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17 January 2013 Written by
    The world's second-biggest holder of gold reserves, Germany, is planning to bring home some of its gold held in New York and Paris - a move that would mark a breakdown of trust between the world's major central banks, analysts said. The Bundesbank, Germany's central bank, announced in a press release on Wednesday it plans to repatriate some of its gold holdings from the New York Federal Reserve and the Bank of France. The release said the Bundesbank intends to move 300 tons of gold from New York to Frankfurt by 2020, plus a further 374 tons from Paris. By 2020, it expects to hold 50 percent of its reserves in its vaults in Frankfurt, with the remainder split between New York and London. None will remain in Paris. "With this new storage plan, the Bundesbank is focusing on the two primary functions of the gold reserves: to build trust and confidence domestically and the ability to exchange gold for foreign currencies at gold trading centers abroad within a short space of time," the Bundesbank said. The Bundesbank said the complete withdrawal of its holdings from France is because the adoption of the euro means it is no longer reliant on Paris as a financial center in which to exchange gold for an international reserve currency. Germany has almost 3,400 tons of gold, the world's second-largest holdings after the United States, valued at almost $177 billion at the end of December, according to the Bundesbank. It moved the bulk of its reserves abroad during the Cold War in case of an attack on West Germany by the Soviet Union. News that Berlin wants to bring some of that gold back home is causing a stir, with Bill Gross, the managing director at bond giant PIMCO tweeting: "Report claims Germany moving gold from NY/Paris back to Frankfurt. Central banks don't trust each other?" Ric Spooner, chief market analyst at CMC Markets in Sydney told CNBC Asia's "Squawk Box", "Whether or not their action really does reflect a lack of trust in the Fed (U.S. Federal Reserve) is a moot point, but it is certainly likely to be taken that way by some sectors of the market. The general inference is that if there was a real debt crisis in the U.S., then they (German authorities) would feel a little more confident about having their assets at home." The U.S. fiscal woes are firmly in focus with Washington expected to reach its debt limit by the end of February. Finding long-term debt sustainability without hampering an economic recovery remains a challenge for policymakers, Fed chief Ben Bernanke said earlier this week.
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11 January 2013 Written by
07 January 2013 Written by
    While Prime Minister Shinzo Abe piled pressure on the Bank of Japan (8301) to weaken the yen last week, the Federal Reserve struck the first blow against the currency. A signal from Fed board members that they may end bond purchases in 2013 helped drive the yen to a 2 1/2 year low of 88.41 per dollar on Jan. 4, still 15 percent stronger than its decade average. The extra yield on 10-year Treasuries instead of similar-maturity Japanese government bonds reached 1.13 percentage points last week, the most in nine months and attracting funds into dollar assets. “With a possible pickup in the U.S. economy, the dollar is more likely to rise than the yen,” said Jun Kawakami, a market economist at Mizuho Securities Co., one of the 24 primary dealers obliged to bid at Japan’s debt sales. “While there’s a good chance that the Fed will reduce bond purchases as early as this year, there is absolutely no exit strategy in sight for the BOJ, creating a contrast between their policies.” In a New Year’s address, Abe reiterated his call for “bold” monetary easing by the BOJ, saying the most urgent issue for the nation is to end deflation and curb the yen. Two days later, minutes of a Dec. 11-12 Fed meeting led by Ben S. Bernanke showed several members advocated cutting the $85 billion monthly buying of notes this year as the economy expands at a moderate pace and unemployment declines.

Weakening Yen

The yen rose 0.3 percent to 87.87 per dollar as of 2:51 p.m. in Tokyo today, after dropping past 88 on Jan. 4 for the first time since July 2010. The currency has weakened from a postwar high of 75.35 in October 2011, helping make Japanese- made products more competitive overseas and boosting the repatriated value of exporters’ earnings. The depreciation of the yen is helping Panasonic Corp. (6752) compete, company chairman Fumio Ohtsubo told reporters in Tokyo today. The manufacturer of Viera televisions wants a stable local currency that’s weaker than 90 per dollar, he said. The ideal yen level would be 90 to 100 yen per dollar, Hiroshi Tomono, chairman of theJapan Iron and Steel Federation, told reporters in Tokyo today. The Topix Index (TPX) of Japanese shares closed last week more than 20 percent higher than its low in November, sapping demand for safer assets such as JGBs. It fell 0.8 percent today. Japan’s 10-year bond yield touched 0.84 percent today, the most since Aug. 21, compared with the 1.88 percent rate for similar- maturity U.S. Treasuries.

