Folker Hellmeyer, chief analyst at Bremer Landesbank, gave an exclusive interview to Lars Schall with his take on the so called “Currency Wars” and China’s role as a stabilizing factor in the world economy. Moreover, he talked about the problem of high frequency trading, the development of oil prices, and the on-going rally in the precious metals markets: “Gold is not in a bubble, silver is not in a bubble, precious metals are in general terms not in a bubble.” Below is the first part of that interview concentrating on the currency wars and precious metals.
By Lars Schall
Folker Hellmeyer, born 1961 in Hamburg, is a banking professional who started his career as foreign exchange trader with Deutsche Bank in Hamburg (1984 – 1987) and London (1988 – 1989). From 1990 to 1995, he worked as an OTC broker in the interbank foreign exchange market at Bierbaum & Co. GmbH & Co. OHG. In 1995, he went to Landesbank Hessen-Thüringen GZ (Helaba) in Frankfurt as a senior analyst. Since April 2002, he has been the chief analyst at Bremer Landesbank, where he is responsible for the Foreign Exchange and Money Market Sales department.
In his book “Endlich Klartext” („At ast, clear text“), published in 2008 by the Finanzbuch Verlag in Munich, Hellmeyer takes a look behind the scenes of our financial system. His critical analysis provides the reader with entertaining and informative insight into the U.S. financial system and its political background. The functions of the free market, the policy of the central and commercial banks and the role of rating agencies are critically examined and reviewed.
To what extent can one still believe economic data from the United States? How can one look beyond the veil of political correctness? What is the aim of the Plunge Protection Team? These are some of his questions. Hellmeyer is one of a very few senior bankers in Germany who doesn’t grow tired of reminding the public: “First the free market dies, then democracy dies.“
A comprehensive interview in German, which Folker Hellmeyer gave Lars Schall in August 2009, can be found under the headline „Das Plunge Protection Team in Aktion“ (“The Plunge Protection Team in Action“) here.
Mr. Hellmeyer, for quite some time there is a “Currency War“ going on – and by now it is reaching the mainstream press. Can you explain to us this development and how gold fits into the picture?
Yes, of course. First of all, we have to say that this “Currency War” topic has been chosen by the Western press and it comes out of the Western financial hemisphere. In that respect we have to check whether the currency war is in fact the “Currency War” which is presented in the media outlets. From my point of view the currency war is not led by China or other emerging market countries and I want to point this out in a very outspoken manner.
China has started revaluing the Renminbi in 2005, the revaluation of the Renminbi stands currently at 20 percent. Throughout the crisis this revaluation of the Renminbi was halted for very good reasons because the insecurity about the further development was very high and from June 2010 onwards we’ve seen again an appreciation of the Renminbi by 3.3 percent so far. If you extrapolate the latest pace since June 2010 on a yearly basis we get somewhere close to 6 percent per year. This is a substantial result in the first place.
Secondly, we have to bear in mind that China took over responsibility on a global frame in stabilizing the global economy and the world financial system. In relation to the GDP, China took on the biggest burden for reviving its economy and thus supporting the global economy. Then they were helping out Russia, Eastern Europe and also the euro-zone in the beginning of 2009 after the financial centers London and New York attacked Eastern Europe and in particular Russia. They were sending a front-up payment of roughly 100 billion dollars to Russia for future energy contracts.
Thirdly, in the year 2010 they were again on the side of the euro zone supporting the euro zone in the question of the budget deficit crisis. They were lending support to Greece, they were buying the euro down in the 1,20′s. Again they were supportive regarding the functioning of the global financial system. So arguing that China is not taking responsibility for the world recovery is simply nonsense.
If we look at Japan we clearly have to state that the JPY value does not comply with the status of its economy. So the interventions we are seeing from Japan are very much in line with fundamentals. Also here I can’t see a currency war. If we talk about a currency war the initiator stands on the other side: the United States are starting QE2, which means swamping the market with dollar liquidity and this dollar liquidity indeed leads to revaluations of foreign currencies, in particular in the emerging markets, where you have comparatively small markets being unable to neutralize this extra liquidity without consequences, pushing up the value of their currencies to levels that don’t comply with their real economies. In that respect, if there is any currency war going on, then it is a liquidity currency war led by the United States, endangering the recovery of the global economy, because it is able to blow bubbles on one hand and destabilizing emerging markets countries in their economic recovery on the other. If we talk about currency wars as I said the United States are at the center of starting this currency war rather than anybody else.
