WISE MONEY

An unnamed bank or banks had lent 380 tonnes of gold to the Bank of International Settlements in return for foreign currencies causing widespread surprise and confusion.
The news that a mystery bank has just pawned the family jewels gave traders a jolt – nervous about the sudden transfer of almost 20pc of the world’s annual gold production and the possibility of a sell-off.

In a tiny footnote in its annual report, the BIS disclosed its unusually large holding of gold, compared with none the year before. The disclosure was a large factor in the correction of the gold price this week, which fell below $1,200 for the first time in more than a month.

Concerns hinged on whether the BIS could potentially sell on this vast cache of bullion in the event of a default, flooding the market with liquidity.

It appears to have raised $14bn for whoever’s been doing the swapping – small fry on the currency markets, but serious liquidity in the gold market.

Denominated in euros, gold has fallen 8pc since the beginning of the month and is now trading at a seven-week low of €937 per troy ounce.

The big gold exchange traded funds (ETFs) – having peaked at record inflows in May – have also been showing net outflows over the past few days.

Meanwhile, economists and gold market-watchers were determined to hunt down which bank is short of cash – curious about who is using their stash of precious metal for what looks suspiciously like a secret bailout.

At first it looked like the BIS was swapping gold with a troubled central bank. After all, the institution is the central bankers’ bank and its purpose to conduct transactions with national monetary authorities.

Central banks in the troubled southern zone of Europe were considered the most likely perpetrators.

According to the World Gold Council, central banks in Greece, Spain and Portugal held 112.2, 281.6 and 382.5 tons of gold respectively in June – leading analysts to point fingers at Portugal, or a combination of the three.

The only other potential monetary authorities with enough gold as the US, China, Switzerland, Japan, Russia, India and Taiwan – and the International Monetary Fund.

This led to musings that the counterparty was the IMF, making sense because the lender of last resort is historically prone to cash shortages and has been quietly selling off gold in the first half of the year.

Renowned gold expert Jim Sinclair adopted this explanation. The panic came when people mistook a lease for a swap, he argues. Far from being a big release of gold into the market, it is simply a commercial arrangement between the IMF and BIS with a favourable rate of interest paid for the foreign currency.

“Gold swaps are usually undertaken by monetary authorities,” he writes on his industry blog, JSMineSet. “The gold is exchanged for foreign exchange deposits with an agreement that the transaction be unwound at a future time at an agreed price.

“The IMF will pay interest on the foreign exchange received. Historically swaps occur when entities like the IMF have a need for foreign exchange, but do not wish to sell the gold. In this case, gold is a leveraging device for needed currency to meet requirements.

“The many reports that characterise the large IMF gold swap as a sale of gold into the markets do not understand the difference between a swap and a lease.”

However, the day after original reports about the swaps, BIS emailed a statement saying that the swaps had not been conducted with monetary authorities but purely with commercial banks.

This did nothing to quell the sense of mystery surrounding the deal or deals. It is almost inconceivable that a single commercial bank could have accumulated so much gold alone. And cynics have suggested that the whole affair still looks like a secretive European bailout that a single country wants to keep quiet.

In this case, one or more of the so-called bullion banks – which act as wholesale market-makers and include Goldman Sachs, Deutsche Bank, JP Morgan, HSBC, Barclays, UBS, Societe Generale, Mitsui and the Bank of Nova Scotia – would have agreed to act on behalf of a monetary authority.

Financial bets against the Pound Sterling have fallen significantly since the emergency Budget – with hedge funds and speculators closing their positions that expected falls in the value of sterling.
In the seven days following the emergency Budget, the number of short positions in sterling fell from 62,267 to 52,397, according to data compiled by the US Commodity Futures Trading Commission.

The number of long positions increased slightly over the same period from 15,921 to 17,626.

The data is based on the activity on the Chicago Mercantile Exchange, which, despite accounting for a fraction of the daily turnover on the world’s currency markets, is seen as representing the wider market.

Short selling of the Pound hit record levels following the formation of the coalition Government with the number of sell contracts reaching 76,745 amid fears that political uncertainty would hamper attempts to tackle the deficit.

But sterling has risen sharply against the dollar over the past month. The pound is up 8 cents or 5.7pc against the dollar since hitting a low of $1.43 on June 8. Yesterday it closed up 0.75 cents at $1.517.

Wise Money urges a note of caution- whilst Sterling’s outlook has improved in the past month, the balance of speculators still hold a net short position by a factor of three to one.

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Your pile of foreign euros left over from your last European holiday might not keep it’s value for the future.
With the ongoing currency and european credit crunch, not all euros are the same and some might be worth more than others in the future.

Each euro banknote’s serial number tells you which country created it.

