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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.

 

Dealing Desk: Brexit Boosts Precious Metals’ Safe Haven Appeal

Thu, 06/30/2016 - 09:04
This week, we have seen an increase in client activity as the number of orders received increased after the Brexit referendum.

Clients have been seen net selling gold and silver in order to take advantage of the profits from the extraordinary price increase post-Brexit. On the other hand, some clients have been buying into gold possibly as a safe haven or speculating that the price may continue to increase.

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 precious metals overall had a strong week due to the results of the Brexit last week. Due to the much-anticipated results, gold rose almost 5% afterwards and touched a spot high of USD1,358.20/oz whilst local currencies were weakened. By Monday, the British Pound and European bank stocks were set for their biggest two-day slide as sterling reached its lowest level against the US Dollar in thirty years.

Tuesday saw the prices retreat throughout the day down a low of USD1,305/oz but managed to find support on Wednesday just above USD1,310.00/oz through early Asian trading which was supported by a weaker dollar.

US economic data had little impact on the markets this week, with most data being very close to expectations; this left the Federal Reserve in the same position of no interest rate raises in the short term, which has provided extra support to the precious metals.

Looking forward into next week, the FOMC is due to release the minutes of its previous meeting as well as the release of the US ADP national employment report. We could see the US data and news begin to take back control of the markets.

30/06/16 16:00. Gold gained 4.4% to $1,318.96, Silver increased 6.7% to $18.47, Platinum rose 4.9% to $1,013.70 and Palladium increased 5.6% to $594.76 Gold/Silver ratio: 71

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

Goldmoney
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Through Goldmoney’s non-bank vault operators, physical precious metals can be stored worldwide, outside of the banking system in the UK, Switzerland, Hong Kong, Singapore and Canada. Goldmoney partners with Brink’s, Loomis International (formerly Via Mat), Malca-Amit, G4S and Rhenus Logistics. Storage fees are highly competitive and there is also the option of having metal delivered.

Goldmoney currently has over 25,000 customers worldwide and holds over $1.6 billion of precious metals in its partner vaults.

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.

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The prospects for money

Thu, 06/30/2016 - 08:41
In my view, this new bout of turmoil in financial markets is the prelude to the final demise of government currency.

If I’m right, a long-expected collapse in the purchasing power, and of the very concept of fiat currency, will evolve from current events. The purpose of this article is to explain why monetary theory predicts a currency collapse.

The question at the heart of today’s market instability is the validity of fiat currency; that is to say, forms of money issued and sanctioned by individual governments, with no backing other than faith in those governments’ creditworthiness, and the enforcement of its use by law. The risks they impose on all of us will be evidenced one day by both the speed of the fall in each individual fiat money’s purchasing power, and inevitably by their comparison with gold’s more stable purchasing power. Essentially, an awareness of the dangers of unsound money will gradually become evident to every economic actor.

So far, or at least since the days when fiat money was freely exchangeable for gold, central banks have managed to enforce upon us their currencies as money, originally on the basis they were gold substitutes. That pretence was finally dropped in 1971. The purchasing power of fiat currencies has never been seriously challenged since, except in relatively few extreme cases, such as Zimbabwe and Venezuela. Not even the financial crisis eight years ago threatened a collapse in fiat currencies, when banks had to be rescued with unlimited extra quantities of money and credit.

The current crisis has commenced while there are determined efforts to stop the purchasing power of the major currencies from rising, even leading to the deployment of negative interest rates in this quest. None of the central banks’ policies appear to have worked. The increasing purchasing power of the yen, despite all attempts to lessen it, is the clearest example of the abject failure of a central bank to achieve its monetary objectives. The same can be said of the ECB and the euro, a currency even more synthetic than those it replaced. It is clear that the central banks are setting monetary policy more in hope than in a true appreciation of their own hopelessness.

They place an undue emphasis on empirical evidence. That’s why charts and statistics are so important to them and all their epigones. When you don’t understand and cannot explain something, you turn to the so-called evidence. And when very few people actually have a reasonable grasp of what money is about, you can rely on empirical evidence being unchallenged. For monetary policy, this tells us two things: central banks are clueless about monetary theory, and in the event of a second systemic crisis, they will be misguided by their experiences of the last one.