And what is the relation to gold? Gold with the increased liquidity of course is getting more friends, simply because the world financial system or the center of this system is demolished by these politics of the United States. The United States as a country setting or delivering the world leading currency at the moment are not living up to the needs of the role of leading world currency in a serious manner and are rather following very selfish policies in order to gain the day and to lose the future – and I really want to point that out: America is doing cosmetic jobs and intends no structural reforms to refurbish their business model. Cosmetics do not deliver the intended results resolving the problems on a longer time frame. They simply increase problems over time.
Nevertheless some people are arguing that the gold price is in a bubble, like for example recently James Altucher in a recent piece for “Business Insider. “Is gold in a bubble, yes or no? And what do you think about Mr. Altucher’s “11 reasons“ to state it is?
First of all, gold is not in a bubble, silver is not in a bubble, precious metals are in general terms not in a bubble. That’s the first statement. If there is a bubble, it’s in Triple A rated Treasury papers, whether from Germany or United States. Precious metals are in demand for very simple reasons: We have an inflexible supply due to a lack of exploration and we have an increasing demand due to various factors.
One factor is definitely the debasement of the U.S. dollar. The second aspect is that the global wealth is increasing quickly, in particular in the emerging market countries. 5 billion of the world population are having higher living standards and thus are consuming more precious metals. Thirdly, and that is very important: smart central banks start to accumulate gold rather than accumulate printed paper from the United States. That means we have a strong demand growth with an inflexible supply. Those are the drivers of the gold price.
If Mr. Altucher is giving some 11 arguments why gold might be in a bubble then this might sound at first sight reasonable, but at second sight it’s simply nonsense. It is as much nonsense as we’ve seen in the past nine years by protagonists being negative on a “professional” basis. Very often throughout the rally of gold we have heard these arguments and they proved to be wrong. The same will apply here.
Would you say that Mr. Altucher and his ilk should give it also a more thorough thought that gold and silver is the preferred currency of the so called elite – and what this might mean for their prices?
Indeed. The elite today are human beings that care about the state of our financial system. The elite are also central banks that do know the game that is being played, and we’re talking here about emerging market central banks like the Russian one, the People’s Bank of China, the Brazilian central bank and the Indian central bank. All these players in this market have a very clear and outspoken view on investments in precious metals, and they figured out that the quality of this asset is basically based on the fact that it can not be increased in volume by political will but rather only by lots of work, and that is why precious metals are precious.
Louise Yamada, probably the best technical analyst in the world (http://www.lyadvisors.com/), says that gold will not be in a bubble before it will cost $5,200 per ounce. If one would add real inflation we get a price of roughly $7,700 per ounce. Do you assess this as realistic?
Well, that depends where the dollar is when we hit 5.200 U.S. dollars in the parity to gold, whether against the Euro or the Swiss franc. Frankly speaking, I do not like these clear cut targets for the rise of gold and silver What I’m saying is: for another 5 to 7 years we will see a further rally in precious metals due to the fact that there has been a lack of exploration. This lack of exploration means that we see an inflexible supply picture. At the same time there is a rising demand picture, and that is what drives prices higher.
My minimum call for gold is that we will see again the prices of 1980 on an inflation adjusted basis, and that means something like 2500 dollars – but that is a very, very conservative call because in 1980 the status of the world financial system was in a much better shape than it is today. And the situation, for example the development of population, has shifted dramatically. In that respect, there is room for much higher prices than the 2.500.
The 2.500 U.S. dollar forecast is a very conservative approach.
In case Ms. Yamada is right: what will those people cry then when they are already now crying “Wolf!“ (a.k.a. “Bubble!“)?
