You are here
James Turk: The truth behind the proposal to sell IMF gold
By William Pesek Jr.
Bloomberg News Service
Friday, February 25, 2005
http://www.bloomberg.com/news/commentary/wpesek.html
It's THE question in global currency markets: What force of nature
prompted South Korea suddenly to scrap plans to sell dollars?
On Tuesday, the dollar was plunging amid a comment by Asia's No. 3
economy that it would diversify foreign-exchange reserves into other
currencies.
By Wednesday, Korea's central bank said it had no such plan, leaving
traders scratching their heads.
Dumping dollars would be a logical move for the world's fourth-
largest holder of reserves after Japan, China, and Taiwan. Korea,
after all, is going against the tide in Asia, letting its currency
rise. It no longer needs so many U.S. Treasuries, nor does it want
to sustain huge losses as the dollar falls.
Korea's hasty and counterintuitive about-face makes you wonder if
U.S. Treasury Secretary John Snow himself made a call to Seoul. It's
hardly in the U.S.'s interest to see Korea pull the plug on
Treasuries. It could prompt other Asian central banks to do the
same, driving up U.S. debt yields.
Or maybe it was Japan, the biggest foreign holder of U.S.
Treasuries, pressuring Korea. Shortly after Korea's denial, Japan's
vice finance minister for international affairs, Hiroshi Watanabe,
referred to "wild" moves in the yen and said Tokyo "will act when
necessary" if its currency rises too rapidly. Asia hardly wants a
resumption of Japan's yen-selling campaign.
Conspiracy theories aside, markets could be excused for wondering if
Franz Kafka is roaming the halls of Korea's Ministry of Finance --
and whether the Czech writer is running its currency policies.
Kafka, of course, is famed for tales possessing bizarre, illogical,
and nightmarishly complex qualities. And there are some rather
Kafkaesque aspects to recent events, not only in Seoul but also on
currency policies throughout Asia.
Korea's retreat from dumping dollars shows the bind central banks
are in these days. This region's mercantilist tendencies have
manifested themselves in exchange-rate management efforts the likes
of which have rarely been seen before.
"Bretton Woods II" is what economists have dubbed the system that
unofficially replaced the original post-World War II currency
regime, which was based on a gold standard that collapsed in 1973.
In gold's place, many nations adopted the U.S. dollar as an anchor,
formally or informally pegging their currencies to it. We may be
seeing the demise of this new system, with Korea in the vanguard.
"The risk of a disorderly unraveling of Bretton Woods II -- a sharp
correction of the U.S. dollar and of the U.S. bond market, a surge
in U.S. long-term interest rates, and a sharp fall in the price of a
wide variety of risky assets such as equities, housing, high-yield
bonds, and emerging-market sovereign debt -- is growing," Nouriel
Roubini of New York University's Stern School of Business and Brad
Setser of Oxford University said in a research paper this month.
As their findings suggest, the current system is looking more and
more like a huge pyramid scheme. As long as Asian central banks
stick together and buy dollar-denominated securities, things are
fine. Once they start selling, virtually everyone loses -- central
banks experience capital losses and economies become less
competitive. Central banks have an interest in keeping the game
going and hoping others do too.
Yet this week's events underline "how vulnerable the dollar is to
negative news," says Carl Weinberg, chief global economist at High
Frequency Economics, referring to the dollar's biggest drop against
the euro in six months. The news, Weinberg says, "unwrapped a lot of
tightly-wrapped traders who were spring-loaded to sell greenbacks on
adverse news."
Sure, Korea's Treasuries holdings are much smaller than China's,
Japan's, or Taiwan's, but its $200 billion of reserves may be at the
forefront of trends to trim dollar holdings.
Central banks here don't buy U.S. debt out of altruism; it's to hold
down currencies to boost growth. Monetary officials find themselves
in the unenviable position of having to buy lots of dollar assets
they know are likely to lose value over time.
This may be as good a time as any for the region's monetary
authorities to avoid losses ahead of a possible surge in U.S. debt
yields. Investors won't ignore the record U.S. current-account and
budget deficits forever.
Yet it's a complex issue for Asian economies, which find themselves
in a "damned if you do, damned if you don't" situation.
Korea seems to have chosen to let the won rise, and it's a good
thing. Asia spends inordinate amounts of time weakening currencies,
worried about growth a quarter or two out. That distracts from
repairing structural problems. It's always easier to devalue your
way to growth than to reform financial systems, improve corporate
governance, and promote entrepreneurship.
Hopefully the rest of Asia will follow Korea's example. Rising
currencies are a sign of confidence in an economy, not a problem.
They lower bond yields and boost stock prices. Capital a hard money
brings in can be more important than increased trade attracted by a
softer one.
The Kafkaesque state of the global financial system may leave Asia
little choice in the matter.
