BIGCAPITAL's Blog

February 28, 2010

10 tips for spending less and saving more

Filed under: PERSONAL FINANCE — bigcapital @ 1:29 pm

 

10 tips for spending less and saving more

If cheap is chic, then saving is suddenly sexy. America Saves Week, which is just wrapping up, takes on new meaning when the U.S. savings rate, which had dipped into negative territory, headed up to 4.6 percent last year. The savings rate could climb as high as 6.5 percent, according to Allianz Group Economic Research.

You know you’re on to something when investing icons such as Burton Malkiel and Charles Ellis jump on the bandwagon. Malkiel and Ellis are authors of a nifty little book called “The Elements of Investing.” The book is just 154 pages, including glossary, and its investing advice can be summed up in four words: “Keep it simple, sweetheart,” a strategy I wholeheartedly endorse.

But, say Malkiel and Ellis, “it all starts with saving.” Who would have imagined that this legendary Wall Street duo would be advising readers to buy next year’s Christmas cards on Dec. 26 or to rent a movie instead of going out? People at all income levels tell me that they have trouble putting money aside because they’re living paycheck to paycheck. But I’m convinced that saving is a classic case of mind over money. Here are 10 surefire ways to trick yourself into spending less and saving more:

— Know your plastic personality. Disciplined credit-card holders can earn rewards points by using their cards for all their purchases and paying the bills in full each month. Consumers with less self-control may want to use debit cards to make sure that they don’t spend more than they have. In either case, your monthly statement provides a handy record of areas where you’re leaking cash.

— Don’t trust yourself to pay yourself first. Instead, have someone else do it for you. Sign up for your employer’s retirement plan. Set up an automatic deposit with your bank to seed your emergency fund. Even Uncle Sam will jump-start your retirement savings by automatically depositing your tax refund in an IRA. And you’ll never miss money you don’t see.

— Deposit your paycheck and other money to your savings account instead of checking. You’re much less likely to spend the money if you have to transfer it from savings.

— Limit yourself to one ATM withdrawal per week. Instead of hitting the cash-back button for $35 every time you go to the drugstore or supermarket, make your money last.

— When you make a credit-card purchase, record it immediately in your checking-account register. You won’t be surprised when the credit-card bill arrives, and you will have enough money to pay it in full.

— When you subtract a check from your account, round up the amount to the next dollar. That way, you’ll always have a slush fund. Your bank might even do this for you. Sounds like small potatoes, but even if it’s only $100 every couple of months, that’s still money in the bank.

— Toss your spare change into a fun savings bank or glass jar — anything that will catch your eye and your quarters. I know one person who accumulates $900 to $1,000 a year this way and uses the money to buy holiday gifts.

— Bag the savings from brown-bag lunches. Each time you bring your lunch to work or pass up the temptation to buy a latte, take the money you would have spent and put it in your cash jar. It’s an immediate reward for your self-discipline.

— Pay yourself after you’ve paid off a debt. Once you finish paying off a loan or credit-card balance, keep writing the check but send it directly to a savings or investment account.

— Give yourself a cooling-off period if you can’t decide between two items in a store. Chances are you won’t go back.

Remember, if money is power, then saving money is empowering. It gives you financial security and the freedom to make choices. Every once in a while I tap my own slush fund to send my three grown children checks to treat themselves to dinner. They appreciate the gesture, and I have fun making it.

How One Student’s Debt Grew to $555,000

Filed under: PERSONAL FINANCE — bigcapital @ 1:26 pm

— Personal Finance For Us —

 

When Michelle Bisutti, a 41-year-old family practitioner in Columbus, Ohio, finished medical school in 2003, her student-loan debt amounted to roughly $250,000. Since then, it has ballooned to $555,000

It is the result of her deferring loan payments while she completed her residency, default charges and relentlessly compounding interest rates. Among the charges: a single $53,870 fee for when her loan was turned over to a collection agency.

“Maybe half of it was my fault because I didn’t look at the fine print,” Dr. Bisutti says. “But this is just outrageous now.”

To be sure, Dr. Bisutti’s case is extreme, and lenders say student-loan terms are clear and that they try to work with borrowers who get in trouble.

But as tuitions rise, many people are borrowing heavily to pay their bills. Some no doubt view it as “good debt,” because an education can lead to a higher salary. But in practice, student loans are one of the most toxic debts, requiring extreme consumer caution and, as Dr. Bisutti learned, responsibility.

