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Updated: 1 hour 9 min ago

Why the business cycle is failing

Fri, 10/17/2014 - 05:41
Since WW2 economic theorists have posited that demand in the economy could be stimulated by a combination of deficit spending by the government and by suppressing interest rates.

The separation of demand from production was promoted by Keynes and interest rate management of the economy by monetarists, though there is considerable overlap between the two. Yet no progress in economic management has been achieved: instead we appear to be on the brink of a major economic dislocation.

Far from banishing the business cycle, it has become worse. To understand why it's worth looking at the reason the concept is failing.

Without government intervention, the economy clears its goods and services at prices determined by the consumer. All production in free markets is aimed to satisfy consumer demand. Equally, the consumer has to earn in order to spend, so his efforts are directed at producing goods and services others are prepared to buy. An economy so based carries uncertainty for the individual which he offsets by saving some of his surplus income, and through financial intermediaries his savings are leant to businesses for investment in the means of production.

If only the world was so simple. Instead we have government, which in modern times increasingly intervenes. We are all familiar with attempts from the pharaohs onwards to divert economic resources towards projects not designed to satisfy human consumption. What is less understood is intervention by manipulating the cost and quantity of money.

If a central bank forces lower interest rates on the market, this falsely alerts the businessman to a savings glut, the result of a reduction in consumption. His first response is therefore to cut his costs so that he can lower his prices to protect his profits. When interest rates remain low he begins to think about investing in more efficient means of production, so that he can keep his prices low and compete in difficult markets. And when he finds that interest rates still remain low he becomes more confident about the future and plans for expansion.

So far the objectives of the central bank are being achieved. The recession has been stopped and modest growth restarts. Furthermore some businesses are cautiously hiring people again. In a nutshell, this describes the current position in the US and UK economies, where there is patchy evidence of capital spending and increasing employment. But then we run into a roadblock: the businessman finds that all other businesses have fallen for the monetary trick, and everyone is chasing the same rainbow. Normally price inflation results, interest rates rise and before very long the businessman is forced to cut his losses. Then the cycle starts over again.

Only this time, the final act of the business cycle is ending differently. The accumulated burden of debt has become too great for consumers and even governments themselves to bear. Financial reality is finally intervening, and consumption simply cannot grow as the Keynesians and monetarists intended. What was originally an economic problem, believed to be solvable by deficit spending and interest rate management has become a financial problem.

The truth of this statement appears to be finally dawning on bond and equity markets, with a rush into the safe haven offered by the former and an aversion to the risks in the latter, a process that having just started has a long way to go.

Market Report: Gold benefits from market uncertainty

Fri, 10/17/2014 - 05:17
The outlook for gold is now more positive than it has been for some time. After a prolonged period of low volatility as funds invested in ever-greater risk, markets have snapped and volatility has jumped. In short, we are swinging very suddenly from complacency to reality.

Financial markets hit a serious air-pocket this week, with a collapse in US Treasury bond yields in a dash-for-cash, illustrated in the chart below.


On Wednesday the yield fell from 2.21% to 1.87%, a move of over three whole points on the price, which for a ten-year maturity is truly exceptional, though it did rally subsequently. The relevance to precious metals is there are many hedge funds which have bet on rising bond yields and a falling gold price. And given that these funds gear their trades up through futures markets, the losses will have been considerable. Indeed, hedge funds recently held near-record short positions in gold, shown in the next chart of Managed Money shorts on Comex.


The Managed Money category includes hedge-funds, high frequency and also algorithmic traders, most of which are hard-wired into higher interest rates next year and as we can see from their short positions, they have placed large bets that the gold price will fall.

Extreme positions are also reflected in equities, with margin debt hitting new excesses, as can be seen in the next chart, of margin debt on the NYSE.


In August this figure stood at $463bn, which was considerably higher than at the 2007 market peak before the banking crisis, and is approaching double the highs seen during the dot-com bubble. This level of financial leverage is likely to do significant damage as it is unwound.

So far, gold has held firm. Having rallied from $1185 last week, this week it gained modestly to $1240 in early London trade this morning. Open Interest has recovered consistently showing that new buying and not short-covering has been driving prices as shown in the next chart of Comex Open Interest.


Silver's recovery has been subdued, and as a result the gold/silver ratio has risen to over 70. Silver and the platinum group metals seem to be affected more by deteriorating manufacturing prospects than their monetary characteristics. Palladium in particular has been hit hard, falling up to 9% this week.

When we see bond prices for Greek sovereign debt collapse, yields for Spanish and Italian debt start rising while others are falling; when we see the outright bullishness expressed by excessive margin debt in equity markets; and when we see oil prices nose-dive, we know that markets are on the edge of substantive change. The attraction of holding some physical bullion as insurance against what looks like developing into a serious market fall-out has gained several notches.

Next week

Monday.

Japan: Leading Indicator (final).
Eurozone: Current Account.
UK: CBI Industrial Trends.

Tuesday.

Japan: All Industry Activity Index.
UK: Public Sector Net Borrowing.
US: Existing Home Sales.

Wednesday.

UK: BoE MPC Minutes.
US: CPI.
Japan: Customs Cleared Trade.

Thursday.

Eurozone: Flash Composite PMI, Flash Manufacturing PMI, Flash Consumer Sentiment.
UK: BBA Mortgage Approvals, Retail Sales.
US: Initial Claims, FHFA House Price Index, Flash Manufacturing PMI, Leading Indicator.

Friday.

UK: GDP (First Est.), Index of Services, CBI Distributive Trades.
US: New Home Sales.

Dealing Desk: GoldMoney customers buck the market trend and sell bullion

Thu, 10/16/2014 - 12:54
It's been a week of stockmarket woes and rising gold prices, but it's highlighted again the differing buying habits of many physical bullion investors compared to the rest of the market.

GoldMoney's Dealing Manager, Kelly-Ann Kearsey said, 'Despite what's been happening in the general market we've seen trading volumes down on last week and net selling across all the metals. It's been really interesting to see that GoldMoney's customers have simply not done what you'd expect, and it's not the first time we've seen this.

'The majority of our physical sales have been in gold and platinum so it's possible our customers have been selling in order to take advantage of the bear market as others speculate. Overall gold's safe haven reputation has been boosting its price this week as disappointing economic data and the slump in US and UK equities raised fears of a global economic slowdown. As most of our customers already view gold as a safe haven commodity, this effect has already been discounted.

'Platinum however slipped below the gold price for the first time in over a year, and palladium was the weakest performer of the week.

'If prices stabilize and continue to rise then we'd expect to see more of our customers buying, and with further key economic data out next week, including Chinese Gross Domestic Product, and the US Consumer Price Index, then we could see further gains for gold at the expense of the dollar.

'One consistent trend we have seen is that most of the selling has been out of the UK and Swiss vaults, with the Malca Amit vault in Singapore being the beneficiary.'

16:00 16/10/14: Week on week performance: Gold rose 1.0% to $1,238.92; Silver slipped 1.3% to $17.33; Platinum also dropped 3.3% to $1,237.00 while Palladium fell 9.4% to $727.97.

NOTES TO EDITOR

For more information, and to arrange interviews, please call Gwyn Garfield-Bennett on 01534 715411, or email gwyn@directinput.je

GoldMoney is one of the world's leading providers of physical gold, silver, platinum and palladium for retail and corporate customers. Customers can trade and store precious metal online easily and securely, 24 hours a day.