Currency’s Value

The yen’s actual value last year was 103.9 per dollar after taking into account differences in consumer prices between Japan and its trading partners, according to estimates from the Organization for Economic Cooperation and Development. No domestic company can generate a profit by making goods at such a disparity between costs and prices, Ryoji Musha, president of Musha Research Co. in Tokyo, wrote in a research note on Jan. 4 about purchasing power and nominal yen rates. The nation’s Ministry of Finance is scheduled to sell 2.3 trillion yen ($26 billion) of 10-year notes tomorrow, followed by a 700 billion-yen auction of 30-year bonds on Jan. 10. Five-year credit-default swaps that protect Japan’s sovereign debt from nonpayment dropped by a record 62 basis points last year and were at 75 basis points on Jan. 4, according to CMA, a data provider owned by McGraw-Hill Cos. A decline signals improved perceptions of creditworthiness. Abe’s Liberal Democratic Party, which won a landslide victory in lower house elections last month, is demanding a 2 percent inflation goal, twice the BOJ’s current target. The LDP gives the “highest priority” to defeating deflation and yen strength and is aiming for 3 percent nominal economic growth, according the party’s election pledges posted on its website.

QE Spillover

Japan’s economy will probably expand 0.65 percent this year, compared with a 2 percent growth in the U.S., according to the median estimates of economists surveyed by Bloomberg. The Dollar Index (DXY), which tracks the greenback against the currencies of six major U.S trading partners, has fallen about 5 percent since the Fed embarked on bond purchases in 2008. In the latest round of so-called quantitative easing, the policy- setting Federal Open Market Committee announced last month it will buy $45 billion of Treasuries a month on top of $40 billion purchases of mortgage-backed debt. A few FOMC members “expressed the view that ongoing asset purchases would likely be warranted until about the end of 2013,” according to the minutes of last month’s meeting released on Jan. 3. “Several others thought that it would probably be appropriate to slow or to stop purchases well before the end of 2013.” Japanese Finance Minister Taro Aso said on Dec. 28 that the U.S. should have a stronger dollar and that foreign countries “have no right to lecture us” on currency policy.

‘Beyond 90’

