Vinny’s Blog

Generally I avoid publishing things on weekends…but this one is long and you need to read a lot and more importantly understand a lot so I decided to publish this over the weekend…….

– This article is old it’s from October-2008. To read the latest on USD click here . To read all about currencies since October-2008….and it has been a journey. Please select Currencies from categories listed on your right. Good things is even though this article is old..it’s worth reading…

I received emails from friends this question everyone seems to be puzzled by the fact that USD is up all other currencies Euro, Pound,Rupee, Gold are down. No one seems to understand why ? All fundamentals suggest otherwise but then again who cares about fundamentals in American economy. Generally speaking if what’s happening in America happened in any other country their currency would have been crushed. Banks in America have lost billions of dollars DOW is making new lows this week ( weak of Oct-5th Oct-11th) and still USD is up.

………on October-10th (Friday)- DOW closed at 8451. Bank/Financial stocks were butchered, US is planning on buying bank stocks……otherwise their game is up.

Cnn Wrote…
U.S. planning to buy bank stocks
Treasury planning a program to attract private capital alongside public capital to financial institutions.
http://money.cnn.com/2008/10/10/news/economy/paulson_capital_injection/index.htm?postversion=2008101019

–And right in the middle of this storm Dow is crashing, Bush is begging for help, when bank’s (America’s backbone) stocks are suffering…..

Dollar climbs on global market rout
Britain’s pound falls to 5-year low as European financial markets plunge.
By Ben Rooney, CNNMoney.com staff writer
Last Updated: October 10, 2008: 4:54 PM ET
NEW YORK (CNNMoney.com) — The dollar rose against the euro and the pound Friday, with the British currency falling to its lowest level in five years as global markets remain shaky.
http://money.cnn.com/2008/10/10/markets/dollar/index.htm?postversion=2008101016

Wow…global market rout makes dollars stronger no kidding specially when source of the problem IS America, looks like world’s love affair with America is still intact. What will world do if US stopped printing all those dollars. Hum………!! may be they will all commit suicide……what better work could they possibly have ? other than collecting US $$.

Anyway…I started a hunt on the net looking for an answer and I found two very different (not sure if these are answers) so I would say arguments - for dollar to be strong. You pick which argument you like better.

Bottom line is no matter which argument you pay attention to both these arguments point to same fundamentals for USD. No matter which argument you believe in USD is to loose it’s value that is for sure…both articles conclude that.

First article suggests that it’s manipulation and it’s a setup. Article has all the necessary arguments in it and makes a strong case. Second article suggests that USD is strong due to technical reason and has supporting arguments for it.

Let us go through first articles that suggests it’s manipulation. That article is long so I have taken parts from it and summarized it but of course as always link is given at the end for you to read it fully if you so desire.

Few extracts from the First Articles as I look at it…..pay attention to the dates….

-August - 26th

Beijing swells dollar reserves through stealth
Last Updated: 3:30PM BST 26 Aug 2008
Rule changes for commercial banks are acting as cover for exchange rate intervention, writes Ambrose Evans-Pritchard
China has resorted to stealth intervention in the currency markets to amass US dollars, using indirect means to hold down the yuan and ease the pain for its struggling exporters as the global slowdown engulfs the economy.

Beijing has raised the reserve requirement for banks five times since March, quickening the pace with two half-point rises in late June.
This is having major spill-over effects into the currency markets because banks in China have been required over the last year to hold extra reserves in dollars rather than yuan. The latest moves have lifted the mandatory deposit from 15pc to 17.5pc of total lending since March.

Even so, the China effect is a key ingredient in the dollar comeback. Beijing’s Politburo is clearly disturbed by the sudden downward turn in the economy as export markets freeze, and surging wage inflation in the country’s manufacturing hubs eats away at profit margins.
http://www.telegraph.co.uk/finance/comment/ambroseevans_pritchard/2795291/Beijing-swells-dollar-reserves-through-stealth.html

Previously, the Bush Administration screamed about such things, but, not now. We haven’t heard one sound, coming from the Bushies, about China’s renewed currency interventions. And China forcing the $ to be strong.