GoldMoney currently has over 22,000 customers worldwide and holds $1.4billion of precious metals in its partner vaults.

GoldMoney has offices in Jersey and Hong Kong. It offers its customers storage facilities in Canada, Hong Kong, Singapore, Switzerland and the UK provided by the leading non-bank vault operators Brink's, Via Mat, Malca-Amit, G4S and Rhenus Logistics.

GoldMoney is regulated by the Jersey Financial Services Commission and complies with Jersey's anti-money laundering laws and regulations. GoldMoney has established industry-leading governance policies and procedures to protect customers' assets with independent audit reporting every 3 months by two leading audit firms.

Visit www.goldmoney.com.

Follow the GoldMoney Dealing desk team on Twitter: @goldmoneyupdate!

CIPD Jersey Group - Special Offer

Thu, 10/16/2014 - 10:55
As sponsors of the award for 'Most Successful Change Management Programme', GoldMoney is delighted to offer you a 15% discount on your first gold purchase.

This special offer is for attendees of the CIPD Jersey Group Awards and ends 18th November 2014.

Open a Holding today to take advantage of this offer. How it works

Follow the steps below to take advantage of our special promotion

  1. Choose the amount of gold that you want to buy in GBP
  2. Write down the promotional code GOLD1 – you will need this later
  3. Login to your Holding or sign up to open a Holding for free
  4. Click "Buy & Sell Exchanges" and then "Buy Metal" - please ensure you have funded your Holding
  5. Enter your Promotional Code and continue through the buy process

Hurry, offer ends 18th November 2014.

Find out why 22,000 people buy and store gold with GoldMoney.

Your discount code

GOLD1

To use your promotional code, simply enter it in the designated box in the buy process within your Holding.

 

Not a GoldMoney customer yet?

Write down your Promotional Code and sign up to open your Holding for free, in just a few minutes you will be able to enter your Promotional Code during your first order and take advantage of the offer.

To find out more about buying gold with GoldMoney and our current fees, please visit our Buy Gold page.

 

Terms of the offer

This offer is available from 18th October 2014 at 00:01 GMT and expires on 18th November 2014 at 23:59 GMT.

This promotion code is applicable for purchases of gold in GBP for storage in any of our vaults.

This offer is only available to you if you have never purchased metal with GoldMoney.

To claim this offer, you must log in to or sign for a GoldMoney Holding and provide the requested verification documentation and information in compliance with GoldMoney’s Customer Acceptance Policy.

In signing up for a GoldMoney Holding, you agree to be bound by the GoldMoney Customer Agreement.

This offer cannot be used in conjunction with any other offer, discount, or promotion.

Each customer can use this promotional code once only.

This offer is open only to residents of countries in which GoldMoney accepts customers, as set out in GoldMoney’s Customer Acceptance Policy. GoldMoney does not accept customers from certain countries, including, but not limited to, the Netherlands or from countries subject to any economic or trade sanctions.

Employees of GoldMoney or their immediate family members shall not be permitted to take part in this promotion.

Any disputes arising in relation to this promotion will be governed by the laws of the Island of Jersey and the parties agree that the Courts of Jersey shall have non-exclusive jurisdiction.

Use of the promotional code is deemed acceptance of the terms of the promotion and of GoldMoney’s Customer Agreement.

GoldMoney reserves the right to amend, vary, extend, or discontinue a promotion at any stage, for any reason, without notice.

GoldMoney takes no responsibility for any inability to enter, complete, continue, or conclude the promotion due to equipment or technical malfunction, busy lines, inadvertent disconnection, force majeure, or otherwise.

GoldMoney is the trading name of Net Transactions Limited, a company incorporated in Jersey, with its registered office at 32 Commercial Street, St Helier, JE2 3RU, Jersey. Net Transactions Limited is regulated as a Money Services Business by the Jersey Financial Services Commission.

James Turk: Forget promises, buy physical assets

Mon, 10/13/2014 - 12:24
In an interview with Finance News Network at the Gold Investment Symposium, James Turk shares his insights into the markets and gold's role in a diversified portfolio.

Read or watch the full interview here.

 

A market reset due

Fri, 10/10/2014 - 07:51
Recent evidence points increasingly towards global economic contraction.

Parts of the Eurozone are in great difficulty, and only last weekend S&P the rating agency warned that Greece will default on its debts "at some point in the next fifteen months". Japan is collapsing under the wealth-destruction of Abenomics. China is juggling with a debt bubble that threatens to implode. The US tells us through government statistics that their outlook is promising, but the reality is very different with one-third of employable adults not working; furthermore the GDP deflator is significantly greater than officially admitted. And the UK is financially over-geared and over-dependent on a failing Eurozone.

This is hardly surprising, because the monetary inflation of recent years has transferred wealth from the majority of the saving and working population to a financial minority. A stealth tax through monetary inflation has been imposed on the majority of people trying to earn an honest living on a fixed salary. It has been under-recorded in consumer price statistics but has occurred nonetheless. Six years of this wealth transfer may have enriched Wall Street, but it has also impoverished Main Street.

The developed world is now in deep financial trouble. This is a situation which may be coming to a debt-laden conclusion. Those in charge of our money know that monetary expansion has failed to stimulate recovery. They also know that their management of financial markets, always with the objective of fostering confidence, has left them with market distortions that now threaten to derail bonds, equities and derivatives.

Today, central banking's greatest worry is falling prices. The early signs are now upon us, reflected in dollar strength, as well as falling commodity and energy prices. In an economic contraction exposure to foreign currencies is the primary risk faced by international businesses and investors. The world's financial system is based on the dollar as reserve currency for all the others: it is the back-to-base option for international exposure. The trouble is that leverage between foreign currencies and the US dollar has grown to highly dangerous levels, as shown below.

Plainly, there is great potential for currency instability, compounded by over-priced bond markets. Greece, facing another default, borrows ten-year money in euros at about 6.5%, while Spain and Italy at 2.1% and 2.3% respectively. Investors accepting these low returns should be asking themselves what will be the marginal cost of financing a large increase in government deficits brought on by an economic slump.

A slump will obviously escalate risk for owners of government bonds. The principal holders are banks whose asset-to-equity ratios can be as much as 40-50 times excluding goodwill, particularly when derivative exposure is taken into account. The stark reality is that banks risk failure not because of Irving Fisher's debt-deflation theory, but because they are exposed to a government debt bubble that will inevitably burst: only a two per cent rise in Eurozone bond yields may be sufficient to trigger a global banking crisis. Fisher's nightmare of bad debts from failing businesses and falling loan collateral values will merely be an additional burden.

Prices

Macro-economists refer to a slump as deflation, but we face something far more complex worth taking the trouble to understand.

The weakness of modern macro-economics is it is not based on a credible theory of prices. Instead of a mechanical relationship between changes in the quantity of money and prices, the purchasing power of a fiat currency is mainly dependent on the confidence its users have in it. This is expressed in preferences for money compared with goods, and these preferences can change for any number of reasons.