Unlike other kinds of debt, student loans can be particularly hard to wriggle out of. Homeowners who can’t make their mortgage payments can hand over the keys to their house to their lender. Credit-card and even gambling debts can be discharged in bankruptcy. But ditching a student loan is virtually impossible, especially once a collection agency gets involved. Although lenders may trim payments, getting fees or principals waived seldom happens.

Yet many former students are trying. There is an estimated $730 billion in outstanding federal and private student-loan debt, says Mark Kantrowitz of FinAid.org, a Web site that tracks financial-aid issues — and only 40% of that debt is actively being repaid. The rest is in default, or in deferment, which means that payments and interest are halted, or in “forbearance,” which means payments are halted while interest accrues.

Although Dr. Bisutti’s debt load is unusual, her experience having problems repaying isn’t. Emmanuel Tellez’s mother is a laid-off factory worker, and $120 from her $300 unemployment checks is garnished to pay the federal PLUS student loan she took out for her son.

By the time Mr. Tellez graduated in 2008, he had $50,000 of his own debt in loans issued by SLM Corp., known as Sallie Mae, the largest private student lender. In December, he was laid off from his $29,000-a-year job in Boston and defaulted. Mr. Tellez says that when he signed up, the loan wasn’t explained to him well, though he concedes he missed the fine print.

Loan terms, including interest rates, are disclosed “multiple times and in multiple ways,” says Martha Holler, a spokeswoman for Sallie Mae, who says the company can’t comment on individual accounts. Repayment tools and account information are accessible on Sallie Mae’s Web site as well, she says.

Many borrowers say they are experiencing difficulties working out repayment and modification terms on their loans. Ms. Holler says that Sallie Mae works with borrowers individually to revamp loans. Although the U.S. Department of Education has expanded programs like income-based repayment, which effectively caps repayments for some borrowers, others might not qualify.

Heather Ehmke of Oakland, Calif., renegotiated the terms of her subprime mortgage after her home was foreclosed. But even after filing for bankruptcy, she says she couldn’t get Sallie Mae, one of her lenders, to adjust the terms on her student loan. After 14 years with patches of deferment and forbearance, the loan has increased from $28,000 to more than $90,000. Her monthly payments jumped from $230 to $816. Last month, her petition for undue hardship on the loans was dismissed.

Sallie Mae supports reforms that would allow student loans to be dischargeable in bankruptcy for those who have made a good-faith effort to repay them, says Ms. Holler.

Dr. Bisutti says she loves her work, but regrets taking out so many student loans. She admits that she made mistakes in missing payments, deferring her loans and not being completely thorough with some of the paperwork, but was surprised at how quickly the debt spiraled.

She says she knew when she started medical school in 1999 that she would have to borrow heavily. But she reasoned that her future income as a doctor would make paying off the loans easy. While in school, her loans racked up interest with variable rates ranging from 3% to 11%.

She maxed out on federal loans, borrowing $152,000 over four years, and sought private loans from Sallie Mae to help make up the difference. She also took out two loans from Wells Fargo & Co. for $20,000 each. Each had a $2,000 origination fee. The total amount she borrowed at the time: $250,000.

In 2005, the bill for the Wells Fargo loans came due. Representatives from the bank called her father, Michael Bisutti, every day for two months demanding payment. Mr. Bisutti, who had co-signed on the loans, finally decided to cover the $550 monthly payments for a year.

Wells Fargo says it will stop calling consumers if they request it, says senior vice president Glen Herrick, who adds that the bank no longer imposes origination fees on its private loans.

Sallie Mae, meanwhile, called Mr. Bisutti’s neighbor. The neighbor told Mr. Bisutti about the call. “Now they know [my dad’s] daughter the doctor defaulted on her loans,” Dr. Bisutti says.

Ms. Holler, the Sallie Mae spokeswoman, says that the company may contact a neighbor to verify an individual’s address. But in those cases, she says, the details of the debt obligation aren’t discussed.

Dr. Bisutti declined to authorize Sallie Mae to comment specifically on her case. “The overwhelming majority of medical-school graduates successfully repay their student loans,” Ms. Holler says.

