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Fleeing the USD

Vietnam, a weathervane for the big Asian powers, is now fleeing the US Dollar...

VIETNAM is planning to cut its purchases of US Treasuries and other Dollar bonds, raising fears that Asian central banks – which control over two-thirds of the world's foreign reserves – may soon join the flight from US assets.

   The State Bank of Vietnam has abandoned its attempt to hold down the Vietnamese currency through heavy purchases of dollars. The policy caused the economy to overheat, driving up inflation to 8.8%. Vietnam, which has mid-sized reserves of $40 billion, is seen as weathervane for the bigger Asian powers. Together these powers hold $3,575 billion of foreign reserves, over 65% of the world's total.

   China leads with $1,340 billion, but South Korea, Taiwan, Singapore, and even Thailand all built up massive holdings. Vietnam's central bank said this week that it would move "gradually" to a floating currency. Vietnam is a relatively small country but it is symptomatic of Asia.

   Should one of them jump the Dollar ship, the others will follow – sooner or later.

Fleeing the US Dollar: Middle East

   Kuwait has already abandoned its Dollar peg, fearing that its economy would overheat if it continued to import America's loose monetary policies. Separately, the gas-rich Gulf state of Qatar announced that it had cut the Dollar holdings of its $50 billion sovereign wealth fund from 99% to 40%, switching into investments in China, Japan, and emerging Asia.

   The Qatari move is intended to increase long-term returns for future generations, but it can easily be seen as a vote of no confidence in US currency management. Qatar will not have a significant impact on the Dollar, but it is being watched by the other members of the Opec oil cartel. All are concerned by the fact that the US Dollar is cheapening by the day. Their dependence on the United States may hold, but that frustration will show itself in the rising and holding price of oil.

   The US will at some point come to terms with Opec and give it a better deal than it has now. Will the deal be that they permit Opec to price oil in currencies other than the Dollar?

   There have been reports that China is already pulling out of US bonds to fund its new sovereign wealth fund. Foreign central banks slashed holdings by $32 billion in the last two weeks of August. We will not know which country was responsible until the Treasury's TIC data is released in November. This is gold positive in the long-term.

Fleeing the US Dollar: The IMF

   Meantime the International Monetary Fund (IMF), headed by managing director Rodrigo Rato, says financial market turmoil has increased downside risks to global growth. Rato said currency adjustment seen so far would likely help bring a significant but not substantial reduction in the US current account deficit. He then stated that there was still room for depreciation of the Dollar.

   The US government needs policies to increase both official and private savings so as to reduce its reliance on foreign borrowing, but this is not and is unlikely to happen yet. There are as yet no signs of any moves to stem the Trade deficit by the US Authorities, nor are any expected.

   What we are seeing already is proof of just what foreign investors in US Treasuries can do if they become unhappy. The sharp fall to negative levels into the US Capital Account proves it. Were it not for the inflow from US and British-owned liquidity funds (perhaps under the direction of the Fed?), based as they are in the tax haven Islands of the Caymans, then the US Balance of Payments would be in disarray now.

   In that scene we can expect a more disorderly decline in the value of the Dollar and possibly but less likely higher US interest rates. This could not be more gold positive.

Fleeing the US Dollar: Surplus holders

   After the seizure suffered by parts of the capital markets over the summer – and following the Federal Reserve's 0.5% rate cut – the US yield advantage over other countries diminished. It will drop further as more rate cuts are made. This has triggered serious withdrawals of capital from the US, and will keep doing so until growth is safe.

   In August, Japan and China led a record withdrawal of foreign funds from the United States in August. Data from the US Treasury showed outflows of $163 billion from all forms of US investments. With the market still affected by the August crises we can expect the outflow to continue into September's figures and October's.

   Asian investors dumped $52 billion worth of US Treasury bonds alone; Japan ($23 billion); China ($14.2 billion); Taiwan ($5 billion).

   Central banks in Singapore, Korea, Taiwan, and Vietnam have all begun to cut purchases of US bonds, or signaled their intention to do so. In effect, they are giving up trying to hold down their currencies because the policy is starting to set off inflation.

   It is the first time since 1998 that foreigners have, on balance, sold Treasuries. And what an impressive outflow in one month we've seen! It is not just foreigners who are selling US assets, Americans are turning their back as well.

   America has relied on "hot money" from abroad to cover 25% to 30% of its short-term credit and commercial paper market over the last two years. The US requires $60 billion a month in capital inflows to cover its current account deficit alone, but this inflow is slowing down, threatening the US Balance of Payments over a much longer term period.

   That would produce global earthquakes in exchange rates, major capital flows and see a battery of national boundaries – otherwise known as Exchange Controls – spring up to protect individual nations.

   From what we believe to be institutions under the control of the US, based in Britain and the Caymans, capital was brought in to the extent of $60 billion from "hedge funds", which covered US capital shortfall and positions at the height of the credit crunch.

   Most of us are still of a mindset to believe that the Fed has full control of US interest rates. If the move out of the Dollar is not just a reaction to the US banking crisis but a long-term trend, then the sales of Treasuries will of itself lead to higher interest rates, leaving the Dollar surplus holders of Asia in control of US interest rates. The Fed will be left to react but not control.

   But is that all that will happen in the financial markets, a declining Dollar and potentially higher interest rates?

   No, oh no! This makes physical Gold Bullion Investment a must in all portfolios.

   For the full report, please visit GoldForecaster.com...

JULIAN PHILLIPS – one half of the highly respected team at GoldForecaster.com – began his career in the financial markets back in 1970, when he left the British Army after serving as an Officer in the Light Infantry in Malaya, Mauritius, and Belfast.

First he worked in Timber Management and then joined the London Stock Exchange, qualifying as a member and specializing from the beginning in currencies, gold and the "Dollar Premium". On moving to South Africa, Julian was appointed a macro-economist for the Electricity Supply Commission – guiding currency decisions on the multi-billion foreign Loan Portfolio – before joining Chase Manhattan and the UK Merchant Bank, Hill Samuel, in Johannesburg.

There he specialized in gold, before moving to Capetown, where he established the Fund Management department of the Board of Executors. Julian returned to the "Gold World" over two years ago, contributing his exceptional experience and insights to Global Watch: The Gold Forecaster.

Legal Notice/Disclaimer: This document is not and should not be construed as an offer to sell or the solicitation of an offer to purchase or subscribe for any investment. Gold Forecaster/Julian D.W. Phillips have based this document on information obtained from sources they believe to be reliable but which it has not independently verified; they make no guarantee, representation or warranty and accepts no responsibility or liability as to its accuracy or completeness. Expressions of opinion are those of Gold Forecaster/Julian D.W. Phillips only and are subject to change without notice. They assume no warranty, liability or guarantee for the current relevance, correctness or completeness of any information provided within this report and will not be held liable for the consequence of reliance upon any opinion or statement contained herein or any omission. Furthermore, they assume no liability for any direct or indirect loss or damage or, in particular, for lost profit, which you may incur as a result of the use and existence of the information, provided within this report.

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