Destroying the Dollar
Research for Online Investors

01/24/12

Precious metals have been on a nice run higher this year.  We called gold our Trade of the Year on Dec. 29th when the GLD etf closed at $150.34.  GLD is up 7.9% since our call.  We saw heavy selling in December, attributable to hedge funds liquidating positions to raise money to cover redemptions. Why is gold going back up?

The law of Unintended Consequences.

As far back as a year ago, the Economic Times of India reported India had discussions with Iran about paying for oil with gold to avoid using U.S. dollars.  India imports 22% of Iran’s production which accounts for 16% of India’s imports.  Iran is India’s second largest crude oil supplier after Saudi Arabia.  U.S. sanctions just ratcheted up a notch with the European Union agreeing to cut off new contracts for Iranian oil while allowing current contracts to run through the end of June.

Israel’s Debkafile reports this morning that India has agreed to pay for Iranian crude oil in gold to bypass the tightening sanctions that include the Iranian Central Bank.  Debkafile’s sources report that China will follow India’s lead and pay for Iranian oil with gold.  India reported last week that crude oil from Iran would be paid for with rupees and Japanese yen while the use of gold “as money” was not disclosed.

Turkey announced last week they would not adhere to any sanctions against Iran.  Turkey’s government owns the Halk Bankasi bank which will transact the oil trade with India on behalf of the Iranian government.  Debkafile also reports that Russia has set up alternative financial terms with Iran to pay for Iranian crude.

Is this behind the strong moves in Gold and Silver since the first of the year?  We don’t know.  Is the dollar still the “World’s Reserve Currency” if it is not used to settle imports and exports between countries?  Our government is playing a dangerous game of chicken with the dollar.  What else could we do to destroy the value of the dollar?  Wait, Bernanke and the FOMC are meeting today and tomorrow.  We will know more tomorrow afternoon.

The market is exhibiting some resilience this morning.  European markets were down this morning and futures pointed to a lower opening for U.S. markets.  Eurozone finance ministers sent Greece’s proposed agreement with creditors back for more negotiations.  They didn’t like the 4% average interest rate, said it was too high!  Charles Dallara, with the Institute of International Finance, appeared on CNBC this morning.  He is negotiating with Greece on behalf of the bondholders.

Dallara told CNBC he was still committed to a voluntary write-down agreement, but is concerned all parties may not be.  We wrote about the different players in last Thursday’s Hypothecation MarketToday article.  Besides the obvious private players that are holding bonds and derivatives of Greek debt, we think Dallara is referring to the other eurozone governments and maybe Greece itself.

The Financial Times reports that several hedge fund managers have said they are not involved in the talks and will not agree to “private sector involvement.”  Mr. Dallara represents bondholders with an estimated $200 billion dollars of the total $340 billion dollars that Greece owes creditors.  Of the $140 billion not represented by the Institute for International Finance, about $65 billion is held by hedgies, pension funds and insurance companies that are not interested in writing down their loans.  The other $75 billion dollars worth of Greek bonds are held by the ECB and the IMF, and they are not participating.  The ECB and IMF demand full repayment of their debt!

If I owned Greece bonds, how happy would I be that the IMF and ECB were not writing down the face value of their Greek bonds?  Isn’t it a little bit amazing that the IMF and ECB are not writing down their Greek bonds but expect all private bondholders to take less than 50 cents on the dollar on any bonds they own?

Over the last few years we have referred to President Obama’s administration using the government to reward their friends and punish their political enemies, but the Europeans are pretty good at it too!

Greek politicians may be growing weary of dancing to everyone’s jerk on their strings.  Maybe they will just announce what their redemption program will be on maturing notes, and let the market adjust.  Would this be a default?  Yes.  Do they really care? No.  It doesn’t cost them anything to legislate their best offer.

The only thing stopping them is Germany’s Chancellor Merkel saying Greece must negotiate a resolution to the debt overhang before more money will be advanced.  Greece has $18.7 billion dollars in debt to roll-over or redeem in March.  They cannot pay it or their other government bills without more money from the eurozone.

What will Greece do?  Watch for Greece to call Merkel’s bluff if negotiations break down with the bondholders.  Watch for the bondholders to overtly call for the ECB and IMF to take write-downs on their debt equal to what private bondholders agree to.

We have a few weeks to watch this play out…it’s better than a sporting match!

Mailbag:
Great article to let me know what is going on in the market…you’re not so grumpy!---subscriber M.C.

The information presented in this newsletter is based on generally available news releases, corporate filings, current events, interviews and the editor’s opinions.  It may contain errors and you should not make investment decisions based solely on what you believe you have read here.  Do your own research, it is your money.  If you lose it, it is your responsibility, not ours or your grandmothers!  The editor may or may not have a position in any securities discussed.  The editor may have held a position in a security earlier, or in the future.

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