When an indebted individual is unable to access further credit, he may be forced to raise cash by selling marketable assets and by reducing consumption. In a normal economy, there are always some people doing this, but when they are outnumbered by others in a happier position, overall the economy progresses. A slump occurs when those that need or want to reduce their financial commitments outnumber those that don't. There arises an overall shift in preferences in favour of cash, so all other things being equal prices fall.

Shifts in these preferences are almost always the result of past and anticipated state intervention, which replaces the randomness of a free market with a behavioural bias. But this is just one factor that sets price relationships: confidence in the purchasing power of government-issued currency must also be considered and will be uppermost in the minds of those not facing financial difficulties. This is reflected by markets reacting, among other things, to the changing outlook for the issuing government's finances. If it appears to enough people that the issuing government's finances are likely to deteriorate significantly, there will be a run against the currency, usually in favour of the dollar upon which all currencies are based. And those holding dollars and aware of the increasing risk to the dollar's own future purchasing power can only turn to gold and subsequently those goods that represent the necessities of life. And when that happens we have a crack-up boom and the final destruction of the dollar as money.

So the idea that the outlook is for either deflation or inflation is incorrect, and betrays a superficial analysis founded on the misconceptions of macro-economics. Nor does one lead to the other: what really happens is the overall preference between money and goods shifts, influenced not only by current events but by anticipated ones as well.

Gold

Recently a rising dollar has led to a falling gold price. This raises the question as to whether further dollar strength against other currencies will continue to undermine the gold price.

Let us assume that the central banks will at some time in the future try to prevent a financial crisis triggered by an economic slump. Their natural response is to expand money and credit. However, this policy-route will be closed off for non-dollar currencies already weakened by a flight into the dollar, leaving us with the bulk of the world's monetary reflation the responsibility of the Fed.

With this background to the gold price, Asians in their domestic markets are likely to continue to accumulate physical gold, perhaps accelerating their purchases to reflect a renewed bout of scepticism over the local currency. Wealthy investors in Europe will also buy gold, partly through bullion banks, but on the margin demand for delivered physical seems likely to increase. Investment managers and hedge funds in North America will likely close their paper-gold shorts and go long when their computers (which do most of the trading) detect a change in trend.

It seems likely that a change in trend for the gold price in western capital markets will be a component part of a wider reset for all financial markets, because it will signal a change in perceptions of risk for bonds and currencies. With a growing realisation that the great welfare economies are all sliding into a slump, the moment for this reset has moved an important step closer.

Market Report: Market turbulence

Fri, 10/10/2014 - 06:28
This week has seen highly volatile equities (mostly down), bond yields sharply lower, the oil price hard down, and gold side-lined but recovering after a miserable month or two.

On the news front, the S&P rating agency reminded us that Greece is likely to default, Germany released some horrible industrial production numbers, and the Federal Open Market Committee unexpectedly released dovish minutes. So what's it all about?

This week more than any other it became clear that the global economy is stalling, with the threat of outright recession in the Eurozone and Japan affecting other economies. And in the US, while much is made of an improving jobs scene, the fact remains that in relation to the size of the workforce there is a greater percentage of working-age people not employed since the 50’s era of the male dominated workplace.

This is creating a two-way pull for gold and silver. Declining commodity prices coupled with a strong dollar have hit both precious metals hard since mid-August with gold falling $130 at worst, and silver having been in continual decline since mid-July. However, both metals have become oversold and as a result have bounced firmly off support at $1180 and $16.75 respectively. The chart below is of gold from its all-time high and its 200-day moving average.

Bulls hope that gold has formed a triple-bottom pattern, which if true suggests the subsequent move will be strongly upwards. However, triple-bottom patterns are uncommon and often turn out to be flag patterns, or consolidations in a continuing bear market. We will need to see gold trading convincingly above the 200-day moving average (currently at $1283) for confirmation the market has turned. Until then the computers that trade to programmed formulae are likely to remain on the bear tack on the basis that the downtrend is still in place.

These bears include analysts who either think that next year US interest rates will rise, which is seen to be bad for gold, or alternatively see a deepening recession leading to a stronger dollar, measured against other currencies. When the FOMC came out with minutes postponing rising interest rates, gold and silver were the best performers in the commodity complex.

Those who think rising interest rates are bad for gold forget that during the 1970s interest rates rose over the decade and gold also rose from a low of $36 in June 1970 to over $800 at the end of the decade. And those who think falling prices seen in a slump are bad for gold forget that in 1934 the price was raised against the dollar by 69%.
Meanwhile this week's rally in platinum and palladium has been spectacular at 8% and 7% respectively.

Next week

Monday.

Japan: M2 Money Supply.

Tuesday.

UK: CPI, Input Prices, Output Prices, ONS House Prices.
Eurozone: ZEW Economic Sentiment, Industrial Production.

Wednesday.

Japan: Capacity Utilisation, Industrial Production.
UK: Average Earnings, Claimant Count Change, ILO Unemployment rate.
Eurozone: Trade Balance.
US: PPI, Retail Sales.

Thursday.

Eurozone: HICP.
US: Initial Claims, Net Long-Term TICS Flows, Capacity Utilisation, Industrial Production, NAHB Survey.

Friday.

US: Building Permits, Housing Starts.

Dealing Desk: Gold prices rise but GoldMoney customers still in a selling mood

Thu, 10/09/2014 - 12:45
It was a slightly better week for gold on the precious metals markets, but online physical bullion trader, GoldMoney, still reported selling among its customers.

Dealing Manager, Kelly-Ann Kearsey said, 'We've seen net selling for the yellow metal and net buying for silver this week, as well as interest in palladium. It appears the industrial metals are currently more in favour.

'Whilst trading volumes are up from last week, it's still in favour of sellers which is at odds with this time last year, and a little quieter than usual.

'The selling has been out of our vault in Switzerland, with metals going in to Singapore, Hong Kong and to a small extent, Canada.

'Gold prices rose thanks to the Federal Open Market Committee minutes which shattered market expectations of an early hike in interest rates. Detailing officials' concerns about a weakening global outlook and the strength of the dollar, the news sent the greenback into reverse and brought out the safehaven buyers.

'Whether or not the Swiss referendum in November will have an impact on the market will remain to be seen. Obviously if they vote in favour of the Central Bank there buying back some of its gold reserves, we could see a large amount of buying in the market, and the resulting boost in price.

16:00 09/10/14: Week on week performance: Gold rose 1.0% to $1,226.56; Silver added 2.8% to $17.56; Platinum also gained 1.4% to $1,279.75 while Palladium jumped 4.3% to $803.22.

NOTES TO EDITOR

For more information, and to arrange interviews, please call Gwyn Garfield-Bennett on 01534 715411, or email gwyn@directinput.je

GoldMoney is one of the world's leading providers of physical gold, silver, platinum and palladium for retail and corporate customers. Customers can trade and store precious metal online easily and securely, 24 hours a day.

GoldMoney currently has over 22,000 customers worldwide and holds $1.4billion of precious metals in its partner vaults.

GoldMoney has offices in Jersey and Hong Kong. It offers its customers storage facilities in Canada, Hong Kong, Singapore, Switzerland and the UK provided by the leading non-bank vault operators Brink's, Via Mat, Malca-Amit, G4S and Rhenus Logistics.

GoldMoney is regulated by the Jersey Financial Services Commission and complies with Jersey's anti-money laundering laws and regulations. GoldMoney has established industry-leading governance policies and procedures to protect customers' assets with independent audit reporting every 3 months by two leading audit firms.

