Dave Gonigam – May 9, 2012
- Is this how the “world’s reserve currency” dies? Behind a hodgepodge of deals conducted in renminbi, gold, even barter…
- Gold sinks below $1,600: Marc Faber thinks it could head lower still
- Day 3 of the latest euro-scare: A top 10 list of the world’s most likely default candidates… including an American interloper
- Economic gloom sparks a return of kneecapping… Readers gleefully join in a round of Buffett-bashing… Taking exception to the “Neo-Nazi right”… and more!
It’s as if China and Iran have gotten together and said, “Fine, we don’t need dollars to conduct business anymore.”
We step away today from the hour-to-hour, nay, minute-to-minute noise generated by the latest euro-scare… to inspect a couple of nails pounded into the coffin of the greenback’s status as “world reserve currency.”
“China is using its currency, the yuan, and gold to pay for some of its imports of Iranian crude oil,” according to anonymous “Iranian trade professionals” quoted by Dow Jones Newswires.
Iran, you’ll recall, is feeling the squeeze of Western sanctions over its nuclear program. Its central bank and commercial banks have been kicked out of SWIFT, the international outfit that transmits payment orders among its member financial institutions.
So to keep selling their oil, the Iranian mullahs are resorting to methods bypassing SWIFT, and by extension, the U.S. dollar.
This nondollar China-Iran trade amounts to as much as $30 billion annualized, according to “industry estimates” furnished to the Financial Times.
- Some of it is in Chinese renminbi. And because of U.S. pressure, domestic Chinese banks aren’t carrying out the transactions. Instead, it’s done through Russian banks — which take a huge commission, natch
- Some of it is in barter: The Chinese trading company Zhuhai Zhenrong pays Iran for its oil by furnishing services like drilling
- And some of it is in gold: Dow Jones describes how recently “two Iranian oil tankers heading for China were bartered at sea with their equivalent in the precious metal.”
Meanwhile, as the Iranian government accepts gold is payment for oil, ordinary Iranians are grabbing as much gold as they can — unsure what the future holds.
“Turkey is exporting massive quantities of gold to Iran and Arab Spring countries as citizens in those countries switch to portable wealth,” says Mert Yildiz, chief economist for Turkey at Renaissance Capital.
The Turkish government estimates that exports of precious metals and jewelry to Iran totalled $480 million in March — up from a piddling $13 million in March 2011.
So U.S. sanctions are achieving a perverse result: They “will now enhance the acceptability of the renminbi as a transaction currency,” the CEO of a bank in Dubai tells the Financial Times.
“The global financial crisis,” he adds, “accelerated the shift from the West to the East.”
And from paper to gold, we’ll interject: to wit, our item yesterday about China’s gold imports from Hong Kong growing sixfold in the space of a year.
“As of six months ago,” Addison writes in The Little Book of the Shrinking Dollar, “China held only 1.8% of its total reserves in gold.”
Russia has loaded up somewhat more, at 8.7%, and India more still, at 9.5%. “They have a lot of catching up to do. And they’re ready, willing and able to do it.”
“We consider this tantamount to a realization that gold is king and fiat currencies have nowhere to go but down. The central banks deny it at press conferences, but they know better in the privacy of their own gold transactions.”
Addison and collaborator Samantha Buker tease out the implications… and pull together some long-term investment guidance… in a breezy 223 pages. The Little Book of the Shrinking Dollar is on sale now.
Gold, in the short term, priced in dollars is down again today. After touching a low of $1,577 this morning… the spot price has recovered to $1,591.
Silver’s down to $29.24.
“Gold may not perform very well in the near future,” says the Gloom Boom & Doom Report’s Dr. Marc Faber — who figures it could test $1400-1500. “The gold market has performed so well,” Faber said, “we could have some setback.”
For the moment, however, both gold and silver remain higher than they were at the start of 2012.
For the third day in a row, U.S. stocks began the trading day looking mighty sickly, and are in line to end the day looking… well, less sickly. As of this writing, the Dow is a bit below 12,900.
The “recovery” in each day’s activity appears to start with the close of the European stock markets at 11:30 a.m. EDT. Indeed, “Trading was much weaker when European bourses were open,” writes Fusion IQ chief Barry Ritholtz.
“There remains an underlying liquidity bid containing the downside so far,” he adds – and he hastens to point out he’s not saying that from the vantage point of a permabull; his own firm is down to 40-50% exposure to stocks. “I’d like to see lower prices,” he says, “to put some equity exposure back on.”
As with the previous two days this week, Europe is getting the blame for the “risk-off” trade.
- Spain is on the verge of nationalizing one of its big banks; yields on Spanish 10-year debt have crested 6%.
- The European Union and International Monetary Fund are making noises about not releasing the next round of bailout money for Greece as long as Greek politicians continue to make noises about rejecting the bailout terms
- Italy’s prime minister has issued a plea for European leaders “to go beyond the rigid focus on budget discipline demanded by Berlin,” as a Reuters dispatch put it
With today’s developments, Spain has crept back into the top 10 among the most likely default candidates, as judged by the credit default swap market…
Yes, Illinois is a higher risk than Spain; this is the first time we’ve seen a U.S. state back in the top 10 for months. The Prairie State still has $9 billion in unpaid bills, despite jacking up the state income tax last year by 66%.
