Gold Forecaster
- Global Watch
Too big for gold and too
big to handle - Major funds dominate the global economy
Julian D.W.
Phillips
Gold Forecaster snippet
Oct 19, 2007
Their appearance has been
sudden spread over just a few recent years. For the rapid
growth of sovereign wealth funds, petrodollar investors [government
controlled], hedge funds, and private equity groups [profit seekers]
poses risks for the world economy as large as themselves. The
prospect of major financial tsunamis can come from these monsters
of capital. How big are they and just how big is the danger?
Asset bubbles, excessive lending, market distortions, and bank
failures are all possible consequences as we are seeing right
now in the U.S. and Europe and much further afield.
For all of their benefits,
the rise of these funds pose awful risks to the global financial
system, the first of which is on us in the "Credit Crunch"
we are seeing unfold on a nearly daily basis now. The threats
are different with each group, the nationally dominated group
and the private profit-seeking group.
- The non-governmental funds
are there for profit and provoke price changes as a way of profiting
often, or change positions as fast as they can, if profits threaten
to dissipate. They can be a source of heavy and persistent volatility
in currencies and markets, should it suit them.
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- Governmental bodies move carefully
and slowly, so as to protect the longer term benefits of their
investments. But when they move, they are large enough to change
investment currents and dominate trends.
Evidence of their influence
is seen in real estate values in developed countries, which have
increased by $30,000 billion between 2000 and 2005, far outstripping
economic growth. This partly reflected property purchases by
petrodollar investors but was also a side effect of lower interest
rates caused by investment in government securities, especially
in the U.S., by Middle Eastern and Asian investors as well as
the private investors. They, alongside European investors are
suffering the pain of the present credit crunch associated with
property, but they are unlikely to go bust.
The size and leverage of hedge
funds, their nepotistic relationships with their banking creators
threatened the sort of contagion we saw in July when the sub-prime
crisis exploded. [Please note that these funds are outside the
banking system, but usually under their control] So as we are
still seeing in the on-going 'credit crunch' damage amongst them
feeds through the entire banking system, as they are interrelated
through syndication and markets. This crisis is by no means over
as we are now seeing in the bankruptcy of the Dublin based Rhinebridge,
a Structured Investment Vehicle and one of its Investors in Germany,
IKB Deutsche Industriebank AG today, which has lost about half
its value and is unlikely to repay all its debt. Their fall can
be attributed to the dramatic growth in high-yield debt, and
lax lending covenants to satiate demand from private equity groups.
Such easy lending of itself increases credit risk.
Oil investors, Asian central
banks, and hedge and private equity funds collectively held $8,400
billion in assets at the end of 2006. These assets have tripled
since 2000 and they are now equivalent to 40% of the size of
the world's pension funds and a similar proportion of global
mutual funds. Altogether, they represent 5% of the world's $167,000
billion in financial assets. With $ deficits, rapidly rising
oil prices and massively growing $ surpluses in the hands of
mainly Asian and oil producing nations their growth rate has
been meteoric. Between 2000 and 2006, the assets held by Asian
central banks grew by 20% a year, four times as quickly as the
world's pension funds. At the current growth rate, the assets
of the four groups will exceed $20,000 billion in five years'
time, 70% of the size of the world's pension funds. Biggest of
the four is the petrodollar reserves, which has grown rapidly
after a tripling in the oil price since 2002 to up to $3,800
billion in foreign financial assets. At a minimum pace of growth
on an oil price less than half the present one petrodollar assets
would continue to grow rapidly over the next five years. Using
the base of $50 oil, an extra $1 billion a day will pile up in
the financial markets by 2012. Take that higher to the $80 level
and it rises to $1.6 billion at least, a day.
Central banks, mainly those
of China and Japan, are the next most significant player, with
$3,100 billion held in foreign reserve assets at the end of last
year. Most of this has found its way into U.S. Treasury bonds,
helping keep interest rates artificially low. The central banks
of China, South Korea, and Singapore have announced plans to
shift a collective $480 billion into more diversified assets.
Clearly they will aim to keep the buying power of the $ high,
so that they don't face losses in their reserves, but they hold
so much this is impossible to do with a declining $.
Hedge funds are less significant
but have still grown from less than $500 billion in 2000 to $1,500
billion today. Together with the leverage they typically employ,
hedge funds could have $12,000 billion of financial firepower
by 2012.
Now this has the potential
to make the recent credit crunch look tame. Their interests are
specific, national, bottom line oriented and respect no foreign
domain in which they are invested. If the global major Central
Banks put a foot wrong in this present delicate situation, the
quake that sets off the tsunami of capital flows we have repeatedly
warned of will happen.
These can no longer be ignored
or thought of as a blessing to stimulate long-term growth, in
these smaller emerging nations, except where they are tied into
securing future resources for the developing East [effectively
passing ownership of their resources to foreigners in exchange
for some infrastructural developments].
We live in a pretty integrated
global economy, where the web of banking has already shown that
what happens in one nation, spreads across the oceans, in a heartbeat.
So small nations receiving these massive inflows of capital,
could see them withdraw, not for local reasons, but those lying
outside the nation. So, brace yourselves for more Capital Controls
such as those we are seeing in India now, as it seeks to protect
its Rupee against inflows of capital.
Expect higher interest rates
in these nations as inflation takes off as a result of the inflows,
but more aggressively, expect Capital Controls to prevent this
'hot money' from draining capital from these emerging countries
and also expect Capital Controls from even the largest nations
on earth to prevent foreigners as well as locals from controlling
the well-being of their economies by withdrawing major amounts
of capital from them.
We live in a financially dangerous
world now, with the warning lights flashing brighter and brighter.
While the gold market is
just too small at the moment and will be until several noughts
are added to the $ gold price, it cannot provide any protection
for these monsters of money, but it is a place to protect yourself,
if you are an individual or smaller institution.
And even though the gold
market cannot provide a haven for such massive amounts the dangers
posed by these monsters will ensure that the gold price will
rise to much greater heights when any of these funds quake in
crisis and send out financial tsunamis, as confidence in the
system buckles yet again.
[With thanks to FNB]
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for the entire report.
Oct 12, 2007
-Julian
D.W. Phillips
email: gold-authenticmoney@iafrica.com
321gold Ltd
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