Visit www.goldmoney.com.

Follow the GoldMoney Dealing desk team on Twitter: @goldmoneyupdate!

The velocity myth

Fri, 10/03/2014 - 05:25
If there is one concept that illustrates the difference between a top-down macro-economic approach and the reality of everyday life it is the velocity of circulation of money.

Compare the following statements:

"The collapse in velocity is testament to the substantial misallocation of capital brought about by the easy money regimes of the past 20 years." Broker's research note issued September 2014; and

"The mathematical economists refuse to start from the various individuals' demand for and supply of money. They introduce instead the spurious notion of velocity of circulation according to the pattern of mechanics." Ludwig von Mises, Human Action.

This article's objective is not to disagree with the broker's conclusion; rather it is to examine the basis upon which it is made.

The idea of velocity of circulation referred to arose from the quantity theory of money, which links changes in the quantity of money to changes in the general level of prices. This is set out in the equation of exchange. The basic elements are money, velocity and total spending, or GDP. The following is the simplest of a number of ways it has been expressed:

Amount of Money x Velocity of Circulation = Total Spending (or GDP)

Assuming we can quantify both money and total spending, we end up with velocity. But this does not tell us why velocity might vary: all we know is that it must vary in order to balance the equation. You could equally state that two completely unrelated quantities can be put into a mathematical equation, so long as a variable is included whose only function is to always make the equation balance. In other words the equation of exchange actually tells us nothing per se.

This gives analysts a problem, not resolved by the modern reliance on statistics and computer models. The dubious gift to us from statisticians is their so-called progress made in quantifying the economy, so much so that at the London School of Economics a machine called MONIAC (monetary national income analogue computer) used fluid mechanics to model the UK's economy. This and other more recent computer models give unwarranted credence to the idea that the economy can be modelled, derivations such as velocity explained, and valid conclusions drawn.

Von Mises's criticism is based on the philosopher's logic that economics is a social and not a physical science. Therefore, mathematical relationships must be strictly confined to accounting and not be confused with economics, or as he put it human action. Unfortunately we now have the concept of velocity so ingrained in our thinking that this vital point usually escapes us. Indeed, the same is true of GDP, or the right hand side of the equation of exchange.

GDP is only an accounting identity: no more than that. It ranks gin with golf-balls by reducing them both to a monetary value. Statisticians select what's included so it is biased in favour of consumer goods and against capital investment. Crucially it does not tell us about an ever-changing economy comprised of successes, failures, and hard-to-predict human needs and wants, which taken all together is economic progress. And because it is biased in its composition and says nothing about progress the value of this statistic is grossly exaggerated.

The only apparent certainty in the equation of exchange is the quantity of money, assuming it is all recorded. No one seems to allow for unrecorded money such as shadow banking, but we shall let that pass. If the money is sound, as it was when the quantity theory of money was devised, one could assume that an increase in its quantity would tend to raise prices. This was experienced following Spain's importation of gold and silver from the new world in the sixteenth century, and following the gold mining booms in California and South Africa. But relating an increase in the quantity of gold to prices in general is at best a summary of a number of various factors that drive the price relationship between money and goods.

Today we no longer have sound money, whose purchasing power was regulated by human preferences across national boundaries. Instead we have fiat currencies whose purchasing power is formalised in foreign exchanges. When the Icelandic krona on 8th October 2008 halved in value, it had nothing to do with changes in the quantity of money or Iceland's GDP. Yet if we try to interpret velocity in this case, we will find ourselves pleading a special case to explain its substantial increase as domestic prices absorbed the shock imparted through the foreign exchanges.

Iceland's currency collapse is not an isolated event. The purchasing power of a fiat currency varies constantly, even to the point of losing it altogether. The truth of the matter is the utility of a fiat currency is entirely dependent on the subjective opinions of individuals expressed through markets, and has nothing to do with a mechanical quantity relationship. In this respect, merely the potential for unlimited currency issuance or a change in perceptions of the issuer's financial stability, as Iceland discovered, can be enough to destabilise it.

According to the equation of exchange, this is not how things should work. The order of events is first you have an increase in the quantity of money and then prices rise, because monetarist logic states that prices rise as a result of the extra money being spent, not as a result of money yet to be spent. With a mechanical theory there can be no room for subjectivity.

It is therefore nonsense to conclude that velocity is a vital signal of some sort. Monetarism is at the very least still work-in-progress until monetarists finally discover velocity is no more than a factor to make their equation balance. The broker's analyst quoted above would have been better to confine his statement to the easy money regimes of the past 20 years being responsible for the substantial misallocation of capital, and leaving out the bit about velocity entirely.

A small slip perhaps on the way to a sensible conclusion; but it is indicative of the false mechanisation of human behaviour by modern macro-economists. However it should also be noted that is impossible to square the concept of velocity of circulation with one simple fact of everyday life: we earn our salaries once and we dispose of it. That's a constant velocity of roughly one.

Market Report: Failing economies and the quarter-end

Fri, 10/03/2014 - 05:10
Precious metals have faced adverse weather as evidence mounts that major economies may be sliding into recession.

Yesterday the ECB finally responded to the deteriorating situation in the Eurozone by announcing a discretionary form of QE to last up to two years if necessary. The only clues are the ECB will buy in covered bonds and asset backed securities issued in euros in the Eurozone with an objective to increasing the ECB's balance sheet by about €1 trillion.
Some sort of easing had been expected, and at the same time the Fed's QE programme is due to be tapered out of existence this month. The market effect has been to encourage selling of the euro into the US dollar, while at the same time a sliding yen has also contributed to dollar demand.

Dollar strength has led to weakness over a whole swathe of commodities from energy to metals, and even dairy products. Bond yields after a brief rally have fallen sharply, signalling deflation, and at last equity markets seem to be cracking. The only good news was yesterday's US jobless claims which came in at about 10,000 less than expected.
This statistic is however being increasingly questioned; so precious metals, seen as particularly vulnerable to dollar strength, have had to weather substantial negativity.

Furthermore Tuesday was the quarter-end, which has come to be regularly associated with a general sell-off of precious metals since the first attempt to break the $1180-1200 level failed in June last year. However, for the last three weeks gold has refused to break that $1200 level again. On Comex, money managers are betting the farm on gold breaking it as can be seen in the following chart.

It is quite likely that the managed money shorts were even more extreme last Tuesday, for which the Commitment of Traders figures will be released tonight and viewed with interest.

Precious metals with industrial use have suffered steep falls with both platinum and palladium hit hardest. Silver has also been badly mauled, slipping to new lows at $17. It now stands at one third of the brief high of nearly $50 achieved in April 2011. Silver is also very oversold as evidenced in the second chart of managed money shorts.

The managed money category is even net short of silver after their longs are taken into account. This is a rare occurrence, because just as market makers (the US bullion banks) normally run short books the managed money category is normally net long an average of 20,000 contracts.

This is possibly the strongest technical factor to favour precious metals. It tells us that the bearish opinion is a reflection of positions already taken, and that the bears have more or less exhausted their ammunition and are likely become net buyers. Against that there is the worry that if gold breaks $1180 normally unshakeable long-term bulls could throw in the towel.