Worries about sovereign states’ differing abilities to repay their debts prompted world leaders at the G20 Summit in Toronto to pledge they will half their national budget deficits by 2013. But translating words into action will be a more difficult challenge for some than others.

For a few, the challenge could prove simply impossible.

Now rising fears about southern European countries’ financial stability mean it could pay to be able to read the code on your euro.

Some Germans are already insisting on holding on to euros issued in their own country and passing on those backed by southern states. They know from not too distant history what it feels like to be left holding worthless paper which used to be official currency.

All euros are backed by the European Central Bank but the serial numbers prefixed with X may be regarded as most secure because they are issued by Germany. N is also a good prefix, because these come from Austria. P, L, U and Z prefixes may also be favoured because these are issued by the authorities in Holland, Finland, France and Belgium.

Code     Country
Z            Belgium
Y           Greece
X           Germany
V          Spain
U          France
T          Ireland
S           Italy
P           Holland
N          Austria
M         Portugal
L           Finland
H          Slovenia
G         Cyprus
F          Malta
E          Slovakia

If you share widespread fears that the euro cannot last in its present form, you might want to avoid notes with the prefixes F, G, M, S, T or Y. These are issued by Malta, Cyprus, Portugal, Italy, Ireland and Greece- highlighted.

If you have some euro cash left over from your last holiday then Wise Money has a great value euro cash exchange service which includes home/ office delivery service.

China’s announcement over the weekend that it was ending its currency’s two year peg to the US dollar boosted Asian stock markets.
Japan’s benchmark Nikkei 225 stock index gained 177.18 points, or 1.8pc, to 10,172.20 in the morning session and Australia’s S&P/ASX 200 was up 0.7pc at 4,604.30.

Hong Kong’s Hang Seng index climbed 1.4pc to 20,571.40. China’s Shanghai Composite Index added 0.6pc to 2,527.22. Benchmarks in Singapore and Taiwan all advanced in early trading.

Investors gained confidence from Beijing’s announcement Saturday that it would determine the exchange rate from multiple currencies, rather than the dollar alone, analysts said.

The yuan’s value has been pegged to the dollar since the global financial crisis took hold in 2008, causing major friction with countries who say it is undervalued for China’s own benefit.

The Chinese central bank also said it plans no major exchange rate adjustments, dousing speculation over possible one-off moves in the yuan’s dollar value. That reduces uncertainty, allowing some investors to plunge back in after weeks of holding back.

The impact of any change in the yuan’s value will be mixed, he noted, with exporters likely to suffer and importers and airlines, whose debts are denominated in dollars, gaining.

The yuan’s value has been pegged to the dollar for two years, causing friction with countries who say it is undervalued for China’s own benefit. A stronger yuan would make Chinese exports more expensive and bring relief to foreign manufacturers that have struggled to compete.

The official exchange rate for China’s currency stood unchanged Monday morning in line with the central bank’s warning the value of the yuan would not dramatically rise after its two-year peg to the dollar ended.

The People’s Bank of China left the yuan’s parity rate against the dollar unchanged Monday at 6.8275, the official Xinhua News Agency said. The rate is a weighted average of prices given by market makers, excluding highest and lowest offers.

The euro has continued sliding against the US Dollar, reaching it’s lowest level in four years.

Concerns remain about the massive bailout package announced by the EU and IMF last week and how effective (or not) it might be in addressing the core issue affecting troubled EU member states, namely huge fiscal deficits.

The ECB have been intervening directly in secondary bond markets, bringing some well needed stability and halting the huge volatility in yields over past couple of months.

The side effect of the ECBs intervention has been to move all traders with negative view of the Eurozone from the bond market to currencies, and with EU officials publicly announcing the need for a weaker currency, it looks like a one way bet at the moment.

Most of the financial press over the weekend were calling for parity in EuroDollar, but if the market is oversold we may see a short squeeze over the next few days before the Euro moves lower again.

The new UK Government is indicating that is making deficit reduction a priority, Chancellor George Osborne has just announced £6bln of savings the details of which will be announced next Monday.

The emergency budget promised by the Tories in their manifesto will be on the 22nd of June and the Office of Budget Responsibility (newly created by the Conservatives) will publish economic forecasts before the EM because Osborne think the market has completely lost confidence in the current Treasury forecasts (3.5% growth next year does seems on the high side).

Sterling has rallied on the back of this but market sentiment seems still to be for further falls in Sterling against the Dollar- which has reached 1.45- from 1.50 only a week ago.

The Eurozone took yet another pounding yesterday as rigorous fiscal tightening threatens to dampen an already weak recovery.

The euro has crashed to 14 month lows of $1.25 after boosting to nearly $1.31 on Monday after the $1 trillion emergency rescue package was announced.