After completing her fellowship in 2007, Dr. Bisutti juggled other debts, including her credit-card balance, and was having trouble making her $1,000-a-month student-loan payments. That year, she defaulted on both her federal and private loans. That is when the “collection cost” fee of $53,870 was added on to her private loan.

Meanwhile, the variable interest rates continue to compound on her balance and fees. She recently applied for income-based repayment, but she still isn’t sure if she will qualify. She makes $550-a-month payments to Wells Fargo for the two loans she hasn’t defaulted on. By the time she is done, she will have paid the bank $128,000 — over three times the $36,000 she received.

She recently entered a rehabilitation agreement on her defaulted federal loans, which now carry an additional $31,942 collection cost. She makes monthly payments on those loans — now $209,399 — for $990 a month, with only $100 of it going toward her original balance. The entire balance of her federal loans will be paid off in 351 months. Dr. Bisutti will be 70 years old.

The debt load keeps her up at night. Her damaged credit has prevented her from buying a home or a new car. She says she and her boyfriend of three years have put off marriage and having children because of the debt.

Dr. Bisutti told her 17-year-old niece the story of her debt as a cautionary tale “so the next generation of kids who want to get a higher education knows what they’re getting into,” she says. “I will likely have to deal with this debt for the rest of my life.”

February 25, 2010

World Bank: Indonesia’s debt ratio above average

Filed under: Uncategorized — bigcapital @ 3:25 pm

 

World Bank: Indonesia’s debt ratio above average

The ratio of Indonesia’s debt to Gross National Income (GNI) was apparently higher compared to the average of such a ratio in other developing countries during the crisis period, the Bisnis Indonesia reported.

Citing to the World Bank’s report entitled Global Development Finance: External Debt of Developing Countries displayed on its website on Monday, Indonesia’s debt to GNI ratio stood at 35 percent, or apparently higher than the average ratio in 128 other developing countries that stood at 22.1 percent in the same period.

If compared to the government’s debt to GDP ratio (PDB), the debt to GNI ratio figure was 2 percent higher.

Indonesian government, however, refused to use the debt to GNI ratio mechanism. It prefers to use the existing mechanism, the debt to GDP ratio.

Indonesian Debt Management Director General at the financial ministry Rahmat Waluyanto said that it would ease Indonesia top compare the ratio with other countries since most of countries in the world use the same mechanism.

Indonesian economist at the Indonesian Institute of Science ( LIPI) Adam Latif had proposed the government to use debt to GNI ratio mechanism since the existing PDB mechanism does not reflect the real Indonesia’s debt burden.
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February 23, 2010

The Japanese Yen Will Start Losing It

Filed under: Uncategorized — bigcapital @ 11:10 pm

 

The Japanese Yen Will Start Losing It

Market Talk – LONDON — This will be a bad week for the yen.

“There’s talk that a lot of mutual funds are being set up this week,” said Yuji Saito, director of the foreign-exchange department at Credit Agricole CIB in Tokyo. “It’s a factor for the yen to be sold.”

Not only will the rash of new Toshin issues put the Japanese currency under pressure, but increasing speculation over a Chinese yuan revaluation as well as growing concern about Japanese deflation will make matters worse.

This should not only ensure further yen losses against the dollar but it should push the yen down on the crosses.

Yen Weakens Amid Speculation Investment Trusts Buying Overseas

The sheer scale of Toshin issues, which are investment trust fund vehicles in foreign currencies offered to Japanese retail investors, are enough to make the yen look vulnerable.

According to Barclays Capital, as much as Y3.36 trillion–or nearly $37 billion–will be made available this week, providing a heavy outflow that will put downward pressure on the yen.

This week could also bring downward pressure on the yen from the yuan.

Speculation that the People’s Bank of China will at least ease the currency’s peg against the dollar has grown sharply in the last week or two as trade data have shown that Chinese exports have recovered and that keeping the yuan down against other currencies shouldn’t be such a high priority.

Meanwhile, fears of the Chinese economy overheating remain. The PBOC has already raised minimum bank requirements to curb excessive lending and a stronger currency to further tighten policy now looks like the next option.

For the yen, this should be bad news.

In the past, the threat of tighter Chinese policy has been yen supportive–as investors have fled to safe havens because of concern over the global recovery.

This could well happen again, at least initially, this time around.

However, the global benefits of a stronger yuan should soon dominate, lifting market sentiment and putting the yen out of favor.

