Stephen’s Posterous

China reveals big rise in gold reserves
By Jamil Anderlini in Beijing and Javier Blas in London, FT.com

China has quietly almost doubled its gold reserves to become the world’s fifth-biggest holder of the precious metal, it emerged on April 24, 2009, in a move that signals the revival of bullion after years of fading importance.

Gold rose to a three-week high of more than $910 an ounce after Hu Xiaolian, head of the secretive State Administration of Foreign Exchange, which manages the country’s $1,954bn in foreign exchange reserves, revealed China had 1,054 tonnes of gold, up from 600 tonnes in 2003.

The news could spark interest in gold among other central banks. “When the largest holder of foreign exchange reserves discloses an increase in gold holdings, other countries may decide to think more carefully about underweight gold positions,” said John Reade, a precious metals strategist at UBS.

The increase in China’s gold reserves has come primarily from domestic production and refining. However, the news raises questions about the future of Beijing’s foreign reserves policy. Ahead of the G20 summit in London this month, China suggested global reliance on the US dollar as a reserve currency should be reduced.

China has been diversifying away from the dollar since 2005, when it broke the renminbi’s peg to the US currency and officially marked it to a basket of currencies, but it still holds more than two-thirds in US dollar-denominated assets by most estimates.

As its trade surplus and forex reserves ballooned in recent years, Beijing continued to buy huge amounts of US Treasury bonds while raising the proportion of purchases it allotted to other currencies and to gold.

China’s accumulation of gold has taken place as European central banks have gradually cut back back gold sales following a 1999 agreement to prevent the market from being flooded after prices were dragged sharply lower after the UK decided to sell part of its reserves.

“China’s announcement signals a broader shift in central banks’ attitude towards gold,” said Philip Klapwijk, chairman of GFMS, the precious metal consultancy.  Suki Cooper, a gold analyst at Barclays Capital, said China’s move was “reigniting gold’s relevance as a monetary asset”.

European central banks agreed to limit gold sales to 500 tons a year in 1999, under the Central Bank Gold Agreement after a UK decision to sell part of its gold reserves dragged prices sharply lower. 

Since 1999, central banks in Europe have sold large amounts of gold, investing the proceeds into bonds. But in the past two years they have curtailed their sales significantly while central banks outside Europe became net buyers of bullion.

China’s forex reserves grew from $623bn at the start of 2005 to $1,906bn at the end of September last year but in the last six months the spectacular growth has slowed to a virtual stop, with reserves rising by just $7.7bn (€5.8bn, £5.2bn) in the first quarter.

That means smaller new purchases of everything from US Treasuries to gold. Paul Atherley, Beijing-based managing director of Leyshon Resources, said that even after the latest purchases China had a very small percentage of its reserves in gold, far below the US or other developed countries.

“Those [gold] holdings are still too low in terms of the size of its economy and the growing significance of its currency,” he said. The announcement boosted gold prices to a three week high above $910 an ounce as investors bet other countries could follow.

Russia has being an active buyer, following Beijing’s similar pattern of purchases from local miners. China became last year the world’s largest producer of gold, outranking South Africa.

Since the financial crisis started, investors have piled record amounts of money into gold, boosting prices to above $1,000 an ounce. Gold hit a low of $250 an ounce a decade ago, when central banks started selling the metal.

Additional reporting by Chris Flood

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Austrian-born Peter Brabeck led Nestlé, the world's biggest food group, as chief executive for 11 years before becoming chairman last year.

The 64-year-old combines that position with roles as vice-chairman of Credit Suisse and cosmetics group L'Oréal, where Nestlé has a big stake. A Nestlé veteran, he joined the company in 1968 and worked in a variety of roles including in Latin America, and in culinary products and marketing, before becoming chief executive in 1997.

Nestlé has been one of the few consumer groups to be relatively untroubled in financial performance by the economic crisis. In a sign of the strength of Nestlé's senior talent, two of its most senior executives, Paul Polman and Lars Olofsson, have left to head Unilever and Carrefour, with Paul Bulcke staying to become Nestlé's chief executive.

In an interview with FT.com, Mr Brabeck talked about the return of inflation, why the food crisis is getting worse and why water could run out sooner than oil. Edited highlights appear below.

How deep will the current recession be?

