Gold’s Record Run: Signals of Crisis or a Potential Shift in the Monetary Order? (2nd of 3 Part Series)

 

In the course of history various commodities have been employed as media of exchange. A long evolution eliminated the greater part of these commodities from the monetary function. Only two, the precious metals gold and silver, remained. In the second part of the 19th century, more and more governments deliberately turned toward the demonetization of silver. In all these cases what is employed as money is a commodity which is used also for nonmonetary purposes. Under the gold standard, gold is money and money is gold. It is immaterial whether or not the laws assign legal tender quality only to gold coins minted by the government—Ludwig von Mises 

This post is the second in a three-part series 

In this Issue 

Gold’s Record Run: Signals of Crisis or a Potential Shift in the Monetary Order?

I. Global Central Banks Have Driven Gold’s Record-Breaking Rise

II. A Brief Recap on Gold’s Role as Money

III. The Fall of Gold Convertibility: The Transition to Fiat Money (US Dollar Standard)

IV. The Age of Fiat Money and the Explosion of Debt

V. Central Banks: The Marginal Price Setters of Gold

VI. Is a U.S. Gold Audit Fueling Record Prices? 

Gold’s Record Run: Signals of Crisis or a Potential Shift in the Monetary Order? 

The second part of our series examines the foundation of the global economy—the 54-year-old U.S. dollar standard—and its deep connection to gold’s historic rally. 

I. Global Central Banks Have Driven Gold’s Record-Breaking Rise 

Global central banks have played a pivotal role in driving gold’s record-breaking rise, reflecting deeper tensions in the global financial system. 

Since the Great Financial Crisis (GFC) of 2008, central banks—predominantly those in emerging markets—have significantly increased their gold reserves, pushing levels back to those last seen in 1975, a period just after the U.S. government severed the dollar’s link to gold on August 15, 1971, in what became known as the Nixon Shock. 

This milestone reminds us that the U.S. dollar standard, backed by the Federal Reserve, will mark its 54th anniversary by August 2025.

Figure 1

The accumulation of gold by central banks, particularly in the BRICS nations, reflects a strategic move to diversify away from dollar-dominated reserves, a trend that has intensified amid trade wars, sanctions, and the weaponization of finance, as seen in the freezing of Russian assets following the 2022 Ukraine invasion.  (Figure 1, upper window)

The fact that emerging markets, particularly members of the BRICS bloc, have led this accumulation—India, China, and war-weary Russia have notably increased their gold reserves, though they still lag behind advanced economies—reveals a growing fracture in the relationship between emerging and advanced economies.  (Figure 1, lower graph and Figure 2, upper image)  

Figure 2

Additionally, their significant underweighting in gold reserves suggests that BRIC and other emerging market central banks may be in the early stages of a structural shift. If their goal is to reduce reliance on the U.S. dollar and close the gap with advanced economies, the pace and scale of their gold accumulation could accelerate (Figure 2, lower chart)

Figure 3

As evidence, China’s central bank, the People’s Bank of China (PBOC), continued its gold stockpiling for a fourth consecutive month in February 2025. (Figure 3, upper diagram)

Furthermore, last February, the Chinese government encouraged domestic insurance companies to invest in gold, signaling a broader commitment to gold as a financial hedge. 

This divergence underscores a deepening skepticism toward the U.S.-led financial system, as emerging markets seek to hedge against geopolitical and economic uncertainties by strengthening their gold reserves 

In essence, gold’s record-breaking rise may signal mounting fissures in today’s fiat money system, fissures that are being expressed through escalating geopolitical and geoeconomic stress. 

II. A Brief Recap on Gold’s Role as Money 

To understand gold’s evolving role, a brief historical summary is necessary. 

Alongside silver, gold has spontaneously emerged and functioned as money for thousands of years. Its finest moment as a monetary standard came during the classical gold standard (1815–1914), a decentralized, laissez-faire regime in Europe that facilitated global trade and economic stability. 

As the great dean of the Austrian School of Economics, Murray Rothbard, explained, "It must be emphasized that gold was not selected arbitrarily by governments to be the monetary standard. Gold had developed for many centuries on the free market as the best money; as the commodity providing the most stable and desirable monetary medium. Above all, the supply and provision of gold was subject only to market forces, and not to the arbitrary printing press of the government." (Rothbard, 1963) 

However, this system was not destined to endure. The rise of the welfare and warfare state, supported by the emergence of central banks, led to the abandonment of the classical gold standard. 

As Mises Institute’s Ryan McMaken elaborated, "This system was fundamentally a system that relied on states to regulate matters and make monetary standards uniform. While attempting to create an efficient monetary system for the market economy, the free-market liberals ended up calling on the state to ensure the system facilitated market exchange. As a result, Flandreau concludes: ‘[T]he emergence of the Gold Standard really paved the way for the nationalization of money. This may explain why the Gold Standard was, with respect to the history of western capitalism, such a brief experiment, bound soon to give way to managed currency.’" (McMaken, March 2025) 

The uniformity, homogeneity, and growing dependency on the state in managing monetary affairs ultimately contributed to the classical gold standard’s demise. 

III. The Fall of Gold Convertibility: The Transition to Fiat Money (US Dollar Standard) 

World War I forced governments to abandon gold convertibility, leading to the adoption of the Gold Exchange Standard—where only a select few currencies, such as the British pound (until 1931) and the U.S. dollar (until 1933), remained convertible into gold. 

