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QE2 Risks Currency Wars and the End of Dollar Hegemony

By Ambrose Evans-Pritchard, 1 November

As the US Federal Reserve meets today to decide whether its next blast of quantitative easing should be $1 trillion or a more cautious $500bn, it does so knowing that China and the emerging world view the policy as an attempt to drive down the dollar.


QE2 risks currency wars and the end of dollar hegemony

The Fed’s “QE2” risks accelerating the demise of the dollar-based currency system, perhaps leading to an unstable tripod with the euro and yuan, or a hybrid gold standard, or a multi-metal “bancor” along lines proposed by John Maynard Keynes in the 1940s.

China’s commerce ministry fired an irate broadside against Washington on Monday. “The continued and drastic US dollar depreciation recently has led countries including Japan, South Korea, and Thailand to intervene in the currency market, intensifying a ‘currency war’. In the mid-term, the US dollar will continue to weaken and gaming between major currencies will escalate,” it said.

David Bloom, currency chief at HSBC, said the root problem is lack of underlying demand in the global economy, leaving Western economies trapped near stalling speed. “There are no policy levers left. Countries are having to tighten fiscal policy, and interest rates are already near zero. The last resort is a weaker currency, so everybody is trying to do it,” he said.

Pious words from G20 summit of finance ministers last month calling for the world to “refrain” from pursuing trade advantage through devaluation seem most honoured in the breach.

Taiwan intervened on Monday to cap the rise of its currency, while Korea’s central bank chief said his country is eyeing capital controls as part of its “toolkit” to stem the flood of Fed-created money leaking out of the US and sloshing into Asia. Brazil has just imposed a 2pc tax on inflows into both bonds and equities – understandably, since the real has risen by 35pc against the dollar this year and the country has a current account deficit.

“It is becoming harder to mop up the liquidity flowing into these countries,” said Neil Mellor, of the Bank of New York Mellon. “We fully expect more central banks to impose capital controls over the next couple of months. That is the world we live in,” he said. Globalisation is unravelling before our eyes.

Each case is different. For the 40-odd countries pegged to the dollar or closely linked by a “dirty float”, the Fed’s lax policy is causing havoc. They are importing a monetary policy that is far too loose for the needs of fast-growing economies. What was intended to be an anchor of stability has become a danger.

Hong Kong’s dollar peg, dating back to the 1960s, makes it almost impossible to check a wild credit boom. House prices have risen 50pc since January 2009, despite draconian curbs on mortgages. Barclays Capital said Hong Kong may switch to a yuan peg within two years.

Mr Bloom said these countries are under mounting pressure to break free from the dollar. “They are all asking themselves whether these pegs are a relic of the past,” he said.

China faces a variant of the problem with its mixed currency basket, a sort of “crawling peg”. Commerce minister Chen Deming said last week that US dollar issuance is “out of control”. It is causing a surge of imported inflation in China.

Critics in the US Congress say China could solve that particular problem very quickly by letting the yuan rise enough to bring the country’s $180bn trade surplus into balance.

They say the strategy of holding down the yuan to underpin China’s export-led model is the real source of galloping wage and price inflation on China’s eastern seaboard. The central bank has accumulated $2.5 trillion of foreign bonds but lacks the sophisticated instruments to “sterilise” these purchases and stem inflationary “blow-back”.

But whatever the rights and wrongs of the argument, the reality is that a chorus of Chinese officials and advisers is demanding that China switch reserves into gold or forms of oil. As this anti-dollar revolt gathers momentum worldwide, the US risks losing its “exorbitant privilege” of currency hegemony – to use the term of Charles de Gaulle.

The innocent bystanders caught in the crossfire of Fed policy are poor countries such as India, where primary goods make up 60pc of the price index and food inflation is now running at 14pc. It is hard to gauge the impact of a falling dollar on commodities, but the pattern in mid-2008 was that it led to oil, metal, and grain price rises with multiple leverage. The core victims were the poorest food-importing countries in Africa and South Asia. Tell them that QE2 brings good news.

So the question that Ben Bernanke and his colleagues should ask themselves is whether they have thought through the global ramifications of their actions, and how the strategic consequences might rebound against America itself.

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Orvana – New Copper Mine for Western U.P.

Project would employ 100 residents for at least 10 years

The closures of the Smurfit Stone Paper Mill and White Pine Copper Refinery have made it a tough year for the Western U.P. but the Canadian based Orvana Company has announced it’s moving forward with plans for a new copper mine in Gogebic County.


If all goes well, County Road 519 could soon become much more traveled – taking at least a hundred residents back to work.

