where Asia takes over the economic engine, and if labor arbitrage keeps up, the West is going to be left out cold in any economic rebound.

If that is so, how do we get from here to there? I certainly have doubts that the commodity sector is not vulnerable for the second coming economic downleg, particularly when China is trying to pop their construction boom/bubble. Which is probably going to happen later this year.

In order to safely navigate through your retirement years, you are going to have to find ways to protect your savings – and that will probably involve not only gold and silver stocks for example to hedge against a falling USD, but also some mix of currencies during the turmoil that is to come for liquid assets like cash.

The recent favorite havens do not have a good track record except gold

6 years ago the Euro was bandied about as being the solution to the USD. Now the Euro appears fatally flawed. I also get concerned that commodities are constantly being promoted as the safe haven, especially after witnessing the horrendous commodity crash in Summer 2008. We warned subscribers of that pending crash two months ahead of time that the USD was due to rally.

In any case, the only way to safely preserve your savings will involve closely tracking developments in sovereign bond markets and careful choices of a batch of currencies, gold stocks (or coins) and possible well chosen commodities, but not ones being turned into speculation markets, which many are now.

How much longer can the dollar defy gravity?

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telegraph
Liam Halligan
The trade deficit of the world's biggest economy also remains huge. How much longer can the dollar defy gravity?

Last week, America's currency fell to a 15-month low against the euro, cutting through $1.5050. Against a trade-weighted currency basket, the dollar was also at its weakest since July 2008. The greenback plunged to parity with the rock-solid Swiss franc, then hit a 14-year low against the yen.

The dollar's weakness is based on fundamentals – not least America's jaw-dropping debt. It's a long-term trend. From the start of 2002 until the middle of last year, the dollar lost 30pc on a trade-weighted basis.

It was during the summer and autumn of 2008, though, that the sub-prime debacle entered its most vicious phase (so far). The rescue of Fannie Mae and Freddie Mac, America's quasi-state mortgage-lenders, followed by the Lehman collapse, sent shock waves around the world. For six months or so, Western investors piled into what they knew, liquidating complex positions and buying plain dollars. The greenback became stronger, spiralling upward during the so-called "safe haven rally".

All that has now changed. The trade-weighted dollar has lost 22pc since March. One reason is that, since the spring, the Federal Reserve has been printing money like crazy – both to bail out Wall Street and service America's rapidly growing debt.

Sophisticated investors have also been exploiting America's ultra-low 0.25pc interest rate to borrow cheaply in dollars, switch these borrowings in currencies where returns are higher, then pocket the difference. This so-called "carry trade" has flooded foreign exchange markets with US currency.

The dollar fell particularly sharply last week, though, as traders were reminded of the patently obvious – that the White House actually wants the dollar to fall. US Treasury officials have lately taken to staring into the TV cameras, puffing out their chests, then stating: "We are committed to a strong dollar." That's nonsense, of course, because a weaker currency boosts US exports and lowers the value of America's external debt.

When the minutes of the Fed's latest policy meeting were published on Tuesday, describing the dollar's decline as "orderly", the markets rightly took that as confirmation of America's "benign neglect" approach – with intervention to support the dollar unlikely. The minutes also showed the Fed's key committee members voted "unanimously" to keep interest rates at rock-bottom for "an extended period" – another reason to sell.

In addition, the Federal Deposit Insurance Corporation, the fund that safeguards US bank deposits, warned that the number of "problem" banks grew in the third quarter, leading to speculation it could seek a credit line from the US Treasury. That would mean more borrowing and money-printing, concerns which sent the dollar even lower.

Yet "benign neglect" is fraught with danger. A weak US currency makes commodities more expensive (seeing as they're priced in dollars). It was when the dollar hit an all-time low of $1.60 against the euro during the summer of 2008 that oil soared to $147 a barrel. Expensive crude damages the economy of the world's biggest oil user. And as the dollar falls, America's huge commodity imports cost more, making the trade deficit even worse.

On top of all that, a falling dollar makes it even more difficult for the US government to meet its massive borrowing needs. Just to service existing debt, America must sell $205bn of Treasuries this year, a total set to hit more than $700bn a year by 2019 – even if annual budget deficits shrink. Selling long-term sovereign debt, in a currency expected to fall, is not easy.

Almost every American economist I know dismisses these concerns. Several have contacted me over the last 48 hours, gloating that the dollar has just put on a renewed "safe haven" spurt in the midst of fears about Dubai.

Yet the state of the dollar poses enormous dangers. For one thing, America's currency depreciation trick could backfire if "the rope slips" and a steadily dollar decline turns into free fall. The cost of US imports would soar, with the Fed being forced to sharply push up rates. The world's largest economy would then be caught in a stagflation trap – a slump, but with high inflation.