August -28th
U.S., Europe, Japan drafted dollar intervention plan: report
By William L. Watts
Last update: 6:20 a.m. EDT Aug. 28, 2008
LONDON (MarketWatch) — U.S., European and Japanese authorities drafted an intervention plan in March designed to rescue the U.S. dollar if it continued to plunge, Japan’s Nikkei business newspaper reported. The plan, which went unused, was drafted the weekend of March 15-16, at the time the dollar was under heavy pressure amid the collapse of investment bank Bear Stearns, Reuters reported, citing the Nikkei article. The plan was reportedly drafted by officials from the U.S. Treasury, Japan’s Finance Ministry and the European Central Bank. The plan didn’t specify levels that would trigger the rescue, but marked an agreement to coordinate aggressive dollar-buying while selling yen and euros, the report said.
http://www.marketwatch.com/news/story/us-europe-japan-drafted-dollar/story.aspx?guid={6142254A-ADB1-44EB-8AB1-FDD615C71471}&dist=hplatest

– We all know dollar cannot be strong if Gold and Oil are high and that is taken care of as well…by selling big quantities of Gold and if Gold goes USD gets strong and that in turn drives down Oil.

Big jump in gold sale spurs manipulation talk
Some analysts say only manipulation is government’s attempt to take down oil
By Moming Zhou, MarketWatch
Last update: 7:55 p.m. EDT Aug. 29, 2008
NEW YORK (MarketWatch) — Recent heat from Congress and regulators, along with public speculation, over whether commodity prices are being manipulated has also reached gold pits, where the debate was stirred by a surge in bets in August that gold prices would fall.
Three unidentified U.S. banks held 86,398 short positions, or bets that gold prices will fall, in the COMEX gold market as of Aug. 5 — 10 times more short positions than a month earlier, a government report showed.
The sudden jump in short positions coincided with a slide in silver and gold prices, which fell $12.30 an ounce in July and another $89.20 in August, their biggest monthly loss since at least 1984, according to Factset. Silver has slumped more than $4 an ounce in August, also the biggest since 1984.
The CFTC’s bank participation report showed that as of Aug. 5, short contracts held by the three U.S. banks account for 21.2% of the open interest, or the total number of outstanding long or short contracts. A month ago, three banks only held 1.8% of short positions.
In the silver market, short positions held by three banks account for 25.4% of the open interest as of Aug. 5, comparing to 4.8% a month ago.
The percentages of bank-held short positions in the gold and silver markets were also higher comparing with other major commodities. As of Aug. 5, short positions in crude futures held by big U.S. banks account for 5.3% of the open interest. In the natural gas market, the percentage is 3.9%, while in the corn market, banks held a negligible number of short positions.
http://www.marketwatch.com/news/story/big-jump-gold-sale-spurs/story.aspx?guid={25D66623-29F3-434B-9B7A-5CE76D3C38F9}&print=true&dist=printMidSection

To tell you how much gold was shorted by these 3 banks…check this out…I also posted this in my another article before…you can read who John Embry is in that article. Click here to read previous post.
John Embry: The downturn in both gold and silver was literally preposterous in magnitude relative to the rise in the dollar. This was a violent intervention by the paper players. Three U.S. banks on COMEX shorted something like 8,000 contracts in a very short time. That’s more ounces than all the world’s miners produce in a month.
http://www.theaureport.com/cs/user/print/na/1624

Odds are just too good to be true here…everything happens on and around August-28th why ? Well as it turns out just weeks later……Lehman Brothers, Merrill Lynch and AIG will go belly up…..

Lehman Brothers, Merrill Lynch woes pile-up as Wall Street faces day of reckoning
Three of the biggest names on Wall Street - Lehman Brothers, Merrill Lynch and AIG - poised to buckle under the seismatic credit crunch pressure.
http://www.telegraph.co.uk/news/worldnews/2959890/Wall-Streets-day-of-reckoning.html

You and me learn that a company went belly up from the media when indeed it has gone up AFTER THE FACT…..but don’t tell me people at the top know it from media too……..they know about it well in advance as they are the news maker not news reader…….and so…….it’s a good time to remind you of the article you just read…

U.S., Europe, Japan drafted dollar intervention plan: report
The plan, which went unused, was drafted the weekend of March 15-16, at the time the dollar was under heavy pressure amid the collapse of investment bank Bear Stearns, Reuters reported
http://www.marketwatch.com/news/story/us-europe-japan-drafted-dollar/story.aspx?guid={6142254A-ADB1-44EB-8AB1-FDD615C71471}&dist=hplatest

If Bear could cause enough damage for USD to go down so much that a rescue plan was needed. Imagine what Merrill, Lehman and AIG would do to USD….that too when these 3 failed in close proximity of each other……..do you think a USD rescue plan was not needed ? and was not executed ?

And BTW since these 3 have collapsed DOW has taken record losses………imagine what additional damage that could have done to the dollar…….instead $ is running high and that too without Manipulation ( Yeah Right !). Fundamentals of US economy are so strong…that people are simply rushing to invest their money in US.

Since AIG has gone down 700 billion dollars have been approved officially to support (manipulate) whatever is required, it will be quite innocent to believe that US government will simply allow $ to fail. Already it is loosing image as an economic power house…check my previous post on it that has overwhelming number of reports coming through various news channels.