Today’s empirical evidence reflects the bail-out of the global banking system in 2008/09. Neo-classical monetarists were initially worried by the potential for price deflation in the wake of the banking system’s rescue, and so central bankers expanded narrow money by unprecedented quantities to counter credit deflation, real and anticipated. These were intended to be short-term measures, to be replaced with more normal monetary policies as soon as the immediate crisis was over. These short term measures are still in place today eight years later.

The impact on the gold price

After the Lehman shock, which led to a temporary flight into both money and short-term government debt, the purchasing power of currencies relative to that of gold rose, with the gold price falling from $930 to $690. Subsequently, when it became apparent that monetary expansion had succeeded in curbing deflationary forces, this trend reversed, taking the gold price to over $1900. That then changed in September 2011, following concerted central bank intervention to supress the gold price.

The dollar-gold relationship has now turned once again, signalling that the tide of confidence is moving against currencies. The purchasing power of currencies measured against that of gold is now falling. We now have a banking crisis in the making, if the share prices of major banks are any indication. The UK’s decision by referendum to leave the EU points to Europe’s political disintegration. Increasing market volatility tells us that another systemic crisis may well be imminent, and government bonds reflect a continuing flight to safety.

Already, the Bank of England has announced that a further £250bn in monetary support will be made available to the banks, and that additional swap lines have been agreed between the major central banks. We can take this as evidence that the central banks, relying on empirical evidence, are preparing a new round of monetary expansion as the solution to any future crisis, confirmed in their belief that the risk to the credibility of their currencies is unlikely to be a problem.

This is not what gold, when priced in these currencies, is telling us. To understand why and where the central bankers are mistaken, we must consider some fundamental points about how money actually works.

The theory of money and its purchasing power

To prepare our minds for a comprehensive understanding of monetary theory, we must at the outset dispense with any idea that statistical analysis is relevant. It is not, because there are no constants involved. Valid statistics require at least one constant, usually the purchasing power of money. In the whole field of economics, let alone money, there are none. The purchasing power of money is to a large degree independent of its quantity, and depends on a fluctuating acceptance that it is exchangeable for goods. Quack monetarists that believe in the equation of exchange, despite all evidence it does not work, overlook the subjective factors that qualify something as money.

When we set out to understand money, we must acknowledge there are three major influences at work, besides a general acceptance that a particular form of money is exchangeable for goods. There is the subjective value of the goods for which an exchange is considered, there are the fluctuations in the relative quantities of goods and money in the exchange process, and there is the balance of relative desires in the population as a whole to increase or decrease the quantity of money held, relative to goods. All these factors are the unknowable decision of every single economic actor, and fluctuate accordingly.

This self-evident truth continually risks undermining the very function of any particular form of money, which in order to be acceptable to the parties in any transaction must have a commonly accepted value, even though one party will want money more than the other at a given price. This commonly accepted value has been described by the economist, von Mises, as money’s objective exchange value. It is the one thing that parties to a transaction can agree upon. A dollar is a dollar, a euro is a euro, and so on, even though different individuals will want these forms of money more or less than other individuals.

So far, we have addressed only one out of four dimensions of the money problem. A second dimension is that demand for some goods is always greater than demand for other goods, so money’s purchasing power will differ for every good and class of good exchanged for it. It is never sufficient to just assume that, for instance, the price of housing is rising solely due to demand for housing. It also rises because people place a lower value on money than they do on bricks and mortar. On reflection, this truth should be self-evident. But it also holds true for every other good for which any particular form of money is exchanged, and it is too simplistic to assume that changes in price come from the goods side alone.

A third dimension to consider is that the products and quantities of goods and services purchased yesterday will not be the same as the products bought tomorrow. Besides making the point again, that statistics are wholly irrelevant to understanding money, we can also add that what money will be used to buy tomorrow and in what proportions cannot be predicted, beyond perhaps some broad generalisations, such as people will buy food, they will use energy, and they will enjoy some leisure time. Such platitudes are of no practical value to understanding monetary theory, and disqualify the use of price indices and aggregates such as gross domestic product.