“We are more likely to see the opposite reaction to that we see when the PBOC tightens monetary policy,” said Steve Barrow, senior currency strategist with Standard Bank in London.

“Namely, risk-taking is likely to increase, stocks will be lifted and “riskier” currencies, like the Aussie, are likely to rise. In fact, the best currency trade on this scenario is a long Aussie/yen trade,” Barrow argued.

Additional reasons for selling the yen are also likely to emerge as fears over Japanese deflation mount.

Last week’s data, with the fourth-quarter GDP deflator much higher than expected, is likely to be followed by more disappointment this week–a further decline in consumer prices, falling retail sales and declining housing starts.

Audrey Childe-Freeman, a senior currency strategist with Brown Brother Harriman in London, expects this week’s data to provide a good opportunity for yen bears.

“This week’s data will rekindle Japan’s deflationary talks, in turn confirming that the Bank of Japan’s exit strategy is a distant prospect and that in fact, some may still argue in favour of an extension in the purchases of Japanese government bonds,” Childe-Freeman said.

February 18, 2010

=DJ Forex Focus: Market Spotlight Will Hurt The Yen

Filed under: Uncategorized — bigcapital @ 4:25 pm

=DJ Forex Focus: Market Spotlight Will Hurt The Yen

Thu Feb 18, 2010
  By Nicholas Hastings
  A DOW JONES NEWSWIRES COLUMN
  LONDON (Dow Jones)–The yen’s 2010 holiday must be coming to an end now.

  In fact, with global financial market investors now turning their attention
away from the woes of Greece and the euro, the Japanese currency could well
find itself in line for a battering.

  The yen has escaped the market spotlight this year so far. With risk aversion
in the ascendant, it found support during most of January because of its
safe-haven status.

  Over the last couple of weeks that support has started to ebb away but with
investors more fixated on the unfolding of the Greek debt saga, rising concerns
over Japan’s economy have largely been ignored and the yen has traded in a very
narrow range between Y89 and Y91 to the dollar.

  See the yen’s recent performance against the dollar:

  http://www.dowjoneswebservices.com/chart/view/3468

  This should all change now.

  This week has brought more evidence that the Japanese economy remains mired
in deflation – failing to respond not only to the government’s vast spending
programs that are driving the country further into serious debt but also
failing to recover despite the quantitative easing that the Bank of Japan has
been pursuing for months.

  The currency strategy team at Commerzbank described it as “a frightening
picture for Japan.”

  The country’s GDP deflator fell by 3% in the fourth quarter of last year and
now more recent data show that tertiary, or service, sector activity lost
momentum, with demand falling at the fastest rate in nine months.

  With household incomes on the slide, chances are that any early recovery in
the sector is highly unlikely.

  Both the Ministry of Finance and the Bank of Japan have immediately agreed on
a goal to bring inflation back up to 1%. The problem is that neither know quite
how to achieve this.

  Further fiscal profligacy, which hasn’t worked particularly well in the past,
will hardly endear Japanese assets to investors.

  At the same time, as Bank if Japan Governor Shirakawa has admitted,
quantitative easing also has a limited impact on the problem. Earlier Thursday,
the Bank of Japan left its rates unchanged at 0.1%.

  Whatever the solution, though, it is more than likely that Japan has fallen
firmly back to the bottom end of the list of major economies that will stage a
recovery from the global recession and be in a position for tightening monetary
policy.

  Investor concern is already being registered in the sovereign credit default
swap market, where the price of Japanese paper has once gain edged steadily
higher, peaking this month at levels last seen in March 2009.

  This could soon start to take its toll on the yen itself. Currency
strategists say that a serious break for the dollar through resistance around
Y90.75 could help to give the move more sustained momentum with an early target
of Y92.

  This would take the dollar back close to its highs at the start of the year
and possibly set the yen up for an even larger tumble if risk aversion remains
low and investors continue to sell the currency.

  There are already fears that Japanese investors will be heading for
higher-yielding markets, with investment trusts launching an estimated $43
billion of so-called Toshin funds in emerging markets over the next week or
two.