And then there’s this ugly harbinger from Europe: a return to the practice of kneecapping in Italy.
The CEO of an Italian nuclear engineering company walked out of his home in Genoa on Monday when a man shot him in the leg and got away on a moped. The victim’s knee was fractured.
“Shooting victims in the legs,” according to the U.K. Guardian, “was a specialty of the Italian Red Brigades, the terrorist organization which sought to destabilize the Italian government with a series of kidnappings and murders, culminating in the snatching and killing of the former Prime Minister Aldo Moro in 1978.”
“We don’t know who it was,” says Stefano Silvestri of the Italian think tank IAI, “but I suspect it was a small group, possibly anarchists, rather than the Red Brigades, even if the continuation of the economic crisis increases the risk of the return to action of larger groups.”
“Your Buffett roasting was impressive,” a reader writes after yesterday’s episode.
“It’s a pity he’s become a tool of the degrading system, mostly because he’s such a likeable guy focused on productive endeavors. But perhaps he’s just among the most unlikely examples that power corrupts, absolute or not.”
“It really irritates me,” another writes, “that these interviewers of Warren Buffett never have the savvy to ask the appropriate question when these platitudes are thrown out like they are pearls of wisdom. They all just gawk and swoon over the Oracle.”
“The appropriate response to his statement, of course, is ‘What was Berkshire’s share price 2,000 years ago?’ Yep, that time frame trick ‘warps’ the mind, apparently.”
“Gold won’t cheat and silver won’t con.”
“Well, Charlie and Uncle Warren can ‘suck it in,’” adds yet another.
“Long ago when I was a broker with E.F. Hutton, I bought one share of Berkshire for around $4,900.”
“Two days ago, I sold that one share. I decided to act in an uncivilized manner and promptly purchased seven 10-ounce PAMP/Swiss gold bars and eight Krugerrands with the proceeds.”
“One aspect of the unemployment numbers,” writes a reader carrying on one of this week’s themes, “is the number of people like myself: an ‘independent contractor’/consultant, whose employer never contributed to unemployment insurance.”
“The consulting work dries up, but since there has never been participation in the unemployment process, no one knows that I no longer have a working income, even though I am still looking. I am, in fact, unemployed, but do not appear in the statistics. How many of us are there?”
“Los Angeles has nothing on Washington, D.C,” writes a reader on the subject of skyrocketing traffic fines.
“D.C. has cameras mounted on their street-cleaning machines and if your vehicle has its picture taken, you get the fine. It’s been a couple of years since I have received one of these, but I believe the cost exceeds the $78 mentioned for LA.”
“Yes, Big Brother now includes the street sweeper.”
“Don’t confuse Nazis with the right,” a reader implores after our take on the eurozone elections Monday.
“Nazis were fascists, in other words socialists, (nationalist socialists versus international socialists). The Nazis didn’t nationalize businesses, but they controlled business to the same effect. They hated the communists because they were competing for the same recruits. Central planning was pervasive.”
“Let me raise a nagging thought,” writes a self-described 5 “groupie” for whom the “right” label also stuck uncomfortably.
“I realize you can go ‘left’ enough past big government and socialism into collectivism and communism, the total loss of the individual. I consider myself ‘right,’ heading to libertarianism, if not anarchy (in the positive sense!).”
“Now that I have arrived at the ‘extreme’ individual liberty and responsibility point on the spectrum, how much further to the right do I need to go until I suddenly start believing in the big government, anti-dissent, anti-freedom, anti-liberty, anti-individual, statist fascist/Nazi philosophy?”
“Seems to me the now accepted tagging of Nazism as ‘far right’ has been a successful smear of us freedom-loving individuals, as Nazism has far more in common with communism than libertarianism.”
“Or am I missing something? One of your stellar contributors has probably written a column or book on this subject that I have missed…”
The 5: You haven’t heard of the Nolan chart?
It’s why this editor doesn’t fret too much about what’s left, right or otherwise.
If you hold to the values of, say, the Founders, or the Austrian economists… you don’t have a place on the “conventional” political spectrum. So why try to claim one?
You’re much better off joining like-minded souls who can engage in a lively exchange of ideas, free of any labels. Which is one of the lesser-known benefits of our newest project.
Cheers,
Dave Gonigam
The 5 Min. Forecast
P.S. The Nasdaq has tumbled about 6% over the last month and a half. But a small circle of readers has successfully used that move to generate a 104% gain as of yesterday morning.
Meanwhile, as the financial sector has weakened 2% this week, this same circle used that move to pick up a 20% gain as of a couple hours ago.
No matter what the broad market is doing, you can rake in profits… provided you can decode the market’s signals. Here’s where you can start.
P.P.S. A reminder that Marc Faber and Barry Ritholtz, who appear today’s 5, will appear in person at the Agora Financial Investment Symposium this July.
Historian Niall Ferguson headlines what might be our best lineup ever. For a full list of speakers and exclusive details on how to register for hundreds of dollars off the regular fee… please review this invitation.