Very deep, and it will be relatively long.

Could it be a depression?

This is terminology. I'm more worried that what we are doing today in some countries might be the basis for a new crisis.

State intervention, especially in the financial sector, should be strong and short. My feeling is that we are going into state intervention which is long, shallow and will continue for many years. And if you look at state deficits being created just now, there is no short way out of this crisis.

Do you think governments have done enough to stabilise the situation?

I am more worried about too much than too little.

Would you be worried about protectionism?

Absolutely. Although every politician says . . . that we should avoid protectionism, every single politician when he comes home does exactly what he was saying we should not be doing. So I think this is a big danger for the future of the economy.

A big topic for consumer businesses is inflation or deflation. Which are you most concerned about?

At the moment, I'm more worried about inflation, because basically all macroeconomic decisions which are being taken will lead us to inflation.

And in a big way?

That I cannot judge. But what I know is that we already see indications that inflation is picking up, and we are just starting. The stimulus projects that are being put into place mean that the printing machine will start to work and this is clearly the start of inflation.

How much has Switzerland's image been hurt by UBS [with big subprime losses and an investigation by US authorities] and the potential end of bank secrecy?

I would say Switzerland has always had the image of being a very special case. Now, over the past 40 years, it was all seen very positively. And perhaps over the past 10 years we started to see Switzerland as a special case, but with some negative aspects also. And there is no doubt that the UBS case has put another shade on this special case.

What kind of changes do you think private banks might have to make on bank secrecy?

First of all, I don't believe Switzerland is a tax paradise, frankly speaking. But if you look at the future of the banking industry, my feeling is that the Swiss banks will continue to do very well, based on the quality and on the service they can provide, not so much on the bank secrecy.

You are worried about the scarcity of water. What would your worst-case scenario be?

That we continue to treat water as we do today, [as] a commodity without any price. Under those circumstances the world will run out of water long before we [run out] of oil.

What should be done to help solve this?

The water issue comes back to three simple things. The first is infrastructure. If you look worldwide it's about 60 per cent of fresh water that we are losing due to insufficient infrastructure. The second is political decisions. It is absolutely unacceptable that we are using food for biofuels. We need 9,100 litres of water to produce one litre of pure diesel. This is not sustainable.

The other aspect is that 93 per cent of all water consumption is in agriculture, and as water has no price there is no economic incentive to improve the productivity.

Is the food crisis in poorer countries getting worse?

[It] is getting worse. Don't forget that food prices are today about 60 per cent higher than only 18 months ago. And this means those people who spend 60 per cent, 70 per cent of their disposable income on food have been hurt very, very strongly.

Are we [therefore] likely to see more social unrest?

I personally believe that food prices will continue to increase because the demand, even during this crisis, will be in 2009 about 3 per cent to 4 per cent higher than last year.

China recently decided to stop Coca-Cola acquiring a Chinese company. Is that a worrying sign?

First, it's a sign that, also in China, the regulatory authorities are becoming tougher. The decision per se is discussable, but I would also say that if the same case had happened in Europe, I'm not so sure Europe would have allowed this acquisition.

Why is Nestlé doing so well when many of your competitors aren't?

It might have to do with our historically long-term view of things. And by identifying critical issues early on. When we talked about the increase of raw material prices, one-and-a-half years before they happened, nobody believed us.

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Gold could surge to $2,500 a troy ounce in the next five years because the prospects of either deflation or inflation were “becoming more extreme”, UBS said on Tuesday, March 10, 2009. The Swiss bank told investors to overweight gold in their portfolios.

The Swiss bank’s warning is the most radical among mainstream institutions and comes as some hedge fund investors who made money last year by betting against investment banks are now buying gold as a way of betting against central banks.

“The current environment is one which can best be characterised as having a ‘low margin of error’ for central bankers, with the prospects for deflation or inflation becoming more ex­treme,” said Daniel Brebner, analyst at UBS in London.  A bet on gold is considered by some as essentially a bet against all paper currencies.

“Given the broad uncertainties in the current macro climate we believe investors should look to gold, given its historic tendency to act as a hedge,” the bank said. The bullish forecast failed to lift gold prices, depressed on Tuesday by lacklustre jewellery demand, traditionally the backbone of gold consumption, some profit-taking and an early rebound in financial stocks.