The fourth dimension is one of time. The injection of money into an economy will start at a point, typically the banks creating loans, or governments through unfunded spending. Money therefore enters an economy unevenly, benefitting some at the expense of others. This is known as the Cantillon effect, and is universally ignored by the neo-classical economic community.

The problem today

The reader should now have a grasp as to why attempts to discern future purchasing powers for money are futile, and why monetary policies of central banks never succeed, except perhaps by pure chance.

As if the four dimensions cited above were not enough, there is a further problem. Most fiat money is produced not by central banks, as is commonly supposed, but by commercial banks, which lend money into existence. Bank credit is essentially temporary money, and is regularly extinguished in credit cycles. It is the obvious potential for this bank credit to contract which concerns central bankers most. When bank credit contracts, businesses that are over-reliant on debt for their capital requirements, and companies that have borrowed to finance unprofitable production go bankrupt. This is the bust of the credit cycle. In recent decades, the bust has been deferred and deferred and deferred, but hasn’t gone away.

The failure of central bank monetary policies appears to have reached an inflection point. This is what the share prices of systemically-important banks are telling us. This is what the political disintegration of Europe, upon which the new synthetic euro is based, is telling us. This is what the cul-de-sac of permanently zero and negative interest rates are telling us. This is what wildly over-priced government bonds are telling us. This is what the greatest indicator of all, the price of gold is now telling us.

The inflection point, I believe, is the marker for a potentially catastrophic decline in the purchasing power of paper currencies that are unbacked by exchangeable gold. The faith and credit-standing of issuers of paper money, and not the known and suspected inadequacies of commercial finance, is the last rotten pit-prop supporting the system. We can easily see how a new round of monetary expansion designed to save the global banking system from its nemesis will lead, not to a Lehman-style outcome, but to a collapse of paper currencies.

This, apart from the implied forecast for gold in the paragraph before last, is the only truly subjective statement in this article on a truly subjective subject.

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.

Goldmoney Presents International Banking & the Future of Money

Tue, 06/28/2016 - 12:02
Goldmoney Presents International Banking & the Future of Money

Money is the bedrock on which functioning economies stand. Stable, reliable currency – serving as both a store of value and providing a liquid medium enabling transactions and commerce – is essential for growing and prospering economies. However, control of governments over money has always presented a challenge, as those with power tend to transform the currency they control into a political tool. The result is the exploding debt, fiscal insolvencies and price and interest rate instability we are witnessing today.

Various approaches to achieve monetary stability have been proposed by economists. However, today technology is enabling fascinating new private solutions in the market place for creating stable and reliable money. Goldmoney and the Friedberg Economics Institute have collaborated in this program to address these issues. The program includes the former president of the Central Bank of Argentina, the Chief Technology Officer of Israel’s largest bank, and the founder of a cutting-edge new firm offering a new digital currency payment platform based on gold.


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 form 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 co

What the leave vote means for gold going forward

Fri, 06/24/2016 - 11:42
What the leave vote means for gold going forward

Introduction

In the Referendum of the United Kingdom's membership of the European Union, 52% voted for leave, causing shockwaves through financial markets and a rally in gold. Using our gold price framework, we look at the impact on the price drivers for gold going forward.

View the entire Research Piece as a PDF here...

What the leave vote means for gold going forward

Against the latest polls before the referendum, and seemingly against the expectations of the City and financial markets in general, nearly 52% of the UK voters voted to leave the European Union. This has come as a massive shock to the markets, with the GBP down 8.4% at the time of writing (over 10% at some point overnight), and equity and commodity markets crashing. Gold began to rally immediately after the first results revealed that the share of leave voters have been hugely underestimated and has rallied to USD1324/ozt, a 13.6% % gain against the GBP.

While only time will tell what the eventual economic implications will be, one thing is already for sure: The reality of BREXIT is shaking financial markets at the core. Asian and European equity markets closed with huge losses, commodity prices tumbled and currency markets are in disarray. We haven’t seen market moves like this since the credit crisis.