Well, “Crying Wolf” is a funny game: the more often you cry wolf the less people will listen to you – and this what will happen eventually to these people. If you look at Mr. Nadler from Kitco, who has stated many times throughout the last five years why gold should come down, nobody really listens to him any longer, at least no one, who takes this topic seriously. And the same applies for banks, for example Barclays. They missed out the whole rally of precious metals during the last nine years. In that respect I do not care about those people or institutions, rather I think it is enchanting to listen to them in order to have a good laugh.
And to do the opposite…
…of their calls. Yes. – Do you think silver has a fair chance to outperform gold?
Indeed, yes. Silver is more volatile, but on the upside there are higher chances. First of all, there is no reasonable amount of silver located with central banks. The industrial use is increasing significantly. With world growth around 4 to 5 percent, again that will increase the demand picture. Also it is the precious metal of small man. In that respect, percentage wise, it has a chance on the upside for a sustained outperformance in comparison to gold. But we have also to bear in mind to look in the rear mirror that corrections in silver are more aggressive than those in gold. Any player who is heavily invested in silver has to bear in mind that correction risks are markedly higher than those in gold.
Mr. Hellmeyer, it seems to me what Mr. Altucher and people like him tend to forget all the time is the problem of huge short positions in the gold and silver future markets. Especially JPM Chase seems to face major difficulties in that respect. What are your thoughts on this, particular since a representative of the CFTC admitted that the silver market is subject to “fraudulent“ influences?
I’m a friend of free markets and I’m a friend of perfect markets, and perfect markets require the structure of a polypoly. In particular the situation at the precious metal market is a situation where two players, which is on the one hand JPMorgan Chase and on the other hand HSBC, have a very dominant role and a dominant role does not fit into the setup of a perfect market or a free market. In that respect, yes I have really difficulties accepting this situation. And given the latest arguments by Bart Chilton by the CFTC, indeed the risk that these markets are corrupted is extremely high.
To put it bluntly: We have a misallocation of market share that is a prime driver of the risk of a manipulated market. And if there is a one thing that has to be altered then it is here the situation that the so called “banking aristocracy” or global financial players has to be split up again into players that comply with the needs of the perfect market and thus of the free market. That is what I do expect by those persons and those organisations that are in charge of the setup of the financial system. The fact, that nothing has been seen of reordering the system, is in my eyes proof that the banking lobby of the banking aristocracy is still in hold of those positions that are important in our free system and that is a shame!
Before we continue to talk about precious metals: what are your thoughts with regard to “fraudulent“ influences in the markets for example via high frequency trading? Here’s a graph related to an estimate of the percentage of HFT trades by the financial markets’ research and strategic advisory firm TABB Group:
Well, first of all, the same what I spoke about in the previous question applies also here: if you have a market place you need for all participants the same entrance barrier or entrance level. And high frequency trading is one of those measures that gives a very limited number of players certain advantages in comparison to all other players. In this regard high frequency trading needs to be abandoned as soon as possible simply because it breaches rules of a fair market.
What else can be said on that? We have created a situation where the global banking aristocracy, the big players, tend to get advantages in comparison to smaller players of the market. And if we want to keep up our free market and ultimately our democratic system then these policies have to be altered.
I also want to put forward another question, and the question is: Why stock exchanges and other exchanges have to be privatized? Given the backdrop of the latest experience in history it shows that they don’t comply with the demands of a level playing field. Thus the privatization of these exchanges in my eyes has led partly also to the crisis we have seen, and it has to be thought upon whether these structures need to be managed rather by governmental instances rather than private entities.
Let’s return to gold. You are familiar with a story by Max Keiser and me: “Currency War: Germany about to lose 66% of its gold reserves. “Should Germany worry about its gold holdings at the New York Fed now that for example some major central banks – as you’ve already mentioned – in the world buying gold big time compared to the past?
Well, in the first place, central banks should and do trust each other. Under that aspect shifting the gold reserves from the United States back to Frankfurt does not seem to be really necessary. Given the fact that we have problems with the balance sheet positions of gold in the United States, whether it’s bullion reserve, custodial gold or deep storage gold, of course some doubts have to be taken into account.