Spot gold in London was $896.5 a troy ounce in late afternoon trading on March 10, down from the previous days’ closing quote in New York of $920.95 an ounce. Gold prices hit a high of $1,030.8 last March and last month traded briefly above $1,000.

UBS, one of the biggest bullion dealers in London and Zurich, said the downside risks to gold prices were limited to about $500 an ounce, or less than 50 per cent below the current price, while the potential upside was $2,500.

Hedge funds that bet last year against investment banks are now betting against their ability to wea­ther the crisis without triggering a jump of inflation or letting the economy fall into deflation. Gold bulls include David Einhorn, founder of the hedge fund Greenlight Capital, who last year came under the spotlight for short selling shares in Lehman Brothers. Others looking at gold include Eton Park and TPG-Axon, investors said.

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Hedge fund investors who made money last year by betting against investment banks are now buying gold as a way of betting against central banks.

The gold bulls include David Einhorn, founder of hedge fund Greenlight Capital, who last year came under the spotlight for his short selling of shares in Lehman Brothers, after arguing that the bank did not have enough capital to offset its exposure to falling property prices. Other funds looking at gold include Eton Park and TPG-Axon, investors said.

Their belief in bullion is being expressed even as gold prices have retreated from last month’s break above the $1,000 an ounce level. Spot gold in London closed last Friday at $939.10, after falling last week to $900.95 an ounce. Investors such as Mr Einhorn are turning to gold because they are worried about the response of the US Federal Reserve and other central banks to the global economic crisis. A bet on gold is essentially a bet against all paper currencies.

“The size of the Fed’s balance sheet is exploding and the currency is being debased. Our guess is that if the chairman of the Fed is determined to debase the currency, he will succeed,” Mr Einhorn wrote in a recent letter to his investors. “Our instinct is that gold will do well either way: deflation will lead to further steps to debase the currency, while inflation speaks for itself.”

Mr Einhorn’s comments, and the revelation he is buying gold itself, are in line with the views held by other large institutional investors in Europe, according to bankers in London. The head of commodity sales at one major bullion bank told the Financial Times that he had never been so busy dealing in gold for large investors in his life.

Goldman Sachs, Morgan Stanley and UBS all forecast the gold price will surge above $1,000 this year. Peter Munk, chairman of Barrick Gold, the world’s largest miner of bullion, told investors last week that all countries have embarked on policies that will favour gold.“The only option to governments is to print and print more money,” he said. “That will end in tears.”

In the past, hedge funds, which depend on absolute returns to earn high fees, had avoided gold because it does not produce any yield and costs money to store and insure. But those issues have become less important as central banks have pushed interest rates to nearly zero, reducing the yields on currencies.

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Imagine a group of physicists looked into the global financial industry. What remarkable things could they find? Covariance strategies? New risk management models? The origin and prevention of asset price bubbles? Or, how about, who controls the global stock market?

Josh Reviews Everything points us to this paper, titled “The backbone of complex networks and corporations: Who is controlling them?” on the physics arXiv blog. The premise looks promising.

Physics arXiv summarises: The study of complex networks has given us some remarkable insights into the nature of systems as diverse as forest fires, the internet and earthquakes. This kind of work is even beginning to give econophysicists a glimmer of much-needed insight in the nature of our economy. In a major study, econophysicists have today identified the most powerful companies in the world based on their ability to control stock markets around the globe. it makes uncomfortable reading…Now James Glattfelder and Stefano Battiston at the Swiss Federal Institute of Technology in Zurich have included these factors in a study of the control and ownership of stockmarkets in 48 countries around the world…

Using physics methodology the authors have found the backbones of the global economy — the 10 most powerful companies in the global financial industry, as measured by stock ownership. They are:

1. The Capital Group Companies
2. Fidelity Management & Research
3. Barclays PLC
4. Franklin Resources
5. AXA
6. JPMorgan Chase & Co
7. Dimensional Fund Advisors
8. Merrill Lynch & Co
9. Wellington Management Company
10. UBS

As Josh Reviews Everything points out — these are a bunch of enormous fund managers and massive market-maker banks. Not really surprising, then. In fact, Josh goes so far as to title his post “OBVIOUS tag, where are you?” exclaiming: “OMG. They’ve just discovered that funds managers and market-maker banks own a lot of shares! What a scandal!”