However, as we have written before, this is not 2008 – at least not for gold. In early 2008, gold dropped from a high of $1003/ozt on March 14, 2008 to a low of $712/ozt on November 12, 2008 while the S&P500 lost over 30%. This time the situation couldn't be more different in our view. Rather, the three core drivers of the gold price are today firmly in gold's favor, and the price outlook is skewed to the upside.

In this report we outline what the result of the vote means for gold prices going forward, using our proprietary gold price framework we have introduced last year (see Gold Price Framework Vol. 1: Price Model, October 8, 2015).

In our model we have identified three main drivers for the price of gold: Real-interest rates, central bank policy and longer-dated energy prices. In our view BREXIT will have an impact on all 3 drivers in a positive way, adding support to gold prices going forward.

Central Bank policy and real-interest rates

As a reaction to the result, central banks will likely adopt much more dovish policies. The enormous volatility caused by the vote shows that markets have been in a very fragile state all along. This means that the likelihood that the FED will be able to raise rates in July has vanished in our view and the outlook for further hikes in 2016 and 2017 is now at risk. We have long argued that the FED will have a hard time raising rates to their desired target of 3.25% at the end of the cycle (which still is well below historical norm). Depending on the severity of the market reaction to the outcome of the vote over the coming weeks, it could well be that the FED will not be able to raise rates any further. Real-interest rates already began to price this in, dropping to the lowest levels since 2013 and at the brink to falling into negative territory again. As a result, gold prices shot up sharply (see Figure 1).

Figure 1: USD Real-interest rates collapsed as a result of the vote, pushing gold sharply higher
Gold USD/ozt (LHS), 10-year TIPS yield, %, inverted (RHS)


Source: Bloomberg, Goldmoney Research

But real-interest rates are unlikely to stop here. Before the recovery from -0.9% in 2012 back to +0.8% by the end of 2015, real-interest rates had been in a steady downward trend for 30 years. Even if the FED had succeeded raising rates again to 3.25% while maintaining inflation at 2%, realized real-interest rates would have only reached 1.25% at the peak. Any monetary policy reaction to a renewed economic recession would have inevitably pushed rates into negative territory again and to new lows. With the outcome of the referendum however, it has become very unlikely in our view that the FED can raise rates anytime soon, meaning that interest rates will be much lower at the beginning of the next economic downturn. There is now a distinct chance that they will not be higher than they are right now at 0.375%. This means that real-interest rates will most likely make new lows during the next down-cycle. It also means that the biggest risk to the gold price, a meaningful increase in the FED funds rate, is much less likely. Hence the referendum has set a floor on the price in our view.

Longer-dated energy prices

The immediate impact of the vote was that energy prices sold off hard. But it was mainly spot prices that go hit while longer dated prices haven’t meaningfully sold off. The reason is that speculative positions in WTI and Brent were close to all-time highs before the vote (see Figure 2). These positions tend to be in the front of the curve and have pushed time-spreads well beyond what is currently warranted by inventories (see Something’s got to give in the oil market, May 3, 2016). The leave vote caused massive sell-off in risky assets, and naturally oil was hit too with front end prices down 6% overnight.

Figure 2: As speculative positions in oil where near all-time highs, front-end prices sold off sharply with the general market sell-off after the vote
Million barrels, WTI (LHS), Brent (RHS)


Source: Bloomberg, Goldmoney Research

The risk to energy prices is that in the aftermath of the vote, global economic growth slows down, which would push the clean-up of the oil market further back in time. We currently expect that global inventories peak in late summer and then decline relatively quickly. A delay in the normalization of stocks would put a lot of downward pressure on front end prices as the curve is currently already pricing in that inventories are normalized. Importantly, the back-end of the curve (which drives gold prices) would not be affected by such a price move in the front. However, if central banks revert to more drastic measures (like NIRP in the US or more QE) and this is seen by the market as creating inflation in real assets, we expect longer dated prices to actually rise.

The unknown variables

Measureable changes in real interest rates, central bank policy and longer-dated energy prices can explain most of the changes in the gold price in the past. However, we can also think of new drivers that impact the gold price going forward, something we haven’t experienced yet. One risk is that the leave vote is the starting shot of something much bigger. The panicking reaction of the financial markets is a clear signal that the monetary foundations stand on extremely shaky ground. Nowhere is this more visible than in the European banks.

