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Posts Tagged ‘US Dollar’

BY MICHAEL PETTIS
October 17, 2011
Financial Sense

My friend Mark Williams sent me last week a reference to a very interesting paper written by Malhar Nabar, an economist at the IMF.  The paper is called “Targets, Interest Rates, and Household Saving in Urban China” and in it Nabar tries to measure the impact of changes in the real deposit rate on changes in Chinese consumptions levels.

How do interest rates normally affect the savings and consumption rate?  The consensus view, of course, is that there should be a negative correlation between interest rates and consumption.  In other words when interest rates rise, households should save more and so consume less out of current income.

Why?  One reason may be that savings are simply postponed consumption, and we are willing to postpone consumption if we are paid enough to do so.  The more you pay me to save in the form of a high interest rate, in other words, the more I save out of current income, and so the less I consume.  The same thing happens, by the way, when rising interest rates cause the cost of consumer financing to rise, and so discourage the use of credit cards.

There is another reason why this may be the case.  Typically we associate rising interest rates with falling stock, real estate and bond prices.  If most of our wealth consists of those three kinds of assets, then higher interest rates should be associated with a decline in our wealth, and because we feel poorer, we reduce our consumption rate.

In both cases rising interest rates are assumed to bring declining consumption and higher savings.  This relationship seems to be supported by the data in many countries.

I am nonetheless a little uncomfortable with the first explanation – that as you increase the reward for postponing consumption, households save more.  I find it hard to believe that people really think this way about savings, and if they did, it seems to me that unless there were an enormous preference for liquidity, in any country in which deposit rates were negative in real terms (i.e. households are paying, not getting paid, to postpone consumption) consumption rates should rise to 100% or more.

This certainly isn’t the case.  In China, for example, deposit rates are seriously negative and have been negative for many years, and yet the household savings rate is nonetheless very high.  In fact it seems that, as a rule, countries with repressed interest rates have higher, not lower savings rates.

What’s more, I have seen US historical data that suggests that when interest-rate declines have coincided with falling, not rising, stock and real estate markets (as they have recently), the savings rate usually rises rather than declines.  In other words households care mainly about their wealth, not about the reward for postponing consumption.

Which explanation is more correct matters a lot for Chinese monetary policy.  We tend to be so US-centric when we think about economics – including, unfortunately, most Chinese economists – that we automatically assume that because raising interest rates in the US will reduce consumption and so limit inflation, it must also be the case in China.

Even very prestigious newspapers, citing prominent economists and research analysts, assure us that in order to fight inflation the PBoC raises interest rates.  Here for example, is what the Financial Times said three months ago:

China has raised interest rates for the fifth time in eight months, indicating the country’s leaders are still focused on taming politically sensitive inflation, despite evidence that the world’s second-biggest economy is slowing. Benchmark one-year lending rates will be raised 25 basis points to 6.56 per cent from Thursday, while one-year deposit rates will go up 25 basis points to 3.5 per cent, the central bank said on Wednesday.

The rise suggests that inflation is likely to have accelerated to a three-year high of more than 6 per cent in June, well beyond Beijing’s comfort zone.  The government is scheduled to announce the inflation figure next week.

Here is Xinhua, on the same day:

The interest-rate hike will help check high inflation and the June CPI data will be 6.2 percent, Lu Zhengwei, chief economist for the Industrial Bank, predicted.

…Guo Tianyong, a professor with the Central China Finance University, said the move is necessary as it can help correct the negative interest rates and manage inflation, but it can also slow economic growth and precipitate inflows of speculative hot money.

A quick Google search uncovers thousands of articles and OpEd pieces that make the same point.

The Empirical Evidence

But for many years I have strongly disagreed with this claim that raising rates is a way of combating inflation.  If it is the wealth effect, and not the consumption-postponement effect, that really drives changes in savings and consumption rates, then raising rates would only reduce consumption if there were a negative correlation between interest rates and wealth, as there clearly is in the US.

Is there a negative correlation between the two in China?  Probably not.  Most Chinese savings, at least until recently, have been in the form of bank deposits.  In a financial system in which deposit rates are set by the central bank, the value of bank deposits is positively, not negatively, correlated with the deposit rate.

Chinese households, in other words, should feel richer when the deposit rate rises and poorer when it declines.  In that case, rising rates should be associated with rising, not declining, consumption and with higher, not lower, inflationary pressure.

I want to repeat this because I think it is a very important source of confusion.  In the past few years the consensus on China has dramatically changed, and as a result many of the things I used to discuss which once sounded so strange and “contrarian” (I hate that word) – discussions for example about the unsustainable increase in Chinese debt, the role of financial repression in undermining household income growth, the nature of the Chinese growth model – are now pretty widely held.

But it is still very rare to hear anyone acknowledge that while raising interest rates in China may be a very good thing – because it reduces the capital misallocation on which Chinese growth is highly dependent – it does not reduce inflationary pressure.  It increases it.

Needless to say that is why I found the Nabar paper so interesting.  My argument had always been a conceptual argument based on balance sheet principles, but Nabar has tested the correlation.  He went out and measured changes in consumption as a function of changes in the real deposit rate.

And he finds in fact, in line with my conceptual argument, that higher real rates really are associated with lower savings and higher consumption.  Here is what he says:

Although a large body of research has examined the determinants of household saving in China, little attention has been directed to interest rates and their impact on saving decisions.  Bank deposits are currently the primary saving vehicle available to Chinese households.
The return households earn on these bank deposits could therefore potentially influence household saving behavior in a tangible way. This research assesses how interest rates affect household saving decisions using a panel dataset that covers China’s 31 provincial-level administrative units over the period 1996–2009.
The main findings are as follows. 

•  Panel estimates suggest that household savings respond strongly to a change in the real interest rate. A one percentage point increase in the real rate of return on bank deposits lowers the urban household saving rate by 0.6 percentage points.

•  A comparison of the relationship across sub-periods shows that the association is stronger in the later period, 2003–09, relative to the earlier period, 1996–2002. The relationship is robust to the inclusion of variables that proxy for other influences on saving such as life cycle considerations and self-insurance against income volatility.  

•  The evidence also indicates that when the return on alternative investment is high (for example when real property price growth is relatively strong), a decline in the real return on bank deposits does not have as negative an impact on household portfolios.  

The results suggest that China’s households save to meet a multiplicity of needs – retirement consumption, purchase of durables, self-insurance against income volatility and health shocks – and act as though they have a target level of saving in mind. An increase in financial rates of return, which raises the return on saving, makes it easier for them to meet their target saving. Financial reform that boosts interest rates could therefore have a strong effect on current tendencies to save. 

The Consumption Share of GDP

I think this is a very important point.  For one thing it confirms the claim that financial repression also represses consumption growth, and so is one of the factors at the heart of China’s economic imbalances – in fact I would say it is the main factor.

It also says that monetary policy may have very different consequences from our hidden assumption that it works the same way in China as it works in the US.  In the US if the Fed wants to lower inflationary pressures, it raises interest rates to reduce household wealth, to raise the cost of consumer financing, and otherwise to put downward pressure on demand by reducing consumption.

In China however when the PBoC raises the interest rate it has limited effect through the cost of consumer financing (consumer finance is negligible in China) and it actually increases household wealth.  This means that raising rates is more likely to encourage inflation than to reduce it.

And since real interest rates have actually declined in the past year, lower real rates help explain why inflation may have already peaked, and why it is coming down.  In fact this may be why financially repressed countries can have both rapid monetary expansion and limited inflation, as they typically do.  Inflation itself, by lowering real rates, can reduce inflationary pressure.  It is self-correcting – at least until households begin withdrawing deposits and spending the money simply because the cost of holding money is too great.