Now that you have read my interpretation of first article that suggests manipulation….I suggest please go through this article yourself , it’s long but it’s packed with information…if you’re going to read this article don’t forget to read last few lines…..as I said both articles don’t recommend buying/depending on USD….from the article…last few lines.
In other words, let us not delude ourselves. The U.S. dollar is a medium and long term sell, with capital letters, not a buy.
http://seekingalpha.com/article/94314-the-great-dollar-pump-of-2008-a-doomed-central-bank-intervention

– Then it’s time to look at second article that points to more technical side indicating why USD is strong.
You may have read in the news many times by now that Money Markets are frozen. Money markets are largely traded in USD and them being frozen means no more trading in Money Markets. As a matter of fact people have withdrawn record amounts from their money market accounts causing more shortage of USD in that market.
As I understand it money markets are major source of short term funding….so if a company needs to borrow money short term they borrow it from money market accounts (which remain frozen) so they can’t borrow from it.
Why do they have to borrow USD…well, it’s explained like this in the article.

….from the article……For example, a European bank that writes down a $2 billion asset by 50 percent will still have a $2 billion liability to finance and will also risk a net short dollar position on quarterly financial statements, forcing it buy dollars to square it off.
The balance sheet gap can be bridged by either raising U.S. dollar capital directly from the likes of sovereign fund investors or by using euro capital to exchange for dollars.
This goes some way to explaining why the severe shortage of dollars in Europe at end of the quarter led to a surge in both interbank borrowing rates and the exchange rate. — remember recent serge in LIBOR rate.
Credit Suisse estimates that if these nonbank assets were to be marked down by an average of just 5 percent, it would imply that euro zone banks would need some $75 billion of foreign currency to level external balance sheets.
The overall picture is a bit of a maze, but the cumulative losses to date for European banks on U.S. mortgage debts are estimated to be between $65 and $120 billion. While these write-downs and losses have been marked, with damage to balance sheets, these dollar assets still need to be financed in full to maturity.
Because most were funded in the dollar money markets, to avoid foreign currency exposure, the need to roll over short-term loans remains intense even though balance sheet concerns have made doing that for any extended period of time very difficult.

Here comes the kicker…what happens to dollar then…well we all know if Money Markets remain frozen hell is going break loose because credit is frozen……what happens if they open up….hell is going to break loose on USD…I guess….it’s explain like this in the article.

Some say the major test will come as the new quarter gets under way and the doubling to some $620 billion of the Fed’s swap lines to foreign central banks starts to flood the market in earnest.
“Central action to provide large scale dollar liquidity may help markets but takes away one important source of dollar support as the dollar funding squeeze eases,” Prendergast said. “We recommend investors consider using current levels to position for a return of significant dollar weakness.”

http://www.iht.com/articles/2008/10/01/business/dollar.php

There you have it both articles suggest that this is short term and eventually USD is going down…so now…what you do with your $$ is your problem……..

- Talking with a few friends I found out they are taking this opportunity very seriously, lot of them sending money back home and converting it into a different currency, because when USD starts to go down those currencies will appreciate.

- Some bought gold (not sure at which price…but they said they did).

- Some are interested in buying real estate in their home country as not only they are getting higher value      for their $ now but real estate is providing a good bargain at the moment.

Right time for NRIs to invest in India: Federal Bank
11 Oct, 2008, 1400 hrs IST, IANS

Venugopalan’s comments came even as remittances from the large expatriate Indian community in the Gulf saw a significant rise over the last one month.

http://economictimes.indiatimes.com/Right_time_for_NRIs_to_invest_in_India_Federal_Bank/rssarticleshow/3583810.cms

-Caution - wounded hungry lion is more dangerous than a well fed one…so expect US to do everything in their capacity to hold on to a position that is advantageous to them….US banks have cheated this whole world with their Subprime, CDS and CDOs and they can do it again. You can’t trust them…anymore…..

As always I save the best for the last……..and this one is pure Vinny report…….

Read the case of gold below and you will laugh how on earth this rare metal could be this low and why not it’s price shooting through the sky……….and obviously why the worthless $ is NOT trashed…which marks the 3rd argument….why USD cannot be strong.

Watch the dates again………….