“The dollar-yen rate will rise beyond 90,” said Yuji Kameoka, chief currency strategist at Daiwa Securities Co., Japan’s second-biggest brokerage. A full-fledged U.S. economic recovery from about the second half of this year makes “an end to quantitative easing more likely, widening U.S.-Japan yield spreads.” The BOJ added 10 trillion yen last month to its 66 trillion-yen program for buying securities, including government debt maturing in three years or less. Yields on the short-term notes have all collapsed to about 0.1 percent amid central-bank buying, which is intended to spur inflationary pressures and growth through low borrowing costs. Concern that inflation will diminish the value of fixed payments from bonds is more evident in the rates on longer-term securities. The extra yield investors demand to hold 30-year JGBs over three-year notes rose to 1.9 percentage points on Jan. 4, the most since April 2011. “As the BOJ buys more, yields will go lower on short- to medium-term notes,” said Shogo Fujita, chief Japanese bond strategist at Bank of America Merrill Lynch, a primary dealer. “The yield curve will steepen as inflation expectations and growth prospects push longer rates higher.”
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04 January 2013 Written by
  Japan's Central Bank Is Pressed to Boost Money Supply     Shinzo Abe and the Liberal Democratic Party swept back into power in mid-December by promising a high-octane mix of monetary and fiscal policies to pull Japan out of its two-decade run of economic misery. To get there, Prime Minister Abe is threatening a hostile takeover of the Bank of Japan, the nation’s central bank. The terms of surrender may go something like this: Unless the BOJ agrees to a 2 percent inflation target and expands its current government bond-buying operation, the ruling LDP might push a new central bank charter through the Japanese Diet. That charter would greatly diminish the BOJ’s independence to set monetary policy and allow the prime minister to sack its governor. Central bankers the world over know what it’s like to feel the heat from political leaders in a bad economy. Republican presidential candidate and Texas Governor Rick Perry in 2011 called Federal Reserve Chairman Ben Bernanke’s ultra-loose monetary policies “treasonous.” What’s taking place in Tokyo right now is far more threatening than a verbal jab. Abe ran against BOJ Governor Masaaki Shirakawa’s economic record as much as he did against former Prime Minister Yoshihiko Noda. The tactic worked: Abe’s LDP-led coalition won a two-thirds majority in the Diet’s lower house. “The LDP’s landslide election victory gives it a virtually free hand in policy,” Robert Feldman, Morgan Stanley (MS) chief economist for Japan, wrote in a Dec. 17 note to clients. “The macro stance will shift to ‘print and spend.’   The markets have started to account for the impact of a 2 percent annual inflation target for consumer prices. That would be a big jump in an economy as depressed as Japan’s, creating public expectations about price increases and, in theory, getting households spending and businesses investing. Abe also wants the BOJ to expand its quantitative easing program, an effort that involves printing money to purchase government bonds and other assets to give the government more leeway to spend. On the fiscal side, the LDP is considering a possible 10 trillion yen ($116 billion) spending package. The superstrong yen, which crushed Japanese export earnings through most of 2012, started to weaken in December on expectations that the new monetary moves will hit the currency. Prices of Japanese government bonds (JGBs) are also falling, because of concerns that a new fiscal expansion will add to the country’s debt, the largest among rich economies and equal to about 220 percent of gross domestic product. On the flip side, 2012’s last day of trading saw the Nikkei 225 finish 23 percent higher for the year on the hope that Abenomics will deliver an adrenaline shot to profits. The BOJ on Dec. 20 agreed to expand an existing program to buy government bonds and other financial assets for the third time in four months and reconsider its current inflation target of 1 percent. Yet Abe is likely to demand that Shirakawa, whose five-year term expires in April, sign an agreement with the government declaring the new inflation target, says Masaaki Kanno, a former BOJ official and chief economist at JPMorgan Securities Japan. To come close to hitting that mark will require “open-ended JGB purchases of, say, 5 trillion yen every month,” Kanno says, and would expand the BOJ’s balance sheet at a faster rate than that of the U.S. Federal Reserve. Even then, the monetary expansion must be coupled with fiscal measures to generate 2 percent inflation annually, he says.   In the past, the BOJ has bent to the political needs of the day. It was commandeered by Hideki Tojo’s government in the early 1940s to fund the war effort and kept interest rates low to help underwrite a bridge and highway spending bonanza in the early 1970s under Prime Minister Kakuei Tanaka. Loose credit conditions contributed to the late 1980s stock and real estate bubbles, while weak bank supervision set the stage for the 1990s bank crisis. In 1998 the BOJ won its independence under a new charter that freed it from government meddling. That same year Tokyo prosecutors uncovered a bribery scandal at the Finance Ministry implicating nearly 100 staff members: A top central bank official leading an in-house probe hanged himself, and then-Governor Yasuo Matsushita resigned in disgrace. The next governor, Masaru Hayami, raised interest rates in mid-2000, which contributed to a recession the following year. The Japanese economy is 7 percent smaller since the BOJ gained full control over monetary policy 15 years ago. “For Japan, central bank independence has turned out very detrimental to the economy,” says Koichi Hamada, a professor emeritus at Yale University who taught Shirakawa at the University of Tokyo in the 1970s.
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12 December 2012 Written by
NFA has made it impossible for all but largest of online brokers to survive. GFT logoGFT, one of the five largest US-based retail FX brokerage firms, has decided to close shop in its own home market (as well as in Japan). GFT posted a notice on its home page stating that it had "made a business decision to move our U.S. retail forex trading accounts to one of our valued partners [editor's note: TD Ameritrade]." GFT earlier this year lost its star research team of Kathy Lien and Boris Schlossberg, who left to start their own FX asset management firm. They do maintain a strong presence in the Far East, recently ranking as the fifth largest online FX firm in Singapore. When the NFA raised minimum capital requirement for FX (and futures) brokers to $20 million, while simultaneously capping leverage at 50x for major currency pairs, it basically made it too expensive for virtually any firm doing less than $50 billion per month in the US market to make money. Further regulations, such as daily customer fund reports now required by US regulators, has made it even more expensive and difficult to operate in the US. While these regulations were meant to protect US retail traders, they have effectively harmed them , reducing competition in the domestic market to just a handful of firms. While GFT is the first serious US firms to close shop domestically, we have seen other global firms abandon their NFA regulation and/or leave the US market, the most recent being FX Club.
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12 December 2012 Written by
As Ben S. Bernanke considers whether to worry about inflation before adding to his record monetary stimulus today, he has the bond market on his side.   Debt traders are anticipating prices will accelerate at the Federal Reserve’s target rate of about 2 percent during the next five years. The break-even rate for five-year Treasury Inflation Protected Securities -- a yield differential between the inflation-linked debt and Treasuries -- was 2.07 percentage points on Dec. 11. That’s a measure of the outlook for consumer prices over the life of the securities. The bond market shows that, two years after the Fed’s second round of asset purchases sparked criticism from Republicans predicting a surge in prices, there’s no incipient anxiety of such risk. That confidence in Bernanke’s ability to keep inflation in check bolsters policy makers’ case for expanding their third round of so-called quantitative easing at the two-day meeting that began yesterday. “The market seems to be convinced the Fed is going to get it just right,” said Dean Maki, chief U.S. economist at Barclays Plc in New York. It’s “not providing a lot of resistance to the Fed’s easing.” Maki predicts the central bank will continue buying bonds at its current monthly pace of $85 billion after the expiration of Operation Twist by year-end. Under the program, announced in September 2011, the Fed has been swapping $45 billion of short- term Treasuries for longer-term debt.