Not surprisingly, as inflation has risen and deposits rates lagged during the past year, much of the evidence suggested that contrary to Beijing’s announced plans, consumption was likely to be declining as a share of GDP.  I have said many times that when they finally published the 2010 data in the China Yearbook 2011, I would expect to see consumption drop from 35.0% in 2009 to 34% in 2010 and perhaps another point lower in 2011.

On Friday my associate Chen Long told me the yearbook had in fact just been published, and he sent me the data.  Our expectation turns out to have been right.  Household consumption for 2010 is reported to be 33.8% of GDP.

Here is the full data:

Aside from the extraordinary decline in the consumption rate, it is interesting to see what happened to the trade surplus.  At 6.4% of GDP in 2010, it is extremely high, but well off its record levels in 2007 and 2008, when as a share of global GDP China’s trade surplus may well have been the highest in modern history.  Notice that as it declined from its peak, investment surged.

This is just what we would have expected.  The negative growth impact of the sharp drop in China’s trade surplus may have forced GDP growth rates to nearly zero, and the sudden and violent expansion in investment was necessary as the counterbalance to keep growth rates high.  Changes in the declining consumption share of GDP have had very little impact on changes in GDP growth.  And it continues to decline.

PS: I often mention my central bank seminar as a fascinating class in which some of the brightest students at Peking University debate and analyze monetary and credit conditions in China in a way that impresses even real central bankers.  The Soros-funded Institute for New Economics Thinking has asked them to provide a blog outlining their deliberations, and you can find here their first few reports examining debt levels in China.  Its in early stages, but keep an eye on it.  These guys are very smart.

Read the entire article HERE.

by Tyler Durden
07/26/2011 18:01 -0400
ZeroHedge

Morgan Stanley has released its comprehensive quarterly metals outlook update for Q3, which while traditionally furiously wrong in its price targets for the assorted metals under consideration, represents one of the best reference materials for the underlying fundamentals behind each hard asset including base and precious metals, steel and bulk commodities, mined energy, rare earths, even such arcania as zircon and titanium dioxide. We suggest readers avoid the conclusion by Morgan Stanley which ultimately will be based on the firm’s prop trading bias, and instead focus on the key supply/demand mechanics in any given product. For the sake of reference, we break down MS’ outlook on gold, silver due to the special place these hold in the modern geo-political and voodoo economic discussions.

Gold

Investment demand is strengthening again…

• Identified and implied investment has become the main driver of demand in the gold market over the past decade and has become essential to absorb the fundamental surplus resulting from mine production, secondary supply, any net sales from central banks and producer hedging, and the long-term decline in jewellery fabrication demand.
• As the transparency of reporting of bar hoarding demand has increased along with the growth in physically backed ETF demand, the depth and structure of the physical investment market has become more visible. In our view, assessing the sustainability of this investment flow has become critical to the gold price outlook.
• According to GFMS, total identifiable investment demand for gold reached a record 1,514t in 2011, or 1,675t if implied investment demand is included, for a new annual record of US$66bn.
• More dramatic growth in investment demand for gold can be pinpointed to 2008-09 and the global financial crisis, which raised serious concerns about a debt deflationary spiral and the long-term purchasing power of the world’s major fiat currencies, especially the US dollar and the Japanese yen.

…as sovereign debt concerns highlight fiat currency risks

• More recently, a sharp rise in inflationary pressures partially driven by a surge in oil prices since February 2011 and the growing risk of sovereign debt default in peripheral countries of the Eurozone have given added impetus to investment demand growth as the fear of sovereign debt contagion has also raised questions over the long-term future of the euro.
• Even more recently, the impending threat of technical default by the US government if the government debt ceiling is breached, and the associated risk of a sovereign debt rating downgrade if a satisfactory long-term debt reduction program is not established have added to investor concerns about the long-term outlook for US treasuries and “risk-free assets.”
• In these circumstances, we expect the long-running bull market in gold will receive further impetus, even if there is no return to QE in the US. However, QE3 is a potential further upside risk to prices in the current environment.
• A further illustration of the growing quasi-monetary role of gold in the current global financial environment has been the persistent trend in official sector sales from net selling to net buying, a trend that we expect to continue, especially now that the sale of the IMF gold tranche has been completed.
• We have increased our annual gold price forecasts by 8%, 22% and 24% for 2011, 2012 and 2013 respectively to US$1,511/oz, US$1,624/0z and US$1,550/oz.

Global supply / demand

Silver

May 2011 correction has reduced risks of demand destruction…

• As GFMS observed in the 2011 World Silver Survey published for the Silver Institute, silver’s “hybrid” precious and industrial nature leads to links with gold, copper, and the CRB index, which can vary greatly.
• In the course of 2011, silver’s precious metal status and therefore its links with gold have been strongly reinforced by investors’ preference to hedge systemic financial risk, rising inflationary pressures, and resurgent political risk in MENA through a cheaper vehicle with characteristics similar to gold as a store of value.
• Driven by a spectacular rally between late March and May led by retail investors, the gold:silver ratio narrowed sharply, reaching its lowest point since October 1980 in early May 2011 at 30:1.
• Closing prices for silver at the peak of the rally in late April 2011 at US$48.70/oz came within 1.5% of the all time high established in January 1980 during the Hunt brothers’ squeeze. Successive increases in the Comex margin requirements then saw prices trade between US$33 and US$36/oz and the gold:silver ratio stabilize around 40 to 44:1.

…helping sustain investment demand going into 2012

• In our view, the 2,000t outflow of silver from ETF funds that has followed this correction is likely to be temporary, as all of the drivers for the initial 3,500t surge in ETF inflows between September 2010 and late April 2011 are still in place.
• Furthermore, the lower trading range for prices since the crash in early May should be an incentive for investors to return to the physical investment market now that the impact of the violent correction has largely been discounted.
• Investor sentiment should also be encouraged by evidence of strongly rising fabrication demand, especially in the brazing alloy/solder and jewellery markets, which are forecast to grow by 8.2% and 3.7%, respectively, in 2011.
• As a result, we have made significant upgrades to prices throughout the forecast period. For 2011, we now expect an average price of US$36.21/oz, up 15% from our previous forecast, and in 2012 we see prices averaging US$36.90/oz, 30% higher than our previous estimate.
• For 2013, we have raised our forecast 32% to US$32.98/oz.

Global supply / demand

MS Q3 Metals

MS Q3 Metals

Read the entire article HERE.

by Zhou Xin and Koh Gui Qing
BEIJING
Wed Jul 20, 2011 9:31am EDT
REUTERS

The urging from China’s currency regulator came as U.S. leaders tried to hammer out an 11th-hour deal to raise a $14.3 trillion debt ceiling for the United States before it runs out of money to cover all its bills on August 2.

“We hope the U.S. government will take responsible policies and measures to boost global financial market confidence and respect and protect the interests of investors,” the State Administration of Foreign Exchange said.

The remarks, published on its website, were carried as a response to queries on whether Beijing will cut its investment in U.S. Treasuries following through from rating agencies saying they may cut the United States’ credit rating.

The agency, which manages China’s $3.2 trillion in foreign exchange reserves, the world’s largest, said its buying and selling of Treasuries were part of normal investment operations.

Due to the size of China’s reserves, Beijing has few choices but to invest the bulk of the stash in U.S. Treasuries, by far the world’s biggest and most liquid asset class.

About two-thirds of China’s reserves are estimated to be invested in dollar assets, ranking Beijing as the biggest creditor to the United States.

While China is keen to cut its reliance on the dollar by investing its reserves in other assets, its currency regulator acknowledged the crucial role of Treasuries by saying it is “an important investment product for both U.S. domestic and international institutional investors.”

The currency regulator also argued it cannot invest too much of China’s reserves in commodities such as oil, gold and silver these markets are too volatile and small.

“Chinese companies and households consume a large amount of gold and crude oil,” it said.