-July-24th.
Gold funds perform better than equities, debt
24 Jul, 2008, 1434 hrs IST,Gaurav Pai & Ashish Rukhaiyar, ET Bureau
http://economictimes.indiatimes.com/Gold_funds_perform_better_than_equities_debt/rssarticleshow/3274453.cms

-July-25th.
Investors buy gold bars in record numbers
By Paul Farrow
Last Updated: 1:31AM BST 25 Jul 2008
Volatile stock markets and a lack of confidence in the UK banking system has boosted demand for gold bars and coins from private investors to levels not seen for 25 years.
http://www.telegraph.co.uk/finance/personalfinance/2793409/Investors-buy-gold-bars-in-record-numbers.html

-Sep-29th
Private banks rethinking gold, seen next big buyers
By Jonathan Leff
KYOTO (Reuters) - Private banks could be the next big buyers in the global gold market, helping drive prices higher as they consider restocking bullion bars that were sold off in calmer times, the top HSBC gold trader said on Monday.
http://in.reuters.com/article/businessNews/idINIndia-35707320080929

-October-2nd - Watch what’s happening in Germany…
As Crisis Grows, Investors Look to Gold
By Anne Seith in Frankfurt
Worried about their nest eggs in the global financial crisis, a growing number of investors are swapping cash for gold. Dealers of coins and gold bars are having trouble keeping up with demand.
Robert Hartman sounds a bit breathless as he answers his phone. “This is already a state of emergency,” the CEO of the Munich-based gold dealer Pro Aurum tells SPIEGEL ONLINE. For two weeks, he has been unable to fulfil all the gold orders his company has been receiving. Customers are storming its online shop. And the banks the company usually services just keep on ordering. At the company’s fulfilment center, orders are packaged seven days a week. “I’m just happy our employees have been willing to do this,” he says.
http://www.spiegel.de/international/business/0,1518,581923,00.html

That’s enough from the demand side clearly it’s on a rise……now watch supply side….and this is not gold on paper, people are buying real gold coins/bars as trust in currencies/investments is diluting……….central banks have been selling less and less gold (less supply)……….read ahead….

-Sep-28th
European central banks cut sales of gold
By Javier Blas in Kyoto
Published: September 28 2008 18:30 | Last updated: September 28 2008 18:30
European central banks have cut their sales of gold to the lowest level in almost a decade, reversing the practice of recent years when hefty sales helped depress prices.
Institutions bound by the Central Bank Gold Agreement - the banks of the eurozone plus Sweden and Switzerland - sold about 343 tonnes of gold in the year that expired on Friday, the lowest amount since the first CBGA was signed in 1999.
http://www.ft.com/cms/s/0/38c8d46c-8d7e-11dd-83d5-0000779fd18c,dwp_uuid=413b4c2e-b9f8-11dc-abcb-0000779fd2ac.html

OCTOBER - 7th…just a WEEK LATER……….

Central banks all but stop lending bullion
By Javier Blas in London
Published: October 7 2008 21:44 | Last updated: October 7 2008 21:44
Central banks have all but stopped lending gold to commercial and investment banks and other participants in the precious metals market, in a move that on Tuesday sent the cost of borrowing bullion for one-month to more than twenty times its usual level.
The one-month gold lease rate rocketed to 2.649 per cent, its highest level since May 2001 and significantly above its five-year average of 0.12 per cent, according to data from the London Bullion Market Association.
http://www.ft.com/cms/s/0/f565b702-949a-11dd-953e-000077b07658.html?nclick_check=1

Now, I am just as puzzled as you are…all data points at Higher GOLD DEMAND, LOW SUPPLY.
Gold prices should be going through the roof right now…………which also means $ should be going to the trash can. However if you look around $ is higher in value against most currencies Euro, Pound, Rupee….and gold is lower in value.
Do rules of economy don’t apply ? Demand and supply does not matter ? Higher USD and lower other currencies is OK ?….

I don’t know, I am not a pundit, I am not a Guru of investments……I wish I knew how this all works…I could have made millions of dollars by now and would not be writing this for you rather would be collecting consulting fee from you on suggesting how to invest.

But…….I do know one thing………rules of economy cannot be changed…..they can be bent, they can be twisted, manipulated for short term gains but ultimately they will apply and situation will be corrected, just like it finally did in case of US housing market, US credit market and US money markets. And the longer true outcome is delayed by manipulation and twisted management bigger the fall will be…………

Watch this video clip from Bloomberg from Jim Rogers he is very savvy investor…and the true message is towards the end of the clip. Where he said…USD is high due to short covering only…which the second article seems to suggest….in this post ..

http://www.bloomberg.com/avp/avp.htm?N=av&T=Jim%20Rogers%20Says%20Cash%20Holdings%20%60Gigantic%2C’%20to%20Sell%20Dollar&clipSRC=mms://media2.bloomberg.com/cache/v12UMJ.V0PuY.asf

This clip works in IE but did not work for me in Firefox………….

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