Russians Buy Jewelry, Hoard Dollars as Ruble Plunges - USA next?

Austrian Theory Economists call this the "beginning of the crack-up boom". Russia now, U.S. later? Don't bet against it...

Russians Buy Jewelry, Hoard Dollars as Ruble Plunges (Update1)

By Emma O’Brien and William Mauldin

Dec. 11 (Bloomberg) -- Moscow resident Tima Kulikov banked on the full faith and credit of the U.S. government, not the Kremlin, when he sold his biggest asset for cash.

The 31-year-old director of a social networking Web site initially agreed to sell his apartment for rubles, then cringed at the thought of the currency weakening as it sat in a lockbox pending settlement of the contract. It wasn’t until the buyer showed up with $250,000 stacked in old mobile-phone boxes and stuffed in his pockets that Kulikov closed the deal.

“The exchange rate we agreed on wasn’t great, but I did it because the money’s going to lie there for a month,” Kulikov said. “Put it this way, the ruble’s more likely to have problems than the dollar.”

Russians are shifting their cash into foreign currencies and buying things they don’t need as the economy stalls and the central bank weakens its defense of the ruble, signaling a larger devaluation may be on the way. The currency has fallen 16 percent against the dollar since August, when Russia’s invasion of neighboring Georgia helped spur investors to pull almost $200 billion out of the country, according to BNP Paribas SA.

The central bank today expanded the ruble’s trading band against a basket of dollars and euros, allowing it to drop 0.8 percent, said a spokesman who declined to be identified on bank policy.

With the specter of the 1998 debt default and devaluation in mind, Russians withdrew 355 billion rubles ($13 billion), or 6 percent of all savings, from their accounts in October, the most since the central bank started posting the data two years ago. Foreign-currency deposits rose 11 percent.

Oligarchs Pinched

Those withdrawals are increasing pressure for the ruble’s devaluation, according to Basil Issa, an emerging- markets analyst at BNP Paribas in London.

Property is now a protective investment, not just a status symbol, said Sergei Polonsky, founder of real estate developer Mirax Group, which is building Moscow’s tallest skyscraper.

“Lately our clients are mostly those who buy real estate not to live in but to secure their investments,” Polonsky said. “No one wants to be left with pieces of paper.”

The 25 wealthiest Russians on Forbes magazine’s list of billionaires, including Oleg Deripaska and Roman Abramovich, lost a combined $230 billion from May to October as asset values plummeted, according to Bloomberg calculations.

‘Feel Happy’

For the burgeoning middle class, investments of choice range from electronics to gold jewelry. Evroset, Russia’s largest mobile-phone chain, is telling people to buy anything they can.

“It’s better to feel happy that you own something than to fear losing the money you have earned,” Chairman Yevgeny Chichvarkin says in a letter posted at 5,200 Evroset stores. “If you need a car, buy a car! If you need an apartment, buy an apartment! If you need a fur coat, buy a fur coat!”

Sales at Technosila, the third-biggest consumer electronics chain, have doubled since September as customers rush to swap rubles for flat-screen TVs and laptops, spokeswoman Nadezhda Senyuk said by phone from Moscow, where the company is based.

Jewelry sales are also accelerating, particularly items made of gold and diamonds, said Vladimir Stankevich, advertising director at Adamas, Russia’s third-largest jewelry retailer.

“More cash appeared on the market and there’s an opinion among shoppers that gold is a good investment in times of crisis,” Stankevich said.

Natalya Kulikova has a different approach. The 31-year-old sales manager said she’s opened accounts in rubles, euros and dollars at three different banks -- one foreign and two domestic -- to guard her savings.

“My main goal is to save money,” she said.

Putin Pledge

Those who don’t want to spend are keeping more money at home or in safe-deposit boxes because the government guarantee on bank accounts is limited to 700,000 rubles, said Yulia Tsepliaeva, chief economist in Moscow at Merrill Lynch & Co.

Alfa Bank, Russia’s biggest non-state lender, said demand for boxes has increased about 40 percent since October, and there are few available.

“The Russian experience with saving is not that good and people prefer to consume and enjoy rather than save in pre-crisis situations,” Tsepliaeva said. “Buy cash dollars and put them in mattresses or safe deposit boxes but not in accounts because most crises are accompanied by banking crises.”