“If we use much of our foreign exchange reserves to invest in such areas, we could push up market prices, which may affect our people’s consumption and economic development.”

Read the entire article HERE.

By Damon van der Linde
Tue, Jul 12, 2011
Exclusive to Gold Investing News

Insecurity over Italy’s financial stability and sinking confidence in the country’s government have made Italy the latest target of Euro Zone contagion fears. These concerns have called into question what role investment in gold will hold as a traditional safe-haven against inflation.

“I think there is great danger in gold being unloaded in specific countries in this problem, and very specifically Italy, which has a huge amount of gold not only as a percentage of the reserves, but the tonnage is one of the largest,” said Jon Nadler, a senior metals analyst at Kitco. “This is the very purpose you keep gold in the basement for the rainy day when you need absolutely to raise cash.”

The European Union is currently in the midst of talks to help determine solutions to Italy’s debt crisis, which is currently at 120 percent of gross domestic product (GDP), the second highest in the Euro Zone after Greece. This has prompted EU discussion encouraging the Italian government to pass an austerity budget to demonstrate it’s initiating reforms.

“I think the Euro has been quite an experiment and a lot of people have thought that maybe it will break up within the first two decades of its existence,” said Nadler. ”I’m not sure if that’s the most important part here. I think that the most important part is what happens with the various economies and how, with the austerity measures, translate into social problems, if any. That’s where the danger really lies.”

According to the June 2011 statistics from the World Gold Council, Italy holds 2,451.8 tonnes or 71.9 percent of its total reserves in the gold. In 2007, when Italy’s debt was 107 percent of the GDP, the country sold gold reserves to relieve the financial troubles. Nadler suggests that rather than selling gold reserves, Italy should consider using the metal as collateral while a more long-term solution can be achieved.

“There is nothing easier to reach for, nothing more liquid, nothing easier to pledge to the IMF or European Union than gold,” said Nadler. “If that goes as a further step to allowing them to breathe easier than great, it shows that gold has value in a central bank basement after all. I think it would highlight gold more positively to say it shined when it was more needed.”

This would, of course, require the co-operation of not only the EU, but of all the major players in the global economy who have holdings in the country’s debt.

“Right now I think we need to watch how the EU gets its act together and enlarges the stability fund, and we have to see to what extent China will utter supportive works to Italy as it did to Spain and Portugal in a vote of confidence,” said Nadler. “Obviously they do have some exposure to that type of instrument and I don’t think they’re going to be dumping it, knowing that it does more damage to the remaining holdings.”

The euro slid Monday on concerns about the situation in Italy, trading down 1.5 percent at $1.4050 at the start of US markets. European stock markets have also been falling, and the yellow metal hit a new all-time high in euro terms, though Nadler says that individual investors should not be too excited about the prospect of soaring gold prices as it would mean disaster for many other investments.

“Gold should be a core, long-term, ‘don’t touch,’ insurance asset. There’s no point in trying to ‘make money on gold’ because gold is not a money-making investment,” said Nadler. “People are rooting for $2,000, $3,000 and $5,000 gold, but they clearly have to weight that against what their entire portfolio would look like when gold achieved that magic number. It would be in shambles, so no one should wish for gold to go to the moon because that implies much, much suffering elsewhere.”

Read the entire article HERE.

European financial markets crumbled Monday as government bond yields surged again in Spain and Italy, deepening fears that the continent’s debt crisis had entered a far more dangerous phase.

U.S. stocks also were broadly lower. Gold hit a record high in early trading as investors ran for cover, and the euro plunged.

While European authorities still are wrestling with bailouts of Greece, Ireland and Portugal, the “contagion” from the debt crisis has spread to Spain and Italy over the last week. Market yields on Spanish and Italian bonds have risen for six straight sessions as investors demand ever-higher returns to buy the countries’ debt — a sign of waning confidence.

The yield on 10-year Italian bonds (charted below) soared to 5.68% from 5.27% on Friday and 4.91% a week ago.

The Spanish 10-year bond yield jumped to 6.03% from 5.68% on Friday.

Many analysts have warned for months that if the crisis ensnared Spain and Italy the future of the eurozone and the 12-year-old euro currency would be threatened because there is no way the rest of Europe could bail out those two huge economies.

“Spain and Italy are nearly five times the size of Greece, Portugal and Ireland and carry nearly four times the volume of debt,” said Michael Darda, economist at MKM Partners in Stamford, Conn. “Thus, they are a much larger threat to the integrity of the eurozone itself.”

European stock markets, which were hammered last week, tumbled again on Monday. The Italian market plummeted 4% after diving 7.2% last week. Spanish stocks slid 2.7% for the day, Portugal slumped 4.1%, France fell 2.7% and the German market sank 2.3%.

The euro plunged 1.7% to a four-month low of $1.402 from $1.426 on Friday.

German Chancellor Angela Merkel said at a press conference that Germany was “steadfastly determined to defend the stability of the euro.” But she also said Italy needed to send an “important signal” to markets by agreeing to new austerity moves.

Gold hit a record high early in the session, reaching $1,557.60 an ounce, then eased a bit. The metal closed at $1,548.80 in New York futures trading, up $7.60 for the day. The record closing high was $1,556.70 an ounce on May 2.

U.S. Treasury bonds also benefited as investors sought safety. The 10-year T-note yield fell to 2.93% from 3.03% on Friday, even though budget-cutting negotiations between the White House and Republican leaders seem at impasse.

On Wall Street stocks fell at the opening bell and have been drifting since. The Dow industrials were off 148 points, or 1.2%, to 12,509 at about 11:10 a.m. PDT.

Market bulls have been clinging to hopes that second-quarter earnings reports will reenergize the U.S. market. Aluminum giant Alcoa Inc. will kick off earnings season after the closing bell Monday.

Read the entire article HERE.

By SHAI OSTER
MAY 9, 2011
Wall Street Journal

HONG KONG—Wages are rising in China, heralding the possible end of an era of cheap goods.

For the past 30 years, customers would ask William Fung, the managing director of one of the world’s biggest manufacturing-outsourcing companies, to make his products—whether T-shirts, jeans or dishes—cheaper. Thanks to China’s seemingly limitless labor force, he usually could.

Now, the head of Li & Fung Ltd. says the times are changing. Wages for the tens of thousands of workers his Hong Kong-based firm indirectly employs are surging: He predicts overall, China’s wages will increase 80% over the next five years. That means prices for Li & Fung’s goods will have to rise, too.

(Click for a Larger Image)

“What we will have for the next 30 years is inflation,” Mr. Fung said. “A lot of Western managers have never coped with inflation.”

The issue is likely to hover behind talks Monday, between Chinese and U.S. leaders in Washington at their annual Strategic Economic Dialogue. Currency and debt issues are expected to dominate the agenda. But there are signs that the low labor costs—and cheap currency—that led to China’s huge trade surplus with the U.S. could be reaching a tipping point. This comes amid pressure from rising wages as China’s working-age population begins to decline.

For decades, plentiful Chinese labor kept down costs of a range of goods bought by Americans. Even as politicians in Washington accused China of hollowing out the American manufacturing sector, cheap DVD players, sweaters and barbecue sets were a silver lining for consumers who grew accustomed to ever-lower prices. China also kept down the value of its currency, giving domestic exporters a competitive edge.

“Inflation has been damped pretty dramatically in the U.S. because it exported work to China and other places at 20% or 30% of the cost,” said Hal Sirkin, a consultant at Boston Consulting Group. The years of dramatic reductions in costs are over, the firm says.

Li & Fung traces the start of rising wages to the “Foxconn Effect.” Foxconn is the trade name of Hon Hai Precision Industry Co., maker of iPads for Apple Inc., and computers for Hewlett-Packard Co., among others. After a string of worker suicides last year at one of its China plants spurred Foxconn to defend its treatment of employees, the company raised wages 30% or more in a bid to improve worker conditions. That raise came as workers at other factories, including staff at a Honda Motor Co. parts plant, went on strike for higher pay.