News that one of the “PIGS”, Portugal is attempting to cut €2 bn from its budget gap has done little to reduce the weakness in the Euro and with more tax hikes and salary cuts due, we could see ugly scenes like those witnessed from Greece.

ECB President Jean-Claude Trichet has stated the ECB is not “embarking on quantitative easing” and he reiterated that “the Governing Council will not tolerate inflation” leading to speculation a rise in interest rates could be on the horizon.

Sterling has also taken a hit this morning with news that the new coalition has already come to loggerheads. With two political parties with separate agendas leading the country, a schedule for cutting the deficit will take longer to agree, and with the credit agencies hovering, a negative outlook over the UK will remain.

A cut in the UK’s prized AAA credit rating would have disastrous consequences to the recovery. Data released yesterday showing the UK’s trade deficit widened more than expected damaged hopes for an export led resurgence.

The US Dollar has been the main winner from the negative news from Europe as investors run for their “safe haven”. The greenback has also been supported by encouraging figures from the US and expectations that the FED will be the first among the major central banks to raise interest rates.

Gordon Brown has headed to Buckingham Palace to ask the Queen to dissolve parliament for a May 6 General Election.

As we have mentioned  many times before, this election will be the most closely watched by the money markets for many years with most attention focused on the how any incoming Government plans to deal with the budget deficit.

All sides have already announced policies aimed at reducing the deficit but expect many more polices over the next month. Markets will closely scrutinise any declared polices and will also be looking for more details from existing proposals so expect increased volatility in Sterling pairs as markets digest the information.

After the announcement by Germany and France of a rescue package for Greece, Government debt stopped making headlines – for last week at least. The Euro continues to be weighed down by expectations of Sovereign risk of its member countries.

The Greek deputy prime minister clearly suggested that if borrowing costs for indebted countries do not decrease the next domino in the pack to topple will be Portugal. Quite how Mr. Pangalos thinks this pearl of wisdom helps any of the PIGS is not clear!

Overnight the Royal Bank of Australia has, as expected raised interest rates to 4.25%, its fifth rise in six meetings, sending the AUS Dollar higher against Sterling, which now trades at 1.64.

Sterling continued its rally against the US dollar yesterday as a combination of mixed macroeconomic data from America and currency converters covering short positions pushed the Pound over the 1.52 level.

Business activity stateside saw larger than forecast declines; in New York the index worryingly dropped from 78.1 to 60.6 suggesting the impressive pace of economic expansion could be slowing.

Although the upward revision of UK GDP from 0.3% to 0.4% was the catalyst of the current Sterling rally, private sector confidence remains weak, confirmed yesterday with the GfK survey down one point to -15.

This, along with the continued spectre of a hung parliament and Friday’s expected strong Non-Farm Payroll numbers from the US means further moves on the upside remain unlikely.

Another day, another disappointing data release from the Eurozone. Data showed inflation running at an annualised pace of 1.5%.

Coupled with the figures from earlier in the week of unemployment rising to 10%, the markets are expecting a continuation of loose monetary policy by the ECB to keep the economic recovery on track.

Over in Ireland, the nationalised lender Anglo Irish announced full year losses of $12.7 Billion as the new bad bank set up by the Government also imposed large charges on loans assumed from other Irish Banks.

Anglo have been singled out by the Governor of the Bank of Ireland as the main culprits in causing the Irish banking crisis in a national newspaper. Which in itself is quite a statement from such an important figure and clearly showing just how much contempt Anglo is held in.

However the pause in its recent decline is more to do with profit taking than a reversal of the currency’s fortunes. 

Today’s Financial Times suggests that £7 billion of short trades are weighing against the eurozone’s immediate currency prospects.

We did see both Euro and Sterling hit 8 month lows overnight as the Asian markets rushed to buy the perceived safe haven US Dollar but once again, proximity to support levels was enough to bounce both rates as Europe entered the fray. 

The concern for Euro bulls is that recovery attempts seem very limited in scope and small in magnitude. 

The rally for the single currency in the US last night was snuffed out by the combination of a late sell off in equities and an expectation that Bernanke’s testimony this evening could very well signal a more hawkish Federal Reserve outlook, with speculation that he might lay groundwork for a tightening of monetary policy.

The contents of this blog are for information purposes only. It is not intended as a recommendation to trade or a solicitation for funds. The Wise Money Blog cannot be held responsible for any loss or damages arising from any action taken following consideration of this information.

The contents of this blog are for information purposes only. It is not intended as a recommendation to trade or a solicitation for funds. The Wise Money Blog cannot be held responsible for any loss or damages arising from any action taken following consideration of this information.