No Limit

Since September, the Fed also has been buying $40 billion of mortgage-debt securities a month in an effort to boost growth and create jobs. The central bank didn’t put a limit on the size or duration of the purchases. Federal Reserve Bank of New York President William C. Dudley, who is also vice chairman of the policy-setting Federal Open Market Committee, said he’s “assessing the employment and inflation outlook” in deciding whether the central bank should continue buying Treasuries next year. Joblessness is “unacceptably high,” while inflation expectations are “fully consistent with our longer-run inflation objective,” Dudley said during a Nov. 29 speech in New York. The unemployment rate was 7.7 percent in November. Inflation as measured by the personal consumption expenditures price index rose 1.7 percent in October from a year earlier. Minneapolis Fed President Narayana Kocherlakota, Chicago Fed President Charles Evans,Eric Rosengren of Boston and John Williams of San Francisco all have voiced support for additional stimulus since the FOMC last met Oct. 23-24.

Support Decisions

“Given the effectiveness of this policy and the relatively high unemployment rate and inflation that is running below our 2 percent target, I fully support the policy decisions to provide stimulus through asset purchases,” Rosengren said in a Dec. 3 speech in New York. Not all Fed officials are endorsing additional bond buying. Philadelphia Fed PresidentCharles Plosser said Dec. 1 it may be “very difficult for us to reverse course,” and “we also have to worry about the future and the consequences of our policies.” James Bullard of St. Louis said Dec. 3 that replacing Operation Twist’s swap of Treasuries with outright purchases of the same amount would risk higher inflation. So far, the data haven’t born out warnings that the Fed’s quantitative easing may lead to a rapid acceleration in prices. QE2, announced in November 2010, unleashed the harshest political backlash against the U.S. central bank in three decades, with criticism leveled by Republicans from House Speaker John Boehner of Ohio to Representative Ron Paul of Texas.