Since then, the Chinese government has supported higher wages in part to address labor unrest, but also as way to boost domestic consumption and reduce reliance on exports to expand the economy. The rising wages affect both foreign and domestic companies.

Other factors besides rising wages are pushing up the price of goods. Chinese workers, for one, are starting to buy more with their higher salaries. That’s contributing to higher prices for commodities such as cotton and oil, which are already climbing in part because of a weaker dollar. Rising living standards in developing economies like China will keep prices of natural resources high as demand outpaces supply.

China’s move to let the yuan slowly appreciate in value—something eagerly sought by its Western trading partners—adds fuel to the fire. A stronger yuan makes it cheaper for China to import the raw materials it needs, such as iron and soybeans, helping tame domestic inflation. But it makes its exported goods more expensive for other countries to buy.

“This idea that we have moved from an era of easy deflationary environment to one of inflation is correct,” said Jeffrey Sachs, economist and director of the Earth Institute at Columbia University.

During China’s 30 years of economic growth, hundreds of millions of factory and urban jobs soaked up surplus rural farm labor. In the past three or four years, he says, that extra labor has been exhausted.

Many analysts predict that China’s vast labor force will begin declining in the next year or two, the result of family-planning policies. Others say there’s already a shortage of the most active members of the factory floor, workers aged 15 to 34. That group has been steadily declining since 2007, according to Jun Ma, Deutsche Bank’s chief economist for Greater China. A shrinking work force will need higher salaries to support an expanding population of elderly.

There’s some debate about the impact and extent of these wage increases on foreign markets. The pace of inflation for U.S. imports is running around 7% this year, but it doesn’t account for a big enough portion of spending to significantly affect overall low inflation rates of about 1.6%, Morgan Stanley’s China strategist Jonathan Garner said. Still, with real wages stagnant for decades, many Americans who have grown dependent on cheap imported goods such as polo shirts or power tools could see their purchasing power decrease.

China still has cheap labor in its interior, away from its developed coastal cities, and productivity gains could mitigate higher wage costs. For example, Foxconn announced it was expanding operations to inland areas near Chengdu, Wuhan, and Zhengzhou, away from its coastal base.Li & Fung is encouraging its suppliers to invest more in their factories to increase worker productivity and raise the quality of goods.

There are limits to what those measures will achieve. Some analysts say that the wage increases will sharply outpace any productivity gains. Moving inland means lower wages, but higher transportation costs on China’s crowded highways and railroads. Furthermore, locating the factories in China’s hinterland puts them in a better position to service China’s growing domestic consumer market instead of exporting to consumers in the U.S. and elsewhere.

Faced with rising wages within China, some companies are shifting resources elsewhere to keep costs down. Yue Yuen Industrial (Holdings) Ltd., the world’s biggest shoe maker, has started moving manufacturing of low-cost shoes from China to countries such as Bangladesh and Cambodia. Li & Fung has been hired a prominent Chinese sneaker brand, Li Ning Co., to help it search for cheap production outside China.

But the wage gap between China and other developing countries will shrink, said Mr. Fung, echoing views shared by Boston Consulting Group, because “China was the thing that kept the price low,” he says. “China was the benchmark. With the China price rising, everyone else wants to raise prices.”

As factories relocate to other countries, local wages will rise faster than they did in China because the potential pools of surplus labor are smaller. In addition, because no other country can replicate the massive scale of China, logistics will become a larger part of costs as companies are forced to slice up their manufacturing over several countries, analysts say.

“Things will be more expensive and people will buy less,” Mr. Fung warns. That means that the West will have to adopt new consumption trends.

Read the entire article HERE.

by Ian Traynor and Helena Smith
May 10, 2011
The Sydney Morning Herald

THE euro zone’s first bailout of a debt-laden member country is failing and needs to be renegotiated just a year after the €110 billion ($147 billion) rescue package was agreed for Greece.

After secret talks in Luxembourg on Friday between Athens and key EU players, it emerged that Greece will not be able to meet the terms of last year’s rescue and is hoping to ask the euro zone for more.

As Britain made clear it did not want to offer any more support for Greece as part of an EU package or a bilateral loan, investors remained unconvinced of the ability of Athens to sustain its €340 billion debt.

Signalling that his government would struggle to finance itself on the bond markets by next year – which was part of the deal struck with the euro zone and the IMF – the Greek Finance Minister, George Papaconstantinou, said: ”We will either go out to markets or use the recent decision by the EU that allows the European fund to buy Greek bonds. The markets continue to disbelieve in our country.”

His trip to Luxembourg had been kept so quiet in Athens that only the Prime Minister, George Papandreou, knew about the discussions, which were led by Jean-Claude Juncker, the Luxembourg Prime Minister and president of the group uniting the 17 countries using the single currency. Mr Juncker confirmed that the Greek bailout would need to be renegotiated amid alarmist reports that the country was contemplating reintroducing the drachma.

After the talks – attended by the finance ministers of Germany, France, Italy and Spain as well as Olli Rehn, European monetary affairs commissioner – Mr Juncker said the Greek package needed a ”readjustment”. Haggling over a new Greek deal is set to dominate the weeks ahead.

EU finance ministers will debate the topic next week and the Germans, in particular, are digging in their heels.

The British Chancellor of the Exchequer, George Osborne, made clear Britain felt it had done enough to support Greece. He told the BBC: ”We certainly don’t want to be part of any bailout of Greece. There are some very difficult questions that Greece has to address now because the whole assumption when the euro zone put together a rescue package last year was that Greece could come back into the market next year and borrow.

”The market is quite sceptical about that happening, and I suspect a lot of my time over the next few weeks is going to be with other European finance ministers and others talking about how we try and help the Greeks.”

Britain provided a bilateral loan to Ireland last year, but Mr Osborne said: ”I can’t see us ever writing a cheque directly from the British taxpayer to the Greeks or the Portuguese or indeed anyone else. Ireland was a special case.”

There was tension in Ireland after the central bank governor was accused of contributing to Ireland’s financial crisis by woefully ”miscalculating” bank losses. The attack on Patrick Honohan came amid reports that the IMF, European Union and European Central Bank troika had agreed to a behind-the-scenes interest rate cut in Ireland’s €85 billion bailout.

Read the entire article HERE.

Tyler Durden
ZeroHedge
May 1, 2011

While it will not surprise anyone that Japan, which for the past 3 decades has been a monetary policy basket case caught in what bankers like calling a deflationary spiral (yet which others like Sean Corrigan merely define as prices re-indexing to a fair value absent endless cheap credit crutches), has constantly had to resort to a record loose monetary policy coupled with endless episodes of quantitative easing, some may not know that over the past month Japan has seen its current account balance swell by $250 billion, or nearly half the entire Fed QE2 monetization mandate. And as the BOJ continues to disclose the full extent of the Japanese economic devastation following March 11, we are confident that very soon the most recent episode of Japanese “printing” will surpass the $600 billion that the Fed is injecting into the US economy (in addition to the roughly $250 billion in Treasury bonds monetized by the BOJ each year): an amount roughly 5 times greater than America’s when expressed as a ratio of GDP. It is thus no surprise then that Bernanke does not seem too concerned with the purported end of QE – after all money printing is merely moving from developed world point A to developed world point B. And thanks to monetary linkages of “globalization” all this brand new money will once again find its way into speculative assets, and thus, Fed mandate #3 favorite – Russell 2000.  Below we provide a closer look at what exactly the current and future, Japanese QEasing will look like.

