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Market Report: PMs appear to be breaking out

Fri, 07/29/2016 - 06:21

Gold and silver drifted this week, continuing last Friday’s end-of-week profit-taking, until the FOMC announced on Wednesday afternoon EST that there was to be no change in the Fed Funds Rate.

This was the signal for gold to gain some $20 and silver 75 cents. These moves represented an apparent break-out from the last month’s consolidation, and prices for both metals could now be on course to challenge the highs of early July.

Yesterday was a day of consolidation with a fall for gold limited to $2.50, and this morning in early European trade gold opened slightly lower still, at $1330, and silver at $20.00.

This market report will be longer than normal, because there is much to tell about what is going on behind the scenes. Some market followers, presumably relying on overbought indicators, such as the record longs held by the Managed Money category on Comex, were telling us earlier this week that the gold price was due a substantial fall.

Furthermore, the maturing August contract, which ahead of its delivery month ran off yesterday, has been a negative factor. Large amounts have been rolled over into the December contract, a situation that normally allows the bullion banks to work prices sharply lower as Open Interest contracts.

While gold’s OI has indeed contracted from record highs, the bullion banks have had only limited success in this quest, and the negative price effect is now behind us.

The underlying market for gold feels rock-solid. Part of the reason lies in the physical market (I’ll return to futures shortly). Asian demand has fallen significantly, for the simple reason that it is mostly in the form of jewellery. This year, prices have risen in yuan by 28% and by 26% in rupees. Until retail buyers become more accustomed to these higher prices, it is hard to imagine Mrs Wang and Mrs Patel continuing to buy jewellery with gusto. The result, fortuitously, is that some supply has come available to satisfy European and US ETF demand.

A number of refiners in the Middle East have been caught out by the switch, and ended up with an accumulation of unwanted inventory destined for the Asian markets. Financing large gold inventories is too costly for refiners operating on thin margins, so they have been forced to sell product to the Swiss refiners. This was reflected in a surprise export of 48 tonnes from the United Arab Republic to Switzerland in June, which was recast into LBMA standard bars for London and the US ETFs. Therefore, the price consolidation over recent weeks was partly due to the absorption of a one-off inventory unwind from the Middle-East.

That negative factor has now diminished. The pace of supply to western investors was artificially high on a temporary basis, and this excess of bullion should now slacken. Assuming demand momentum in western markets is maintained, this should help ensure bullion prices begin their next advance.

Turning to futures, it seems almost certain now that investing institutions are beginning to use Comex futures to maintain strategic portfolio allocations. We must remember that owning physical gold is a compliance problem for regular fund managers, because it is not a regulated investment. They can hold ETFs, but internal fund rules will limit ownership of any one security. Regulated futures present an efficient means of maintaining additional exposure to a particular asset class for the purpose of maintaining a medium to long-term portfolio allocation, and a good futures broker can minimise dealing costs.

This could explain why gold’s Open Interest remains at relatively elevated levels, and why the Managed Money category has become seemingly impervious to short-term movements. The next chart shows the Managed Money net position, and how extended it had become by 19 July.

The fall in Open Interest since then indicates this position will have corrected somewhat, but it will still be very high. The stickiness of new players also explains why the rapid run-off in the August contract has had less impact on the price than might be expected.

The fact that there has been the normal book-squaring without a substantial price fall indicates other forces are at work, and must be a major concern for the bullion banks that are short. If this analysis is correct, there is the unusual potential for a bear squeeze on the bullion banks in the coming weeks now the August contract is done and dusted, as they seek to limit their losses.

The situation is more extreme in silver, where Open Interest refuses to fall. After a slow start to the year, silver has now caught up with gold, and the gold/silver ratio has fallen to the mid-sixties. The extent of this move is reflected in our third chart.

On Wednesday, the Fed decided not to raise interest rates yet again, and it is becoming apparent they will only raise rates when they really have to. Therefore, there is probably a less than 50% chance that they will be raised by next January.

Today (Friday) should see the ECB’s stress tests announced. These are usually dumbed down, with banks in the past failing soon after being given the all-clear, an historical experience that seems set to undermine share prices of the weaker banks in the coming weeks. At the same time, the Italian banking crisis appears to be coming to a head, and depositors are receiving no compensation for the risk with zero to negative interest rates.

There is currently an attempt to rescue the Italian bank, Monte Paschi, by the weekend. The rescue plan seems to be getting very little traction, and the bank could fail next week.

The outlook for UK monetary policy is still causing concern, with a number of influential economists talking negative sterling rates on the back of Brexit, and the government-controlled banking group, Royal Bank of Scotland, has also warned its business customers it may introduce negative deposit rates.

Then there’s Japan. Overnight, the Bank of Japan announced its updated simulative measures. The markets expected something extra, only to find the BoJ appears to have run out of ideas. Apart from doubling its purchases of ETFs, which stops the equity market from falling, super-expansive monetary policy is unchanged. This is likely to indicate the Keynesians in the BoJ are cooking up a new surprise for us.