Later, the Bretton Woods System attempted to reinstate a form of gold backing by pegging global currencies to the U.S. dollar, which in turn was tied to gold at $35 per ounce. 

However, rising U.S. inflation, fueled by fiscal spending on the Vietnam War and social welfare programs, combined with the Triffin dilemma, led to a widening Balance of Payments (BoP) deficit. Foreign-held U.S. dollars exceeded U.S. gold reserves, threatening the system’s stability. 

As economic historian Michael Bordo explained: "Robert Triffin (1960) captured the problems in his famous dilemma. Because the Bretton Woods parities, which were declared in the 1940s, had undervalued the price of gold, gold production would be insufficient to provide the resources to finance the growth of global trade. The shortfall would be met by capital outflows from the US, manifest in its balance of payments deficit. Triffin posited that as outstanding US dollar liabilities mounted, they would increase the likelihood of a classic bank run when the rest of the world’s monetary authorities would convert their dollar holdings into gold (Garber 1993). According to Triffin, when the tipping point occurred, the US monetary authorities would tighten monetary policy, leading to global deflationary pressure." (Bordo, 2017)

Bretton Woods required a permanently loose monetary policy, which ultimately led to a mismatch between U.S. gold reserves and foreign held dollar liabilities. 

To prevent a run on U.S. gold reserves, President Richard Nixon formally ended the dollar’s convertibility into gold on August 15, 1971, ushering in a fiat money system based on floating exchange rates anchored to the U.S. dollar. 

IV. The Age of Fiat Money and the Explosion of Debt 

With the shackles of gold removed, central banks gained full control over monetary policy, leading to unprecedented levels of inflation and political spending. Governments expanded their fiscal policies to fund not only the Welfare and Warfare State, but also the Administrative/Bureaucratic State, Surveillance State, National Security State, Deep State, Wall Street Crony State, and more. 

The most obvious consequence of this system has been the historic explosion of global debt. The OECD has warned that government and bond market debt levels are at record highs, posing a serious threat to economic stability. (Figure 3, lower chart) 

V. Central Banks: The Marginal Price Setters of Gold 

Ironically, in this 54-year-old fiat system, so far, it is politically driven, non-profit central banks—rather than market forces—that have become the marginal price setters for gold. 

Unlike traditional investors, central banks DON’T buy gold for profit, but for political and economic security reasons. 

The World Gold Council’s 2024 survey provides insight into why central banks continue to accumulate gold: "The survey also highlights the top reasons for central banks to hold gold, among which safety seems to be a primary motivation. Respondents indicated that its role as a long-term store of value/inflation hedge, performance during times of crisis, effectiveness as a portfolio diversifier, and lack of default risk remain key to gold’s allure." (WGC, 2024) 

This strategic accumulation reflects a broader trend of central banks seeking to insulate their economies from the vulnerabilities of the fiat system, particularly in an era of heightened geopolitical risks and dollar weaponization.

Figure 4 

The Bangko Sentral ng Pilipinas (BSP) has historically shared this view. (Figure 4, upper graph) 

In a 2008 London Bullion Management Association (LBMA) paper, a BSP representative outlined gold’s importance in Philippine foreign reserves—a stance that remains reflected in BSP infographics today. 

Alas, in 2024, following criticism for being the largest central bank gold seller, BSP reversed its stance. Once describing gold reserves as "insurance and safety," it now dismisses gold as a "dead asset"—stating that: "Gold prices can be volatile, earns little interest, and has storage costs, so central banks don’t want to hold too much." 

This shift in narrative conveniently justified BSP’s recent gold liquidations. 

Yet, as previously noted, history suggests that BSP gold sales often precede peso devaluations—a warning sign for the Philippine currency. (Figure 4, lower window)

VI. Is the Propose U.S. Gold Audit Help Fueling Record Prices? 

Finally, could the Trump-Musk push to audit U.S. gold reserves at Fort Knox be another factor behind gold’s rally? 

There has long been speculation that U.S. Treasury gold reserves, potentially including gold stored for foreign nations, have been leased out to suppress prices.

Figure 5

Notably, Comex gold and silver holdings have spiked since these audit discussions began. Gold lease rates rocketed to the highest level in decades last January. (Figure 5, top and bottom charts) 

With geopolitical uncertainty rising, central bank gold buying accelerating, and doubts growing over fiat stability, gold’s record-breaking ascent may be far from over. 

Yet, it’s important to remember that no trend goes in a straight line.

___

References 

Murray N. Rothbard, 1. Phase I: The Classical Gold Standard, 1815-1914, What Has Government Done to Our Money? Mises.org 

Ryan McMaken, The Rise of the State and the End of Private Money March 25,2025, Mises.org 

Michael Bordo The operation and demise of the Bretton Woods system: 1958 to 1971 CEPR, Vox EU, April 23, 2017 cepr.org 

World Gold Council, Gold Demand Trends Q2 2024, July 30,2024, gold.org

Media’s Rationalization of the ASEAN Standout

Remember I spoke about the ASEAN standout here?

Well, mainstream finally sees this or this now is in the news.

From Bloomberg,

Southeast Asia (MXSO), the heart of the 1997 currency crisis, produced the best risk-adjusted returns for Asian stocks since global markets started to rebound three years ago, as investors sought a haven from Europe’s debt turmoil.