As our colleague Alasdair McLeod writes in his recent report (see Brexit is getting the blame, June 16, 2016):

“Caught in the middle of these imbalances are the private sector banks. Because of the scale of these problems, it is no longer a patch-and-mend issue, but a serious systemic problem. The European banking system has been struggling for survival ever since the Lehman crisis, reflected in the dismal performance of share prices for nearly all the major banks.”

And further:

”The other evidence of banking woes is the flight of investment capital into government bonds from cash and deposits held within the banking system, so much so that Germany’s 10-year bond now carries a negative redemption yield. The flight into tangible bonds is so pronounced, that €400bn of investment grade corporate bonds are also on negative redemption yields. Market commentators are blaming this on fear of Brexit, but one look at the financial condition of the European banks tells us a different story. The banks must be struggling with deposit contraction on their balance sheets, fuelled by a combination of negative interest rates and systemic fears, at a time when their loan books are burdened with bad and irrecoverable debts. It looks like the modern equivalent of an old-fashioned run on the banking system, led by the pension and insurance companies, which are becoming increasingly concerned about leaving balances with the banks.”

A loss in confidence in the monetary system could have a far bigger impact on gold prices than changes in real-interest rates and longer dated energy prices alone.

View the entire Research Piece as a PDF here...

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 consequences of leaving the party

Thu, 06/23/2016 - 22:45
The collective decision of the British electorate is to reject the recommendation of its government, excepting those of its few dissenting ministers, that Britain should remain in Europe.

It is a signal failure of government policy. Above all, it is a failure that undermines the state’s control over ordinary people. Time will tell whether it is just a temporary setback for the world’s economic planners, or the removal of a keystone supporting the whole structure of modern statism.

There are, therefore, two aspects of this development that must be considered, domestic UK politics and the international economic and political consequences.

There can be little doubt that David Cameron and George Osborne the Chancellor are now only caretakers, with the duty of managing a planned withdrawal from Europe until their replacement as executive politicians. The withdrawal will be a lengthy process, which over the next two years at least, will lead to the final, official separation. It is possible there will be attempts by the European elite in Frankfurt and Paris, to come up with proposals to keep Britain in the EU club and to force a second referendum. Any such attempt will fail, because it cannot even be entertained by a caretaker Prime Minister.

David Cameron’s days as Prime Minister are numbered and he now has no real authority. The Conservatives will have to elect a new leader, and the bookies’ favourite is almost certain to be Boris Johnson. He is likely to be elected by the Conservative Party by the end of this year.

Britain’s future will therefore be subject to the policies of a Boris-led government, which it has to be admitted, will have obtained power basically through the failure of the Remain camp to come up with a convincing argument. It was arguably Remain that lost, and not Leave that won.

While the Leave camp campaigned on an agenda, which by implication was for freer markets, it is another thing to assume that regulations and red-tape will actually be rescinded. Therefore, a cynic might with justification point out that instead of being controlled by one bunch of inept politicians in Brussels, the British economy will be run by another bunch of inept politicians in Westminster.

The reality is that Boris Johnson, if he becomes Prime Minister, and his future government are creatures of the system. Importantly, they lack the intellectual basis to confidently challenge it. Doubtless, they will consult the same advisors who supported Remain, not just in the civil service, but in the private sector banks and in big business. No politician, unless he really understands the economic challenge, is immune from the persuasive efforts of these lobbyists and vested interests.

Britain’s progress from being part of a European super-state to full independence is therefore unlikely to be smooth. The UK will, once again, be more exposed to the discipline of private sector markets. Sterling markets are not too big for speculators to attack successfully. There is a significant risk, in the short-term at least, that Britain will stumble from sterling crisis to sterling crisis.

We could argue that from today, nothing immediately changes. Britain will still be an EU member for the next two years. This is true, but it ignores the fact that markets are forward-looking, and will not treat government procrastination kindly. It will be a steep learning curve for Boris & Co.