  Bloomberg TNI FRX POV
   Reuters   USD/DJ
   Thomson   P/1066 or P/1074

  (Nick Hastings has covered the foreign exchange markets and industry for over
20 years. Apart from his written commentary and analysis, he also appears on
Fox Business News and CNBC television in Europe, Asia and the U.S)
  (END) Dow Jones Newswires

  18-02-10 0815GMT

February 11, 2010

Fed in Talks With Money Market Funds to Help Drain $1 Trillion

Filed under: Uncategorized — bigcapital @ 10:27 pm

Fed in Talks With Money Market Funds to Help Drain $1 Trillion

 

Feb. 11 (Market News) — The Federal Reserve is in talks with money-market mutual funds on agreements to help drain as much as $1 trillion from the financial system as policy makers prepare for the first interest-rate increase since June 2006, according to a person familiar with the discussions.

The central bank is looking to the $3.2 trillion money- market mutual-fund industry because the 18 so-called primary dealers that trade directly with the Fed have a capacity limited to about $100 billion, estimates Joseph Abate, a money-market strategist at Barclays Capital in New York.

Money-market funds may welcome the opportunity to trade with the Fed after the financial crisis reduced the supply of safe assets in which they can invest. In one example of demand for such assets, auctions on four-week Treasury bills have attracted an average of $5.47 in bids for every dollar sold this year, compared with an average of $3.77 last year, according to Bloomberg data. Yields on the four-week bill fell to five basis points from 20 basis points a year ago.

“There are lots of great credit stories, but the option of going with the Fed and the government — it takes away part of the risk,” said Deborah Cunningham, a chief investment officer at Federated Investors Inc. in Pittsburgh, which manages $318 billion in money-market investments. Conversations with the Fed “seem pretty positive,” she said, adding that the Fed and the industry should be in a position to conduct operations before the end of the year.

Fannie, Freddie

Chairman Ben S. Bernanke yesterday charted ways the Fed might withdraw record monetary stimulus pumped into the economy to fight the recession. Among the central bank’s tools are reverse repurchase agreements, in which the Fed sells securities with the intention of repurchasing them at a later date.

The Fed is also considering reverse repurchase agreements with mortgage lenders Fannie Mae and Freddie Mac, said the person familiar with the discussions. Freddie Mac spokeswoman Sharon McHale declined to comment. Fannie Mae spokesman Brian Faith also declined to comment.

“To further increase its capacity to drain reserves through reverse repos,” Bernanke said, the Fed is “in the process of expanding the set of counterparties with which it can transact” beyond primary dealers of government securities.

The primary dealers, which are required to bid at auctions of Treasury notes and trade directly with the New York Fed’s markets desk, include BNP Paribas Securities Corp., Banc of America Securities LLC and Goldman Sachs & Co.

Bernanke repeated yesterday that while interest rates are likely to stay low for an “extended period,” the Fed in “due course” will need to “begin to tighten monetary conditions to prevent the development of inflationary pressures.”

Securities Purchases

The central bank has created more than $1 trillion in excess reserves in the banking system through its purchases of $300 billion of Treasury debt and $1.25 trillion of mortgage- backed securities. To put upward pressure on the federal funds rate, the Fed may need to drain as much as $800 billion, Abate estimates.

One potential tightening tool is the interest rate on reserves that commercial banks keep on deposit at the Fed. By raising that rate, the central bank “will be able to put significant upward pressure on all short-term interest rates,” Bernanke said.

The Fed can also use reverse repos to shrink the quantity of reserves, which in turn gives it “tighter control over short-term interest rates,” he said.

Fed officials face the risk that when they start to tighten policy by raising the rate they pay banks on reserves, other market rates may not follow. That would keep monetary conditions too loose in an expansion.

Controlling Rates

“They still seem nervous that they might not be able to control short rates, and if they can’t control short rates, how do they tighten?” said Mark Spindel, chief investment officer at Potomac River Capital LLC, which manages $200 million in Washington.

The Fed has sought to keep the benchmark rate in a range of zero to 0.25 percent since December 2008. The federal funds rate is now 0.13 percent, even though banks can earn 0.25 percent by keeping their money on deposit at the Fed.

One reason for the discrepancy is that Fannie and Freddie have become “significant sellers” of funds in the overnight market and aren’t eligible to place cash on deposit at the Fed, according to a December research paper by the New York Fed.

Some hurdles remain in the Fed’s efforts to secure bigger repo capacity. Fed officials and mutual-fund industry representatives are working on a structure that would allow funds to invest in relatively liquid assets that can be sold in seven days, while allowing the central bank to avoid having to renew billions of dollars in transactions each week.