Benchmark indexes in the Philippines, Malaysia, Thailand, Indonesia and Singapore returned the most among Asia-Pacific markets worth more than $100 billion in the three years ended July 17, according to the BLOOMBERG RISKLESS RETURN RANKING. All five beat an index of developed markets by risk-adjusted returns, and four came out on top over five years.

“Investors have been focused on and rewarded in the smaller Asean markets because they have been more defensive and domestic-oriented,” said Timothy Moe, a Hong Kong-based strategist at Goldman Sachs Group Inc., referring to the Association of Southeast Asian Nations. “That’s been a better source of growth than what we see in the other more cyclical markets in North Asia. It probably will continue,” he said in a Bloomberg television interview in Hong Kong on June 26.

Southeast Asian governments have bolstered spending on infrastructure and stepped up efforts to spur domestic consumption in a bid to reduce their economies’ reliance on exports. That’s helping to shield the nations from Europe’s debt crisis and a global economic slowdown, which has fueled volatility in the northern Asian markets.

Asean countries shipped 32.9 percent of their exports to the U.S. and European Union in 2010, down from 72.4 percent in 2000, according to data from the organization’s website. China’s exports to the EU and U.S. accounted for a combined 38 percent of total overseas shipments in 2010, according to Bloomberg calculations based on data from the customs bureau.

Small and domestic seems now the flavor.

I don’t have any qualms of being small, but I do mind when media implies that financial markets today rewards cronyism and protectionism via “domestic-orientation”…scarcely a positive aspect to extol.

Of course, it is even ridiculous to say that ASEAN’s advantage has been about “bolstered spending on infrastructure and stepped up efforts to spur domestic consumption”.

Which economies have not been ‘spending’ to bolster consumption? Has not today’s crisis emerged from too much debt financed spending in order to uphold ‘consumption’?

It is also worth pointing out that despite the huge reduction in exports to the US and EU by ASEAN, they still make up a third of exports.

And it misleads to focus only on exports because there are other important external linkages as remittances, capital or investment flows and the banking system.

Yet a reduction in exports down to such level does not imply or guarantee of immunity from a global recession (that’s if a recession occurs)

More ASEAN hallelujahs…

Five Asean economies -- Indonesia, Thailand, Philippines, Malaysia and Vietnam -- along with China and India will outpace the rest of the world over the next two years, the International Monetary Fund said in an April report. In 2013, the Asean-5 will grow 6.2 percent, compared with 2.4 percent in the U.S., 0.9 percent in the euro area and 1.7 percent in Japan, it said.

Faster economic growth has fueled stock-market gains and valuations. The MSCI South East Asia Index has rallied 13 percent this year, including dividends, and more than doubled since 2008. The MSCI Asia Pacific Index has gained 3.8 percent in 2012 and returned 43 percent since the end of 2008.

The supposed ASEAN brilliance has really not about ‘faster economic growth’ but about three major unseen factors.

First is low debt as consequence of restructuring from the Asian crisis

As rightly pointed out by the article,

Southeast Asia “does not have debt problems like Europe,” Alan Richardson, a Singapore-based fund manager for Samsung Asset Management Co., who helps oversee $82 billion, said by phone on July 2. The region “hasn’t been through a strong investment up-cycle compared to the BRIC economies, so increasingly investors are seeing Asean has an alternative equity class.”

The second and most important which has been tightly correlated to the first is domestic negative interest rates.

Negative interest rates have been conducive or encourages debt take up in low debt economies.

So what has been deemed as relatively ‘faster’ economic growth is in reality an ongoing credit boom as discussed here. I mentioned that even Fitch rating has recently warned the Philippines on this.

The third interrelated factor has been the monetary easing policies by developed economies.

Many international investors have taken ASEAN as quasi-refuge justified as ‘investment’ based on growth when in reality (particularly the Japanese), they represent as yield searching dynamic or rampant speculation meant to preserve the purchasing power of their savings (euphemism for capital flight) against reckless monetary policies at home.

Be reminded that one major characteristic of a bubble is to broadcast a "new paradigm". This seems what we are seeing today in ASEAN

The BRICs has initially been thought to have been the 'new paradigm'; now this has been shattered.

Booms brought about by bubble policies will eventually be exposed for what they are, as they have always been.

Be careful out there.

Phisix: Why the Contagion Risk Must Not be Discounted

Here is what I wrote last week[1]

after 3 successive weeks of advances which racked up 8.53% in returns, it would be normal to see some profit taking.

So apparently correction of the Phisix materialized.

In line with the activities of the region’s bourses, the Phisix fell 2.76% this week.

For our ASEAN peers, the outcome had been mixed. Thailand and Malaysia was modestly higher while Indonesia joined the Phisix in a correction mode but had been down moderately.

The BRICs or Brazil, Russia, India and China continue to suffer from hefty losses.

Whatever bounce we have seen lately have mostly signified as deadcat’s bounce for the BRICs. So far only India (BSE) has shown a little bit of strength compared to her contemporaries; China (SSEC), Brazil (BVSP) and Russia (RTSI)

If you have noticed, events have become sooo incredibly short term oriented, exceedingly volatile, and at worst, complacency seems to have become a dominant feature, especially in the Philippine setting, where the current environment has largely been seen as hunky dory.

And part of my concern stems from idea that BAD news has been interpreted as GOOD news where many have come to believe that either local and regional markets have become immune to the external developments or that interventions has been seen as a sure thing and will always be successful.

And as I have pointed out during the past few weeks, my other concern is that perhaps the Philippine market may have been “jockeyed” to project political goals.

