Gold Is Not A Safe Haven? Tell That To People In Indonesia

Gold Is Not A Safe Haven? Tell That To People In Indonesia

Today’s AM fix was USD 1,317.25, EUR 985.74 and GBP 828.67 per ounce.
Yesterday’s AM fix was USD 1,314.75, EUR 984.83 and GBP 825.17 per ounce.  

Gold fell $13.70 or 1.04% yesterday, closing at $1,309.50/oz. Silver dropped $0.49 or 2.21%, closing at $21.70. At 2:55 EDT, Platinum fell $15.76 or 1.1% to $1,433.74 /oz, while palladium rose $5.50 or .8% to $702.00/oz.

Gold inched up from its five week low, gaining on the weak U.S. dollar plus increased safe haven demand prior to the U.S. Fed’s policy meeting which starts today.

Gold in Indonesian Rupiah, 2000 to Today – (GoldCore)

Yesterday Goldman Sachs said that a ‘dovish’ taper would likely limit the downside to gold prices but said that a more hawkish taper than currently expected would likely precipitate a further decline in gold prices.

Goldman Sachs have a habit of making big and loud market calls such as their call for oil to rise to $200 a barrel when oil had already surged from $50 a barrel in March 2007 to $140 a barrel in September 2008. 

Soon after that call, oil fell from $140 a barrel to a low of $32.40 a barrel at the end of 2008. Their call should be seen as another contrarian buy signal. 

The CHART OF THE DAY shows how the Indonesian rupiah, like all currencies has devalued consistently in recent years and remains close to record nominal highs in gold terms.

There are concerns that Indonesia’s record current account deficit and consistently large trade deficits  may deter  foreign investors and add pressure on the rupiah, the worst-performing currency in Asia in recent months.

The currency has weakened nearly 15% against the dollar since the start of June and 20% against gold since June 28th – from 12.235 million rupiah per ounce (12,235,000/oz) to 14.728 rupiah (14,728,000/oz) per ounce.

This  compares with the 10% drop in India’s rupee leading the rupiah to be the worst performer in Asia during the period.

The recent losses are simply a continuation of the devaluation seen in recent years. 

Since 2000, the rupiah has fallen by nearly 600% against gold from 2.174 million rupiah per ounce in 2000 to over 14.755 million rupiah per ounce today. 

The Bank Indonesia has embarked on its most aggressive tightening since 2005, joining Brazil and India in taking steps to support their currencies. The prospect of reduced U.S. monetary stimulus and QE may be prompting investors to sell government bonds internationally.

Government debt has been supported by the Federal Reserve’s extremely radical debt monetisation programmes – electric money creation to buy government debt.

Indonesia’s foreign-exchange reserves have declined as the central bank defended the rupiah, but the Indonesian Central Bank (BI) still has $92.6 billion foreign exchange reserves.

Unlike many large debtor nations such as the U.S. which hold little or no foreign exchange reserves, Bank Indonesia (BI) said in August that the $92.6 billion will be enough to protect the rupiah from further devaluation and the consequences of that devaluation.

Cross Currency Table – (Bloomberg)

Bondholders are demanding higher yields to hold its debt. According to Bloomberg, Indonesia sold $1.5 billion of dollar-denominated Islamic bonds this month at the highest yield since 2009, its reserves are near the lowest level in almost three years, and foreigners have pulled out $2.66 billion from local equities since the start of June. 

The trade deficit widened to a record in July as an export slump extended to a 16th month, while the expanding middle class increased purchases of manufactured goods and fuel.

However, Indonesia is solvent unlike the U.S. government and the Federal Reserve.

U.S. Public Debt, 1972 To 01/01/13 – (Bloomberg)

The U.S. Federal Reserve is insolvent and has liabilities of over $3.2 trillion and yet has capital of just $60 billion. Therefore, it is leveraged by fifty to one, akin to a highly leveraged hedge fund. 

The U.S. government’s national debt is heading rapidly to $17 trillion and the off balance sheet liabilities are now estimated by respected economists at between $100 trillion and $200 trillion.

The national finances of the UK, Japan and many European countries are akin to those of the U.S. and they are also either insolvent or close to insolvency.

Therefore, the dollar and all currencies will continue to devalue and debase against finite and rare gold in the coming months and years. 

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