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Rising Gold Reserves In Emerging Economies Indicate Power Shift

By  |  Commodities  |  Nov 18, 2012 06:28AM GMT  |   Add a Comment
 
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Massive rises in Gold Reserves in emerging economies in a time when debts are rising even faster in the western developed nations indicate a power shift in the near future, sooner or later. Central Banks in the Middle East are building up their Gold Reserves, while reducing their US Dollar Forex holding. Gold reserves of GCC states are less than 5%. Dubai International Financial Center Authority economists released a report calling for local countries to build gold reserves, according to The National. Despite a high interest in gold, GCC states maintain less than 5% of their total reserves in gold. Compared to the ECB, which holds 25% of Gold Reserves, that leaves a lot of room for growth, stated Business Insider.

GCC states should boost their foreign reserve holdings of gold to help shield their billions of dollars of assets from turbulence in global currency markets, say economists at the Dubai International Financial Centre Authority (DIFCA). Diversifying more of their reserves from US dollars to the yellow metal would help to offer central banks in the region higher investment returns, said Dr Nasser Saidi, the chief economist of DIFCA, and Dr Fabio Scacciavillani, the director of macroeconomics and statistics at the authority. “When you have a great deal of economic uncertainty, going into paper assets, whatever they may be – stocks, bonds, other types of equity – is not attractive,” said Dr Saidi. “That makes gold more attractive.”

Declines in the dollar during recent months have dented the value of GCC oil revenues, which are predominantly weighted in the greenback. According to a report in People’s Daily; The latest rankings of Gold reserves show that, as of mid-December, the United States remains the top country and the Chinese mainland is ranked sixth with 1,054 tons of reserves, the World Gold Council announced recently.

Russia climbed to eighth place because its gold reserves increased by 167.5 tons since December 2009. The top ten in 2010 remains the same compared to the rankings of the same period of last year. And Saudi Arabia squeezed to the top 20. Developing countries and regions, including Saudi Arabia and South Africa, have become the main force driving the gold reserve increase. The International Monetary Fund (IMF) and the European central bank are the major gold sellers, and the IMF’s gold reserves decreased by 158.6 tons.

It should be understood that actual purchases of physical gold are not the only factor in explaining the movement of gold prices. The gold market is marked by organized speculation by large scale financial institutions. The gold market is characterized by numerous paper instruments, gold index funds, gold certificates, OTC gold derivatives (including options, swaps and forwards), which play a strong role, particularly in short-term movement of gold prices. The recent increase and subsequent decline of gold prices are the result of manipulation by powerful financial actors.

China increasing Gold Reserves quietly to become a Gold superpower:
While Western central banks have frittered away their gold, China is quietly building up its reserves. There is evidence that central banks in several regions of the World are building up their Gold Reserves. What are published are the official purchases. A large part of these Central Bank purchases of Gold Bullion are not disclosed. They are undertaken through third party contracting companies, with utmost discretion. US dollar holdings and US dollar denominated debt instruments are in effect being traded in for gold, which in turn puts pressure on the US dollar.

In turn, both China and Russia have boosted domestic production of gold, a large share of which is being purchased by their central banks: It has long been assumed that China is surreptitiously building up its gold reserves through buying local production. Russia is another major gold miner where the Central bank has been purchasing gold from another state entity, Gokhran, which is the marketing arm and central repository for the country’s mined gold production.

Now it has been reported by Bloomberg that the Venezuelan Central Bank director, Jose Khan, has said that country will boost its gold reserves through purchasing more than half the gold produced from its rapidly growing domestic gold mining industry. In Russia, for example, Gokhran sold some 30 tonnes of gold to the Central Bank in an internal accounting exercise late last year. In part, so it was said at the time, the direct sale was made rather than placing the metal on the open market and perhaps adversely affecting Gold prices.

China is currently the world’s largest gold producer and last year it confirmed it had raised its own Central Bank gold holdings by more than 450 tones over the previous six years. China is the world’s largest gold producer. And yet – according to various sources – Gold bullion brokers have not seen any gold coming from China. In other words, China is producing more gold than any other country, but isn’t exporting any of it. As such, China is quietly becoming a gold superpower. China has a habit of being quiet for several years at a time, and then announcing big increases in Gold Holdings.