----------------------------------------------------
To subscribe to GATA's dispatches, send an e-mail to:
gata-subscribe@yahoogroups.com
To unsubscribe, send an e-mail to:
gata-unsubscribe@yahoogroups.com
----------------------------------------------------
RECOMMENDED INTERNET SITES
FOR DAILY MONITORING OF GOLD
AND PRECIOUS METALS
NEWS AND ANALYSIS
Free sites:
http://www.cbs.marketwatch.com
http://www.capitalupdates.com/
http://www.silver-investor.com
http://www.thebulliondesk.com/
http://www.goldismoney.info/index.html
http://www.minersmanual.com/minernews.html
http://www.a1-guide-to-gold-investments.com/euro-vs-dollar.html
http://www.investmentrarities.com
http://www.kereport.com
(Korelin Business Report -- audio)
http://www.plata.com.mx/plata/home.htm
(In Spanish)
http://www.plata.com.mx/plata/plata/english.htm
(In English)
http://www.resourceinvestor.com
Subscription sites:
http://www.lemetropolecafe.com/
http://www.interventionalanalysis.com
http://www.investmentindicators.com/
Eagle Ranch discussion site:
http://os2eagle.net/checksum.htm
Ted Butler silver commentary archive:
http://www.investmentrarities.com/
----------------------------------------------------
COIN AND PRECIOUS METALS DEALERS
WHO HAVE SUPPORTED GATA
AND BEEN RECOMMENDED
BY OUR MEMBERS
Blanchard & Co. Inc.
909 Poydras St., Suite 1900
New Orleans, Louisiana 70112
888-413-4653
http://www.blanchardonline.com
Centennial Precious Metals
3033 East First Ave., Suite 807
Denver, Colorado 80206
1-800-869-5115
http://www.USAGOLD.com
Michael Kosares, Proprietor
cpm@usagold.com
Colorado Gold
222 South 5th St.
Montrose, Colorado 81401
http://www.ColoradoGold.com
Don Stott, Proprietor
1-888-786-8822
Gold@gwe.net
El Dorado Discount Gold
Box 11296
Glendale, Arizona 85316
http://www.eldoradogold.net
Harvey Gordin, President
Office: 623-434-3322
Mobile: 602-228-8203
harvey@eldoradogold.net
Gold & Silver Investments Ltd.
Mespil House
37 Adelaide Rd
Dublin 2
Ireland
+353 1 2315260/6
Fax: +353 1 2315202
http://www.goldinvestments.org
info@gold.ie
Investment Rarities Inc.
7850 Metro Parkway
Minneapolis, Minnesota 55425
http://www.gloomdoom.com
Greg Westgaard, Sales Manager
1-800-328-1860, Ext. 8889
gwestgaard@investmentrarities.com
Kitco
178 West Service Road
Champlain, N.Y. 12919
Toll Free:1-877-775-4826
Fax: 518-298-3457
and
620 Cathcart, Suite 900
Montreal, Quebec H3B 1M1
Canada
Toll-free:1-800-363-7053
Fax: 514-875-6484
http://www.kitco.com
Lee Certified Coins
P.O. Box 1045
454 Daniel Webster Highway
Merrimack, New Hampshire 03054
http://www.certifiedcoins.com
Ed Lee, Proprietor
1-800-835-6000
leecoins@aol.com
Lone Star Silver Exchange
1702 S. Highway 121
Suite 607-111
Lewisville, Texas 75067
214-632-8869
http://www.discountsilverclub.com
Miles Franklin Ltd.
3015 Ottawa Ave. South
St. Louis Park, Minn. 55416
1-800-822-8080 / 952-929-1129
fax: 952-925-0143
http://www.milesfranklin.com
Contacts: David Schectman,
Andy Schectman, and Bob Sichel
Missouri Coin Co.
11742 Manchester Road
St. Louis, MO 63131-4614
info@mocoin.com
314-965-9797
1-800-280-9797
http://www.mocoin.com
Resource Consultants Inc.
6139 South Rural Road
Suite 103
Tempe, Arizona 85283-2929
Pat Gorman, Proprietor
1-800-494-4149, 480-820-5877
Metalguys@aol.com
Swiss America Trading Corp.
15018 North Tatum Blvd.
Phoenix, Arizona 85032
http://www.swissamerica.com
Dr. Fred I. Goldstein, Senior Broker
1-800-BUY-COIN
FiGoldstein@swissamerica.com
The Moneychanger
Box 178
Westpoint, Tennessee 38486
http://www.the-moneychanger.com
Franklin Sanders
1-888-218-9226, 931-766-6066
----------------------------------------------------
HOW TO HELP GATA
If you benefit from GATA's dispatches, please
consider making a financial contribution to
GATA. We welcome contributions as follows.
By check:
Gold Anti-Trust Action Committee Inc.
c/o Chris Powell, Secretary/Treasurer
7 Villa Louisa Road
Manchester, CT 06043-7541
USA
By credit card (MasterCard, Visa, and
Discover) over the Internet:
http://www.gata.org/creditcard.html
By GoldMoney:
http://www.GoldMoney.com
Gold Anti-Trust Action Committee Inc.
Holding number 50-08-58-L
Donors of $1,000 or more will, upon request,
be sent a print of Alain Despert's colorful
painting symbolizing our cause, titled GATA.
Donors of $200 or more will receive copies
of "The ABCs of Gold Investing" by Michael
Kosares, proprietor of Centennial Precious
Metals in Denver, Colorado, and "The Coming
Collapse of the Dollar" by James Turk and
John Rubino.
GATA is a civil rights and educational
organization under the U.S. Internal Revenue
Code and contributions to it are tax-deductible
in the United States.