To do that, we present some observations from an Ad Hoc Comment by GaveKal: “The Understandable Japanese Liquidity Surge.” As we presented yesterday, while for the time being the Japanese monetary base (unlike our own exploding Adjusted Monetary Base) will not show much if any change for a few months, the Japanese current account balance has “swollen by Yen equivalent of $250 billion in the past few days  (i.e., about half of the amount of QE).” This is shown on the chart below:

And since this move does not occur in isolation, it has impacted the broader total assets category of the BOJ, which is now close to an all time high following the recent surge:

So while it is now obvious that Japan has quietly, and without much fanfare moved into another monetization regime, the two questions remaining are: i) what is the mechanism by which Japan is pumping a quarter trillion into the market, and ii) and, much more important, where is this money going? GaveKal answers question #1:

Breaking down the BoJ’s increase in assets, it seems that the entire increase of the past week is pretty much attributable to one source – loans by funds supplying operations against pooled collateral (green line below). This is clearly a change in normal practices:

Click Chart for larger view

• In 2002-2004, the BoJ injected cash in the system by purchasing treasury bills (dark blue above).
• In 2008, the little the BoJ did was through the purchase of foreign assets and even then, the BoJ’s intervention was sterilized through the sale of JGBs (yellow line going down).

So what is this ‘loans by funds against pooled collateral’? Given the underlying amount, the only explanation we come up with (though we look forward to alternative theories from clients) is that the BoJ has dramatically increased its bank repo operation; in essence, making sure that the banks are not scarce of cash in the middle of the current national emergency. Importantly, so far, there seems to be no sterilization by the BoJ of this cash injection. A fact which begs a number of important questions, including:

• Why isn’t the Yen retreating on this news? Is it just a question of delays and the markets still finding their footing after the massive exogenous shock of two weeks ago?
• Where will that excess money go? Will it all go into rebuilding the devastated areas? Will it go into local stocks? Or will we see what we saw in 2003 onwards from Japanese investors, namely a rush for carry?

On this last point, it is interesting to note that since the G7 intervention was announced on the 18th, the typical ‘carry’ currencies, namely AUD, NZD, ZAR, BRL, etc., have done rather well:

Click Chart for larger view

As for question #2, as Louis Gave speculates, the excess money, instead of hitting the Nikkei, and with the dramatic relative underperformance of the Japanese stock market compared to the US this would not be surprising at all, could simply be fuelling the latest surge in commodity prices, which at this point provide far greater rates of return than stocks (by now everyone has seen the parabolic rise in silver prices in 2011 soon to be followed by gold and all other commodities). To wit:

Another possibility of course is that this excess liquidity is already helping fuel the next leg of the equity bull market while a more worrying development would be if this excess cash found its way in the hot ‘momentum’ trades of the day, namely oil, gold or silver.

Thus if the March action by the BOJ has taken about one month to translate into a nearly $20 spike in silver, just what will happen as the BOJ is forced to pump hundreds of billions more into its market? And pump it will: after holding back for over a month on the consequences of Japan’s earthquake, tsunami and nuclear disaster, the head of the central bank has finally stepped up to the plate and warned that the Japanese economic outlook is “very severe.”

First a quick overview of what was disclosed about the Japanese economy in the past week: factory output fell at a record monthly pace in March, household spending declined at a record annual rate and another private survey showed manufacturing activity languishing at a two-year low. This is about as catastrhopic for a deflationary economy as it gets. And with apologies to Larry Kudlow, there is no boost in GDP coming any time soon. In fact, March monthly GDP was cut to the lowest since Lehman.

So with its back to the wall, what is Japan to do? More of the same of course. From Reuters:

Bank of Japan Governor Masaaki Shirakawa said on Saturday that the country’s economic outlook was very severe and that the central bank would take appropriate action to support the economy.

But he offered few clues on whether and when the BOJ would expand its asset-buying scheme, only saying that its next policy step would depend on economic conditions at the time.

“The BOJ sees the outlook for Japan’s economy as very severe,” Shirakawa told a financial committee meeting in the lower house of parliament.

“We’d like to take appropriate policy steps as needed while monitoring the economy and prices, taking into account that uncertainty over the outlook is high,” he said.

Asked by a lawmaker whether the BOJ would consider buying more government bonds to support the economy, Shirakawa said only: “We’d like to consider in earnest what would be the desirable step to take.”

The BOJ kept monetary policy unchanged on Thursday even as it lowered its growth forecast for the current fiscal year, which began in April, and warned of uncertainties over the extent of damage that last month’s devastating earthquake would inflict on the economy.

Shirakawa reiterated that having just expanded its asset purchasing scheme days after the March 11 quake, the BOJ preferred to spend more time examining the impact the step would have on the economy.

But he also left open the possibility of easing monetary policy further if damage from the quake proved bigger than expected, stressing that the central bank was focusing on downside risks to growth for the time being.

In a sign some in the BOJ were more cautious about the economic outlook than Shirakawa, Deputy Governor Kiyohiko Nishimura proposed on Thursday expanding the central bank’s asset buying scheme by 5 trillion yen ($62 billion).

While the proposal was outvoted by the board, some market players said it may be a sign the BOJ may loosen policy as early as next month.

And loosen it will, because unfortunately as the past 30 years have shown, the country at this point has no other choice but to take the same toxic medicine which merely removes the symptoms briefly, while making the underlying problems far worse.  Also, with the Fed threatening to end QE2 in precisely two months, someone out there has to be dumping hundreds of billions in infinitely dilutable 1 and 0s into primary dealer prop desks. Furthermore, as shown above, the BOJ needs not to buy securities outright: tinkering with the shadow economy in the form of the repo market will provide just as desirable an outcome… If, of course, said outcome is to see gold and silver continue on their relentless rise to new all time record highs. And/or higher. Because the only thing limiting the price of gold is price stupidity and the amount of paper money in existence. Both are infinite.

Part 2 of our “Japan resumes hyprintspeed speed” series comes courtesy of The Privateer‘s Bill Buckler who has discovered that quadrillion is the new black.

The latest projections from the Japanese Finance Ministry regarding the fiscal year which started on April 1 make for sobering reading. They say that Japan’s “public” (funded) debt will probably rise by 5.8 percent this year – to 997.7 TRILLION Yen ($US 12.2 TRILLION at current exchange rates). Should these projections be even slightly on the optimistic side – and government financial projections always are – then Japan could easily be looking at a public debt of 1,000 TRILLION Yen by March 31, 2012.

There is another way of expressing 1,000 TRILLION. It is the same as ONE QUADRILLION.

The sheer magnitude of these numbers has long been a talking point for the watchers of international finance. Now, they are becoming very nervous indeed. The OECD has recently “urged” the Japanese government to “do something” about their deficits, especially in the wake of the earthquake disaster. Noting that Japanese sovereign debt is about to hit 204 percent of GDP, they suggested that Japan’s current sales tax be “at least” doubled from its present 5 percent to 10 percent. The Japanese Foreign Ministry politely declined to comment on this suggestion, contenting themselves with assuring the OECD that – “We will continue to work to maintain and secure trust in Japanese government bonds.”

At this, a line from Rosencrantz and Guildenstern are Dead comes to mind: “Eternity’s a terrible thought. I mean, where’s it all going to end?” While this has been mostly a rhetorical question over the ages, G7 central planners are set to provide a definitive answer very soon.

(and people worry about the “bubble” in precious metals)

Read the entire article HERE.

By Doug Casey
Chairman, Casey Research
Monday, April 18, 2011

A meme is now circulating that gold is in a bubble and that it’s time for the wise investor to sell. To me, that’s a ridiculous notion. Certainly a premature one.

As you listen to the current blather from talking heads about where gold is going, keep in mind most of them are just journalists, reporters that are parroting what they heard someone else say. And the “someone else” is usually a political apologist who works for a government. Or a hack economist who works for a bank, the IMF, or a similar institution with an interest in the status quo of the last few generations.