Worst Fears

“Some of the worst fears of quantitative easing, of a pickup in inflation or a severe devaluation in the dollar, did not come to pass with QE1 or QE2, so while you still hear critics,” they “seem to be more subdued this time around,” said Dana Saporta, a U.S. economist at Credit Suisse Group AG in New York. Some Republicans have sought a change in the Federal Reserve Act that would restrict the Fed’s focus solely to its goal of price stabilityBob Corker, a Tennessee Republican on the Senate Banking Committee with Fed oversight authority, said in a Sept. 25 interview he would “continue to champion” a single mandate. Saporta said she doesn’t “see an inflation problem in the near term at all” and doesn’t think QE3 poses such a risk. Inflation expectations have fallen from 2.37 percent on Sept. 14, the day after QE3 was announced, as measured by the five- year break-even rate. Yesterday’s 2.07 percentage points compare with 2.09 points on Sept. 12.

Not Worried

Stephen Stanley, chief economist at Pierpont Securities LLC in Stamford, Connecticut, said he’s no longer worried about inflation after previously criticizing the Fed’s policies. Price changes are “wrapped up” in the growth outlook, said Stanley, who added he’s no longer “optimistic” about the economic expansion. The U.S. “feels like it’s stuck in this everlasting 2 percent-type range, so I just don’t see much of a move in inflation,” Stanley said. “I might have been one of the last holdouts, and I have given up the ghost.” The economy will grow 2.2 percent this year and 2 percent in 2013, according to the median estimate of 74 economists surveyed by Bloomberg News from Nov. 9 to Nov. 14. The Fed’s expanded balance sheet still may lead to inflation in the future, Stanley said. The central bank’s assets have ballooned to about $2.9 trillion from about $894 billion at the end of 2007. `Raw Material' “QE is obviously still providing the raw material for price increases down the road, but, until the economy catches fire,” inflation won’t move much, he said. The central bank doesn’t plan to raise its benchmark interest rate until at least mid-2015, and policy will remain accommodative “for a considerable time,” even after the economy strengthens, the Fed said after its September and October policy meetings. “Inflation is not a concern,” Saporta said. “That gives the Fed leeway to continue with asset purchases.”
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12 December 2012 Written by
There has been an announcement from the Bank of Korea that it bought 14 tonnes of gold during the month of November but that has so far been the only Central Bank to declare purchases for last month. Others might take a little bit more time but our target of net buying from Central Banks for 2012 of 500+ tonnes seems to be very much achievable.   Economic Background Europe
  • The Spanish 10-year bond yield closed the week at 5.46 per cent.
  • The Italian 10-year bond yield closed the week at 4.53 per cent. It appears that the political risk in Italy has risen with the announcement of Mr. Berlusconi to remain not only in the political arena, but also contemplating to run again for the office of Prime Minister in the election, scheduled for March 2013.
  • The European Central Bank left the refinancing rate unchanged at 0.75 per cent, while revising the 2013 growth forecast for the Eurozone to a contraction of 0.3 per cent. The 2012 growth figure has also been revised to show a contraction of 0.5 per cent for the whole year. However, the outlook of the ECB for inflation in 2013 has also been lowered to 1.6 per cent, down from an earlier forecast of 1.9 per cent. The outlook for inflation in the Eurozone for 2014 has also been lowered to 1.4 per cent.
  • The Bank of England has left the benchmark interest rate unchanged at 0.5 per cent, while no more additional stimulus for the economy has been forthcoming at the Bank's meeting last week.
  • Last Friday was the last trading day for bond holders of Greek debt to submit the papers for the proposed Greek government bond buy-back.
China
  • The estimates from analysts for the Chinese Industrial Production readings are expected to show a rise of 9.8 per cent, year on year, while Retail Sales figures are expected to show a rise of 14.6 per cent. The official figures will be released on Sunday, 9th December.
US
  • The Non-Farm-Payroll (NFP) numbers for the month of November were released at 146,000, which is much better than the median forecast of 90,000. However, the NFP numbers for September and October have been revised downwards. The unemployment rate fell to 7.7 per cent.