I know from the Bundesbank that the gold from the Bank of England has been reallocated into Frankfurt. That was back in my time when I was at the Helaba and running the central bank desk there. In that respect parts of these reserves have definitely been shifted into Frankfurt.
I strongly recommend, as there is a rift on the central bank side which policies are adequate – if we look at the policies between the ECB and the Federal Reserve the rift is rather increasing – to remove the German gold from the USA back into Germany, into Frankfurt.
Another aspect regards the way the bullion reserve of the Bundesbank has been verified by the Bundesbank in the past. If it is clear cut accounted for reserve held in New York or at Fort Knox and it is verified on a regular basis, then you can, of course, keep this policy on. At the end it’s a question of trust.
I prefer the direct control by the Bundesbank rather than trusting somebody. At this very stage I can neither state that Max Keiser’s call on the situation is correct nor the position of the Bundesbank. Generally I trust the Bundesbank, that the whole reserve of roughly 3.400 tonnes is still available to the Bundesbank.
Yes, but shouldn’t there be a public discussion here in this country about this question?
There should be a public discussion about all central bank gold reserves, and the transparency the central banks require from all players in the financial field should be fulfilled by central banks regarding bullion reserve. In that respect, yes, a discussion is meaningful, but obviously central banks do not wish an intense communication.
Like a former official of the Federal Reserve said: “The last duty of a Central Banker is to tell the pubic the truth.”
Well, that is the American way to view it. From my experiences with the Bundesbank and also with the ECB I know that this view is definitely not shared in the first place. Regarding bullion reserve there are many question marks, whether with the BIS, with the Bundesbank reserve or with the U.S. reserve – whether they are still there or they have been swapped and they’re simply financial receivables against mines or other financial players. We need transparency in order to avoid too much speculation. I don’t want speculation, I want clear investment.
How do you think about the initiative of the Gold Anti-Trust Action Committee, GATA (www.gata.org), to have an audit in the U.S. of their gold reserves – which would be the first since the days of President Eisenhower?
It is more than due. I am very happy that we have a group like GATA that insists on this audit. And I am also very happy that we have GATA because GATA has been the best provider of news regarding bullion in general for the past ten years. I am a reader of “Le Metropole Cafe” (www.LeMetropoleCafe.com) since, I think, 2002 and the best information that we have received within the bullion market has not been the information granted by banks and bullion banks in particular, but rather the information given by GATA and “Le Metropole Cafe” – and this stands for itself.
So you appreciate the work of GATA in general – and it shouldn’t be dismissed as “conspiracy theories“ per se?
Well, I think that conspiracies are much more common than most people seem to believe. If you look at your office and there’s a nice, smart girl who wants to have the post of chief secretary and there is another one who is very intelligent but less attractive, very often you will see a kind of mobbing going on and mobbing is a conspiracy. If you take a look at chemical industries and just google the word cartel in combination, you clearly see that also here the conspiracies are comparatively common, as a cartel always includes conspiracy. In that respect, conspiracies do deliver very good reasons to be discussed, and I would not put GATA and “Le Metropole Cafe” in the corner of conspiracy theories only, but rather they delve into matters very, very deeply and create a very satisfying setup of information which implicitly shows that most of their claims are correct.
To say “this a conspiracy theory“ is a psychological tactic – well, it’s a conspiracy theory, don’t pay attention to it.
Indeed. Normally those people talking about conspiracy theories want to finish off this discussion at first sight in order not to delve into this problem.
Thus those people acting in this manner have to be seen with lots of caution.
One last topic for our conversation: the development of the oil price. Mike Norman, the chief economist at John Thomas Financial (www.johnthomasbd.com), wrote to me last month this opinion of his:
“Current oil market fundamentals do not justify the price. Stocks of crude in the U.S. are just off record levels, yet the price is more than double a year ago. Same with gasoline. All speculation. Total NYMEX open interest in crude is 1.4 m contracts or about 1.4 billion barrels of crude. Daily volume of crude traded on NYMEX is over 1 billion barrels per day. Total daily global demand is only 83 million barrels per day. The amount traded on one single exchange is more than 10 times total daily consumption. It’s a giant casino with prices being driven up by speculators and consumers having to pay more and more.”