Two bits of unfinished business will have to be addressed. There is little doubt that the post-referendum collapse in sterling was exacerbated by the derogatory statements of two men, George Osborne, the Chancellor, and Mark Carney, the Governor of the Bank of England. Both men in office have a duty not to undermine the economy or the currency in their statements. Some latitude can be given in this matter to an incumbent politician, but not to the head of a central bank.

If Remain had prevailed, they would have got away with it. But it did not, and the Leave vote carried the day despite their threats. The consequences of their scare tactics, it could be argued, have not only made things worse for sterling and sterling-denominated financial markets than they would otherwise be, but their statements have contributed to a wider market crisis. Both men are therefore likely to be forced from office sooner rather than later.

Black swans and just deserts

The immediate response in global markets to the Leave surprise has been one of panic, starting with Asian markets, and a yen soaring to under 103 to the dollar. Gold has been just about the only bright spot, jumping by over 6% to $1340 at one point. Given sterling’s weakness, gold has risen more dramatically measured in pounds, by nearly 20% to £1,000 per ounce. Asian equity markets are taking it badly, with the Japanese market down over 7.5%.

This is the overnight market news.  With a bit of luck, traders might be more rational when European markets begin trading properly later this morning. However, the global financial and economic situation is dire, and ripe for a crisis. At particular risk are the European banks, whose complacent bets on a Remain result will hurt them badly. Expect the share prices of banks such as Deutsche, UniCredit and Credit Suisse to plumb new lows, fuelling concerns about their solvency.

That is the black swan. Just deserts are the fare of politicians in Europe and the crew at the IMF. The EU is faced with populist demands for democracy, or at least a better system than on offer from the EU hierarchy. It will be lucky to avoid further disintegration, with ex-members seeking their own trade alliances. That is, if a systemic banking crisis doesn’t get it first.

The IMF also made a very bad and inappropriate call, with Christine Lagarde publicly supporting the Remain mantra of gloom and doom in the event of leave. This important institution, which issues the world’s SDRs, would have served markets better if it had kept quiet and prioritised risk control. Its credibility has been badly damaged.

I must end this report on one further gloomy note. The bullion banks in their complacency have built up large short positions in gold, which by 5.00AM London time this morning had soared $100 at one point. Unless, during the course of today’s trade, gold loses most of this remarkable rise, there could be defaults in this market. The gold market, being based on the one form of money that is no one else’s risk, is central to the whole financial system. This could turn out to be the largest worry of 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.

The consequences of leaving the party

Thu, 06/23/2016 - 21:45
The collective decision of the British electorate is to reject the recommendation of its government, excepting those of its few dissenting ministers, that Britain should remain in Europe.

It is a signal failure of government policy. Above all, it is a failure that undermines the state’s control over ordinary people. Time will tell whether it is just a temporary setback for the world’s economic planners, or the removal of a keystone supporting the whole structure of modern statism.

There are, therefore, two aspects of this development that must be considered, domestic UK politics and the international economic and political consequences.

There can be little doubt that David Cameron and George Osborne the Chancellor are now only caretakers, with the duty of managing a planned withdrawal from Europe until their replacement as executive politicians. The withdrawal will be a lengthy process, which over the next two years at least, will lead to the final, official separation. It is possible there will be attempts by the European elite in Frankfurt and Paris, to come up with proposals to keep Britain in the EU club and to force a second referendum. Any such attempt will fail, because it cannot even be entertained by a caretaker Prime Minister.

David Cameron’s days as Prime Minister are numbered and he now has no real authority. The Conservatives will have to elect a new leader, and the bookies’ favourite is almost certain to be Boris Johnson. He is likely to be elected by the Conservative Party by the end of this year.

Britain’s future will therefore be subject to the policies of a Boris-led government, which it has to be admitted, will have obtained power basically through the failure of the Remain camp to come up with a convincing argument. It was arguably Remain that lost, and not Leave that won.

While the Leave camp campaigned on an agenda, which by implication was for freer markets, it is another thing to assume that regulations and red-tape will actually be rescinded. Therefore, a cynic might with justification point out that instead of being controlled by one bunch of inept politicians in Brussels, the British economy will be run by another bunch of inept politicians in Westminster.