The 450 tons figure corresponds to an increase in the gold reserves of the central bank from 600 tons in 2003 to 1054 tons in 2009. If we go by official statements, China’s gold reserves are increasing by approximately 10% per annum. China has risen to now be the largest gold producing nation in the world at around 270 tons. The amount bought in by the government initially looks like 90 tons per annum or just under, 2 tons a week.

Before 2003 the announcement by the Chinese central bank that gold reserves had been doubled to 600 tons, accounted for similar purchases before that date. Why so small an amount you may well ask? We think local and national issues clouded the central bank’s view as it was the government that bought the gold since 2003 and have now placed it on the central bank’s Balance Sheet. So we would conclude that the government has ensured central bank gold purchasing must continue.

Backing the yuan or renminbi with some gold will certainly help it become a major international currency. If China backs its currency with gold, it could have profound effects for investors. If China undervalues its currency and runs a large trade surplus as a result, takes a huge radical step and goes all the way to a 100%-reserve gold currency. If this succeeds, China is the new England – the financial capital of the world, forever. In that case, China will need to surpass the Federal Reserve’s official, but un-audited, gold holding of 8,133.5 tons.

It seems extremely likely that senior and influential Chinese policy makers, bankers and government officials may be having similar thoughts. China is the sixth largest holder of gold reserves in the world today and officially has reserves of 1054.1 tons which is less than half those of even euro debtor nations France and Italy who are believed to have 2,435.4 and 2,451.8 tons respectively.

The only thing that matters from China’s perspective is that “suppressing the price of gold is very beneficial for the U.S. in maintaining the U.S. dollar’s role as the international reserve currency." China’s increased gold reserves will thus act as a model and lead other countries towards reserving more gold. Large gold reserves are also beneficial in promoting the internationalization of the RMB.

Why does Federal Reserve ask Banks to test for 12% Unemployment now?
The US Federal Reserve is asking 30 big banks to make sure their capital can withstand a deep recession in which the Unemployment rate rises to 12%, as reported by MarketWatch. As per the Economic data reports released in the previous few months, it has always been noticed that that the US Economy was on an uptrend & also that the employment was on the rise with the last figure being quoted at 7.8% on November 5, when Gold prices witnessed a huge intraday decline.

All these reports were before the US Presidential Elections that were held on 6 November 2012. What so devastatingly drastic may have suddenly happened for the Fed to now initiate such a step just within a week of the Elections taking place? Why does the Fed now fear that unemployment may rise to 12%? Or is it that unemployment has always been around 12+% and the reports announced till now have been only eyewash to avoid rocking the boat before the Presidential Elections? Will we be in for a shock now with more realistic reports slowly pouring in, based on flimsy reasons?

The Fed, which first required big banks to conduct “stress tests” in 2009, laid out three scenarios lenders have to test against. The goal is to ensure that the firms have enough capital to continue operations during stressful economic times. The Fed stressed they were not making economic forecasts “but rather hypothetical scenarios designed to assess the strength of financial institutions in stressful economic environments.”

In addition to considering an unemployment rate of roughly 12% — up from 7.9% in October — in the most severe recession scenario, banks must evaluate how their capital buffers would withstand real GDP declining by around 5%. Banks will also have to test for equity prices that would fall by more than 50% over the course of the recession, with house prices declining more than 20% and with commercial real estate prices falling by a similar amount.

While harsh, the Fed stress test isn’t necessarily as bad as conditions actually were during the so-called Great Recession from late 2007 to 2009. The unemployment rate rose from 4.7% before the recession started in Nov. 2007 to as high as 10%, the economy shrank as much as 8.9% during one quarter, and home prices have tumbled by roughly a third from their peak.

The 30 largest U.S. financial institutions will be required to submit capital plans to the Federal Reserve by January 7. The Fed said that 19 of the largest banks under review have hiked their common capital to $803 billion in the second quarter of 2012 from $420 billion in the first quarter of 2009. The Fed uses the stress tests to decide whether to allow banks to issue dividends and implement stock buybacks. Under the process banks tell the Fed what dividends and stock buybacks they want to issue.

For the first time, the Fed will allow banks to modify these proposals while they discuss the ongoing stress tests with the central bank. The new guidance comes after Ally Financial Inc., Citigroup, MetLife and SunTrust Banks initially failed to have enough capital under a stress test conducted on 19 big banks by the US Federal Reserve in March. The new guidance also conveniently comes after the US Presidential Elections.

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