The views and opinions expressed in the article are those of the author and do not necessarily reflect those of Goldmoney, unless expressly stated. Please note that neither Goldmoney nor any of its representatives provide financial, legal, tax, investment or other advice. Such advice should be sought from an independent regulated person or body who is suitably qualified to do so. Any information provided in this article is provided solely as general market commentary and does not constitute advice. Goldmoney will not accept liability for any loss or damage, which may arise directly or indirectly from your use of or reliance on such information.

Dealing Desk: Precious Metals Spike on FOMC Statement

Thu, 07/28/2016 - 10:20
This week, we saw an increase in client activity.

Many clients have been net selling the metals in order to take advantage of the price increases since last week. Simultaneously, many clients have been buying into gold possibly as a safe haven or ahead of the FOMC statement expecting their position to remain the same.

GoldMoney’s clients have favoured the Singapore and Switzerland vaults this week with less preference being shown for the London vault.

Kelly-Ann Kearsey, Dealing Manager at Goldmoney said that markets have been anticipating the FOMC meeting this week in which a statement was released on Wednesday evening (GMT). Leading up the release of the statement, both gold and silver had been making gains throughout the day. This was likely due to the expectations that there would be no interest rate hike this month, which was, in fact, later confirmed by the FOMC. In turn, the metals then spiked with gold reaching 1,340/oz and silver reaching USD20.00/oz

Wednesday also saw the release of the durable goods orders for June which was worse than expected with a drop of roughly 4%, when it had been expected to drop only 1.1%-1.4%. This can also be seen as supporting the metal prices as gold would be used as a safe-haven against economic difficulties.

Platinum and palladium have increased consistently throughout July and have both reached a high point for this year to date. At this moment, platinum is currently trading at a spot price of USD1,139.15 and palladium is currently trading at a spot price of USD702.13. There has been speculation that stricter legislation on vehicle pollution in China may raise demand for the metals in the long term.

28/06/16 16:00. Gold gained 1% to $1,336.71, Silver increased 3.9% to $20.23, Platinum rose 3.2% to $1,134.40 and Palladium increased 2.2% to $694.25 Gold/Silver ratio: 66

NOTES TO EDITOR
For more information, and to arrange interviews, please contact Emily Cornelius, Communications & PR Tel: + 1 647 362 5957 or email: Emily.Cornelius@Goldmoney.com

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Brexit post-mortem

Thu, 07/28/2016 - 09:42
It is a month after Britain’s surprise vote to leave the EU.

A new Conservative Prime Minister and Chancellor are in place, both David Cameron and George Osborne having fallen on their swords. The third man in the losing triumvirate, Mark Carney, is still in office. Having taken a political stance in the pre-referendum debate, there can be little doubt the post-referendum fall in sterling was considerably greater than if he had kept on the side-lines.

This article takes to task the Treasury’s estimates of the effect of Brexit on the British economy and Mr Carney’s role in the affair, then assesses the actual consequences.

The Treasury’s economic weapons of mass destruction

One of the Treasury’s models predicted Brexit would cost each household £4,300 every year. There were at least two things wrong with this prediction. Firstly, it was presented as if it was a loss of net income, in other words the business profit or wages the average household would lose. The estimate was nothing of the sort, it was the Treasury’s estimate of the loss of annual GDP divided by the number of households in the event of Brexit.

A second wrong should be equally obvious. No economic model is capable of predicting an outcome without subjective inputs. This is why garbage in produces garbage out. One can even goal-seek specific answers by feeding assumptions into an economic model. One suspects this was the principal basis of what the press dubbed “Project Fear”. There were in fact two Treasury models, the first one described above, which is meant to predict the medium to long-term outlook, and a second which predicted an immediate recession in the event of Vote Leave. This is the Treasury’s VAR model, which uses statistical analysis to measure and quantify the level of financial risk. The simple assumption, with no basis in evidence, was that Brexit would amount to an economic shock half as great as the 2008 financial crisis, lasting for two years.

Combining the output of these two models allowed George Osborne to threaten us with an economic disaster if we didn’t vote Remain.

An important point that seems to be lost on government economists when making their forecasting assumptions is that we all quietly get on with making a living, very successfully if we are left alone by the state. It is when they interfere that things start to go wrong. Furthermore, they are convinced we need national trade deals, and appear incapable of understanding that we manage far better with free trade.

We will not digress into why using economic models can never work, and instead note the abuse of its own models by the Treasury. An independent paper by Professor David Blake published by the Cass Business School exposes the intent in the Treasury’s approach, some of which is repeated here. He even goes so far as to describe the published outputs as “dodgy dossiers”, a phrase that was first used to describe the cooked-up intelligence report that led us into the last Iraq war. It is as if the purpose of the Treasury’s economic assessment was to threaten us, to pursue the Iraq analogy, with non-existent weapons of mass economic destruction.