Is Mr. Norman on the right track with this opinion?
At first sight, again, this sounds very smart but it is definitely not. We trade foreign exchange for example and the main volumes are speculative. Only roughly 1 percent of the trade volume of foreign exchange on a daily basis is backed by real trade. We could also say that the foreign exchange is a casino. No, it’s a market place where you have lots of interests, which comes close to the status of a polypoly. That also applies for the commodity market of oil. In that respect, the amounts that have been traded are not that important.
Secondly, yes, the stocks of crude and gasoline may be at record levels in the United States, but the question is not whether they are at record levels in the United States – we trade oil and gasoline as a global commodity. When we look into other countries this picture is different. We have a global growth meanwhile of 4.8 percent given the latest call by the IMF and next year by 4.2 percent. So what we are seeing here is that the market anticipates an increase of demand. To me these prices at $ 80 – 85 are very much in line with the global growth picture.
Another argument that has to be taken into account: all these commodities are valued in U.S. dollars. The supply of dollars is increasing with the next quantitative easing measures. In that respect, the price increase of commodities priced in U.S. dollars is also a function of the liquidity provided by the Federal Reserve System. Thus the debasement of the U.S. dollar also plays out in the commodity market. So I strongly oppose the point of view of Mr. Mike Norman.
And you know that the OPEC members are already calling for an oil price of 100 U.S. dollars just to outbalance the loss of the value of the US dollar.
Indeed, and this is very much in line with our call for the next year. We are forecasting that the bottom of the range in the next year will be somewhere around 80 U.S. dollars and that the upside potential for the next 12 to 14 months stands at roughly 110 U.S. dollars.
Are we heading towards a new oil price spike like the one of 2007/08?
I’m not seeing this really. This oil price spike was very much related to a free market approach. As we have figured out earlier on, we have two mayor players, in particular JPM. What applies to the precious metal markets partly applies to the energy markets. JPM plays a very important role. If we see the surprise for many related to the upswing of the global economy throughout 2010, it is quite remarkable that the oil price is comparatively stable, though the market is surprised about the strength of the economy. My gut feeling is, that energy markets have a kind of a political taste to it. In this respect I am not expecting a repeat of 2008.
What will be the outcome of a rising oil price for a) the economy, b) precious metals, c) commodities in general, and d) food prices?
Let me put it this way: when you look at the stance of China throughout the last few years, it is getting very obvious that we do have a “war” in the world of commerce on commodities. It is essential for the future development of countries that they find enough resources to feed their economies. In that respect, all these topics: oil price, precious metals, and commodities in general, food, do basically mirror the same topic. The oil price will have a price impact for example on food production, it will have a impact on commodities in general – and this is an upward price momentum. With this upward price momentum, as I said early on, precious metal prices will also move up.
For the next decade I clearly see a further bull market in all commodities. If you look at the food markets, we can claim 5 billion people have higher living standards and they require more. That gives a very solid footing to the agricultural markets. Commodities in general, whether we talk about rare earths or whatever, are in demand – also here we have an upward price momentum. And energy is basically the means how to move all these things around in a mobile world. So these prices will also surge up. We will have inflation on an exogenous commodity related basis.
With regard to food prices: do you foresee dramatic developments for the ordinary common people?
No, not really. We have to bear in mind that only 50 years ago people were earning their money in order to pay the rent and pay the food. What we have seen for the last 30, probably 40 years is a situation where this cluster has changed. We will have to adopt to a new situation where people have to stand ready to pay up for food and agricultural products.
Do you think the peak oil scenario is something we all should pay more attention to?
Well, I think there is peak oil in a way, but not in the way it is being described. There is enough oil on the earth in my eyes, but the reserves we can get hold on are limited currently due to the price scenario. In that respect, yes, peak oil plays a role in pushing prices higher for the foreseeable future. Eventually we will exploit new resources and use these new resources. There are plentiful resources on a longer time frame, but at higher prices.