The news on physical demand is better, increasing at current prices for both silver and gold. Physical gold deliveries on the Shanghai Gold Exchange last week totalled 46.3 tonnes, an annualised rate of 2,300 tonnes, so the underlying liquidity upon which paper gold shorts is based continues to diminish.

Next week's announcements

Monday.

UK: Halifax House Prices.
Eurozone: Sentix Indicator.

Tuesday.

UK: Industrial Production, Manufacturing Production, NEISR GDP Estimate.
US: IBD Consumer Optimism, Consumer Credit.
Japan: Leading Indicator, Current Account, BoJ Overnight Rate.

Wednesday.

US: Fed FOMC Minutes.
Japan: Key machinery Orders, Economy Watchers Survey.

Thursday.

UK: BoE Rate Decision.
US: Initial Claims, Wholesale Inventories.

Friday.

UK Construction Output, Trade Balance.
US: Import Price Index, Budget Deficit.
Japan: BoJ Minutes, Bank Lending Data, Consumer Confidence.

Dealing Desk: Precious metal bears growl but don’t bite

Thu, 10/02/2014 - 12:36
It's been a week for prowling bears on the precious metals markets, as good US economic data reaffirms the dollars strength and reduces gold's safe haven appeal.

Online precious metals trader, GoldMoney has seen its customers selling gold, platinum and palladium this week, but there has been some net buying in silver according to Dealing Manager, Kelly-Ann Kearsey, 'We've seen some limited interest as people took advantage of silver falling to a four year low, and probably on expectations of increased industrial demand. Interestingly, although there's been selling for the other metals it's all small sales. Our High Net Worth customers are holding on to their metals which indicates their long-term perspective.

'Generally volumes are down on last week, but it's also interesting to remember that this time last year we were watching the US budgetary impasse play out as the Government there suspended all non-essential activities and the world held its economic breath. What a difference a year makes.

'We were also reporting this time last year about the continued flow of precious metals out of western vaults to the east and that is one trend which is still the case today. Swiss vaults fared the worst this week whilst the buying we have seen went into Singapore.

'Gold fared better than palladium and platinum, and has stayed above the crucial $1200 support level. The gold/silver ratio has also stayed steady.

16:00 02/10/14: Week on week performance: Gold fell 0.5% to $1,214.56; Silver lost 2.6% to $17.08; Platinum also dropped 3.7% to $1,262.00 while Palladium slipped 4.1% to $770.22.

NOTES TO EDITOR

For more information, and to arrange interviews, please call Gwyn Garfield-Bennett on 01534 715411, or email gwyn@directinput.je

GoldMoney is one of the world's leading providers of physical gold, silver, platinum and palladium for retail and corporate customers. Customers can trade and store precious metal online easily and securely, 24 hours a day.

GoldMoney currently has over 22,000 customers worldwide and holds $1.4billion of precious metals in its partner vaults.

GoldMoney has offices in Jersey and Hong Kong. It offers its customers storage facilities in Canada, Hong Kong, Singapore, Switzerland and the UK provided by the leading non-bank vault operators Brink's, Via Mat, Malca-Amit, G4S and Rhenus Logistics.

GoldMoney is regulated by the Jersey Financial Services Commission and complies with Jersey's anti-money laundering laws and regulations. GoldMoney has established industry-leading governance policies and procedures to protect customers' assets with independent audit reporting every 3 months by two leading audit firms.

Visit www.goldmoney.com.

Follow the GoldMoney Dealing desk team on Twitter: @goldmoneyupdate!

Jersey Heritage Coin Hoard Event

Tue, 09/30/2014 - 11:39
  15% discount on your first gold purchase.

This special offer is for attendees of the GoldMoney Private Viewing of the Jersey Coin Hoard and ends 31st October 2014.

Open a Holding today to take advantage of this offer. How it works

Follow the steps below to take advantage of our special promotion

  1. Choose the amount of gold that you want to buy in GBP
  2. Write down the promotional code Heritage – you will need this later
  3. Login to your Holding or sign up to open a Holding for free
  4. Click "Buy & Sell Exchanges" and then "Buy Metal" - please ensure you have funded your Holding
  5. Enter your Promotional Code and continue through the buy process

Hurry, offer ends 31st October 2014.

Find out why 22,000 people buy and store gold with GoldMoney.

Your discount code

Heritage

To use your promotional code, simply enter it in the designated box in the buy process within your Holding.

 

Not a GoldMoney customer yet?

Write down your Promotional Code and sign up to open your Holding for free, in just a few minutes you will be able to enter your Promotional Code during your first order and take advantage of the offer.

To find out more about buying gold with GoldMoney and our current fees, please visit our Buy Gold page.

 

Terms of the offer

This offer is available from 1st October 2014 at 00:01 GMT and expires on 31 October 2014 at 23:59 GMT.

This promotion code is applicable for purchases of gold in GBP for storage in any of our vaults.

This offer is only available to you if you have never purchased metal with GoldMoney.

To claim this offer, you must log in to or sign for a GoldMoney Holding and provide the requested verification documentation and information in compliance with GoldMoney’s Customer Acceptance Policy.

In signing up for a GoldMoney Holding, you agree to be bound by the GoldMoney Customer Agreement.

This offer cannot be used in conjunction with any other offer, discount, or promotion.

Each customer can use this promotional code once only.

This offer is open only to residents of countries in which GoldMoney accepts customers, as set out in GoldMoney’s Customer Acceptance Policy. GoldMoney does not accept customers from certain countries, including, but not limited to, the Netherlands or from countries subject to any economic or trade sanctions.

Employees of GoldMoney or their immediate family members shall not be permitted to take part in this promotion.

Any disputes arising in relation to this promotion will be governed by the laws of the Island of Jersey and the parties agree that the Courts of Jersey shall have non-exclusive jurisdiction.

Use of the promotional code is deemed acceptance of the terms of the promotion and of GoldMoney’s Customer Agreement.

GoldMoney reserves the right to amend, vary, extend, or discontinue a promotion at any stage, for any reason, without notice.

GoldMoney takes no responsibility for any inability to enter, complete, continue, or conclude the promotion due to equipment or technical malfunction, busy lines, inadvertent disconnection, force majeure, or otherwise.

GoldMoney is the trading name of Net Transactions Limited, a company incorporated in Jersey, with its registered office at 32 Commercial Street, St Helier, JE2 3RU, Jersey. Net Transactions Limited is regulated as a Money Services Business by the Jersey Financial Services Commission.

Market Report: $1200 for gold underpinned by physical demand

Fri, 09/26/2014 - 05:15
This week saw gold rally $15 to $1233 on Tuesday before sliding to $1207 yesterday morning, then rallying in the afternoon. Silver's moves tracked gold's, bottoming out at $17.30 yesterday at the London opening. This morning precious metals are firmer in pre-LBMA trade, reflecting some short-covering ahead of the weekend.

The action, as has often been the case recently, is in paper markets with hedge funds shorting gold and silver against a strong dollar. This can be readily seen in the following chart of Managed Money shorts on Comex, which is back in record oversold territory. The chart of silver is similar.

The analysts encouraging fund managers to sell gold are mostly working for the investment and bullion banks, and it turns out that their traders are buying it, closing their bear positions. This is shown in the next chart of Swaps, which represents mostly the aggregate futures positions of the non-American bullion banks.