A decade ago, many lost their life savings after the ruble plunged 71 percent against the dollar. Those fears prompted Prime Minister Vladimir Putin to pledge not to allow “sharp jumps” in the exchange rate, during a call-in television show Dec. 4.

‘Ideal Time’

Troika Dialog, Russia’s oldest investment bank, is betting the central bank will allow a one-time devaluation of the ruble of about 20 percent in January, following New Year’s and Orthodox Christmas celebrations.

“With the holidays at the beginning of January, companies won’t be fully working and people will be spending more money,” said Evgeny Gavrilenkov, Troika’s chief economist and a former acting head of the government’s Bureau of Economic Analysis. “That means demand for rubles will increase and that means it’s an ideal time to allow a devaluation.”

Russia has drained almost a quarter of its foreign-currency reserves, the world’s third-largest, since August as it tries to slow the ruble’s decline. The central bank has widened the trading band five times in the past month, effectively reducing its defense of the currency amid plunging oil prices.

Devaluation Skeptic

Urals crude, Russia’s main export earner, has slumped 72 percent since reaching a record $142.94 a barrel July 4. It fell below $40 for the first time in three years last week, compared with the $70 needed to balance the country’s budget.

The government will avoid a large, one-step devaluation because it wants to prevent a run on the banks and lure back foreign investors, said Chris Weafer, chief strategist in Moscow at UralSib Financial Corp.

“I’m skeptical a 10 to 15 percent devaluation will provide a significant boost for the economy because the sector that it will most benefit, manufacturing, is just too small,” he said.

The ruble will probably be allowed to drop in small steps to as low as 33 per dollar by the middle of 2009, from about 28 now, Weafer estimates. It will end next year at 26.8 because of a recovery in oil prices and a weaker U.S. currency, he said.

Svetlana Guseva isn’t taking any chances.

The 32-year-old mother of two from the southern city of Sochi plans to take her 8-year-old daughter, Dasha, to Moscow for the New Year’s holiday, a trip that will cost twice her family’s monthly income of about 30,000 rubles.

“This way at least we’ll have some memories,” she said.

To contact the reporters on this story: Emma O’Brien in Moscow at eobrien6@bloomberg.net; William Mauldin in Moscow at wmauldin1@bloomberg.net.
Last Updated: December 11, 2008 03:51 EST

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Gold rallies, surpasses platinum as dollar drops

Gold rallies, surpasses platinum as dollar drops

* Reuters, Thursday December 11 2008

* Gold trades above platinum for the first time since 1996
* Bullion hits record in sterling terms, says Reuters data
* Platinum, palladium markets eye automaker bailout debate

By Frank Tang and Jan Harvey
NEW YORK/LONDON, Dec 11 (Reuters)

- Gold rose to its highest level in nearly two months on Thursday, surpassing platinum for the first time in 12 years as investors bought it as a safe haven while the dollar tumbled and oil rallied.

Spot gold hit a high of $833.80 an ounce, the highest since Oct 16. It was last at $823.30 at 2:03 p.m. EST (1903 GMT), up 1.7 percent from Wednesday's close.

In New York morning trade, spot platinum traded around $824-825 an ounce, falling below gold, which traded around $828 an ounce.

"It means that platinum is a great buy. Gold is starting to move as a monetary asset," said Frank Holmes, CEO of U.S. Global Investors, which manages $2.3 billion of fund assets.
"As the economy starts to get traction, I think you will see platinum prices take off. As South Africa continues to have problems supplying platinum, I think that platinum is undervalued," Holmes said.

Spot platinum was last at $827.50 an ounce, up 0.7 percent from its previous finish of $822.

"There's going to be people playing this ratio between the two from a trading point of view," precious metals strategist Tom Kendall at Mitsubishi said.

"But in the big scheme of things I don't think there is much overlap between the two in terms of their actual use and physical demand," he said.

The dollar hit a six-week low against the euro, as improving credit conditions eased fears about the global credit crisis and investors sought higher-yielding currencies.

"With all the printing of money taking place in the U.S., the dollar, which has gone parabolic on the upside, is due for a correction, and gold is now responding to that," Holmes said.

INFLATION HEDGE

In sterling terms, gold rose to an all-time high of 559.18 pounds an ounce from 546.51 pounds an ounce late on Wednesday, according to Reuters data. The euro hit a record high against sterling.