The reality is that Boris Johnson, if he becomes Prime Minister, and his future government are creatures of the system. Importantly, they lack the intellectual basis to confidently challenge it. Doubtless, they will consult the same advisors who supported Remain, not just in the civil service, but in the private sector banks and in big business. No politician, unless he really understands the economic challenge, is immune from the persuasive efforts of these lobbyists and vested interests.

Britain’s progress from being part of a European super-state to full independence is therefore unlikely to be smooth. The UK will, once again, be more exposed to the discipline of private sector markets. Sterling markets are not too big for speculators to attack successfully. There is a significant risk, in the short-term at least, that Britain will stumble from sterling crisis to sterling crisis.

We could argue that from today, nothing immediately changes. Britain will still be an EU member for the next two years. This is true, but it ignores the fact that markets are forward-looking, and will not treat government procrastination kindly. It will be a steep learning curve for Boris & Co.

Two bits of unfinished business will have to be addressed. There is little doubt that the post-referendum collapse in sterling was exacerbated by the derogatory statements of two men, George Osborne, the Chancellor, and Mark Carney, the Governor of the Bank of England. Both men in office have a duty not to undermine the economy or the currency in their statements. Some latitude can be given in this matter to an incumbent politician, but not to the head of a central bank.

f Remain had prevailed, they would have got away with it. But it did not, and the Leave vote carried the day despite their threats. The consequences of their scare tactics, it could be argued, have not only made things worse for sterling and sterling-denominated financial markets than they would otherwise be, but their statements have contributed to a wider market crisis. Both men are therefore likely to be forced from office sooner rather than later.

Black swans and just deserts

The immediate response in global markets to the Leave surprise has been one of panic, starting with Asian markets, and a yen soaring to under 103 to the dollar. Gold has been just about the only bright spot, jumping by over 6% to $1340 at one point. Given sterling’s weakness, gold has risen more dramatically measured in pounds, by nearly 20% to £1,000 per ounce. Asian equity markets are taking it badly, with the Japanese market down over 7.5%.

This is the overnight market news.  With a bit of luck, traders might be more rational when European markets begin trading properly later this morning. However, the global financial and economic situation is dire, and ripe for a crisis. At particular risk are the European banks, whose complacent bets on a Remain result will hurt them badly. Expect the share prices of banks such as Deutsche, UniCredit and Credit Suisse to plumb new lows, fuelling concerns about their solvency.

That is the black swan. Just deserts are the fare of politicians in Europe and the crew at the IMF. The EU is faced with populist demands for democracy, or at least a better system than on offer from the EU hierarchy. It will be lucky to avoid further disintegration, with ex-members seeking their own trade alliances. That is, if a systemic banking crisis doesn’t get it first.

The IMF also made a very bad and inappropriate call, with Christine Lagarde publicly supporting the Remain mantra of gloom and doom in the event of leave. This important institution, which issues the world’s SDRs, would have served markets better if it had kept quiet and prioritised risk control. Its credibility has been badly damaged.

I must end this report on one further gloomy note. The bullion banks in their complacency have built up large short positions in gold, which by 5.00AM London time this morning had soared $100 at one point. Unless, during the course of today’s trade, gold loses most of this remarkable rise, there could be defaults in this market. The gold market, being based on the one form of money that is no one else’s risk, is central to the whole financial system. This could turn out to be the largest worry of 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.

Goldmoney Presents Max Keiser Live on Stage

Thu, 06/23/2016 - 12:19
Goldmoney Presents The Keisers Live on Stage

Max Keiser and Stacy Herbert, hosts of the Keiser Report, joined Goldmoney CEO Roy Sebag and chief strategy officer Josh Crumb for a lively discussion about gold ownership, banking, Bitcoin, and monetary choice. Recorded live at the Isabel Bader Theatre in Toronto, Canada.

 

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 form 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 co

Dealing Desk: Brexit Discussions Control Precious Metals

Thu, 06/23/2016 - 11:58
This week, clients have been net selling gold and silver whilst net buying platinum and palladium.

Clients have been speculating on the market conditions ahead of the Brexit referendum. There has been increase in client buying activity this afternoon especially as we draw closer to the releasing of the results.