So the swaps have reduced their net shorts by over 60,000 contracts (190 tonnes) over the last five weeks. The next chart is of the largest four traders, which are mainly the American bullion banks.

Here again, over the last five weeks they have bought back about 200 tonnes, which added to the swaps makes nearly 400 tonnes, bought over the last month-and-a-bit by banks whose analysts are mostly encouraging the public to sell. As they say, go figure.

This does not mean that gold and silver won't go lower next week: we will only know that with hindsight. But it is going to get more difficult for the bullion banks to close their shorts from here for the following reasons: the weak hands have now mostly sold, and there is increasing evidence (mostly anecdotal admittedly) of growing physical demand for delivery. This varies from wealthy investors taking a long-term view, to the pre-Diwali season stock-building reflected in centres such as Dubai, as well as the usual suspects such as the Chinese and Russians. In fact this morning the Shanghai Gold Exchange reported deliveries rose to over 50 tonnes in the week to 19th September. This is the highest weekly delivery since February, and at current prices SGE demand could turn out to be even higher this week.

A brief mention on silver: between Thursday 18th and yesterday, the equivalent of 48,265,000 ounces were swapped for 9,630 Comex December contracts (Exchange for Physical, or EFP). On Tuesday the volume of futures and options was exceptionally high, Open Interest fell 5,501 contracts, and 2,489 contracts were exchanged for physical. Could it be that this silver was required to be delivered to other markets, such as Shanghai, where stocks are depleted and silver is trading at a price premium?

Could it be that the acceleration of demand for silver eagles is indicative of the demand for physical silver at these low prices? If so, it is an indication that Comex is pricing silver futures too low to reflect genuine demand, and the price will struggle to go lower.

Next week

Monday.

UK: BoE Mortgage Approvals, Net Consumer Credit, Secured Lending, M4 Money Supply.
Eurozone: Business Climate Index, Economic Sentiment, Industrial Sentiment, Consumer Sentiment.
US: Core PCE Price Index, personal Income, Personal Spending.
Japan: Real Household Spending, Unemployment, Industrial Production, Retail Sales.

Tuesday.

Japan: Housing Starts, Construction Orders, Tankan Survey.
UK: Nationwide House Prices, Current Account, GDP (3rd est.), Index of Services.
Eurozone: Flash HICP, Unemployment.
US: Case-Shiller Home Price, Chicago PMI.

Wednesday.

Japan: Vehicle Sales. Eurozone: Manufacturing PMI.
US: Manufacturing PMI, ADP Employment Survey, Construction Spending, ISM Manufacturing, Vehicle Sales.

Thursday.

Eurozone: PPI, ECB Deposit Rate, Refinancing Rate.
US: Initial Claims, Factory orders.

Friday.

Eurozone: Services PMI, Composite PMI, Retail Trade.
US: Non-Farm Payrolls, Private Payrolls, Trade Balance, Unemployment.

Valuing gold and turkey-farming.

Fri, 09/26/2014 - 04:48
Today's financial markets are built on the sand of unsound currencies. Consequently brokers, banks and investors are wedded to monetary inflation and have lost both the desire and ability to understand gold and properly value it.

Furthermore governments and central banks in welfare-driven states see markets themselves as the biggest threat to their successful management of the economy, a threat that needs to be tamed. This is the backdrop to the outlook for the price of gold today and of the forces an investor in gold is pitted against.

At the heart of market control is the substitution of unsound currency for sound money, which historically has been gold. Increasing the quantity of currency and encouraging banks to increase credit out of thin air is the principal means by which central banks operate. No matter that adulterating the currency impoverishes the majority of the population: central banks are working from the Keynesian and monetarist manual of how to manage markets.

In this environment an investor risks all he possesses if he insists on fighting the system; and nowhere is this truer than with gold. Gold is not about conventional investing in this world of fiat currencies, it is about insurance against the financial system collapsing under the weight of its own delusions. Regarded as an insurance premium against this risk, gold is common sense; and there are times when it is worth increasing your insurance. In taking that decision, an individual must be able to evaluate three things: the relative quantities of currency to gold, the likelihood of a systemic crisis and the true cost of insuring against it. We shall consider each of these in turn.

The relationship of currency to gold

Not only has the quantity of global currency and bank credit expanded dramatically since the Lehman crisis, it is clear that this is a trend that cannot now be reversed without triggering financial chaos. In other words we are already committed to monetary hyperinflation. Just look at the chart of the quantity of US dollar fiat money and note its dramatic growth since the Lehman crisis in 2008.

Meanwhile, the quantity of above-ground stocks of gold is growing at less than 2% annually. Gold is therefore getting cheaper relative to the dollar by the day. [Note: FMQ is the sum of all fiat money created both on the Fed's balance sheet and in the commercial banks. [See here for a full description]

Increasing likelihood of a systemic crisis

Ask yourself a question: how much would interest rates have to rise before a systemic crisis is triggered? The clue to the answer is illustrated in the chart below which shows how lower interest rate peaks have triggered successive recessions (blue shaded areas are official recessions).

The reason is simple: it is the accumulating burden of debt. The sum of US federal and private sector debt stands at about$30 trillion, so a one per cent rise in interest rates and bond yields will simplistically cost $300bn annually. The increase in interest rates during the 2004-07 credit boom added annual interest rate costs of a little over double that, precipitating the Lehman crisis the following year. And while the US this time might possibly weather a two to three per cent rise in improving economic conditions, much less would be required to tip other G8 economies into financial and economic chaos.

The real cost of insurance

By this we mean the real price of gold, adjusted by the rapid expansion of fiat currency. One approach is to adjust the nominal price by the ratio of US dollars in circulation to US gold reserves. This raises two problems: which measure of money supply should be used, and given the Fed has never been audited, are the official gold reserves as reported to be trusted?

The best option is to adjust the gold price by the growth in the quantity of fiat money (FMQ) relative to the growth in above-ground stocks of gold. FMQ is constructed so as to capture the reversal of gold's demonetisation. This is shown in the chart below of both the adjusted and nominal dollar price of gold.

Taken from the month before the Lehman collapse, the real price of gold adjusted in this way is $550 today, based on a nominal price of $1220. So in real terms, gold has fallen 40% from its pre-Lehman level of $920, and has roughly halved from its adjusted high in 2011.

So to summarise:

• We already have monetary hyperinflation, defined as an accelerating debasement of the dollar. And so for that matter all other currencies that are referenced to it are on a similar course, a condition which is unlikely to be halted except by a final systemic and currency crisis.
• Attempts to stabilise the purchasing power of currencies by raising interest rates will very quickly develop into financial and economic chaos.
• The insurance cost of owning gold is anomalously low, being considerably less than at the time of the Lehman crisis, which was the first inkling of systemic risk for many people.

So how is the global economy playing out?

If the economy starts to grow again a small rise in interest rates would collapse bond markets and bankrupt over-indebted businesses and over-geared banks. Alternatively a contracting economy will increase the debt burden in real terms, again threatening its implosion. So the last thing central banks will welcome is change in the global economic outlook.

Falling commodity prices and a flight from other currencies into the dollar appear to be signalling the greater risk is that we are sliding into a global slump. Even though large financial speculators appear to be driving commodity and energy prices lower, the fact remains that the global economy is being undermined by diminishing affordability for goods and services. In other words, the debt burden is already too large for the private sector to bear, despite a prolonged period of zero official interest rates.