“There needs to be liquidity,” said Cunningham of Federated. “A reverse repo contract is not considered to be liquid in the context of anything beyond seven days.”
 

 

Last Updated via Bloomberg: February 11, 2010 00:00 EST

Why gold price will plunge to $800 per ounce

Filed under: Uncategorized — bigcapital @ 5:34 pm

 

Why gold price will plunge to $800 per ounce

Davos 2010: George Soros warns gold is now the ‘ultimate bubble’

Gold is now “the ultimate bubble”, billionaire investor George Soros has declared, sparking fears that prices for the precious metal may soon suffer a tumble

Mr Soros, arguably the most famous hedge fund manager in history, warned that with interest rates low around the world, policymakers were risking generating new bubbles which could cause crashes in the future. In comments delivered on the fringe of the World Economic Forum, Mr Soros said: “When interest rates are low we have conditions for asset bubbles to develop, and they are developing at the moment. The ultimate asset bubble is gold.”

At the World Economic Forum two weeks ago, George Soros dubbed gold “the ultimate asset bubble.” Some commentators insist that the most recent rise in the gold price, beginning in late 2008, has been driven primarily by the single factor that has caused nearly all other assets to rise during this time: the weakening U.S. dollar. Indeed, the dollar’s renewed strength over the last 60 days has coincided with the decline in the gold price from its all-time high of $1,226.50 per ounce in early December.

LONDON (Commodity Online): In the last few months, we have been reading predictions and forecasts from bullion analysts who insisted and argued that gold price is booming to touch $2,000, $3,000, $5,000, $10,000 per ounce in the coming years.

These forecasts have caught people’s attention who have been pouring money into gold and other precious metals all these months. But after the big surge of gold price to $1,227 per ounce some two months back, the yellow metal has been climbing down the ladder of speculation.

Despite speculators going on the ‘boom-in-gold-price predictions’, the yellow metal price has been sinking in the last two months. “If the gold price fall continues like this way, it is certain to touch down to $1,000 per ounce or below this level in the next one month,” says bullion analyst Mark Robinson.

Robinson, who is not a great bull on gold, says even if gold price falls to $900 or $800 per ounce, people should not complain. “For those who have invested in gold some years back, even $900 or $800 per ounce is a great price tag. So, there is no room for complaints even if gold price falls to realistic levels,” he said.

Robinson, a keen bullion watcher focusing on China, says that the Chinese government wants gold price to plunge to $800 per ounce level. “China’s biggest ambition these days is to build up gold reserves. For this, the best thing that China wants is a big fall in gold price so that it can buy more gold from IMF, gold miners and from the physical bullion market,” argues Robinson.

It is not just Robinson who is a bear in gold price forecast. On Monday, a senior analyst with Citigroup came out with purely bearish prediction on gold. Citigroup bullion analyst Alan Heap said that gold prices could sink to $820 an ounce by 2014.

Here is that interesting article that TheStreet.com published on the bearish prediction on gold:

“NEW YORK (TheStreet) — gold prices could sink to $820 an ounce by 2014, in the absence of inflation or strong demand from China, says a Citigroup analyst

Alan Heap, an analyst at Citi Investment Research, adds a bearish voice to a crowded debate over where the precious metal is headed. Billionaire investor James Rogers and perma-bear David Tice say gold will hit $2,500. James Turk , Author of GoldMoney, predicts $8,000, while author Mike Maloney is betting on $15,000.

Over the last decade, gold prices have soared from $250 an ounce to an all-time high of $1,227 an ounce, with many analysts believing that gold is in a continued bull market despite short-term pullbacks. Heap broke with this bull view by saying in a research analysis, “Gold: Paper Problems,” that prices will sink to $820 by June of 2014 and head lower long term to $700 an ounce.

As global economies print more money and lower interest rates to survive financial crises, gold becomes popular to own. As paper money loses value, investors turn to gold as an alternative safe haven asset.

As gold prices hit a record high of $1,227 an ounce, the U.S. dollar started to move towards its all-time low of $71.40. As the dollar loses value, commodities become cheaper to buy in other currencies. Many analysts expect low interest rates, President Obama’s $3.8 trillion budget plan, a raised deficit ceiling and money printing pressure the dollar and buoy gold prices.