What’s your overall outlook for 2011?
There are two sides to it. If we look at the crisis, in summer 2011 the fifth year of the crisis will begin and the United States will again be in the center of this crisis. Fact is, that the United States and Japan are the only countries that are still focused on cosmetics in order to manage their economies and systems. There are no structural reforms to be seen so far. They stand in for 23 percent of world GDP. That is a risk factor. But this risk factor looks manageable under the aspect that 70 percent of the world economy is performing strongly.
50 percent of the world economy are the emerging market countries. They are free of any major dependence on Western finance. They are rather those countries that provide stability into the system. They have a growth pattern of 6 to 8 percent. Their indebtedness, whether it’s governmental or private, is at very low levels. Take China: 22 percent debt-to-GDP ratio and with hardly no consumption related indebtedness by the private subjects.
So this growth pattern within the emerging market countries in my eyes is stable. Next year the growth pattern will come off from roughly 7.3 percent this year towards 6.5 percent, but it is still going strong.
20 percent of world GDP is defined by strong industrialized nations like Australia, Canada, Germany, Scandinavia and the Northern European hemisphere. They are doing well with growth patterns in between 1.5 and 3.5 percent.
These 70 percent are the two main catalysts for a very positive outcome next year. I expect world growth to be at minimum at 4 percent and I don’t rule out 5 percent, so it’s a very high level growth in 2011 to be expected. In that respect I am seeing stronger equity markets.
Also I want to put a focus on the cyclical approach. We have on the one hand the inventory cycle. The inventory cycle is by far from being finished. Normally it is a short cycle. This time it is prolonged, because many participants in the real economy have been frightened by the sheer size of the global crisis. The inventory cycle will at least last until summer of 2011 and will have a positive impact on global growth in 80 percent of the world economy.
The capital investment cycle has only just started in the first quarter of 2010, after having halted for 18 months within industrialized nations, which is a total anomaly under historic proportions. In that respect I expect the capital investment cycle within 80 percent of the world economy to last for another two to three years and basically this capital investment cycle will have an effect also on the inventory cycle, because, as I’ve said, the inventory has not been build up.
As a result of these two impacts, the consumption cycle starts to pick up in 70 percent of the world economy due to higher employment. And this setup of 80 percent inventory cycle and capital investment cycle plus 70 percent consumption cycle is something that we have not seen in the world economy since the early 1950′s. That will have a more pronounced effect on the global growth picture than most of my colleagues do anticipate.
I have been an optimist for 2010 and we were calling correctly the turn around of the world economy in 2009 and said that this will be a very strong upswing. We stick to this view. In particular the analysis of these cycles – inventory, capital investment and consumption cycle – gives us very good arguments to expect in 2011, and probably into 2012, a growth pattern that is higher than the mainstream expects. That leads us to the conclusion that commodities, in particular precious metals, will gain throughout this development of the world economy.
One final question: if we would assume a more worst case scenario – what can and what should the common people do in order to survive the survival of the fittest competition?
Well, as I’ve said, the biggest risk related to this positive outlook of mine is that the U. S. fails. I can’t see that in 2011 or 2012, but it is a risk. Given the fact, that the financial system is not in an equilibrium, but rather distorted, in particular by the policies of the United States, I strongly recommend investment in real assets – and real assets are commodities, are precious metals, is land, is real estate at reasonable prices and are equities, are shares.
As I’ve said to you, we have 70 percent of the world economy that is doing nicely. And if you look at the current reporting season of the companies, the companies are doing extremely well and are surprising positively by the ratio 4:1. That is something to bear in mind. And giving the evaluation of equity markets – if you look at the price-earning ratios of the DAX for example, you’re standing below 11 at 2011 expected profits – you are standing at 140 percent of book value, which is historically cheap, and a dividend yield of 3.2 percent outperforming outstanding 10 year bonds, which stands 2.3 percent. So if you look at equity markets, these markets are very, very attractive given the pricing.
Thank you very much for taking your time, Mr. Hellmeyer!