A slump was halted when prices collapsed after Lehman went bust; that time it was the creation of unlimited money and credit by the Fed that saved the day. Preventing a slump is the central banker's raison d'être. It is why Ben Bernanke wrote about distributing money by helicopter as the final solution. It is why we have had zero interest rates for six years.

In 2008 gold and oil prices fell heavily until it became clear that monetary stimulus would prevail. Equities also fell with the S&P 500 Index down 60% from its October 2007 high, but this index was already 24% down by the time Lehman failed.

The precedent for unlimited creation of cash and credit has been set and is undisputed. The markets are buoyed up by a sea of post-Lehman liquidity, are not discounting any trouble, and are ignoring the signals from commodity prices. If the economic downturn shows any further signs of accelerating the adjustment is likely to be brutal, involving a complete and sudden reassessment of financial risk.

This time gold has been in a bear market ahead of the event. This time the consensus is that insurance against financial and systemic risk is wholly unnecessary. This time China, Russia and the rest of Asia are buying out physical bullion liquidated by western investors.

We are being regularly advised by analysts working at investment banks to sell gold. But bear in mind that the investment industry is driven by trend-chasing recommendations, because that is what investors demand. Expecting analysts to value gold properly is as unlikely as farmers telling turkeys the truth about Thanksgiving.

Dealing Desk: Precious metals lose their shine across the board

Thu, 09/25/2014 - 12:41
It's been a week of selling across the precious metals this week with silver living up to its volatile reputation.

For the previous two weeks GoldMoney customers had been buying silver, but this week they abandoned it according to Kelly-Ann Kearsey, Dealing Manager at the online precious metals trader, 'It's been a one way week with selling across the board. Most of the metals are still coming out of our vault in Switzerland and what buying we have seen has gone into Singapore.

'Whilst the gold price did try to pick up a little late Thursday, it fell to its lowest level since early January this week as positive US economic data and the expectation that the US Federal Reserve will start to increase interest rates boosted the dollar to a four year high against a basket of leading currencies.

'Gold is threatening its $1200 psychological level despite the expected increase in sales from India as the Festival and wedding season gets underway.

'Platinum is faring a little worse, sinking to a 15 month low, whilst silver's industrial heritage has failed to give it any backing. Our customers have followed the rest of the market this week with profit taking on all the metals.'

16:00 25/09/14: Week on week performance: Gold fell 0.4% to $1,220.75; Silver lost 5.4% to $17.54; Platinum also dropped 2.5% to $1,310.74 while Palladium slipped 2.8% to $802.97.

NOTES TO EDITOR

For more information, and to arrange interviews, please call Gwyn Garfield-Bennett on 01534 715411, or email gwyn@directinput.je

GoldMoney is one of the world's leading providers of physical gold, silver, platinum and palladium for retail and corporate customers. Customers can trade and store precious metal online easily and securely, 24 hours a day.

GoldMoney currently has over 22,000 customers worldwide and holds $1.4billion of precious metals in its partner vaults.

GoldMoney has offices in Jersey and Hong Kong. It offers its customers storage facilities in Canada, Hong Kong, Singapore, Switzerland and the UK provided by the leading non-bank vault operators Brink's, Via Mat, Malca-Amit, G4S and Rhenus Logistics.

GoldMoney is regulated by the Jersey Financial Services Commission and complies with Jersey's anti-money laundering laws and regulations. GoldMoney has established industry-leading governance policies and procedures to protect customers' assets with independent audit reporting every 3 months by two leading audit firms.

Visit www.goldmoney.com.

Follow the GoldMoney Dealing desk team on Twitter: @goldmoneyupdate!

Aviation Beauport Event Discount - Terms

Wed, 09/24/2014 - 08:41
  15% discount on your first gold purchase.
This special offer is for attendees of the Aviation Beauport Open Evening Event and ends 30th September 2014.
Open a Holding today to take advantage of this offer. How it works

Follow the steps below to take advantage of our special promotion

  1. Choose the amount of gold that you want to buy in any of the 9 major currencies we accept
  2. Write down the promotional code ABGOLD – you will need this later
  3. Login to your Holding or sign up to open a Holding for free
  4. Click "Buy & Sell Exchanges" and then "Buy Metal" - please ensure you have funded your Holding
  5. Enter your Promotional Code and continue through the buy process

Hurry, offer ends 30th September 2014.

Find out why 22,000 people buy and store gold with GoldMoney.

Your discount code

ABGOLD

To use your promotional code, simply enter it in the designated box in the buy process within your Holding.

 

 

Not a GoldMoney customer yet?

Write down your Promotional Code and sign up to open your Holding for free, in just a few minutes you will be able to enter your Promotional Code during your first order and take advantage of the offer.

To find out more about buying gold with GoldMoney and our current fees, please visit our Buy Gold page.

 

Terms of the offer

This offer is available from 18 September 2014 at 00:01 GMT and expires on 30 September 2014 at 23:59 GMT.

This promotion code is applicable for purchases of gold in any currency accepted by GoldMoney for storage in any of our vaults.

This offer is only available to you if you have never purchased metal with GoldMoney.

To claim this offer, you must log in to or sign for a GoldMoney Holding and provide the requested verification documentation and information in compliance with GoldMoney’s Customer Acceptance Policy.

In signing up for a GoldMoney Holding, you agree to be bound by the GoldMoney Customer Agreement.

This offer cannot be used in conjunction with any other offer, discount, or promotion.

Each customer can use this promotional code once only.

This offer is open only to residents of countries in which GoldMoney accepts customers, as set out in GoldMoney’s Customer Acceptance Policy. GoldMoney does not accept customers from certain countries, including, but not limited to, the Netherlands or from countries subject to any economic or trade sanctions.

Employees of GoldMoney or their immediate family members shall not be permitted to take part in this promotion.

Any disputes arising in relation to this promotion will be governed by the laws of the Island of Jersey and the parties agree that the Courts of Jersey shall have non-exclusive jurisdiction.

Use of the promotional code is deemed acceptance of the terms of the promotion and of GoldMoney’s Customer Agreement.

GoldMoney reserves the right to amend, vary, extend, or discontinue a promotion at any stage, for any reason, without notice.

GoldMoney takes no responsibility for any inability to enter, complete, continue, or conclude the promotion due to equipment or technical malfunction, busy lines, inadvertent disconnection, force majeure, or otherwise.

GoldMoney is the trading name of Net Transactions Limited, a company incorporated in Jersey, with its registered office at 32 Commercial Street, St Helier, JE2 3RU, Jersey. Net Transactions Limited is regulated as a Money Services Business by the Jersey Financial Services Commission.

Two Shocking Charts Expose The Stunning Collapse In The US

Mon, 09/22/2014 - 10:38
With the Dow still trading above 17,000 and the U.S. Dollar Index holding near 85, James Turk sent King World News two shocking charts that expose the stunning collapse which has taken place in the United States. Turk also discussed how a bankrupt company fits into the puzzle and what is happening with gold and silver.

Read the full interview at King World News.