Professor Blake’s findings are damning, but they were less widely read in financial circles than the Treasury’s forecasts, which were almost always accepted without question. The Treasury forecasts were then given added impetus when Mark Carney, the Governor of the Bank of England, took the unusual step of intervening in the political debate. Claiming that the Bank has a mandate to warn us of economic threats, he gave the Treasury forecasts unwarranted credibility in the foreign exchanges and international financial markets. Though he denied his intervention was political, there can be no doubting that that was the effect.

If Britain had voted to remain, there would have been no immediate problem for the markets. Ahead of the vote, sterling rallied in a growing belief the referendum would be in favour of Remain, because the bookies odds said so. Instead, the vote went the other way. There can be little doubt that the markets reacted as sharply as they did on the basis of the Treasury’s dodgy dossiers, and the added spin given to them by Mark Carney’s warnings.

In the event, sterling immediately fell over 10% and markets worldwide took a big knock. A run developed on UK commercial property funds. But the most important event, in terms of the Bank of England’s mandate, was the collapse in sterling. It went against the Bank’s stated mission, “to promote the good of the people of the United Kingdom by maintaining monetary and financial stability”.

Mr Carney’s intervention was a gamble for Remain that failed to pay off. The evidence that he was caught up in the Treasury’s deceit has now emerged, with markets rapidly regaining their poise, apart from the sad exception of sterling. The Monetary Policy Committee on 14 July decided that no further economic stimulus is required. In other words, both markets and the Bank are now signalling that Brexit does not have the consequences for the UK threatened by the Treasury, beyond a 10% sterling devaluation. And that would most likely not have occurred if markets were not preconditioned to think Brexit would be a disaster for the currency.

If it wasn’t for the sensitivity of his position, one would have expected Mr Carney to resign his post immediately. But the replacement of a central bank governor is never hurried, being managed in the interests of market stability. Therefore, Mr Carney might quietly arrange for his early departure.

What happened to the Brexit recession?

One month on from the referendum, there is no sign of the Treasury’s VAR model predictions coming to fruition. London is teeming with people, many of them foreign visitors, spending money in cafes, restaurants, theatres and other visitor attractions. The country roads are still jammed with caravans, tractors, tourists and white vans trying in all their productive mayhem to go about their business. Wimpish businessmen dithering over trade and investment plans are being forced to get on with life, and it should be noted that turncoat Remain supporter, GSK, this week announced a massive new capital investment programme, one of several such announcements in recent days.

Our long-abandoned trade friends in the Commonwealth are keen to talk to us, as is China. And who can forget President Obama’s threat when it came to negotiating T-TIP with the EU? Well, we are no longer at the back of the queue, but at the front of the line. Only this week, it was announced that our American friends will shortly be able to enjoy fine Welsh lamb and prime Scottish beef again for the first time in twenty years. Suddenly, everyone, with the exception of the EU, wants to engage with us about trade. A dyed-in-the-wool bureaucrat, Michel Barnier, has been appointed to represent the EU Commission in the Brexit divorce. He is expected to talk tough, and make any agreement with the UK hard-won. Good luck to him, when the opportunities and everyone’s focus have moved elsewhere.

The scientific community, which warned us about the loss of important subsidies and cooperation on European research projects, is now backtracking. The President of the Royal Society, says he sees no evidence that European funding bodies are discriminating against British research projects. Professor Nick Donaldson, of University College, London, points out that “money is pouring into the research and development pipeline, but new products are not getting to market, because of the expense incurred through the EU’s Active Implantable Medical Device Directive of 1990 (Letters, Daily Telegraph, 26 July). At last, we will be able to set our own rules in this and other matters for the benefit of ordinary people.

It must be extraordinary, to anyone who was sucked in by the Treasury’s forecasts, how quickly markets and the economy have recovered their poise. Mainstream economists are confounded. Again, we must refer to Professor Blake’s paper. He points out that Greenland’s economy grew rapidly when it left the EU in 1985, and Ireland’s trade with the UK was unchanged by her exit from the sterling area in 1979. Both these outcomes are wholly inconsistent with the Treasury’s assumptions. He also points out that the model on the Treasury’s input assumptions would predict the UK is better off joining the euro, and that every country in the world would be better in the EU. Tell that one to Donald Trump.

It is worth reading his key points, if not Professor Blake’s paper in its entirety. That the Treasury got is so wrong tempts one to think there was another agenda, perhaps stuck in the mind-set of the post-war geopolitical establishment.

More immediately, there is the obvious problem that the EU’s economic and financial trajectory is a genuine crisis, and that the whole project is liable to collapse. If so, Britain remaining in the EU would have amounted to a sacrifice of Britain’s relatively free trade values in the interests of the EU’s lemming-like self-destruction.