A more immediate concern is that a blind rush into the US currency could cause the carry-trade to go badly wrong – with those who've borrowed in dollars suddenly owing more, while their dollar-funded investments elsewhere are worth less.

A rapid "unwinding" could cause major losses at financial institutions, posing renewed systemic dangers. Far from being a safe haven, the dollar is the likely source of the next financial crisis.

Silver: An Investment Opportunity of a Lifetime

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Saefong, MarketWatch
Silver's not so much a poor man's gold anymore and investors may soon realize that the white metal's the real treasure.

"Silver is unique in terms of being both a monetary and an industrial metal," the Bullion Services Team at GoldCore said in a recent report, pointing out that it's severely undervalued. "Silver remains the investment opportunity of a lifetime."

Gold's prices have climbed nearly 11% in the last two months. In that same time span, silver's up by only 3.1%.

And "investors looking for returns continue to wager on higher gold prices, whether it be on concerns over equity or currency markets ... or to make quick short-term profits," according to CPM Group's latest Precious Metals Advisory.

But investors would be better served to turn their eye toward silver.

"Silver is highly correlated to the safe haven of gold and is, in effect, a leveraged sister of the precious yellow metal," according to GoldCore, an international bullion dealer. "Thus, informed investors use gold more for wealth preservation purposes and silver in order to make a return."

That's particularly important to keep in mind as investors change the way they perceive the paper-asset markets.

As stocks, currencies, bonds and other paper assets have begun to disappoint investors, investor attitudes have been shifting, said Mark Leibovit, chief market strategist for VRTrader.com.

"What begins as a trickle ends as a tidal wave when the panic peaks [and] when public revulsion at the U.S. dollar begins, the tidal wave will become a tsunami," he said.

Under that scenario, "silver, far more volatile than gold, will benefit most," he said.

A split personality

Forced to pick just one, Chris Mayer, editor of Agora Financial's Capital and Crisis said he'd rather own gold. Others disagree.

"Silver does not have the same appeal as gold," said Mayer.

"What did India's central bank buy in record amounts ... [and] what did China double its reserves of this year? Gold," he said. "They aren't buying silver."

"It's not like comparing oil with [natural] gas, where you are comparing the energy equivalent of the two and there is some economic incentive when the gaps get very wide to switch to one or the other at the margin," said Mayer. "That doesn't exist with silver and gold."

And when the global industry remains mired in a slow growth pattern, the market's not going to see sky-high prices for a metal whose "lion share of demand comes from its industrial applications," said Jon Nadler, a senior analyst at Kitco Metals.

It's really silver's "precious side that is holding it up right now," said Ed Bugos, director of mining finance at Strategic Metals Research and Capital. "Its industrial side would be over valued" with the ratio of silver to other commodities having made new highs.

The investment figures for silver show this loud and clear.

"Silver's allure as an investment is evermore appealing as a hedge against fading fiat currencies that are getting inflated into oblivion," said Scott Wright, an analyst at financial-services company Zeal LLC.

This is "measurable via skyrocketing investment demand" for physical bullion and exchange-traded funds, he said, pointing out that the iShares Silver Trust /quotes/comstock/13*!slv/quotes/nls/slv (SLV 17.15, +0.23, +1.36%) has already increased its holdings by 29% in 2009.

From the start of this year through the end of October, total silver holdings in exchange-traded funds were up 36.3%, according to data from CPM Group.

The sale of silver coins and minted bars also offers a good gauge of demand.

Over at The Perth Mint, total silver ounces sold as coins and minted bars is five times higher in the 2008-2009 year compared with 2005-2006, according to data from the Mint, which is owned by the Government of Western Australia. During the same period, gold ounces sold as coins and minted bars have more than doubled.

U.S. Silver Eagle coin sales were up 72.6% in October from a month ago -- up 106.2% from October 2008, CPM Group data showed.

"Although fabrication demand is important, it is investment demand that tends to have a more dynamic effect on silver prices," said Chintan Parikh, a commodity analyst at CPM Group in New York.

"This is because of the larger dollar volumes of money that can be involved with investment demand, the speed and intensity with which investment demand trends can rise, fall and reverse course, and the ultimately total discretion that investors have over whether they wish to be involved in silver at all," he said.
Fame and fortune

But while some agree that benefits for silver's precious metal characteristics have outweighed the pluses from its industrial uses, that industrial label may soon turn out to be of lesser hardship.

"The industrial uses for silver are numerous and generate substantial additional demand for silver outside its precious metal usage," said Patrick Kerr, managing director at Amerifutures Commodities & Options.

True, silver's suffering from a falloff in demand from the photography world as consumers turn to the digital age, but industries are finding other uses for the versatile metal, including medical applications, and actually consuming supplies as they use them.