Investors also bought gold as a hedge against oil-led inflation as OPEC sought more output cuts. U.S. crude futures ended more than 10 percent higher at $47.98 per barrel.

In the COMEX futures market, traders dismissed talk that gold rallied partly because tight physical supplies may have prompted the cash or near delivery price for bullion to rise above the price for forward delivery -- a situation known in the market as backwardation.

George Gero, vice president of RBC Capital Markets Global Futures, said physical deliveries out of the COMEX warehouses remained normal, indicating that gold's strength was driven by dollar weakness and inflation concerns.

Still, Jon Najarian, co-founder of optionMONSTER.com, said in a commentary that delivery of physical gold in futures could drive the gold market into backwardation, and traders could profit from the resulting spike in gold price.

U.S. gold futures for February delivery settled up $17.80, or 2.2 percent, to $826.60 an ounce on the COMEX division of the New York Mercantile Exchange.

Platinum and palladium traders awaited the outcome of the proposed U.S. automaker bailout. Carmakers account for more than half of annual global consumption of these metals.

Until more definite news on the bailout package emerges, the metals are likely to remain rangebound, analysts said.

Spot palladium was at $178.00, which was up 0.3 percent from Wednesday's late quote of $177.50. Spot silver was at $10.37, which was 1.6 percent higher than its Wednesday close if $10.21.

(With additional reporting by Doris Frankel and Humeyra Pamuk; Editing by David Gregorio)

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A Fast Fall for the Russian Ruble

(source: seekingalpha.com)

The Russian ruble has dropped about 2.5% a month since August, despite being heavily supported by the Bank of Russia. The cause is, of course, the fall in oil prices. About three quarters of Russia’s exports are related to oil, and the revenue generated by oil sales funds much of the government’s budget. They need oil at about $70 a barrel to pay their bills.

The chart below shows a long-run perspective on the ruble:

The chart does not show all of the recent drop in price. A recent price of the Rydex Russian Ruble Trust (XRU) is $35.57 which translates to about a $.0357 price for a ruble.

Some investors fear that a devaluation of the ruble of 25% to 30% is needed to find a stable bottom, and we may see this kind of devaluation if the price of oil doesn’t turn up soon. The Bank of Russia has been supporting the ruble with its own dollar and euro reserves of about $450 billion, but these assets have dropped 25% since they began defending it in August. At this rate, they cannot keep up their defense for another year.

To help staunch the fall of their currency the Bank of Russia has raised interest rates on ruble deposits to 13%, but this has not worked, at least not yet. International hot money flows are in a state of shock for now. Investors are risk averse to a point not seen in decades, so it doesn’t look as if the carry trade will bail them out of their current crisis.

Domestic growth could help some in coping with falling oil prices. Its economy has been in a growth spurt for several years, but many economists expect its internal growth to fall next year---perhaps as low as 3%. This will not be enough to offset the steep decline in oil prices, given their outsized dependence on petroleum products. An expected pipeline from its eastern neighbors through Russia will probably add some revenues in the future, but that will not be enough or in time to help the current situation.

If Russia wants to sustain its growth with domestic spending it needs to adjust its tax base to be less dependent on oil and reform its poor legal infrastructure for financial institutions. A modern banking system is a must for them to move to higher level of development, but much of their present banking structure is a privatized, cosmetic makeover of the old communist system of state owned savings banks. This will not do if they want to shift to a more sustainable model of domestic growth.

For currency investors, the Rydex Russian Ruble Trust has an inception date of 11/10/08, so it doesn't have much of a track record. If I were a gambler, shorting this ETF would be a play that could have a good payoff--if there are enough long positions to support short sales.

Also, the drop in the ruble has ugly consequences for Russian equity shares. The chart below show the Van Eck Russian ETF (RSX) over the last six months.

The fall in the Russian equities market exceeds the magnitude of the fall in the ruble, but the ruble has certainly contributed to the weakness of the stock market.

As with any emerging market, Russia has great promise and great risks. For investors, a long term perspective and high tolerance for risk is required for a play in either the currency or equities market.

Disclosure: Author has no position in either the Russian equities market or their currency.

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Jim Rogers using rally to exit dollar assets

Thu Dec 11, 2008 12:08pm EST

By Vivianne Rodrigues

NEW YORK (Reuters) - Investor Jim Rogers said on Thursday he has been using the sharp rally in the U.S. dollar as an opportunity to exit assets denominated in the U.S. currency.