Bubble Cycles: This Time Will NOT be Different

“This time is different” are four words that I fret most. For the late investment legend Sir John Templeton these are the four most dangerous words in investing[2].

Such statement is symptomatic of overconfidence, a deeply ingrained euphoric sentiment or an embedded belief that a new paradigm has somewhat reconfigured how life would play out.

A classic example is when the late distinguished monetary economist Irving Fisher infamously declared that the US stock market, at the climax of the bullmarket in 1929, had reached “a permanently high plateau.”[3] What followed in the coming months were the gruesome Wall Street Crash and the Great Depression.

So when I stumble upon news which avers that “Southeast Asia is looking more a safe haven than a risky bet, with foreign investors souring on China and India and pouring money into markets proving resilient to the global gloom”[4] such assumptions gives me a creepy feeling.

That’s because such sentiment evokes of the memories of the excruciating Asian crisis which once was heralded as the “Asian Economic Miracle”[5] in 1994 and which ultimately turned out into a grand cataclysmic bubble bust in 1997.

Yet it took 3 years for the bust to occur.

But euphoria does seep through public’s consciousness even when bubble cycles have not been homemade.

Exactly during the pinnacle of the last boom phase of the Philippine stock market, a local news outfit featured the ‘basura queen’ in June of 2007[6]. Basura is a local term for garbage and a stock market colloquial or slang for high risk issues.

The ‘Basura’ Queen swaggered about her making millions out of ‘basura’ issues, or the penny stock equivalent of Wall Street.

Overconfidence and the increasingly desperate search for returns seem to be revving up the public’s appetite for gambling.

But the seeds of a homegrown bubble are also being sown.

The Fitch Rating, a US credit rating agency recently, seems to have echoed on what I have been repeatedly warning about: that the Philippines may be on the ‘brink’ of a domestic credit boom[7]. Not just on the brink, we are already having a domestic credit boom[8].

Of course, local officials will hardly do anything about this, since the credit boom will spruce up the economy over the short term and would thereby provide an image booster or political advertisement to the incumbent administration as their “major accomplishment”.

The boom will be seen as a feat, but the bust will be passed on like a hot potato. In politics, who cares about the future?

Besides, officials have limited knowledge of the unseen or undefined “equilibrium” levels from where or which point to put the policy brakes on.

In addition, since the Philippine political economy have been mostly state driven, chieftains of the industries involved in the boom, who are most likely allies of the administration, will exert their political capital to influence on the direction of policymaking thereby extending the boom to unsustainable levels.

Finally since policymakers have innate Keynesian leanings, who try to promote consumption as the main policy thrust, the policy of negative real rates will drive

1. consumer spending through acquisition of more debt via mortgages, credit cards, and other consumer loans,

2. encourage more government spending which will be financed by low interest rates from the private sector, particularly channelled through banks and other financial institutions, which again would add to systemic debt, and importantly leads to consumption at the expense of production, and lastly,

3. fuel capital intensive speculation which will likely be directed to real estate projects, manufacturing and mining, and which again leads to more systemic debt accrual. Such misdirection of allocations of resources eventually leads to the consumption of capital. A great bust.

Again all inflation is political, designed to push the interests of a few at the expense of the society

And I am talking here of a locally fuelled bubble which is aside from today’s present risk: contagion.

Europe’s Capital Flight Paradigm

In case of a full blown global recession, there has hardly been convincing evidence that ASEAN bourses will entirely decouple.

As I predicted Japanese foreign direct investments capital flows into ASEAN has currently been intensifying[9].

Since Japan’s capital flows into ASEAN have still been couched on the term ‘investments’ based on ‘growth’, this has yet to translate into a full capital flight dynamic where Japanese investors frantically stampede into ASEAN assets regardless of risk conditions.

Once Japan’s debt crisis reaches a ‘tipping point’[10], where in the face of the dearth of access to private capital and from external financing, and where the Bank of Japan (BoJ) will substitute as the buyer or financier of last resort of local sovereign papers in order to save the banking system, then this ‘growth’ dynamic will likely be substituted for ‘flight to safety’[11].

Such dynamic appears as partially being played out in the Eurozone: government debts of Germany, Finland and Netherlands[12] (as well as Denmark[13]) have become lightning rods against the concerns of the Eurozone’s dismemberment and this dynamic has also began to diffuse into Belgium and France.

Yes, it is panic time in the Eurozone as expressed by the bond markets…

…but not in the equity markets

I think that the difference is that the European Central Bank (ECB) has yet to aggressively step up as the buyer and financier of the last resort which is why most of the capital flows have been absorbed into government bonds.

Nevertheless some of these safehaven flows may have already been rechanneled to the equity markets of Germany (DAX), Denmark (KFX), Netherland (AEX) and Belgium (BEDOW).

Meanwhile the Finnish and French bellwether has yet to ventilate similar ‘capital flight’ dynamics.

Remember if the risk conditions in the Eurozone stabilize, then these capital flight dynamics will likely be reversed as money flows back to their sources, and the current boom may turn out to another bust, which ironically may again fuel more destabilization.

Some bullish background, eh?

Contagion Risk Must Not be Discounted

We shouldn’t forget that the Asian Crisis proved that contagion risk was a real risk that spread throughout the region.

As the Reserve Bank of Australia noted[14],

One can then locate the onset of crisis in Korea, Indonesia, Malaysia, and the Philippines in a process of contagion: a flip to the bad equilibrium to which the economies were vulnerable, in response to the ‘wake-up call’ (i.e. signal) from Thailand that this was a possible outcome.