There is, of course, every possibility that the British government will screw Brexit up. The signals from the establishment are mixed, to say the least. The state-controlled Royal Bank of Scotland and its NatWest subsidiary is preparing its business customers for negative interest rates on their deposit accounts. Many economists, immersed in the beliefs of the neo-Cambridge school and with the Treasury’s forecasts still uppermost in their minds, desire further cuts in interest rates and even helicopter money.

We cannot know what the future holds, particularly when governments attempt to micro-manage their citizens’ economic activities. There is no evidence that compels us to argue that a British government and the Bank of England are much better than any other Western government and central bank. Nor can we assume that an escape from the EU is an escape from their group-think.

We do know with reasonable certainty, on the balance of firm evidence, that if the British or European economies tank, it will have nothing to do with Brexit.

The views and opinions expressed in this article are those of the author(s) and do not reflect those of Goldmoney, unless expressly stated. The article is for general information purposes only and does not constitute either Goldmoney or the author(s) providing you with legal, financial, tax, investment, or accounting advice. You should not act or rely on any information contained in the article without first seeking independent professional advice. Care has been taken to ensure that the information in the article is reliable; however, Goldmoney does not represent that it is accurate, complete, up-to-date and/or to be taken as an indication of future results and it should not be relied upon as such. Goldmoney will not be held responsible for any claim, loss, damage, or inconvenience caused as a result of any information or opinion contained in this article and any action taken as a result of the opinions and information contained in this article is at your own risk.

Market Report: Technicians turning bearish

Fri, 07/22/2016 - 07:38
The consolidation of June’s price rises for gold and silver continues.

Predictably, technical analysts are now talking prices down, expecting gold to test the 55-day moving average currently at $1280, and possibly the 200-day MA, which is at $1195. Last night (Thursday) gold closed at $1333 and silver at $19.80.

We shall see. There is no doubt that technically both metals are showing up as very overbought, and vulnerable to a significant correction. Furthermore, the Managed Money category on Comex shows record long positions, and is vulnerable to a shake-out. No wonder technical analysts have turned.

Truth to tell, they got it wrong on the way up, and only changed their minds when uptrends for gold and silver were firmly in place. They called a bottom, only after gold had risen 20% against the dollar, about 5% below current levels.

Last month, I drew readers’ attention to gold’s steady performance in yen. This has continued, as the next chart shows.

The price in yen is the green line. Admittedly, the gradual steady rise owes much to yen weakness on the foreign exchanges, but from the point of view of a Japanese resident the price trend is eye-catching, particularly given negative interest rates on Japanese government bonds. Furthermore, gold’s stability has been impressive, the price in yen being only down 4% from the September 2011 highs.

The Eurozone has negative interest rates as well, with an Italian banking crisis on the back burner. For a Eurozone resident, avoiding exposure to a shaky banking system can only be done investing deposits in government bonds, or alternatively physical gold. The gold option is certainly something Germans understand fairly well. The older generation in France and Italy does as well. So it is not hard to understand where new sources of demand are coming from.

I am also detecting growing interest in gold from investing institutions. They are less likely, perhaps, to think in terms of physical gold, but are interested in building a position in a portfolio context. It should be borne in mind that physical gold is not a regulated investment, but futures are regulated. Institutional interest is therefore likely to focus, initially at least, on the paper markets.

This brings us back to the relevance of the Managed Money category on Comex. The chart below shows how net longs have exploded to extraordinary levels in recent weeks.

Analysts would argue that speculative positions this extreme will end in tears. Normally, they would be right. But what if investing institutions, and not speculating hedge funds, are using futures to maintain a strategic non-speculative portfolio position in gold? If so, then we can expect a significant and continuing positive bias to net contracts in this category.

This opens the possibility that the bullion banks, which take the other side of Managed Money longs, could be forced to capitulate. They must be worried that open interest in both gold and silver is larger than in the past by substantial margins. It is no longer a market where persistent shorting and a bit of patience always wins out for them profitably.

It is a bold call, but it could be “Game On” for the bulls.

The views and opinions expressed in this article are those of the author(s) and do not reflect those of Goldmoney, unless expressly stated. The article is for general information purposes only and does not constitute either Goldmoney or the author(s) providing you with legal, financial, tax, investment, or accounting advice. You should not act or rely on any information contained in the article without first seeking independent professional advice. Care has been taken to ensure that the information in the article is reliable; however, Goldmoney does not represent that it is accurate, complete, up-to-date and/or to be taken as an indication of future results and it should not be relied upon as such. Goldmoney will not be held responsible for any claim, loss, damage, or inconvenience caused as a result of any information or opinion contained in this article and any action taken as a result of the opinions and information contained in this article is at your own risk.

 

The real message from asset inflation

Thu, 07/21/2016 - 06:11
The earliest signs are developing of hyperinflation, more correctly described as a collapse of the purchasing power of all the major government currencies.