Market Report: Another miserable week for PMs

Fri, 09/19/2014 - 06:12
Gold and silver drifted lower over the course of the week, with a challenge to the $1200 level for gold becoming a distinct possibility. Silver is struggling to hold $18.50. Mainstream opinion has been negative for commodities generally, with a strong dollar undermining them. Brent crude, for example, is now well under $100.

It is important to understand the connectedness between different asset classes in today's markets. Hedge funds, and bank traders sell one asset and hedge it by taking a position in another. Furthermore, the majority of traders rely on technical analysis instead of rational value-based price assessments. Instead of markets correcting anomalies, this often leads to added momentum behind trends, ultimately increasing market instability. We can see this everywhere today, and precious metals are not immune to this problem.

That is the reality of markets, but as I've written before history shows us that the most successful investors are value investors, and those experienced in precious metal markets are currently happy to buy the dips. Meanwhile, with the majority of momentum traders being short of physical gold and silver, it is hardly surprising they talk these metals down.

The long-term chart below of total OTC forwards, swaps and Comex futures quantifies this effect. The OTC numbers are derived from the Bank for International Settlements statistics, and futures are from the Commitment of Traders Reports released by the CFTC. The total shown is half the gross to reflect the paper equivalent of physical demand, the other half being supply. It is in effect the sum total of derivatives on the LBMA and of US futures up to December 2013. Note that these figures do not include options.

The tonnage equivalent of outstanding derivatives has fallen dramatically over the last fifteen years. To some extent this was due to the rise in the gold price, but with an accelerated dip in 2008, the year Lehman went bust. But since the peak in the gold price three years ago, these outstanding positions have declined with the price.

At only 3,800 tonnes last December, total derivatives were the lowest they have been with the exception of the Lehman crisis panic. No wonder the average bullion bank is negative on gold: they reflect a decline in investor interest, consistent with an extended bear trend.
The point is these are the market conditions sought by value investors looking to buy into unloved markets.

The other big news this week was the Scottish referendum on independence, the result of which became clear a few hours ago: panic over.

Next week

Monday. Eurozone: Flash Consumer Sentiment. US: Existing Home Sales.

Tuesday. Eurozone: Flash Manufacturing PMI. UK: Mortgage Approvals, Public Sector Borrowing. US: Flash Manufacturing PMI

Wednesday. US: New Home Sales.

Thursday. UK: Nationwide House Prices. Eurozone: M3 Money Supply. US: Durable Goods Orders, Initial Claims. Japan: CPI (Core).

Friday. US: GDP (3rd est.), GDP Price Index (3rd est.), Personal Income, Personal Spending

The end of tapering and government funding

Fri, 09/19/2014 - 05:55
Last year markets behaved nervously on rumours that QE3 would be tapered; this year we have lived with the fact. It turned out that there has been little or no damage to markets, with bond yields at historic lows and equity markets hitting new highs.

This contrasts with the ending of QE1 and QE2, which were marked by falls in the S&P 500 Index of 9% and 11.6% respectively. Presumably the introduction of twist followed by QE3 was designed at least in part to return financial assets to a rising price trend, and tapering has been consistent with this strategy.

From a monetary point of view there is only a loose correlation between the growth of fiat money as measured by the Fiat Money Quantity, and monthly bond-buying by the Fed. FMQ is unique in that it specifically seeks to measure the quantity of fiat money created on the back of gold originally given to the commercial banks by our forebears in return for money substitutes and deposit guarantees. This gold, in the case of Americans' forebears, was then handed to the Fed by these commercial banks after the Federal Reserve System was created. Subsequently gold has always been acquired by the Fed in return for fiat dollars. FMQ is therefore the sum of cash plus instant access bank accounts and commercial bank assets held at the Fed.

The chart below shows monthly increases in the Fed's asset purchases and of changes in FMQ.

The reason I take twice the monthly Fed purchases is that they are recorded twice in FMQ. The chart shows that the creation of fiat money continues without QE. That being the case, QE has less to do with stimulating the economy (which it has failed to do) and is more about funding government borrowing.

Thanks to the Fed's monetary policies, which have encouraged an increase in demand for US Treasuries, the Federal government no longer has a problem funding its deficit. QE is therefore redundant, and has been since tapering was first mooted. This does not mean that QE is going to be abandoned forever: its re-introduction will depend on the relationship between the government's borrowing needs and market demand for its debt.

This analysis is confirmed by Japan's current situation. There, QE coincides with an economy that is deteriorating by the day. One cannot argue that QE has been good for the Japanese economy. The reality behind "abenomics" is that Japan's government is funding a massive deficit at the same time as savers are drawing down capital to cover their day-to-day living requirements. In short, the funding gap is being covered by printing money. And now the collapsing yen, which is the inevitable consequence of monetary inflation, threatens to expose this folly.

On a final note, there appears to be complacency in capital markets about government deficits. A correction in bond markets will inevitably occur at some point and severely disrupt government fund-raising. If and when this occurs, and given that it is now obvious to everyone that QE does nothing for economic growth, it will be hard to re-introduce it as a disguised funding mechanism for governments without undermining market confidence.

Dealing Desk: Gold sell off continues but silver still attracts

Thu, 09/18/2014 - 06:28
This week saw a continuation of last week's sell-off in gold as prices fell to an eight month low. GoldMoney customers sold the yellow metal, but Kelly-Ann Kearsey, Dealing Manager at the online precious metals trader, said, 'We saw a continued interest in silver.

Our customers carried on where they left off last week and across the board we had more buyers than sellers with silver being the metal of choice.

'Gold was mostly sold out of the UK and Swiss vaults with Singapore benefitting from the purchasing. There was very little other activity for platinum and palladium, and it's a wait and see game to find out at what point the buyers return to gold as the price drop encourages bargain hunting.

'Overall, volumes are slightly lower, but with more buyers than sellers compared to last week. Tomorrow's quadruple options witching and next week's US durable goods orders, Gross Domestic Product (GDP) figures and Chinese Purchasing Manager Index (PMI), could provide further impetus to the market, although it might not be in gold's favour.

16:00 18/09/14: Week on week performance: Gold fell 1.11% to $1,225.79; Silver lost 0.48% to $18.55; Platinum also dropped 1.93% to $1,344.99 while Palladium slipped 1.64% to $825.72.

Ends

NOTES TO EDITOR

For more information, and to arrange interviews, please call Gwyn Garfield-Bennett on 01534 715411, or email gwyn@directinput.je

GoldMoney is one of the world's leading providers of physical gold, silver, platinum and palladium for retail and corporate customers. Customers can trade and store precious metal online easily and securely, 24 hours a day.
GoldMoney currently has over 22,000 customers worldwide and holds $1.4billion of precious metals in its partner vaults.

GoldMoney has offices in Jersey and Hong Kong. It offers its customers storage facilities in Canada, Hong Kong, Singapore, Switzerland and the UK provided by the leading non-bank vault operators Brink's, Via Mat, Malca-Amit, G4S and Rhenus Logistics.

GoldMoney is regulated by the Jersey Financial Services Commission and complies with Jersey's anti-money laundering laws and regulations. GoldMoney has established industry-leading governance policies and procedures to protect customers' assets with independent audit reporting every 3 months by two leading audit firms.

Visit www.goldmoney.com.

Follow the GoldMoney Dealing desk team on Twitter: @goldmoneyupdate

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