It’s all a part of the Copperwood Project – a plan by the Orvana Resources U.S. Corporation to open a temporary mine north of Wakefield.

“Geologists have known there was a steady ore body there for years; it was just a matter of time before mineral rights were secured,” says Project Coordinator Dave Anderson. ?”We’re hoping to build a copper mine to last for about 10 and a half years.”

The company just finished a mandatory two year environmental study of the site. Now they’re working to submit their permit application by next spring and also receiving assistance from the Western U.P. Planning and Development Region (WUPPDR) in obtaining federal grants.

“They have to upgrade County Road 519 and punch up a new road to the mine site,” says WUPPDR Executive Director Kim Stoker. ?”Our job is to assist the road commission and coordinate activities with MDOT.”

Construction on the Copperwood mine could begin by 2012 with production starting up a year later.

Everyone involved with the project is hoping the mine will have a positive effect on the local economy, even after production stops.

“This is a seed,” Anderson says. ?”We’ll leave behind infrastructure – water infrastructure, improved roads and improved power grid systems – and those infrastructure elements should be used to develop other types of businesses.”

Orvana says they’ve had local support from the beginning but they plan to keep the public up to date as the project progresses.

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New Zealand Gold Miner Continues Shining Run

The stellar run by OceanaGold, which continues to find more ore at its two New Zealand mining sites was well illustrated in the September quarter.

OceanaGold Corporation (ASX, TSX, NZX: OGC), which is domiciled in Melbourne but has the Toronto Stock Exchange as its home bourse had a net earnings for the September quarter of US$13.7 million (NZ$18.28 million) and, at $42.6 million (NZ$56.8 million), a 9% improvement in EBITDA over the previous quarter.

Gold production for the quarter totalled 68,763 ounces, realising a year-to-date total of 201,595 — in line with company projections.

There have been improved mining and milling rates at the Fraesers open cut and Frasers underground operations at Macraes, north of Dunedin on the South Island, resulting in a 20% increase in production when compared to the previous quarter.

A New Zealand exploration program added 3,600 metres of underground drilling completed at Frasers Underground at Macraes and 7,600m of drilling at Globe Deeps at its Globe-Progress mine at Reefton on the South Island’s West Coast.

Mill throughput of Macraes ore for the September quarter was 1.48 million tonnes, compared to June quarter’s 1.34 Mt and the grades treated were generally higher. Cash operating costs were $US568/ounce (NZ$758/oz) compared to June quarter $US564/oz. A key factor for this was the progressively weakening American dollar, as the company pointed out that since June the $US had declined 10% to the $NZ.

The operating margin grew to US$664/oz (NZ$885/oz) compared to US$627/oz (NZ$836/oz) for June.

The Globe-Progress mine, which delivers a concentrate to the Macraes pressure oxidation plant, mined 14% less ore in the quarter due mainly to wet conditions on the West Coast that gave mining equipment poor access to the pit floor.

Gold production attributable to Reefton was 19,031 oz, 7,000 oz less than the June quarter.

OceanaGold’s executive chairman, Jim Askew, said the company’s third quarter results demonstrated higher cash operating margins and solid cash flows from our NZ operations.

With the resumption of development of the Didipio gold-copper project in the Philippines “the company will be well positioned for ongoing earnings growth and expansion”.

“Didipio represents a long life mine with robust economics that, after allowing for copper by-product credits, will create a cash cost profile that aims to put the company within the lowest quartile amongst its peer group,” he said

Since releasing the quarterly results, OceanaGold separately released a new technical report that provides positive signs for lifting the mothballs of this project and have it contributing to group production within two years. This year’s group production from NZ operations was estimated to be between 270,000-300,000 oz.

Source

Silver Market Manipulation?

A commissioner on the U.S. Commodity Futures Trading Commission believes there have been repeated attempts to manipulate the silver market. BNN gets into the debate with Jeffrey Christian, managing director of CPM Group; and David Morgan, editor and founder of Silverinvestor.com.

 

 

IMF Sold 1.04 Mln Ounces of Gold in September

Oct 29 (Reuters) – The International Monetary Fund sold 1.04 million ounces (32.3 tons) of gold in September, well above the amount sold in August, an IMF spokesman said on Friday.

The sale was part of a plan announced late last year for the Fund to sell 403.3 tonnes of gold to boost its lending resources. The fund said the sale would avoid disruptions to the gold market, which has been buoyed by huge liquidity injections of central banks around the world.

The IMF sold 320,000 ounces to Bangladesh, the spokesman said.

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