Excerpts From "Gold Forecaster - Global Watch"

By: Julian D. W. Phillips | Sat, Jun 3, 2006
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HIGHLIGHTS in "Gold Forecaster - Global Watch"
Silver - COT, Gold : Silver Ratio EDR.to, SSRI, PAAS, SIL, SLW / Platinum.
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1-2. Market Forecasts / Short-term forecasts across the Board!
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3-16. Central Bank gold Sales in 2006 / $ negative - Gold Positive stories of the week/ Gold shares in emerging markets - Big opportunities/U.S. $ & its Prospects/ The Oil crisis / Indian Demand/Gold: Oil Ratio / Dow Jones / Technical Analysis of the Gold Price: Long / Gold price drivers 2006 / Short term in the U.S. $ / Treasury Notes / CRB Index
14 - 29. International Gold Markets / Silver / Gold vs. Silver / Gold: Silver Ratio / Platinum / Silver & Gold Shares

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Russian Exchange Stabilization Fund - From Rubles to foreign currencies to gold?

As part of the moves to protect surplus $ nations from the U.S.$ and its malaise, Russia has joined the ranks of nations actively making moves to ward off the threats from the U.S. currency.

The two main threats are:

Both of these are caused by the depreciating U.S. $ internationally, springing from the huge and constant U.S. Trade deficits. With the U.S. making absolutely no effective moves to rectify this deficit, eventually the weight of nations following the Chinese & Russian roads, will lead to major U.S.$ crises and the probable disruption of global trade as we know it now.

In moves designed to avoid precipitating the downfall of the $, China and now Russia are preventing such $ surpluses from entering their nations to bring on inflation or causing their currencies to appreciate, by sending them back to alternative foreign currencies as well as retaining them in a portion of U.S.$ then investing them abroad.

The fund, which receives oil export revenues above a certain point, was created as an inflation-fighting tool to absorb the petrodollars pouring into Russia's economy as oil prices break new records and to help pay down foreign debt. These funds will now be invested in Western government bonds and eventually also in blue-chip shares, once legislation is passed permitting this. Last year Russia used some of its "windfall" oil profits from its Exchange Stabilization Fund to repay around $20 billion of foreign debt.

This Russian Exchange Stabilization fund has grown considerably over the last year, fed by 'windfall' profits from its sales of oil. Russia's 'oil fund' currently stands at 1.8 trillion rubles (US$66.7 billion, euro 52 billion), is forecast to grow to about 2 trillion rubles (US$74 billion) by the end of 2006.

This year Russia's Finance Minister Kudrin said that the deposits would be moved out of the Ruble and switched into 45% in dollars, 45% in Euros and 10% in Pounds Sterling. The move will not result in any net purchase of foreign currencies because the Rubles held in the fund will be exchanged into Dollars, Euros and Sterling from the central bank's own reserves. In the past these would have almost certainly have been placed in the U.S.$ to around 80% if not all of them.

This should not be seen in the context of making the Ruble convertible [June 8th this begins]. The protection the investments provide the Ruble, will make it a more reliable, convertible currency in terms of foreign exchange rates, but the investment is not connected to its convertibility otherwise. Once it is established as a convertible currency, the objective is to have it used in the global system as part of other countries reserves.

As part of the process of elevating the status of the Ruble, Russian lawmakers gave initial approval to legislation that would ban businesses listing prices in Euros and $s and bar Cabinet ministers from referring in their speeches to currencies other than the Ruble. The Ruble has recovered from the days of chronic weakness during the economic turmoil of the post-Soviet era.

China, through its revaluation in terms of a 'basket of currencies' [of the currencies of the countries China trades with] has followed the same route as Russia is doing at present [as above].

What conclusions can we draw from these moves on the Stabilization Fund concerning gold and the $?

Some observers have thought this a prelude to buying gold, but we think not, at least not with funds from the Stabilization Fund. Yes, President Putin has indicated he want to see Russian Gold reserves raised to 10% of Russia's reserves but the Central Bank of Russia has not reported taking any action on this front yet. One of the biggest difficulties that any Central Bank faces is the actual task of buying the gold. The main routes to more gold a Central Bank can take, are these:

We certainly think Russia & China, at least, are toying with the idea and indeed many other Central Banks are contemplating buying gold for their reserves. This year should see some movement forward by Central Banks being buyers rather than sellers and holders.

What we are waiting to see is a mindset change to recognizing that gold is needed as a support for currencies in general, to restore confidence in them.

But to recognize, as in time they will have to do, that the overissueance of paper currency and their over reliance on confidence in that piece of paper, has led to the system needing the support of gold, is a huge metamorphosis.

Germany is there in mind at least, as is Italy. [France's bankers are there but their politicians are too powerful at present]. Russia is getting there and China thinks they may be too late. But when the oil/$ reserve currency crisis arrives in the market place [which could be in the next few months], the spur to make them think differently will be there, as will the support of the system to do so. Need will force them to do so, to preserve what they have left of confidence in their paper money.

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Julian  D. W. Phillips

Author: Julian D. W. Phillips

Julian D. W. Phillips
Gold Forecaster

Julian D. W. Phillips

"Global Watch: The Gold Forecaster" covers the global gold market. It specializes in Central Bank Sales and details, the Indian Bullion market [supported by a leading Indian Bullion professional], the South African markets [+ Gold shares shares] plus the currencies of gold producers [ Euro, U.S. $, Yen, C$, A$, and the South African Rand]. Its aim is to synthesise all the influential gold price factors across the globe, so as to truly understand the global reasons behind the gold price.
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