Central bankers are almost certainly unaware of this danger, partly because their chosen statistics fail to capture it, but mostly because conventional monetary economic theory is lacking in this regard.

This article draws on the evidence of extreme overvaluations in equities and bonds worldwide, and concludes the explanation lies increasingly in a greater perception of risk against holding cash, or bank deposits. Risk relationships between cash and assets are inverting, due to failing monetary policies and escalating counterparty risk with the banks.

There are of course subplots involved, such as the real and imagined rigging of markets by central banks, and the bullish confidence that gives to buyers and holders of investments. Then there is the unanimous assumption that interest rates must not and therefore will not be permitted to rise.

Extreme one-way bets aside, the overriding reason for valuation disparities is becoming more consistent with the downgrading of cash, rather than a revaluation of assets. If this was happening to money’s relationship with goods and services, economists would begin to worry about inflation, stagflation, and even hyperinflation.

Why asset inflation matters

Because today’s price inflation is mainly confined to assets, no one worries. Instead investors rejoice in the wealth effect. Assets are excluded from the consumer price indices, so the danger of a fall in the purchasing power of money in respect of assets does not appear to exist. This does not mean that the problem can be ignored. But if the reason behind rising markets is a flight from cash, we should begin to worry, and that point in time may have arrived. If so, we should stop rejoicing over our increasing wealth, and think about the future purchasing power of our currencies.

Confining the estimation of price inflation to selected finished goods and services is a myopic mistake. It was originally for econometric convenience that consumer purchases became so categorised, but it is misleading to assume that for the consumer there is any such clear categorisation between the purchase of different items. In pure economics there can be no distinction between the purchase of an item of food, a capital good, or the lending of money which is used by someone else to purchase capital assets and use as working capital. The exclusion of partially depreciated second-hand goods is equally illogical. All purchases are purchases, full stop.

Not only do the neo-Cambridge economists and econometricians of today ignore this fundamental error in their attempts to construct measures of price inflation, central bankers and the whole investment community make a further omission without even realising it, and that is to assume that money has a constant value in all transactions. This is hardly surprising, because we account in money, and we pay our taxes on profits measured in it.

These two important errors distort all economic analysis and can have serious consequences.

Asset inflation is increasingly spilling over into commodities, the feedstock for final goods. It has also been inflating services, for example driving up the wage rates in building trades and raising agency commissions. This effect has been developing since the last financial crisis began to recede, and has accelerated with the reversal of falling commodity prices. The official line, that there is almost no price inflation, is misleading markets, the general public, and economic planners themselves as well.

Investors act rationally

It is becoming clear that some investors are showing a growing preference for investment assets over bank deposits. Analysts unquestioningly believe that this preference is not a vote against money, but is driven by a desire to profit from investment. This is correct for regulated managers of mutual funds, who are required by their mandates to generate valuation profits in absolute or relative performance terms.

Others, particularly the very rich with a close eye on their own finances, are beginning to take a different view. They observe the share prices of the banks that owe them money, and worry. Private bankers in Europe are reportedly trying to persuade their very-rich customers not to withdraw substantial funds. Anyway, transferring deposits from one bank to another doesn’t protect you against systemic risk, so you must buy something, such as a short-dated government bond or gold, to get rid of your money and transfer the risk to others.

The principal danger to these wealthy investors is a pick-up in the inflation rate, but at the moment, talk is exclusively of deflation and systemic risk, not inflation. However, raw material prices have been rising noticeably this year, reversing the trend of the last few. Unless commodity prices start falling materially and soon, they are certain to drive up recorded price inflation, despite the lack of economic activity in the advanced economies. Eventually, central banks will have to respond by raising interest rates, undermining government bond markets and the valuation of all asset classes that refer to them.

The flight from cash, for the moment at least, reflects in large part systemic risks. However, we cannot say that a collapse of the banking system will definitely happen unless interest rates rise to reflect the falling purchasing power of fiat currencies. Only then can we be much more certain of a general financial immolation, accelerating the flight from bank deposits.

For the moment, markets have gone nap on deflation. Deflationary conditions are necessary for the future monetary expansion required to rescue the banks, the economy, or both. Most investors appear to be as sure of this outcome as they were that the UK would choose to remain in the EU. The error here is to have little or no understanding that price inflation can coexist with contracting business activity.

Monetary inflation, particularly when it becomes extreme, actually guarantees a contraction in economic activity, because it withdraws purchasing power from the masses. This is why the early warning signs of asset price inflation from a declining preference for money should be taken very seriously. And as the effect spreads into the consumer price index, so too will a wider rejection of money in favour of goods.

It could easily develop into what the Austrian economist, Ludwig von Mises, described as a crack-up boom, the final flight out of money in preference for goods. We are not yet hoarding toilet paper and baked beans, but the prospect that we will be driven to do so has already been signalled to us.