This was likewise true with the 2007-2008 meltdown of the US property and mortgage bubble.

Remember that the real effects of an external transmission of contagion were hardly felt since the Philippine economy escaped a recession and that the ensuing global slowdown hardly left an imprint to local corporate earnings, yet the Phisix lost over half of its value from peak to trough[15]!

So while it may be true that those years had different conditions from today, despite some of the real relatively positive changes on ASEAN economies, we must be reminded that globalization and dependence on the US dollar through international currency reserve accumulation via the global banking system has been the umbilical cord for global asset markets.

Merchandise trade as % of GDP remains as a significant factor to ASEAN economies particularly to the Malaysia and Thailand.

But the Philippines also depends on foreign remittances (10.73% of GDP 2010[16]) as well, and to the lesser extent Indonesia (>1% of GDP 2010[17])

While the Philippines and Indonesia may be less exposed, the question will be internal dynamics.

Dependence on government spending only provides temporary relief (benefits the cronies) at the expense of the future (higher taxes, higher debt levels, and higher inflation)[18].

Has the political, legal, tax and regulatory environment eased to incentivize entrepreneurs to take on more productive ventures?

Philippine economic growth has recently been powered by exports[19], most likely due to global restocking. But with a ongoing recession in the Eurozone, as well as, a pronounced slowdown China and other major emerging market economies, and importantly the US, expectations of robust “double digit” growth signifies as wishful thinking…unless major central banks come up with more aggressive short term palliatives.

And a slowdown in global merchandise trade has been prompting for a contraction on trade surpluses (perhaps partly due to increasing domestic demand) and a reduction of foreign currency reserves, as some emerging market central banks have attempted to stabilize exchange rate values with use of these surpluses and thus results to monetary tightening conditions that may not be conducive for equities[20].

In addition, the banking crisis at the Eurozone will prompt for major balance sheet adjustments in order to raise capital mostly through shrinkage, particularly banks are slated to reduce balance sheets by €2 trillion by dumping 7% of these assets by the end of 2013. This also means that supply of credit to the economy will contract.

Of course the real problem isn’t due to credit contraction which affects mostly the government and their protégé the banking system but of the failure to undertake real reforms focused on competitiveness and productivity[21].

Yet under the worse policy scenario arrived by IMF estimates according to DBS Research[22], a dramatic slowdown in the economy compounded by bank deleveraging (bursting bubble) will affect even the US and emerging markets will not be spared (most especially in Eastern Europe).

So we can hope for the best and prepare for the worst.

So underneath the headlines, ASEAN+3 (China Japan and South Korea) have doubled their Chiang Mai Initiative Multilateralism (CMIM) currency swap buffer to USD 240 billion which was a third funded by total foreign reserves accumulated by ASEAN 5 (US 765 billion as of April)[23][24].

So while Asian central bankers have been adding insurance against the risk of the aggravation of Europe’s banking crisis, domestic investors have been in a buying binge.

Yet the ongoing Euro-Brazil, Russia, India, China slowdown compounded by deleveraging within their respective economies has already affected Singapore whose economy suffered a contraction last quarter[25]

Yes China’s economy managed to post 7.6% growth last quarter, but many questioned on the validity of the statistics used to arrive at this output which for some have been overstated for political reasons[26]

And yet US and European markets rallied fiercely last Friday, which according to news drew on the conclusion that the recent conditions of China’s economy will lead to more monetary accommodation by policymakers[27]. Bad news again seen as good news.

I think that such knee jerk response represents more of a melt-up from “crowded short positions” rather than a major inflection point.

As Prudent Bear analyst Doug Noland rightly points out[28],

But the downside of the Credit cycle radically alters rules of the game. Over time, reality sinks in that the previous prosperity was in fact an unsustainable boom-time phenomenon. The downside of the Credit cycle ensures faltering asset prices, deflating household net worth and financial sector deficiencies, along with the revelation of problematic economic imbalances and maladjustment. It’s not long into the bust before many see themselves as losers – and to have lost unjustly at the hands of an unfair system. The growing ranks of losers become an increasingly powerful political force.

Nevertheless I expect Friday’s huge jump to filter into Asian markets including the Phisix at the start of the week.

My conclusion remains: for as long as political gridlock over policies persists (in the US, China and Eurozone) and central bankers of major economies remain rudderless, markets will remain subject to extreme volatility from the collision of hope (expectations of decoupling, deeply embedded Pavlovian expectations of major central bankers coming to the rescue and of the narcotic effects of inflationism) and reality (ramifications from deflating bubbles: economic slowdown and deleveraging). Not to discount of the possibility of major policy errors from too much focus on the short term fixes.

While I remain bullish over the Phisix over the long term, the short term horizon has been filled to the brim with uncertainties coming from almost every direction. This for me magnifies the tail event risks.

