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Wednesday, February 29, 2012

Wed Post#2: Wild day for Gold, Silver and revelations in US Treasury's


So after wild gains yesterday - particularly in Silver), both Silver and Gold plunged dramatically today. Silver was down over $2 per ounce while Gold dropped over $100 intraday.

Algo driven liquidations followed Ben Bernanke's testimony before congress as he implied that QE3 is off for now. As the cascading price triggered the $1700 sell limits, Gold fell all the way to $1685 then reversed back over $1700.

The fundamental elements driving Gold/Silver remain the same and I note that even more dats is coming out confirming China's move away from the US Dollar.

Today the US Treasury department released its adjustment to foreign purchases of US Treasury bond holdings.  This bi-annual exercise updates the monthly reports.

A great many naysayers have been expecting the revision to show that China has in fact been building up its US Treasury stake (following the now traditional transfer of UK purchases to China), contrary to the reports that they have been dumping those Treasurys.

The reality is that China has indeed been dumping its US exposure.

China sold over $100 billion in Treasurys in December alone (bringing its total to $1152 billion,down 12% from its June total of $1307 billion.

This means the US will be forced to rely ever more on domestically funded purchases of USTs... which means Primary Dealers and the Federal Reserve.

The biggest surprise from the data is that, contrary to previous speculation, Russia has not been dumping its Treasurys.

In fact the country's holding of $150 billion are the same as they were back in June, and over $60 billion more compared to the pre-revised number.

The key element here is that unless the US finds substitute demand for it's Treasurys, the only remaining buyer will be the entity that already has the largest holding of US paper - the US Federal Reserve.

The American's are monetizing their debt.

How much longer before other nations start to follow China's lead?

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3 comments:

  1. Good to see you posting regularly again. I knew I could come here and find out the reason behind the decline in gold/silver today. Thanks for all the posts.

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  2. Thank you. I continue to watch the Silver market keenly and hope to have some posts dedicated to the topic over the next month.

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  3. I disagree with your conclusion. China accumulates treasuries as a function of its trade surplus. Chinese exports are falling, so no more stockpiling US debt. This is a good thing, no? I mean, it was totally whacked that a developing country would hold so much US debt. It was an unhealthy situation all around.

    China will spend its reserves on whatever it needs. Whoever gets the dollars can hold them or buy something else. If people choose to hold them then nothing will change. But if people spend the dollars then inflation will rise and so will interest rates around the world. That isn't bad. It may not happen though.

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