"Silver is consumed and gone forever in most applications," said Julian Phillips, an editor at SilverForecaster.com. On the other hand, "huge efforts are made to recover gold, so essentially it is not consumed."

Gold's much higher value prompts great efforts to recycle it. In fact, "all the gold mined in the world ever is still with us, but a huge amount of silver has been used in photography, mirrors and other industrial uses in the last 200 years," according to the GoldCore report. "The low price of silver makes recovery and recycling uneconomic."

So "industrial demand has been outstripping mining supply for most of the last 20 years, driving above-ground supply to historically low levels" and silver production has been flat in recent years, while demand has been increasing, the report said.

As a result, refined silver stocks are near an all-time low, with stocks dropping from around 2.2 billion ounces in 1990 to around 300 million ounces today, it said.

"At one time, silver was more expensive than gold, but that was in the days of Egypt's Pharaohs," said Phillips.

And while no one wants to say that will ever happen again, most analysts expect that silver prices will soon react to gold's recent gains.

Prices for silver could spike to $18.25 or even $20 between now and December, according to CPM Group.

GoldCore expects to see prices at well over the nominal high of $50 an ounce and, eventually, surpass the inflation-adjusted high of some $130 per ounce in the coming years.

"Ultimately, silver tends to exhibit its largest spurts in the latter stages of a major gold up legs," said Zeal's Wright. "Once speculators and investors start to get excited about this metal, it can really fly -- and fast."

Gold Is Its Own Currency

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"While no major currency is likely to replace the dollar any time soon, the need for an alternative is clear, and growing...That gold has a currency aspect without being tied to any country is key to enhancing its value as an asset"

Chikako Mogi
Reuters
TOKYO -- As the dollar's dominance fades with the emergence of a multipolar world, gold may stand to gain the most of all assets, thanks to an unlikely quality -- neutrality.

While no major currency is likely to replace the dollar any time soon, the need for an alternative is clear, and growing. China among others is considering how to diversify its more than $2 trillion in foreign exchange reserves, and talk of using other currencies to trade oil or commodities continues to circulate.

Supply constraints mean there is no chance of a full revival of the gold standard era, when currencies were pegged directly to gold, but investors say gold's duel role as both currency and asset make it an almost irresistible buy for years to come as financial geopolitics add risk into global markets.

"That gold has a currency aspect without being tied to any country is key to enhancing its value as an asset," said Koichiro Kamei, managing director at financial research firm Market Strategy Institute. "The realization that gold can be turned into anything spread quickly and widely as people used it to raise dollars last year when they were short of dollars."

Gold plunged almost 20 percent in October 2008, taking a hit when investors dumped assets across the curve for cash as liquidity dried during the height of the credit crunch.

But in comparison to other asset classes gold did well, with broader commodities and equities hitting multi-year lows in the unwinding of complex positions built over the past several years.

"Globally, gold has been bought as it is re-evaluated as a stable currency," said Osamu Ikeda, general manager at Tanaka Kikinzoku Kogyo, Japan's biggest bullion retailer.

It is also seen as a simpler investment after huge losses on sophisticated financial products endangered the global financial system and plunged the world deep into recession.

After the October 2008 plunge, gold returned to the upward momentum that had carried it to a record high in March 2008, defying the downtrend in most other assets.

The Reuters-Jefferies CRB Index, a global commodities benchmark, fell to a seven-year low earlier this year just as gold was again trying the $1,000 mark.

A big part of gold's gains have been attributed to the declining dollar. The dollar index, a measure against six major currencies, fell about 14 percent since March this year while gold rose about 13 percent during the same period.

"What has been a textbook reference of gold as a currency has been given life, especially after the Lehman shock. And that has concurrently highlighted its character as an asset that performs differently from other assets," said Shuji Sugata, a manager at Mitsubishi Corp. Futures & Securities.

"Given its price movements against other assets and the declining confidence in the dollar, more funds have begun to include gold in their asset portfolios," he said.

The launch of gold-backed exchange-traded funds has also altered the way gold is viewed.

Such ETFs grew explosively over the past year after the financial crisis as retail investors entered the market, giving significant support to gold prices.

"Prior to ETFs, it was supply/demand balances and currency, gold's inverse relationship with the dollar. The launch of ETFs was an additional supportive factor for gold just as scepticism was growing about the dollar's dominance," Sugata said.

The world's largest gold-backed exchange-traded fund, the SPDR Gold Trust, saw its holdings rise to a record 1,134.03 tonnes on June 1, a 44 percent rise on the year that contributed to gold's 16 percent rise in the same period.

The growing number of investors means price action could also add to gold's volatility.

"I think the moves to the upside will be far quicker in their velocity, hitting $1,100 very shortly and then far higher over the next few years," said Peter McGuire, managing director Commodity Warrants Australia.