Rogers told the Reuters Investment Outlook Summit 2009 in New York that the rally -- which has pushed the greenback up about 20 percent since July -- is a reversal of a "gigantic short position" accumulated over several years and not a result of a fundamental bet. He added the U.S. currency is likely to weaken sharply again.

"I plan to get out of all of my U.S. dollars at some time throughout this rally," he said. "The dollar is a terribly flawed currency, and perhaps a doomed currency."

"I've driven around the world looking for a sound currency. There aren't any.... but the yen is the only thing that's going to go up for a while," he added.

Rogers, who spoke via a conference call from Miami, also noted that economies and currencies in regions such as Central Europe and Russia are particularly vulnerable.

On Thursday, the Russian central bank allowed the fifth one percent devaluation in the rouble against the dollar/euro basket in a month as data showed a $17.9 billion drop in gold and foreign exchange reserves last week.

"Russia is a disaster that is spiraling down to a catastrophe. I wouldn't put a penny of my money into Russia right now," he said.

Rogers said he expects the economic situation to deteriorate not only in Russia but in Central Europe, which in turn may weigh further on the euro zone.

"Central Europe is a giant fiasco -- hundreds of billions of dollars were floated using the Swiss franc and Japanese yen because rates were so low -- You've got some huge huge problems coming out," he said. "Banks there aren't writing them down yet."

(Reporting by Vivianne Rodrigues; Editing by Chizu Nomiyama)

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Bank Runs in the Philippines

Herein lies the problem with fractional reserve banking...they only keep a fraction on reserve to cover deposits. If more than 10% of depositors attempt the pull out their money, there will not be any left for them. It is for this reason the FDIC is a major confidence game. The FDIC has less than 1% on reserves against total deposits. My advice? Only keep in the banks what you can afford to lose....

Heavy withdrawals hit Gaisano bank as more banks close

CEBU CITY — Alarmed by the bank holidays declared by rural banks under the Legacy Group, depositors have flocked to a Gaisano-owned bank since Wednesday in a bid to withdraw their money.

Three of the seven branches of the Rural Bank of Subangdaku (RBS) in Metro Cebu and one in Dumaguete City in Negros Oriental suffered from heavy withdrawals since Wednesday, said spokesperson and administrative manager Maritess Obenza.

Despite this, she assured that they had no plan to declare a bank holiday in any of the affected branches.

"The board (of directors) is still meeting on how to address the withdrawals although we have contained these because we were able to explain to our depositors and convince them that there’s no need to panic," Ms. Obenza said.

RBS depositors panicked after rural banks under the Legacy Group declared bank holidays. The affected RBS branches are located near the Legacy banks.

The Bangko Sentral ng Pilipinas Cebu regional office has confirmed that the Pilipino Rural Bank, Inc. and Philippine Countryside Rural Bank, Inc. have declared bank holidays. The Bank of East Asia, formerly Rural Bank of Bisayas Minglanilla, also declared a bank holiday on Wednesday.

All three are under the Legacy Group and covered by a recent Supreme Court ruling that upheld the central bank’s move to close them for capital deficiency.

A fourth bank, the Rural Bank of Bais, also declared a bank holiday on Wednesday. In a notice posted on its doors, the bank said it was waiting for the release of its emergency loan by the central bank.

A source at the Bangko Sentral Cebu office, who asked not to be named, said they were still evaluating the situation at the Rural Bank of Bais and Bank of East Asia as of yesterday.

They have been informed of the heavy withdrawals at the Rural Bank of Subangdaku, but they were confident that the bank was capable of servicing these withdrawals. — Marites S. Villamor

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Story Location: http://www.bworldonline.com/BW121208/content.php?id=023
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What if They Returned to the Gold Standard?

What if They Returned to the Gold Standard?

By: Jason Hommel, Silver Stock Report

-- Posted Thursday, 11 December 2008 | Digg This Article | Source: GoldSeek.com

(They can't, but we can.)
Silver Stock Report

What if the Government went back on a Gold Standard?

Do do that, they would need to use their gold to pay off all their debt.

That would give a price of gold if the U.S. Government backed the dollar with gold.

We only need to know two numbers, and do a simple problem of division.