  • The Congressional Budget Office (CBO) of the US estimates that the US might enter into a recession during the first half of 2013, while the unemployment rate is expected to rise to 9.1 per cent in Q4 of 2013, if the “Fiscal Cliff” is not resolved at the end of 2012. It seems that the ramifications in that case would take a lot of time to filter through into the economy, while uncertainties will take hold rather quickly.
  • The meeting of the Federal Open Market Committee (FOMC) on December 11th and 12th will give an answer to the question, if the monthly spending of US$ 45 Billion for the Operation TWIST will be used to buy US Treasury securities instead. The balance sheet of the FED was US$ 869 Billion at the end of 2007 and that could reach US$ 4 Trillion by the end of 2014, which would require a revisiting of potential exit strategies from the FED.
  • The Michigan Consumer Sentiment Index for December fell to 74.5, down from 82.7 in November 2012.
India
  • The Indian Rupee finished the week at 54.47 to the US dollar.
Gold $1704 – down $11 from last week. Gold endured another difficult week with more “sweeps” being conducted during relatively illiquid time zones, when the US is already closed and Asia is not fully opened yet. The logic of this behaviour, to push prices lower with relatively small amounts, would only make sense if the originator of these “sweeps” is actually looking to accumulate significantly more gold positions at lower prices once the markets are fully opened and liquidity is plentiful. It appears that according to official import statistics, India has only imported 398 tonnes in the period April to October 2012 against figures of 589 tonnes for the same period in the previous year. That equals a loss of imports in the region of 32 per cent and is in line with our expected loss of physical off-take from India of approximately 320 tonnes for the full year. The reasons are well documented with the strike at the beginning of the year, followed by a period of adverse currency movement and the resulting all-time-high prices for gold prices in Indian Rupee. The premium from Gold over Platinum fell last week to US$ 100. The latest Commitment of Traders Report (COTR) shows a very strong decrease in long positions, accompanied by an increase in fresh short positions. (End of business 4 December). Silver $33.07 – down $0.43 from last week. Silver traded down to the support level at US$ 32.50 during last week but managed to bounce back quite quickly and finished the week above the US$ 33 level. The new first resistance level is now already at the US$ 33.50 level and a break of that level would indicate a fresh attempt to rally above the US$ 34 mark. The silver market was visibly torn between following the weakening price trend in gold and the encouraging performance of the Platinum Group Metals, especially palladium. The latest Commitment of Traders Report (COTR) shows a decrease in long positions, accompanied by a decrease in fresh short positions (End of business 4 December). Platinum $1604 – up $4 from last week. The discount to gold has decreased to US$ 100. Platinum prices closing nearly unchanged for the week at the US$ 1604 level, but it was a very different picture during the events of last week. Platinum tanked in sympathy with the plunge in gold prices and maintained during most of last week a discount of approximately US$ 120 to gold. However, there seems to be continued workers unrest in South Africa and this will naturally be of significantly more importance for the platinum mining compared with the gold mining industry. Some good industrial customer based buying and some light short covering lifted the prices back up and it appears that the downside might be exhausted for the time being. The latest Commitment of Traders Report (COTR) shows an increase in long positions, accompanied by a decrease in fresh short positions (End of business 4 December). Palladium $696 – up $15 from last week. Palladium has again performed in the midst of adversity, coming from the negative price movements of gold. Prices for palladium have held the US$ 675 level very strongly and these attempts to sell it down were very short lived. It appears to be a strong consolidation, based much more on fundamentals than on speculative involvement. This is clearly very welcome, but it also implies that a slower and steady price progress would be much more preferable and sustainable than a sudden rally. The fundamental strength of palladium is best explained through the strong industrial usage and the structural supply deficit, while the palladium industry does not need to speculate about unrest and strikes to maintain a positive outlook. The latest Commitment of Traders Report (COTR) shows an increase in long positions, while more covering of short positions have been prominent. The latest surge in long Palladium positions brings the open reported positions close to their record highs (End of business 4 December).
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