Jesse's Café Américain

Charts in the Babson Style for Miércoles Matado 8 October 2008

Gulf State Central Banks to Increase Gold Reserves

Gulf News
Gulf central banks look to gold as uncertainty rises
By Cleofe Maceda, Staff Reporter
October 07, 2008, 23:26

Dubai: Central banks in the Gulf and elsewhere in the world will likely turn to gold as the global banking crisis boosts the metal's appeal as a buffer against dire economic conditions, industry sources said on Tuesday.

With bank shares across the world plunging and the US dollar still unstable, central banks have no better option but to diversify their reserves into gold, considered the only alternative to the US dollar and euro.

Analysts said demand from banks will likely affect gold prices, and retail consumers will resort to investing in bullion as well, particularly in exchange traded funds (ETFs), coins and small bars.

"Gold will definitely see a revival as a reserve asset for central banks. The main purpose for the central banks when investing is not to generate the highest possible returns, but to provide a safe and sound financial basis for the currency and the economy built on it," Rolf Schneebeli, former head of the World Gold Council, told Gulf News.

Schneebeli said suitable central bank assets must be universally recognised and must provide a liquid market that is deep enough to absorb major transactions. However, he noted, there are not many currencies that can be used as possible assets.

Earlier this year, the US dollar plummeted against the euro. Although it has started to strengthen recently, doubts remain over its outlook.

"The only alternative to the US dollar is the euro. The pound sterling is probably not strong enough anymore. The yen and the Swiss franc, both strong currencies, do not have enough depth ... Hence, gold is really the only alternative to the dollar and euro," Schneebeli added.

Another advantage of investing in gold, Schneebeli said, is that the precious metal is "nobody's liability."

"This means one is not at the mercy of other governments. After all, governments might use the financial system to exercise pressure on other governments. In the case of gold, this is quite difficult," he said.

K.P. Baiju, managing dir-ector and chief executive officer of Buz Consulting, said gold demand from banks "will impact the prices and will help sustain the current levels for the time being".

Baiju noted that demand from consumers will continue to increase as well, because "gold is considered a good means of small-time savings."

"Gold prices are currently ranging around $825 to $850 an ounce, which was last year's fourth quarter level and the consumers know that this is a good time to buy," Baiju told Gulf News.

Among UAE consumers, Schneebeli sees an increase in demand for ETFs, coins and gold stocks.

Shhhhhh! Here is a Secret Worth Remembering.

The Treasury is going to devalue the US dollar by 30 to 40 percent, or more, from here.

Why?

Because they have no choice. Its what you must do when you cannot selectively default by creditor and you can't pay your debt service with additional debt.

The devaluation will be coated with a minty flavored shell of verbage and G7 misdirection and government programs with lots of letters in the names.

But isn't everyone else is in the same boat?

Actually they aren't. Take a look at the current account deficits and debt service payments growth. That will tell you who is in what boat.

Remember, its a secret. Don't tell the Chinese, foreign holders of US debt, and especially the US middle class whose life savings are going to be wiped out.

Isn't monetary deflation the natural outcome of a country's failure to maintain their credit and grow their debts?

Tell it to Iceland. Want to buy some krona?

But what about Japan? I think we are going to be in a deflation where our money is worth more as we print more of it, while producing less goods in return, and our financial paper is increasingly discredited and worth less.

Excellent. Someone has to hold the bag. Welcome to the team. Have a koolaid and a cookie and take a seat over there while you wait for further processing and creative destruction.

You may also be interviewed for an upcoming documentary to be titled "Cargo Cult Economics."

P.S. Have a nice day