The views and opinions expressed in this article are those of the author(s) and do not reflect those of Goldmoney, unless expressly stated. The article is for general information purposes only and does not constitute either Goldmoney or the author(s) providing you with legal, financial, tax, investment, or accounting advice. You should not act or rely on any information contained in the article without first seeking independent professional advice. Care has been taken to ensure that the information in the article is reliable; however, Goldmoney does not represent that it is accurate, complete, up-to-date and/or to be taken as an indication of future results and it should not be relied upon as such. Goldmoney will not be held responsible for any claim, loss, damage, or inconvenience caused as a result of any information or opinion contained in this article and any action taken as a result of the opinions and information contained in this article is at your own risk.

 

Video: Goldmoney's Las Vegas Townhall Feat. George Gilder and Peter Schiff

Tue, 07/19/2016 - 14:00
Goldmoney's Las Vegas Townhall Featuring George Gilder and Peter Schiff

Goldmoney Co-founder, Josh Crumb and CEO, Darrell MacMullin host the Las Vegas Townhall featuring best-selling author, George Gilder, and Peter Schiff of Schiff Gold. Watch as they discuss the enablement of a global currency for today's global commerce, debate centralized or decentralized options and the re-invention of gold.


The views and opinions expressed in this article are those of the author(s) and do not reflect those of Goldmoney, unless expressly stated. The article is for general information purposes only and does not constitute either Goldmoney or the author(s) providing you with legal, financial, tax, investment, or accounting advice. You should not act or rely on any information contained in the article without first seeking independent professional advice. Care has been taken to ensure that the information in the article is reliable; however, Goldmoney does not represent that it is accurate, complete, up-to-date and/or to be taken as an indication of future results and it should not be relied upon as such. Goldmoney will not be held responsible for any claim, loss, damage, or inconvenience caused as a result of any information or opinion contained in this article and any action taken as a result of the opinions and information contained in this article is at your own risk.

Market Report: Precious metals consolidate

Fri, 07/15/2016 - 04:58
Following the Brexit shock, gold and silver have been consolidating the sharp rise that followed.

This consolidation, which started after America’s Independence Day, has been in the form of a relatively shallow correction, as our introductory chart shows. This leaves gold up 27% against the US dollar, and silver up 47%. Silver has caught up on all its earlier underperformance, driving the gold/silver relationship down from 83 in March to 66 this week.

While on the subject of performance, it is worth noting gold’s performance disparity between different currencies. Our second chart shows this in the major currencies.

There is much to interest the observer in this chart, but even the more observant reader might miss the development of the gold price in yen. So far, it is up only 10% on the year, one quarter of the 40% shown in sterling. But bear in mind two things: a 10% rise is a very good return for yen investors, and with negative interest rates, the bullish drivers are significant. Furthermore, Tanaka, a major Japanese dealer in precious metals, is buying out Metalor, the well-known Swiss refiner. While deals are often opportunity-driven, in this case it is reasonable to assume that Tanaka sees exceptional demand developing for gold bars specifically for the Japanese market. In the normal course of business, Tanaka would be able to satisfy expected future demand by commissioning refiners to produce branded bars on a competitive basis. The fact that they have decided to acquire a major Swiss refiner sends a signal that they expect a significant expansion in retail demand for physical metal in Japan, necessitating security of supply.

In recent weeks, there has been increasing talk of yet more monetary stimulation around the world, but with zero and negative interest rates common to major currencies, attention is turning to variants of more directed stimulation through unfunded government spending. Japan, it turns out, has been consulting with Ben Bernanke, the previous governor of the Federal Reserve, famous for his long-standing recommendation of helicopter money. This popular description is a bit crude, but is the Keynesian end point for monetary inflation.

While currencies face new destructive tactics by their issuers, which is bullish for gold, one cannot ignore the technical position in the market. The bullion banks make money trading on the short tack, and have always managed to bring the price back under control when the speculators pause in their buying. If the market is to rise from here, physical buyers will have to overwhelm paper supply. 

Hedge funds have made a good attempt to achieve it this time, taking their long positions into record territory by a country mile. The next chart shows how their net bull position on Comex has soared into record territory.

By any past measure, the futures market is wildly overbought. But will the speculating bulls win out this time?

There is a very good chance they will, but the danger of a market drifting lower while the bullion banks close their shorts is significant. It will depend on developments, such as European banking risks intensifying, and further developments in the course of monetary expansion.

The views and opinions expressed in the article are those of the author and do not necessarily reflect those of Goldmoney, unless expressly stated. Please note that neither Goldmoney nor any of its representatives provide financial, legal, tax, investment or other advice. Such advice should be sought from an independent regulated person or body who is suitably qualified to do so. Any information provided in this article is provided solely as general market commentary and does not constitute advice. Goldmoney will not accept liability for any loss or damage, which may arise directly or indirectly from your use of or reliance on such information.