You should treat almost everything you hear about finance or economics in the popular media as no more than entertainment.

So let’s take some recent statements, assertions, and opinions that have been promulgated in the media and analyze them. Many impress me as completely uninformed, even stupid. But since they’re floating around in the infosphere, I suppose they need to be addressed.

“Gold is expensive.”

This objection is worth considering – for any asset. In fact, it’s critical. We can determine the price of almost anything fairly easily today, but figuring out its value is as hard as it’s ever been. From the founding of the U.S. until 1933, the dollar was defined as 1/20th of an ounce of gold. From 1933 it was redefined as 1/35th of an ounce. After the 1971 dollar devaluation, the official price of the metal was raised to $42.22 – but that official number is meaningless, since nobody buys or sells the metal at that price.

(More importantly, people have gotten into the habit of giving the price of gold in dollars, rather than the value of the dollar in gold. But that’s another subject.)

Here’s the crux of the argument. Before the creation of the Federal Reserve in 1913, a $20 bill was just a receipt for the deposit of one ounce of gold with the Treasury. The U.S. official money supply equated more or less with the amount of gold.

Now, however, dollars are being created by the trillion, and nobody really knows how many more of them are going to be shazammed into existence. It is hard to determine the value of anything when the inch marks on your yardstick keep drifting closer and closer together.

“Gold is risky.”

Risk is largely a function of price. And as a general rule, the higher the price, the higher the risk, simply because the supply is likely to go up and the demand to go down – leading to a lower price. So yes, gold is riskier now, at $1,400, than it was at $700 or at $200. But even when it was at $35, there was a well-known financial commentator named Eliot Janeway (I always thought he was a fool and a blowhard) who was crowing that if the U.S. government didn’t support it at $35, it would fall to $8.

In any event, risk is relative. Stocks are very risky today. Bonds are ultra risky. Real estate is in an ongoing bear market. And the dollar is on its way to reaching its intrinsic value.

Yes, gold is risky at $1,400. But it is actually less risky than most alternatives.

“High gold prices will bring on huge new production, which will depress its price.”

This assertion shows a complete misunderstanding of the nature of the gold market. Gold production is now about 82.6 million ounces per year and has been trending slightly down for the last decade. That’s partly because at high prices, miners tend to mine lower-grade ore. And partly because the world has been extensively explored, and most large, high-grade, easily exploited resources have already been put into production.

But new production is trivial relative to the 6 billion ounces now above ground, which only increases by about 1.3% annually. Gold isn’t consumed like wheat or even copper. Its supply keeps slowly rising, like wealth in general. What really controls gold’s price is the desire of people to hold it, or hold other things – new production is a trivial influence.

That’s not to say things can’t change. The asteroids have lots of heavy metals, including gold. Space exploration will make them available. Gigantic amounts of gold are dissolved in seawater and will perhaps someday be economically recoverable with biotech. It’s now possible to transmute metals, fulfilling the alchemists’ dream. Perhaps someday this will be economic for gold. And nanotech may soon allow ultra-low-grade deposits of gold (and every other element) to be recovered profitably. But these things need not concern us as practical matters in the course of this bull market.

“Gold sentiment is at an all-time high.”

Although gold prices are at an all-time high in nominal terms, they are still nowhere near their highs in real terms – of about $2,500 (depending on how much credibility you give the government’s CPI numbers) – reached in 1980. Gold sentiment is still quite subdued among the public. Most of them barely know it even exists.

Some journalists like to point out that since there are a few (five, perhaps) gold dispensing machines in the world, including one in the U.S., there’s a gold mania afoot. That’s ridiculous, although it shows a slowly awakening interest among people with assets.

Journalists also point to the numerous ads on late-night TV offering to buy old gold jewelry (generally at around a 50% discount from its metal value) as a sign of a gold bubble. But this is even more ridiculous, since the ads are inducing the unsophisticated, cash-strapped booboisie to sell the metal, not buy it.

You’ll know sentiment is at a high when major brokerage firms are hyping newly minted gold products, and Slime Magazine (if it still exists) has a cover showing a golden bull tearing apart the New York Stock Exchange. We’re a long way from that point.

***

These are some of the more egregious arguments against gold that are being brought forward today. Most of them are propounded by knaves, fools, or the uninformed.

The bottom line is that gold and its friends are no longer cheap, but they have a long way – in both time and price – to run. Until they’re done, I suggest you be right and sit tight.

Good investing,

Doug Casey

Editor’s note: Doug Casey, chairman of Casey Research, is a best – selling author, international investor, and entrepreneur. He travels the world looking for the best real estate and natural resource investments. His work is required reading here at DailyWealth.

Each month, Doug and his team provide subscribers of The Casey Report with the kind of investment analysis you won’t read anywhere else in the world. We think one good rant from Doug is worth twice the subscription price. Click here to learn more about The Casey Report.

Submitted by Jeff Clark of Casey Research
Wednesday, 23 March 2011

What will happen to the U.S. economy and the dollar in the near term? Will inflation increase dramatically? What is the outlook for gold, and where should you put your money? BIG GOLD asked a world-class panel of economists, authors, and investment advisors what they expect for the future. Caution: strong opinions ahead…

Jim Rogers is a self-made billionaire, author of the best-sellers Adventure Capitalist and Investment Biker, and a sought-after financial commentator. He was a co-founder of the Quantum Fund, a successful hedge fund, and creator of the Rogers International Commodities Index (RICI).

Bill Bonner is the president and founder of Agora, Inc., a worldwide publisher of financial advice and opinions. He is also the author of the Internet-based Daily Reckoning and a regular columnist in MoneyWeek magazine.

Peter Schiff is CEO of Euro Pacific Precious Metals (www.europacmetals.com) and host of the daily radio show The Peter Schiff Show (www.schiffradio.com). He is the author of the economic parable How an Economy Grows and Why It Crashes and the recent financial bestseller The Little Book of Bull Moves: Updated and Expanded. He’s a frequent guest on CNBC, Fox Business, and is quoted often in print media.

Jeffrey Christian is managing director of CPM Group (www.cpmgroup.com) and a prominent analyst on precious metals and commodities markets. CPM Group produces comprehensive yearbooks on gold, silver, and platinum group metals, and provides a wide range of consulting services. Jeffrey publishedCommodities Rising, an investors’ guide to commodities, in 2006.

Walter J. “John” Williams, private consulting economist and “economic whistleblower,” has been working with Fortune 500 companies for 30 years. His newsletter Shadow Government Statistics (shadowstats.com) provides in-depth analysis of the government’s “creative” economic reporting practices.

Steve Henningsen is chief investment strategist and partner at The Wealth Conservancy in Boulder, CO, assisting clients interested in wealth preservation. Current assets under management exceed $200 million.

Frank Trotter is an executive vice president of EverBank and a founding partner of EverBank.com, a national branchless bank that was acquired by the current EverBank in 2002. He received an M.B.A. from Washington University and has over 30 years experience in the banking industry.

Dr. Krassimir Petrov is an Austrian economist and holds a Ph.D. in economics from Ohio State University. He was assistant professor in economics at the American University in Bulgaria, then an associate professor in finance at Prince Sultan University in Riyadh, Saudi Arabia. He is currently an associate professor at Ahlia University in Manama, Bahrain. He’s been a contributing editor for Agora Financial and Casey Research.

Bob Hoye is chief financial strategist of Institutional Advisors and writes Pivotal Events, a weekly market overview. His articles have been published by Barron’s, Financial Post, Financial Times, and National Post.

BIG GOLD: A lot of economists, including the government, believe the worst is behind us economically. Do you agree? If not, what should we be on the lookout for in 2011?

Jim Rogers: It is better for those getting all the government largesse, but the overall situation is worse. More currency turmoil. State and local problems, plus pension problems.