---

[1] see Why Current Market Conditions Warrants a Defensive Stance July 9, 2012

[2] SirJohnTempleton.org Consider these 'words of wisdom' about investing September 20, 2006

[3] Wikipedia.org Irving Fisher

[4] Reuters.com Southeast is Asia safe haven as China, India stumble, July 14, 2012

[5] Wikipedia.org 1997 Asian financial crisis

[6] See Philippine Stock Exchange: The PUBLIC’s MILKING Cow???!!!, June 17, 2012

[7] Inquirer.net Philippines on the brink of a credit boom, must be wary of dangers—Fitch Rating, July 6, 2012

[8] See Why has the Phisix Shined? July 2, 2012

[9] See Japan’s Capital Flows to ASEAN Accelerates July 4, 2012

[10] See The Coming Global Debt Default Binge: Japan’s Government Under Financial Strains July 9, 2012

[11] See Will Japan’s Investments Drive the Phisix to the 10,000 levels? March 14, 2012

[12] Bloomberg.com AAA Yields At Zero Drive Investors To Belgian Debt: Euro Credit July 13, 2012

[13] See Denmark Cuts Interest Rates to Negative July 6, 2012

[14] Corbett Jenny, Irwin Gregor and Vines David From Asian Miracle to Asian Crisis: Why Vulnerability, Why Collapse? 1999 Reserve Bank of Australia

[15] See Dealing With Financial Market Information February 27, 2011

[16] Tradingeconomics.com Workers' remittances and compensation of employees; received (% of GDP) in Philippines

[17] Tradingeconomics.com Workers' Remittances And Compensation Of Employees; Received (% Of GDP) In Indonesia

[18] See S&P’s Philippine Upgrade: There's More than Meets the Eye July 3, 2012

[19] ABS-CBNNews.com May exports growth at 17-month high, July 10, 2012

[20] See Emerging Market “Liquidity” Conditions Deteriorate July 5, 2012

[21] See What to Expect from a Greece Moment June 17, 2012

[22] DBS Vickers Economics Markets Strategy 3Q 2012 June 14, 2012

[23] Ibid

[24] Wikipedia.org Chiang Mai Initiative

[25] See Contagion Risk: Singapore Economy Contracts, July 13, 2012

[26] See China’s Economic Growth Slows Anew, Economic Data Questioned July 13, 2012

[27] Bloomberg.com S&P 500 Erases Weekly Loss On JPMorgan Rally, China, July 13, 2012

[28] Noland Doug Game Theory And Crowded Trades Credit Bubble Bulletin, Prudent Bear.com July 13, 2012

China Promotes the Yuan to the BRICs

China has been promoting her currency as alternative to the US dollar

Writes the Reuters/Financial Times

China is planning to extend renminbi loans to other major emerging BRIC countries, in another step toward the expansion of the yuan's role in foreign exchange, the Financial Times reported on Wednesday.

The China Development Bank (CDB) will sign a memorandum of understanding at a meeting with its BRICs counterparts - Russia, South Africa, Brazil and India - in New Delhi on March 29, the newspaper reported, citing people familiar with the talks.

Under the agreement CDB, which lends mainly in dollars overseas, will make renminbi loans available, while the other BRICs nations' development banks will also extend loans denominated in their respectivecurrencies, the FT said in an article published on its website.

The renminbi is the official currency of China and its primary unit is the yuan. Of the six largest economies in the world, China is the only one whose currency does not have reserve status.

The initiative aims to boost trade between the five BRICs nations and promote use of the renminbi, rather than the U.S. dollar, for international trade and cross-border lending, the FT said.

China appears to be ‘flanking’ the US by promoting her currency with ASEAN through trade, and now with other major emerging markets.

This is not to say that China’s yuan will replace the US dollar (whatever monetary standard the world will embrace in the future is beyond our ken, as I can only guess), instead these seem emblematic of attempts by several nations to wean away from the US dollar standard, possibly as insurance or as diversification strategy to reduce currency risks.

Paradigm Shift: Wealthy Russians Buy US Homes

In my earlier post, I pointed out that the wealthy Brazilians, Indians and Chinese had been lending “support” to the US property sector.

Under the major emerging markets the rubric of the BRIC acronym coined by Goldman Sach’s analyst Jim O’Neil, Russia posed as the missing link.

Not anymore.

From Bloomberg, (bold emphasis mine)

Roustam Tariko, billionaire owner of Russian Standard Bank and Russian Standard Vodka, completed the most expensive home purchase in Miami Beach since 2006 when he bought a $25.5 million estate on Star Island in April.

The transaction made Tariko the neighbor of another wealthy Russian with a taste for Florida luxury living. Vladislav Doronin, chairman of Moscow-based real estate developer Capital Group, paid $16 million in 2009 for the Star Island home previously owned by Shaquille O’Neal, the now-retired professional basketball player.

“In Russia, it’s a status thing now,” Jorge Uribe, a real estate agent with One Sotheby’s International Realty Inc. in Coral Gables, Florida, said in a telephone interview. “If you’re wealthy and you say you have a place in Miami, it’s like saying back in the old days, ‘I own a place in Ibiza or Monaco.’ It’s a cocktail conversation thing.”

International investors are buying some of the priciest homes in America as the broader housing market slumps and a weak dollar makes U.S. property more of a bargain. Sales of residences above $20 million are rising in New York, California and Florida, which are popular business and vacation destinations for foreigners, according to Miller Samuel Inc., DataQuick and real estate brokers who cater to luxury buyers.

This is just one of the manifestations of the effects of globalization from fund flows (capital mobility) to the diffusion of prosperity worldwide.

The same article underscores this, (bold emphasis mine)

The precise number of foreign deals for U.S. luxury properties is difficult to calculate because many purchasers are registered as trusts or limited liability companies. Jed Smith, managing director of quantitative research for the National Association of Realtors, said the number of overseas buyers for multimillion-dollar homes is increasing, helped by the rise of emerging markets such as Russia, Brazil, China and India.