Over the last 10 years, investors have been diversifying into gold more than any other asset class. You no longer have to be a doom and gloom analyst or store gold bars in a bank in order to own the precious metal. Average institutional investors and world central banks have been increasing their gold holdings supporting high prices. Helping investors buy gold is the emergence of gold ETFs. There are now three physically backed ETFs available SPDR Gold Shares(GLD Quote), iShares Comex Gold(IAU Quote) and ETFS Gold Trust(SGOL Quote).

Central banks have become one of the biggest buyers of gold. Countries increase their gold reserves on a percentage basis, usually irrespective of the spot price. In the past year, countries like China, India and Russia have transitioned from being net sellers of gold to net buyers. Portugal holds 90% of its reserves in gold, while the U.S. has 70%. China currently only holds 1,054 tons of its reserves in gold, which is less than 2%.

The biggest threat to rising gold prices is a substantial decrease in long positions in paper markets, Heap writes in his report. “Positions held by money managers and broader non-commercial positions have fallen since November 2009 when the USD strengthened. Non-commercial net long positions are at 5x the average levels seen over the last 17 years.”

The Euro reached a seven-month low against the U.S. dollar Friday, as sovereign debt fears in Spain, Portugal and Greece continued to devalue the currency. The dollar is playing the role of safe haven asset for investors jolted by global economic recovery fears lead them out of riskier commodities. There is also an expectation that the Federal Reserve might raise its key interest rate target sooner than expected, which would also support the currency.

The most popular physically backed ETF SPDR Gold Shares(GLD Quote) has seen a decline in tonnage since the beginning of 2010 from 1,128.74 to 1,104.54. Heap noted that ETF holdings are high, but stable. As long as worries over a global banking crisis subside, holdings should remain flat.

A big driver for gold prices in 2009 was pent up demand from China. The country has recently increased its gold reserves to 1,054 tons from 600 tons and is expected to continue diversifying. However, recently the Chinese government ordered banks to increase their reserve ratio by 50 basis points and has encouraged them to restrict lending. China is targeting an 8% growth rate for 2010 instead of the 11% analysts had anticipated.

China’s emerging middle class has also unleashed significant gold buying in the physical market. According to the Citi report, from September 2008 to September 2009, China retail demand grew 20 tons out of 260 tons globally. There are worries that the country’s $585 billion stimulus program is slowing down, which would curb gold demand from retail investors as well as central banks Gold is typically seen as a hedge against inflation as investors buy the precious metal as an alternative asset. But Heap argues that it’s not actual inflation that correlates to gold prices, but inflationary expectations. According to the figure above in 2009, the U.S. Consumer Price Index dipped into negative territory, which means no inflation at all. However, gold prices kept rising. Heap thinks that inflationary expectations would have to skyrocket to boost gold; just a pick-up in inflation wouldn’t be the big mover in prices many analysts anticipate.”

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February 6, 2010

Euro Currency Crisis Spreads to Spain and Portugal

Filed under: Uncategorized — bigcapital @ 12:23 am

Euro Currency Crisis Spreads to Spain and Portugal

 

Internationally respected Nobel Memorial Prize in Economics winner and Professor at the London School of Economics, Paul Krugman, has warned that the debt crisis which has stuck Greece is worse in Spain and the fault for the spreading disaster lies in the European Monetary Union’s  (EMU) “one-size-fits-all monetary system” which leaves no “defence against an adverse shock.”

Professor Krugman, who is also Professor of Economics and International Affairs at the Woodrow Wilson School of Public and International Affairs, Princeton University, was commenting after credit default swaps (CDS), which measure bankruptcy risk, roses 16 basis points in Spain and 28 basis points in Portugal.

Professor Krugman was heavily criticised by the pro-EU fanatics in Spain after his comments, which pointed out a truth which they find unwelcome, namely that a common European currency is not viable with such widely differing economic models and engines as found on the Continent.

According to reports, the EMU’s credit bubble has left southern Europe with huge foreign liabilities: Spain at 91 percent of Gross Domestic Product (950 billion euros); Portugal 108 percent (177 billion euros). This compares with 87 percent for Greece (208 billion euros).

As the crisis has spread through those countries which hold the euro currency, frenzied debates within the European Commission’s leading members continue over whether the crippled countries should be bailed out or not.