Bill Bonner: None of the problems that caused the crises in Europe and America have been resolved. They have been delayed and expanded by more debt and more money printing and will lead to more and worse crises. Deleveraging takes time. 2011 will, most likely, be a transition year… not unlike 2010. But the risk is that one of these latent crises will become an active crisis.

Peter Schiff: To me, it’s like watching someone walk into the same sliding glass door again and again. Wall Street must know by now that large infusions of liquidity from the Fed spur present consumption at the expense of investment for the future. We are an indebted family going out for an expensive meal to celebrate getting approved for a new credit card. It might feel good (at the time), but we’re still simply delaying the inevitable.

Jeffrey Christian: We believe the worst is behind us economically, in the short term. The recession ended in late 2009, and 2010 saw U.S. economic growth in line with what CPM had expected, but higher than the more pessimistic consensus had been. In 2011 we expect continued expansion. We think some economists and observers are too enthusiastic about economic prospects right now.

For the U.S. in 2011, we are looking for real GDP of 2.5% – 2.8%, inflation to remain low, and for the economy to avoid deflation. Interest rates are expected to start rising, perhaps significantly in the second half of 2011. The dollar is expected to be volatile, rising somewhat against the euro but continuing to weaken against the Canadian and Australian dollars, the rupee, yuan, rand, and other currencies.

European sovereign debt issues will continue to plague financial markets, but market reactions will be less severe than they were regarding Greece in April 2010.

John Williams: An intensifying economic downturn – what formally will be viewed as the second dip of a double-dip depression – already has started to unfold. The problem with the economy remains structural, where household income is not growing fast enough to beat inflation, and where debt expansion – encouraged for many years by the Fed as a way to get around the economic growth problems inherent from a lack of income growth – generally is not available, as a result of the systemic solvency crisis. Accordingly, individual consumers, who account for more than 70% GDP, do not have the ability, and increasingly lack the willingness, to fuel the needed growth in consumption on which the U.S. economy is so dependent.

Steve Henningsen: The governments worldwide (I don’t pay much attention to economists) want us to believe that the worst is behind us because the financial system is built upon the foundation of trust and confidence. Both of these were battered badly when it was shown that much of the world’s prosperity over the past few decades was simply a mirage that, once dispersed, left behind only debt with no means of future production. Now they want us to believe that they fixed the problem via more debt.

What I will be watching for this year is sovereign and U.S. municipal debt corpses floating to the surface sometime in the months ahead.

Frank Trotter: Right now I have a somewhat dark but not dismal outlook. I think that over 2011, we will continue to experience a Jimmy Carter-style malaise that combines continuing high unemployment, tentative business investment, rising prices, low housing numbers when looked at on an absolute basis, and creeping interest rates.

As a very large mortgage servicer, we are not seeing significant improvements in payment patterns that would indicate the worst is fully behind us, and with mortgage rates moving upward, we see less ability for current mortgage holders to refinance and reduce payments.

Krassimir Petrov: No, the worst is yet to come. No structural changes have been made, no problems have been fixed. Printing money, a.k.a. Quantitative Easing, is a quick fix that has postponed the problem, yet also made it a lot worse. I would say that we are still in the early stages of the crisis and have another 4-8 years to go.

Bob Hoye: The worst of the post-bubble economic adversity is not behind us.

BG: Price inflation is creeping up, but the enormous amount of money printing hasn’t really hit the system yet. Does that happen in 2011, further down the road, or not at all?

Jim Rogers: It is happening. The U.S. and CNBC lie about it. Most other countries do not lie and acknowledge it is worsening.

Bill Bonner: Most likely, substantial consumer price inflation will not show up in 2011. The explosion of money printing is being contained by the bomb squad of deleveraging. That will probably continue in 2011. But not forever.

Peter Schiff: 2010 was the year that China began cutting back its Treasury purchases in favor of gold, hard assets, and emerging market currencies. The Fed has stepped in as a major purchaser of Treasuries. This represents a new phase on the path to dollar collapse, and it will manifest in 2011 in the form of more “unexplainable” inflation – as we are now seeing in the prices of everything from corn to gasoline.

Jeffrey Christian: We are now beginning to see some increases in monetary aggregates, suggesting that some of the monetary accommodations are beginning to filter into the economy. We expect this trend to accelerate over the course of 2011. This will bring some increase in inflation, but we expect the major manifestation will be through higher U.S. Treasury interest rates as the Fed and Treasury seek to sell bonds to sterilize the inflationary implications of the monetary easing and to finance ongoing massive federal deficits.

John Williams: The problems of the money creation will become increasingly obvious in exchange-rate weakness of the U.S. dollar. Related upside pricing pressure already is being seen on dollar-denominated commodities such as oil. There is high risk of consumer prices rising rapidly before year-end 2011, setting the stage for a hyperinflation. The outside date for the onset of a U.S. hyperinflation is 2014.

Steve Henningsen: My guess is further down the road, as the deleveraging cycle continues with deflationary-housing winds in our face and the banks still hoarding money like my 9-year-old daughter stockpiles American Girl doll paraphernalia. I still expect inflation to continue in areas such as energy, bread, circuses, and whatever else provides sustenance to the Romans – I mean people.

Frank Trotter: Most research has shown that over time the increase in money supply is not a short-term economic stimulus, but rather has a moderate effect in the 18- to 36-month range. In addition, this theory contends that a growth in the monetary base – which is what has happened so far – only increases economic activity when accompanied by a decent multiplier; this is not occurring. The real risk is that with rising rates and continued soft economy, the Fed will feel obliged to continue to QE3, QE4, and so on, all of which may have a significant inflationary impact.

I am more concerned about general price inflation here in the U.S. and the potential it has to reduce global growth.

Krassimir Petrov: This is a tough one. I would have thought that price inflation would have been raging by now, but this is obviously not the case. I have the feeling that 2011 will be a repeat of early 2008, with commodity prices (CRB) making new all-time highs. A falling dollar will trigger a rush into commodities as a hedge against inflation. I am really tempted to make a totally outrageous forecast that oil could make a run for $200 as QE3 unleashes another dollar scare, or maybe even a dollar crisis.

Bob Hoye: Massive “printing” has been widely publicized and is “in the market.”

BG: The U.S. dollar ended 2010 about where it started; does it resume its downtrend in 2011, or are fears about its demise overblown?

Jim Rogers: No, but further down the road.

Bill Bonner: No opinion. But there is more risk in the dollar than potential reward.

Peter Schiff: It’s hard to pinpoint exactly when the dollar will collapse, but it will take a miracle to avoid that outcome in the near term. It really depends on when the creditors of the United States realize that they are not going to get their principal returned to them in real terms, but rather in grossly devalued dollars. We have already seen the average duration of U.S. Treasury debt drop below that of Greece. No one wants to buy a 30-year bond with negative real interest rates as far as the eye can see.

Jeffrey Christian: We expect the dollar to be volatile against most currencies in 2011, but that its demise has been prematurely predicted. The dollar may move sideways to slightly higher against the euro, yen, and pound, while continuing to deteriorate against the Canadian and Australian dollars, the rupee, yuan, rand, and other emerging economy currencies.

John Williams: There remains high risk of a dollar selling panic unfolding in the year ahead, as the U.S. economy tanks anew, as the Fed continuously expands its easing, and as dollar holders dump the U.S. currency and dollar-denominated paper assets. Such would be a precursor to the inflation problem.

Steve Henningsen: Similar to my thoughts last year, I still believe the dollar is headed down long-term, but it could bounce around over the next year. If sovereign debts become a problem again, like I think they will later this year, then everyone will go running back to “Mother Dollar” once again for one last hug before she lies back down on her sickbed.