The pump and dump of UK residential property

Thu, 07/14/2016 - 07:56
Messrs Carney and Osborne are turning out to be a dangerous double-act for UK residential property investors.

They have been using monetary and fiscal policies through a combination of directed bank lending, selectively increasing transaction taxes and by implementing other tax policies with a view to suppressing demand for residential property.

If they think they can fine-tune these markets, history suggests they will eventually fail. There are significant challenges facing the UK residential property investors already, without state intervention. Incidentally, the problems discussed herein have little to do with the current difficulties faced by commercial property funds in the UK, which have had to suspend redemptions because of illiquidity, though their structural failure sends us a timely reminder about this inflexible characteristic of property generally.

Residential property has become everyone’s pension fund

Over the years, private individuals in the UK have learned that buying residential property is the best way to protect capital. Rising property prices have been the natural consequence of official efforts to reduce the purchasing power of sterling over time, and consequently property is widely accepted as a better long-term investment than other savings vehicles, such as bank deposits, listed securities and mutual funds. The desire for something tangible and better, the safety of bricks and mortar, has inevitably led to a substantial increase in buy-to-let investment, with many private individuals buying one, two or even three rental properties with the aid of mortgage finance. This has greatly increased the rental market’s supply, which is economically beneficial at a time of high net immigration and increasing job mobility.

This is not how George Osborne’s advisors at the Treasury appear to see it. To them, the restriction of overall housing supply, undoubtedly due to inflexible planning regulations, is the main reason for rising prices. As always, the problem is seen by government economists as leading to an undesirable redistribution of wealth in favour of existing, already wealthy home-owners, disadvantaging the future generation, struggling to get on the property ladder. The policy response has been to impose higher taxes, first on residential property owned by foreigners, and then on the buy-to-let market. Buy-to-lets will also suffer the marginal effects of the introduction of discriminatory capital gains taxes, and the removal of normal business tax reliefs, particularly as regards borrowing costs.

The government’s approach is founded on the same underlying premise behind all price controls: the market has failed and the state can improve on the market. Government has a self-imposed duty to ensure prices remain affordable for first-time buyers, and the suppression of capital values also serves as an indirect means of rent control.

However, the use of fiscal policies to control prices is doomed to fail if the lessons of history, let alone sound economic theory, are any guide. Meanwhile, the Bank of England has been busy telling banks on what terms they can offer mortgages, and to whom. But Instead of managing the market for a desired outcome, monetary and fiscal policies are unlikely to affect prices significantly, so long as interest rates remain suppressed at close to zero levels.

The underlying point is that by their actions both Mark Carney and George Osborne are behaving as if they are wholly ignorant of the real reason property prices are rising. It is the Bank’s interest rate policy and the intended, if gradual, destruction of the currency that’s the underlying cause, leading to investment flows into everything that’s not deposit money. They have corralled reasonable people into a confined investment space, and do not appear to understand the long-run consequences of their actions. Furthermore, they particularly fail to grasp the important message from the market, which is that long-term investments, such as residential property, art, equities, and now even gold, are effectively discounting an accelerating rate of loss of purchasing power for deposit money.

In addition to Carney’s and Osborne’s attempts to manage the market, the new Basel 3 banking standards will impose a greater haircut on mortgage lending by the banks from 2019 onwards, and undoubtedly banks will be reducing their supply of mortgage finance well in advance of that date. This macro-economic change, no doubt for prudent reasons, will have a negative impact on funding for property purchases, in the longer term.

Interest rates will eventually rise

That is the background to what will inevitably become a future crisis, when interest rates eventually rise. There are early signs this could happen sooner than most analysts expect. Official rates of inflation are set to increase in the coming months as higher energy and commodity prices begin to bite, an effect worsened by the fall in sterling. Doubtless, it is concerns over future interest rates that have had some influence on investors in commercial property funds.

At the same time as anxieties over long-term sterling interest rates grow, an increasing awareness of short-term systemic risks in Europe are encouraging the financially-aware to reduce their cash deposits in the banking system. The price-effect of economic actors swapping money for other financial assets, and eventually goods as well, promises to lead to an accelerating decline in purchasing power for all currencies, initially in terms of investable assets and ultimately for physical goods as well. The current, surprising strength of various asset markets is just that: an early anticipation of an accelerating loss of the future purchasing power of major currencies, and runs counter to the risk that the next move for sterling interest rates should be up.

This market dilemma has been driving markets for some time now, ever since the post-Lehman turbulence settled into continued interest rate suppression, and is the “pump” in this article’s title. For the moment, this pump phase is being extended by a renewed banking crisis, which can be expected to provoke central bank responses of yet more monetary stimulus, not only in Europe, but elsewhere as well, even in post-Brexit UK.