There is some intriguing material stuff in the report. For instance, this graph below, which plots the dispersion of control for various countries.  The X-axis is a measure for the local dispersion of control and the Y-axis indicates global concentration of control.  The paper notes:

In Fig.11 the log-values of ’s’ and ‘h’ are plotted against each other. The ’s’ coordinates of the countries are as expected: to the right we see the presence of widely held firms (i.e. the local dispersion of control) for the Anglo-Saxon countries, AU, GB and the US. FR, IT, JP are located to the left, reflecting more concentrated local control.

However, what is astonishing is that there is a counterintuitive trend to be observed in the data: the more local control is dispersed, the higher the global concentration of control becomes. In essence what looks like a democratic distribution of control from close up, by taking a step back, actually turns out to warp into highly concentrated control in the hands of very few shareholders.

It has been known for over 75 years that the Anglo-Saxon countries have the highest occurrence of widely held firms. This statement, that the control of corporations is dispersed amongst many shareholders, invokes the intuition that there exists a multitude of owners that only hold a small amount of shares in a few companies.

However, in contrast to such intuition, our main finding is that a local dispersion of control is associated with a global concentration of control and value. This means that only a small elite of shareholders continually reappears as the controlling entity of all the stocks, without ever having been previously detected or reported on.

On the other hand, in countries with local concentration of control (mostly observed in European states), the shareholders tend to only exert control over a single corporation, resulting in the dispersion of global control and value.

Finally we also observe that the US financial sector holds the seat of power at an international level. It will remain to be seen, if the continued unfolding of the current financial crisis will tip this balance of power, as the US financial land-scape faces a fundamental transformation in its wake.

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Pioneer Corp. lost a fifth of its market value as plans to abandon unprofitable TV operations and focus on auto electronics triggered mass selling by investors. Shares in the Japanese electronics company dropped 20% Friday, February 13, 2009, on the Tokyo Stock Exchange to 142 yen ($1.56). The benchmark Nikkei index rose 1%.

Analysts such as Nikko Citigroup and UBS cut their ratings on the company's stock to "sell," unconvinced by Pioneer's long-awaited restructuring plan.

"Pioneer did not provide a clear roadmap to revival," Goldman Sachs wrote in a note. The company said Thursday it expects a loss of nearly $1.5 billion in the fiscal year through March and will cut 10,000 jobs in a restructuring plan. Pioneer said it expects to remain in the red in the next fiscal year as it soaks up costs associated with the restructuring. Management said Thursday it is still assessing exactly how much the restructuring will cost.

Analysts pointed out that the auto industry, identified by Pioneer as its new business focus, is experiencing troubles of its own. "The car-electronics business will experience severe conditions given the deteriorating auto industry," said Osamu Hirose, an analyst at Tokai Tokyo Research Center Co.

Some said that even though questions remain about the company's strategy, the overall restructuring package in itself is large: With 6,000 permanent jobs going, Pioneer will be shedding 16% of its global full-time work force as it closes nearly a third of its production facilities.

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Gold, one of the best performing assets of 2008, will continue to attract buyers in 2009 because of physical demand for it amid fears about the financial crisis, says John Reade, strategist at UBS.

“We expect the precious metal will average at about $1,000 an ounce in 2009, a level we last saw in March last year. This compares with our old forecast of $700 an ounce,” he says.

This is in spite of adverse moves in three of gold’s strongest drivers: the strengthening of the US dollar, falls in the price of crude oil, and the rapid reduction in inflation.  Purchases of physical gold have jumped in the past six months as investor fears about the financial crisis and the possible outcomes from government efforts to support banks and economies have intensified.

“On the back of investor risk perceptions and the potential implications for other asset classes, we estimate that investment demand for gold could double in 2009 compared with 2007. This is the reason for the upgrade in our expectations for the gold price,” he says.

“We believe that higher gold prices will lift silver and platinum in sympathy, and we have made large upgrades to our forecasts for these metals too. We now see silver averaging $14.75 an ounce this year, compared with our old forecast of $8.40. For platinum, we have lifted our forecast for 2009 to $1,050 an ounce from our old forecast of $900.”

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