Frank Trotter: As the economy waffles and the global investing community’s attention is drawn from one crisis to the next, I expect the U.S. dollar to bounce up and down in the current range. After that, however, my analysis suggests that measured by the key factors of fiscal and monetary policy, combined with a significant trade deficit, the U.S. does not look as good as our major trading partners, and I thus expect the dollar to decline, perhaps significantly, in the intermediate term. Big geopolitical events may accelerate this or create a flight to U.S. dollar quality, so hold on to your hats.

Krassimir Petrov: I think the dollar resumes lower. I expect QE3 and QE4 – a dollar-printing fest that will eventually sink the dollar. Sure, all fiat currencies are in deep trouble and prone to overprinting, but the reserve status of the dollar actually makes it more vulnerable now. Whether the dollar sinks against other currencies is a fool’s game not worth playing. It is like being in the hospital, where all patients are suffering from cancer, and trying to guess who will feel best at the end of next year, or trying to guess who will succumb first. That’s why it is so much safer to play the dollar against gold.

Bob Hoye: Fears of the dollar’s demise have been widely discussed and are “in the market.” The dollar, itself, will not be repudiated – just the mavens that have been “managing” it.

BG: Gold has risen 10 years in a row, so some are calling it a bubble, yet it’s roughly $1,000 below its inflation-adjusted high. What’s your outlook for the metal in 2011?

Jim Rogers: It is hardly a “bubble” when very few own it still. Who knows? Overdue for a correction, but who knows?

Bill Bonner: The smart money is in gold. It will stay in gold until the bull market that began 10 years ago finally reaches its peak. It is extremely unlikely that the top will come in 2011; it’s probably years in the future. In the meantime, gold is bound to have a losing year or two. Don’t worry about it. Buy gold. Be happy.

Peter Schiff: The funny thing about a bubble is that when it’s real, no one can see it. The same commentators who were blind to the tech bubble, the housing bubble, and now the Treasury bubble are quick to call gold a bubble. The truth is that many of them have a personal aversion to gold because they directly benefit from our fiat money system. Goldman Sachs was paid 100 cents on the dollar in the AIG bailout, which never would have happened in a gold-based system. It’s a lot easier to print a billion paper dollars than dig up a million ounces of gold.

Gold will continue to climb in 2011 as the currency war continues and investors continue to seek stability. Unless there is a major sea change in the way the U.S. does business, I think the gold trade is a safe one.

Jeffrey Christian: A price of $1,550 is possible, although given the enormous investor buying pressure, prices could spike to almost anywhere. After that, we expect prices to fall back, initially to around $1,340 or $1,380. We expect gold prices to stay above $1,280 or so for most of 2011, and to average around $1,369 for the full year.

John Williams: As the U.S. dollar increasingly is debased, and where gold tends to preserve the purchasing power of the dollars invested in it, the upside to gold in the year ahead is open-ended, restricted only by any limits to the massive downside potential for the U.S. dollar. Any intermittent gold price volatility, extreme or otherwise, will be short-lived. There is no bubble – only increasing weakness in the U.S. dollar – with the gold price fundamentally headed much higher in the years ahead.

Steve Henningsen: I believe gold will once again prove the bubble-boys wrong and end the year positive (I have no idea by how much and don’t really care). However, I think this year will be more volatile and that Gold Bugs better remain seated on the precious metals express or they might get squished.

Frank Trotter: I still think that with price inflation on the rise and big political events occurring, there may be room to continue to rise. If stock markets take off, then there will be a reduction in appreciation or even a significant decline, but based on the factors I mentioned above, I don’t see that as highly likely.

Krassimir Petrov: Gold still has outstanding fundamentals. I believe that over the course of 2010, the fundamentals have strengthened significantly: (1) “No Exit [Strategy] for Ben” as he unleashed QE2, and will likely unleash QE3, QE4, etc., (2) no more central bank selling of gold, (3) more central banks become buyers of gold, and (4) trial balloons for a global gold-backed currency.

I have no idea how people could even claim that gold is in a bubble – barely 1 out of 100 people have any idea about investing in gold. During the real estate bubble, every second person was involved in it. Maria “Money Honey” Bartiromo has yet to report from the COMEX gold pits; gold fund managers and analysts have yet to obtain rock-star status; and glamorous models are not yet dating the gold guys. Who is the Henry Blodget [co-host of Tech Ticker] of the gold sector, do we have one yet?

Yes, gold will eventually become a bubble, but that feels 5-8 years away.

Bob Hoye: In 2011, gold’s real price will resume its uptrend.

BG: What’s your best investment advice for 2011?

Jim Rogers: Buy the rmb [renminbi, the Chinese currency].

Bill Bonner: We are in a period much like the period following WWI, in which the great debts and losses of the war had to be reckoned with. It is an era of great risk. The U.S. faces many of the same challenges faced by Germany and England after WWI. Like England, it has huge debts. It is a waning imperial power. And it has the world’s reserve currency. And like Germany, it is attempting to fix its problems by printing more money. This is not a good time to be long either U.S. stocks or U.S. bonds.

Peter Schiff: Don’t be suckered into the idea that recovery is just around the corner. The current climate is like living in a hurricane or earthquake zone; it’s important to stay vigilant because you never know when disaster will strike. Physical gold is the financial equivalent of a flashlight, first-aid kit, and store of canned goods. It’s a basic way to protect yourself from any eventuality. From there, if you’re looking for returns, there are plenty of foreign markets with strong fundamentals, as well as commodities that feed those markets.

Investing in the U.S. is now driven largely by force of habit. It’s a habit you should resolve to break.

Jeffrey Christian: Do not invest based on what you believe, but on what you know. Gold is a market, like other markets. It rises and falls. You probably want to stay long gold on a long-term basis, but may want to cull the weaker gold assets from your portfolio in the first quarter, and put some hedges in place to protect a long-term core long gold position against the potential of significant price weakness over the next two years or so. Such a period of weakness would be an excellent time to add to one’s gold assets.

John Williams: As an economist, I look for the U.S. dollar ultimately to lose virtually all of its current purchasing power. Accordingly, for those living in a U.S. dollar-denominated world, it would make sense to move to preserve wealth and assets over the long-term. Physical gold is a primary hedge (as is silver). Holding some stronger currencies outside the U.S. dollar, as well as having some assets outside the United States, also may make sense.

Steve Henningsen: Dramamine (for volatile markets), a stash of cash (for potential investment opportunities), and move some of your assets offshore if you haven’t already.

Frank Trotter: My advice is first to look at the other side of your balance sheet – the liability and risk equation – before seeking out absolute gains. What are your goals, what resources do you already have to meet those goals, and what events (health, income stream, upheavals) might impact these risks? Place some assets to hedge these risks directly, then look to diversify globally into markets with higher growth potential than we see here at home, and that may balance your global purchasing power risk. Almost like a religion, we have had the phrase “Stocks are the only legitimate hedge against inflation” beaten into our heads. I say, look at assets that define inflation like commodities and currencies and evaluate where these fit into your risk portfolio.

Krassimir Petrov: Last year I recommended silver, and I would stick to silver again, despite the phenomenal run in 2010. Then it gets tricky. I usually don’t recommend diversification, but now I would again recommend a broad portfolio of commodities. Investing in 2011 should be easy: stay out of real estate, out of bonds, out of fiat currencies, and out of stocks; stay fully invested in commodities, overweight gold and silver.

What to watch in 2011: stay focused on the sovereign debt crisis and bond yields. Spiking yields will trigger the next stage of the crisis.

Bob Hoye: Once past the early part of 2011, the best returns are likely to be obtained from the junior gold exploration sector.

[These world-class experts are right to bank on gold and silver – because the U.S. dollar keeps losing more and more of its value. Watch this eye-opening videoext on how China and Russia are plotting to dump the dollar… why you should be worried… and what to do about it.]

Read the entire article HERE.