“There’s substantial growing wealth overseas,” Smith said in a telephone interview from Washington. “Just go to the Forbes list of billionaires and see that we’re no longer the only folks on it.”

Of the 214 newcomers to Forbes magazine’s annual global ranking of billionaires this year, 54 were from China and 31 from Russia. The Asia-Pacific region had more billionaires than Europe for the first time in more than 10 years and gained the most of any region, with 105 additions, according to the list. Moscow displaced New York as the city with the greatest number of billionaires with 79, compared with New York’s 58.

If there is anything that would be considered as certain or permanent, (aside from death and taxes) that would be ‘change’.

Surging Demand for Emerging Market Currencies

China’s yuan will be traded in the Chicago’s CME group this August.

According to the Bloomberg,

CME Group Inc., the world’s largest futures exchange, said it will start yuan contracts to meet rising demand among global investors for products denominated in the Chinese currency.

Trading of the futures, which will be listed on the CME exchange, is due to begin Aug. 22 for September 2011 settlement, the Chicago-based group said in a statement released in Singapore yesterday. The contracts will be quoted in interbank terms, reflecting the number of yuan per dollar, it said.

If China aims to challenge the US dollar’s role as international currency reserve then convertibility is a necessary step towards attaining this goal.

But what caught my eye was the following observation.

From the same article, (bold emphasis mine)

“We see the success of these new contracts following a similar pattern to that of our other emerging-markets products such as Russian ruble and Brazilian real,” Roger Rutherford, London-based managing director of foreign-exchange products at CME, said in the statement. “Given the yuan’s movement toward greater convertibility and the growing offshore trade of the currency in Hong Kong,” the products will enable customers to manage currency risk, he said.

Futures contracts in the ruble and real have seen year-to- date growth of 350 percent and 450 percent respectively, the statement said. CME foreign-exchange volumes averaged 930,000 contracts per day in 2010, up 49 percent versus 2009, reflecting average daily notional value of $120 billion, it said.

So it’s not all about China but about major emerging markets. China would only add weight to this basket.

Yet this looks very much to me as added evidence of the US dollar’s declining role as a reserve currency.

Political Interventions has Led to the Widening of Divergences in Global Asset Markets

By creating illusory profits and distorting economic calculation, inflation will suspend the free market's penalizing of inefficient, and rewarding of efficient, firms. Almost all firms will seemingly prosper. The general atmosphere of a "sellers' market" will lead to a decline in the quality of goods and of service to consumers, since consumers often resist price increases less when they occur in the form of downgrading of quality. The quality of work will decline in an inflation for a more subtle reason: people become enamored of "get-rich-quick" schemes, seemingly within their grasp in an era of ever-rising prices, and often scorn sober effort. Inflation also penalizes thrift and encourages debt, for any sum of money loaned will be repaid in dollars of lower purchasing power than when originally received. The incentive, then, is to borrow and repay later rather than save and lend. Inflation, therefore, lowers the general standard of living in the very course of creating a tinsel atmosphere of "prosperity.- Murray N. Rothbard

The fascinating thing about markets is that we can always expect the unexpected.

When events don’t play out according to expected patterns, this only shows how people respond differently to even similar conditions. That’s because many variables affect or influence people’s response to evolving conditions.

As the great Ludwig von Mises wrote, (bold emphasis mine)[1]

Epistemologically the distinctive mark of what we call nature is to be seen in the ascertainable and inevitable regularity in the concatenation and sequence of phenomena. On the other hand the distinctive mark of what we call the human sphere or history or, better, the realm of human action is the absence of such a universally prevailing regularity. Under identical conditions stones always react to the same stimuli in the same way; we can learn something about these regular patterns of reacting, and we can make use of this knowledge in directing our actions toward definite goals. Our classification of natural objects and our assigning names to these classes is an outcome of this cognition. A stone is a thing that reacts in a definite way. Men react to the same stimuli in different ways, and the same man at different instants of time may react in ways different from his previous or later conduct. It is impossible to group men into classes whose members always react in the same way.

This is not to say that future human actions are totally unpredictable. They can, in a certain way, be anticipated to some extent. But the methods applied in such anticipations, and their scope, are logically and epistemologically entirely different from those applied in anticipating natural events, and from their scope.

And based on logical and epistemological observations one can observe that the current market conditions are being defined by the deepening signs of divergences.

Divergences in Global Equity Markets

As global markets continue to wobble, most of Asian markets caught fire this week.

Despite Asia’s seeming reanimated equities, individual performances based on recent price actions have been idiosyncratic. In other words, some bourses have recoiled strongly from sharply oversold conditions while the other outperforming bourses have merely shed some the recent languor and could be poised for another upside run.

I would think the Philippine Phisix as representing the second category.

Most of the major bourses, the US S&P 500 [SPX], iShares MSCI All Country Asia ex Japan Index Fund [AAXJ] and the MSCI World (ex USA) Index (EOD) [MSWORLD] have all been on a downdraft almost synchronically since May.

In the past, all markets would have chimed as one.

In contrast the Phisix has swung like a pendulum to erase last week’s losses and post a positive (+2.15%) year to date gains.

Yet based on chart formations, the Phisix appears to be emitting significantly bullish signals. A reverse head and shoulder pattern, which once transgressed or encroached, could possibly send the local benchmark to the 4,900-5,000 level by the year end.