First number: The national debt.
http://www.treasurydirect.gov/NP/BPDLogin?application=np

The government tells us this is:
$10,656,119,227,403

That's 10.6 trillion dollars.

Second number: The U.S. Gold stock.
http://www.fms.treas.gov/gold/current.html

The government tells us this is:
261,498,899 ounces of gold

That's 261 million ounces of gold.

So $10,656,119,227,403 divided by 261,498,899 = $40,750/oz. of gold.

In theory, if the U.S. government had the restraint to stop issuing any kind of new debt, and if there was a runaway hyperinflation, the government could credibly stop any sort of runaway gold price by offering gold at a price of $40,750/oz.

That's the price that could cap the gold market if the U.S. government sold all their gold to all their bond holders. At that point, all new taxes would have to be levied in gold, not dollars.

It's important to realize that any effort by the government to sell gold below that price will ultimately fail, and will eventually cause the gold price to go even higher than that price, as that would only deplete their limited stock of gold at inappropriate price levels.

The main point is that T-Bills, which are perceived as the safest haven around, are not safe. They are only backed up by gold at a rate of $40,750 per oz. With gold trading today at around $800/oz., the U.S. gold backs less than 2% of the value of the issued bonds, or stated another way, $800 is 2% of the price of $40,750. Gold, at today's prices, is clearly a far superior safe haven.

And silver, which is in short supply, due to relentless industrial demand that has consumed nearly all world silver supplies, is even safer.

Clearly, the government cannot offer gold at $40,750 per oz. today. There would be no buyers. But, over time, the gold price may rise to such levels, and beyond, as a generation of people slowly wake up to the monetary fraud of the last 29 to 95 years, depending on whether you count from 1980 or 1913.

I am not an advocate of a return to a gold standard, where gold backs up paper money. I'm in favor of a return to using silver and gold coins and bars as money, as measured by weight, and traded at their intrinsic value according to the price in an open and free market place.

Sincerely,
Jason Hommel

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Fear triggers gold shortage, drives US treasury yields below zero

From the Financial Times:

Fear triggers gold shortage, drives US treasury yields below zero
The investor search for a safe places to store wealth as the financial crisis shakes faith in the system has caused extraordinary moves in global markets over recent days, driving the yield on 3-month US Treasuries below zero and causing a rush for physical holdings of gold.


By Ambrose Evans-Pritchard
Last Updated: 6:53PM GMT 10 Dec 2008

"It is sheer unmitigated fear: even institutions are looking for mattresses to put their money until the end of the year," said Marc Ostwald, a bond expert at Insinger de Beaufort.

The rush for the safety of US Treasury debt is playing havoc with America's $7 trillion "repo" market used to manage liquidity. Fund managers are hoovering up any safe asset they can find because they do not know what the world will look like in January when normal business picks up again. Three-month bills fell to minus 0.01pc on Tuesday, implying that funds are paying the US government for protection.

"You know the US Treasury will give you your money back, but your bank might not be there," said Paul Ashworth, US economist for Capital Economics.

The gold markets have also been in turmoil. Traders say it has become extremely hard to buy the physical metal in the form of bars or coins. The market has moved into "backwardation" for the first time, meaning that futures contracts are now priced more cheaply than actual bullion prices.

It appears that hedge funds in distress are being forced to cash in profits on gold futures to cover losses elsewhere or to meet redemptions by clients. But smaller retail investors – and perhaps some big players – are buying bullion in record volumes to store in vaults.

The latest data from the World Gold Council shows that demand for coins, bars, and exchange traded funds (ETFs) doubled in the third quarter to 382 tonnes compared to a year earlier. This matches the entire set of gold auctions by the Bank of England between 1999 and 2002.

Peter Hambro, head Peter Hambro Gold, said the data reflects a "remarkable" shift in the structure of the market. The rush to safety reflects a mix of fears about the fragility of world finance and concerns that the move towards zero interest rates could set off an inflationary surge further down the road, and possibly call into question the worth of some paper currencies.

The near paralysis in the "repo" markets may prove to be no more than pre-Christmas jitters as banks square their books.

However, there are some signs that extreme monetary stimulus by the US Federal Reserve and other banks is starting to have unintended consequences.

The Bank of Japan is it is reluctant to cut its rates to zero again because of the damage this causes to the money markets, which serve as a key lubricant of the credit system. The US is now starting to face the same dilemma.

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