‘Stay Away From the Euro’

Investors should avoid the euro because the region’s finances hinder its ability to adjust to changes in the global economy, said Pacific Investment Management Co.’s Michael Gomez.

“I would want to stay away from the euro, the eurozone and some of the emerging European currencies,” Gomez, co-head of emerging markets at Newport Beach, California-based Pimco, said today at a conference in Moscow. “When you look at the state of balance sheets in Europe, when you look at the state of pegs and quasi-pegs across the region, that hinders the ability for adjustment.”

The euro weakened to its lowest level since June against the dollar today, while eastern European currencies sank after European Central Bank President Jean-Claude Trichet said the economic outlook is subject to “uncertainty.” The euro has lost 3.5 percent this year on concern Greece and other so-called peripheral nations will face increasing difficulty in curbing budget deficits that are in excess of European Union limits.

The EU’s pledge yesterday to back Greece’s plan to cut the region’s biggest budget deficit prompted investors to shun securities of countries with the worst shortfalls. Spanish borrowing costs rose at a sale of three-year notes today and Portugal scaled back an auction of Treasury bills yesterday.
Reflecting on yesterday’s interest rate meetings we saw no great surprises with the Bank of England keeping rates on hold at 0.5% and deciding to hold QE at £200 billion. This did at least help the pound hold firm (aside from against the USD and the JPY) as there was growing fear of a further expansion of QE.

Over to the ECB and they as expected left rates unchanged. In the statement, Trichet tried to defend the fiscal position of Europe as a whole with little impact. It is very clear that the Euro is being driven lower on fear with EUR/GBP and EUR/USD hitting a low of 1.3646
 

Published: Friday, 5 Feb 2010

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February 5, 2010

Don’t Bet on a UK Debt Downgrade: Fitch says

Filed under: Uncategorized — bigcapital @ 11:25 pm

 

Don’t Bet on a UK Debt Downgrade: Fitch says

The UK does not face the same risk of sovereign debt default as Greece because it doesn’t have the same structural problems and has benefited from the falling value of the pound, Andrew Colquhoun, director, sovereign group at Fitch Ratings Agency, told CNBC Friday.

“The UK has a very wealthy, diverse economy. I’m not sure the structural problems in the UK are anywhere near as severe as they are in Greece,” Colquhoun said.

“The UK is AAA. We have said that the chances of that changing are less than 50 percent and therefore the UK remains AAA with a stable outlook,” he added

Greece’s credit rating was cut in various stages over 2009 by Fitch to BBB+. The rating is relatively low for a euro zone country, but still quite high on a global scale, Colquhoun said.

One of the reasons that Greece has struggled to get its public deficit under control is the relative strength of the euro, according to Colquhoun. Meanwhile, the pound has seen its value fall sharply against the euro and other currencies during 2009, which has supported the UK’s growth outlook, he said.

European stocks declined sharply this week as investors fretted about the outlook for sovereign debt in Greece, Portugal and other euro zone countries. Meanwhile, bonds issued by the likes of Greece have been hammered in the markets, making it more expensive for governments to raise funds and leading to fears of default.

The sudden market moves have taken some investors by surprise given that the euro zone’s debt problems have been known for some time. But Anantha Nageswaran, chief investment officer at Bank Julius Baer, thinks investors have been “ignoring the problem until it stares them in the face.”

Spain could be the next country to have its debt rating downgraded and could see a cut within the next eighteen months, José Manuel Amor from Analistas Financieros Internacionales told CNBC
 

 

Published: Friday, 5 Feb 2010  via CNBC
http://www.cnbc.com/id/35253200/site/14081545

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February 2, 2010

RBS Spies Possible ‘Implicit Intervention’ On JPY

Filed under: Uncategorized — bigcapital @ 5:12 pm

 

RBS Spies Possible ‘Implicit Intervention’ On JPY

[Market Talk – Dow Jones] Is this a new form of Japanese intervention? RBC reports that the currency was hit by a story in the Financial Times that Japan Post has been urged by the Japanese financial services minister to diversify its holdings into US Treasurys and corporate bonds to reduce over concentration in JGB’s. “If this were realised, it could almost be seen as implicit intervention to weaken Japanese yen ,” the Canadian bank says. (NEH)
 

Foreign Exchange and Money Market News via Dow Jones Newswires

February 02, 2010 04:04 ET (09:04 GMT)

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