On the other hand, the actions of the BRICs represent the first category where some of the recent gains of Asian bourses signify more of oversold bounces.

China’s (SSEC) and India’s (BSE) spectacular rallies this week, appears to have broken the intermediate downtrend. As to whether the upside breakaway from the current downturns signify as key inflection points remains to be seen.

This will likely be reflected on the commodity markets too.

Divergence in Commodity Markets

Again divergences have likewise been apparent over at the commodity markets.

The recent rally in gold seems to have been thwarted and this has been coincidental to the forcible or manipulated tanking of oil prices which have been due to the International Energy Agency’s [IEA] declaration to release oil reserves in the markets over the coming month[2].

This has been part of the concerted efforts to depress commodity prices since May.

So far the gold and silver remains on the uptrend while oil and the CRB Reuters [CCI] index appears to have broken down.

With the Belgian central bank reportedly having to lease out 41% of their gold reserves, which effectively represents as shorting of gold[3], another political angle with which to manipulate the commodity markets, aside from the setting up for the conditions required for the next wave of asset purchasing program[4], would be to limit the losses being suffered by central banks that have been ‘short’ gold.

But this, in my view, signifies as the secondary order.

On the other hand, the current distortions in the commodity markets brought about by these variable interventions will likely only worsen the commodity economic imbalances and would likely signify a fleeting impact.

To the contrary, this could even setup the gold market for a possible trailblazing run!

Signs of such dynamic can be seen in the unfolding Greece debt crisis where ordinary Greeks have reportedly been stampeding into gold (to even eschew gains from interest rates) just to safeguard their savings from the fear of a collapse of their banking system[5].

QE 2.0 as Bailout of Foreign Banks?

And speaking of the European debt and entitlement crisis, US Federal Reserve Chairman Ben Bernanke recently downplayed the contagion risks of US banks because US banks haven’t been “significantly exposed”. Although Mr. Bernanke admits that US banks have “very substantial exposure to European banks in the so-called core countries, Germany, France”[6].

Given Mr. Bernanke’s very dismal track record and his admission that they “don’t have a precise read” of the performance of the US economy[7], I am pretty confident that his public statements conceals the true nature of intended political actions.

Tyler Durden of Zerohedge.com exposes evidences where money from QE 2.0 have been redirected or diverted to foreign or mostly European banks operating in the US.

Cash holdings of foreign banks based on the US have risen almost in proportion with the US Federal Reserve’s $600 billion QE 2.0.

These intricate diversions have been coursed indirectly through the Eurodollar market via US primarily dealers, US and foreign banks. The US Federal Reserve do not buy assets directly, they are done through agents.

The beneficiary international banks had supposedly been in trouble and require these excess reserves to neutralize the growing risks from the ongoing crisis at the Eurozone.

To quote Mr. Durden[8] (bold emphasis mine, above chart from Zerohedge)

In other words, foreign banks operating in the US have an artificially pumped up cash balance creating a false sense of security, with the fungible cash having been borrowed from abroad. This also means, that when and if European banks realize they need the cash "lent out" to US-based subsidiaries, and demand the $600 billion+ in dollars, all they will see is a white flag of surrender, as the US-operating banks disclose they have pledged the cash for one thousands and one uses, and its sudden withdrawal would end up crashing the capital markets. It also means that explanations that this cash was used by European banks to satisfy regulatory capitalization shortfalls are absolute gibberish. And yes, if and when there is a surge in dollar needs out of Europe, the Fed will have two choices: QE(x) and FX liquidity swaps.

If such claim is true, then we should even expect more QEs to come...and quite soon, given the current tumultuous conditions of the Eurozone.

Also, such actions imply that the US has been very concerned with the developments in Europe enough to engage in QE 2.0 for this reason.

Also, this only goes to show that the US has surreptitiously been in rescuing or bailing out banks across the globe.

Fitting pieces of the puzzle together, we can easily see why a Goldman Sachs alumni has been appointed as the European Central Bank president[9] and why Bank of Japan (BoJ) has imported Ben Bernanke’s dogma of propping up her domestic stock markets by asset purchases as policy[10]—all of which has been meant to rescue the teetering banking system of the world.

If the overall undeclared aim is to survive the current central bank-banking cartel, then there will be NO alternative but for central banks to maintain the asset purchasing programs.

Apparently, the myriad political interventions in the marketplace have led to different effects or the widening of divergent price actions across the global asset markets.

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[1] Mises, Ludwig von Regularity and Prediction, Theory and History; Introduction

[2] See War on Commodities: IEA Intervenes by Releasing Oil Reserves, June 24, 2011

[3] See Belgian Central Bank ‘Lends’ 41% of Gold Reserves, Growing Role of Gold as Money, June 21, 2011

[4] See Poker Bluff: No Quantitative Easing 3.0?, June 5, 2011

[5] See Greeks Go For Gold, June 22,2011

[6] Bloomberg.com Bernanke Sees Small Impact on U.S. Banks of a Greek Default (1), June 22, 2011

[7] See Ben Bernanke Admits to the Knowledge Problem, June 23, 2011

[8] Durden, Tyler The Eurodollar Missing Link: Explaining The QE2-Related Cash Surge In US-Based Foreign Banks, Zerohedge.com June 22, 2011

[9] See Revolving Door Syndrome: European Central Bank’s New Head was Goldman Sach’s Honcho, June 25, 2011

[10] See Bank of Japan’s Interventions in Japan’s Stock Markets, June 23, 2011