At some stage, concerns are bound to increase over the long-run consequences of a new round of monetary inflation, with the discounting of the effect on prices spreading from assets into goods. So the Bank of England, in common with the other major central banks, will eventually find itself in an impossible position, conflicted between the need to raise interest rates to protect sterling, and avoiding bankrupting the middle classes which have taken on record amounts of mortgage debt. That will be the “dump” in our title.

The effect of rising nominal interest rates will be a nightmare for all asset markets, not just residential property. The effect on residential property can be expected to hit house prices hard, risking widespread distress, initially because of vanishing mortgage finance, accelerated by the Basel 3 regulation changes, and then through actual foreclosures. However, property investors who can sit out this phase of the crisis might wish to bear in mind that property will continue to offer protection against monetary destruction, after over-leveraged home owners and buy-to-let investors have been shaken out.

This is because the fundamental logic of owning a property asset is that it is more productive in its use-value than depreciating money, giving capital protection to a degree perhaps second only to gold.

The views and opinions expressed in this article are those of the author(s) and do not reflect those of Goldmoney, unless expressly stated. The article is for general information purposes only and does not constitute either Goldmoney or the author(s) providing you with legal, financial, tax, investment, or accounting advice. You should not act or rely on any information contained in the article without first seeking independent professional advice. Care has been taken to ensure that the information in the article is reliable; however, Goldmoney does not represent that it is accurate, complete, up-to-date and/or to be taken as an indication of future results and it should not be relied upon as such. Goldmoney will not be held responsible for any claim, loss, damage, or inconvenience caused as a result of any information or opinion contained in this article and any action taken as a result of the opinions and information contained in this article is at your own risk.

 

Using Goldmoney’s preloaded card

Thu, 07/07/2016 - 12:09
At Goldmoney, we have noticed that account-holders sell gold to preload their Goldmoney cards when gold rises.

This makes sense. People are using their accounts as money, which is exactly what they should be doing.

A Goldmoney payments account compliments a fiat currency account, and gives people options. Everyone who has a Goldmoney account also has a conventional debit or credit card, both of which they can use for day-to-day payments. By running a Goldmoney account alongside a conventional bank card, you give yourself added payment flexibility.

Let’s assume you plan to take someone out to dinner. Beforehand, you look at the price of gold. If it is up, measured in your normal currency, preloading your card in order to pay for your dinner will make it less costly than using your normal bank card, compared with yesterday. If the gold price is down, you just use your bank card. In other words, you use the money that gives you the best deal.

This is the point about money. It is not an investment, so computing what you initially paid for gold and your profit or loss on it is not the point. You have to look at it as a competing form of money, which can give you an economic benefit.

I don’t think any analysts have adequately described the benefits of being able to use two different forms of money for daily purchases, because this facility has been rarely available until now. But is clear, from Goldmoney’s experience of how users use their cards, that consciously or unconsciously, this is what their customers are now doing. As a user myself, I am certainly benefiting from this dual-money approach to spending.

Admittedly, my current experience is somewhat unusual, because of the turmoil around Brexit. But my experience of gold versus sterling is a good illustration of why it works so well.

About four months ago, I planned a trip to Canada, which, it so happened, was to be at the same time as the British referendum on leaving the EU. I paid for the flights, hotels and car hire several months ahead. That left the issue of spending money, about which I did nothing, other to ensure I had adequate funds in both my Goldmoney and regular bank accounts.

Before the vote, sterling was strong, which impacted negatively on the purchasing power of gold measured in sterling, so I drew down on my regular bank debit card to pay for local expenses in Canada. Then came the surprise vote for Brexit, and the gold price, measured in sterling, took off like a scalded cat.

The sterling rate for Canadian dollars was also trashed, but I still had my gold, which actually bought significantly more than before, even measured in Canadian dollars. From that time, I have used my Goldmoney card for local expenses. So instead of worrying about the collapse in sterling, I have continued to enjoy my stay in Canada by using gold.

I could, of course, have taken out a travel company’s pre-loaded card, and bought my Canadian dollars well in advance. By locking in the rate, I would have had the advantage of certainty, but lost the flexibility gained by using gold as a rival form of money. In the event, I was far better off retaining that flexibility.

I share this experience with my readers as a lesson for us all.

The views and opinions expressed in this article are those of the author(s) and do not reflect those of Goldmoney, unless expressly stated. The article is for general information purposes only and does not constitute either Goldmoney or the author(s) providing you with legal, financial, tax, investment, or accounting advice. You should not act or rely on any information contained in the article without first seeking independent professional advice. Care has been taken to ensure that the information in the article is reliable; however, Goldmoney does not represent that it is accurate, complete, up-to-date and/or to be taken as an indication of future results and it should not be relied upon as such. Goldmoney will not be held responsible for any claim, loss, damage, or inconvenience caused as a result of any information or opinion contained in this article and any action taken as a result of the opinions and information contained in this article is at your own risk.

 

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