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

Kelly-Ann Kearsey, Dealing Manager at Goldmoney said that gold hovered near its lowest in over a week on Wednesday as Asian stocks rose; this followed into Thursday, as gold touched a two-week low in advance of the much anticipated Brexit referendum. The final decision will be announced tomorrow as to whether the UK will stay or leave the European Union.

Should the UK vote to leave the European Union, more pressure will be put on the global economy, giving support to bullion’s safe-haven appeal, which was also a possible support for the gold price last week being above USD1,300/oz.

The opinion polls conducted immediately prior to the polling stations opening suggested that a ‘Bremain’ is more likely than a ‘Brexit’ which is a likely cause behind the retreat in price this week. Should they vote to keep the UK within the EU, volatility of the precious metals could well increase.

Looking forwards into next week, we can expect to see the US GDP figures being released on Tuesday and Janet Yellen from the FOMC will also be speaking on Wednesday. After the referendum in the UK, this could be the next data to either give support or suppress the precious metals.

23/06/16 16:00. Gold lost 3.8% to $1,263.30, Silver decreased 2.6% to $17.30, Platinum fell 1.8% to $966.65 and Palladium increased 5.4% to $563.45 Gold/Silver ratio: 73

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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Market Report: Gold sets new post-bear market high

Fri, 06/17/2016 - 06:21
Precious metals had a strong performance this week, so much so that yesterday gold soared through the $1308 level, long regarded as the technical point which confirms, once breached, that the bear market is over.

Having closed at $1276 last Friday, yesterday gold traded as high as $1314, and silver at $17.84. Then the news that a Labour MP had been shot in her constituency, accompanied by unfounded rumours that the referendum might be postponed, reversed sterling’s downtrend. Equity markets rallied, and precious metal prices dropped, losing all the week’s gains in just a few hours. The turnaround in the gold price was $33, to close down $14 on a volatile day, and silver lost 35 cents to close at $17.22.

In early trade this morning, European time, prices were steadier, with gold up a dollar at $1283, and silver up ten cents at $17.32. Given the strength and speed of the rise over the last thirteen trading sessions, a correction of yesterday’s magnitude could be expected. Furthermore, speculative traders have good short-term profits to take, and no doubt the bullion banks who are short were itching to mark prices down ahead of the weekend.

The assumption that Brexit alone is behind current market instability appears too simplistic. Sterling has been weak, but not that weak. It certainly held the $1.40 level yesterday, before bouncing yesterday afternoon to $1.4270, almost unchanged from the previous Friday’s close. One cannot help thinking that if the Brexit story was the prime driver of global markets, not only would sterling have traded lower than it did, but selling of sterling should have pushed UK gilt yields higher. Instead, gilt yields fell to record lows, which is inconsistent with a supposed capital flight from sterling.

This is not to say that Brexit is unimportant. Indeed, Janet Yellen cited it as an uncertainty following the FOMC’s decision on Wednesday to keep rates on hold. If the British vote for Brexit, it will damage the EU, a prospect which is generating real concern in Brussels.

Meanwhile, the Government and the Bank of England is doing no one any favours by telling markets that Brexit will lead to economic collapse, higher taxes, higher interest rates, and all the rest of it. Given that withdrawing from the EU is a gradual phased process, as a US President once famously said, the only thing we have to fear, is fear itself.

There are therefore other factors at play, and the obvious one is the weakness of the European banks. The share prices of a number of systemically important banks have halved over the last twelve months, while Eurozone, Swiss and Danish bond yields have gone yet more negative. In other words, institutions are prepared to pay money not to have liquidity on deposit with the banks, and the fact that throughout Europe bond yields are behaving in this way is a strong indication that worries about banks must be spreading.

However, gold in sterling is performing very strongly, as shown in the next chart.
 

At best, gold in sterling peaked with a rise of 29% on the year so far, before settling at up 25% this morning.

It would appear that in dollars, pounds and euros, the period of price consolidation over the last three months may be over, and following some profit-taking, prices now have the potential to rise further still. This is the technical implication of yesterday’s breach of that $1308 level.

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: Safe-Haven Gold Breaks $1,300/oz

Fri, 06/17/2016 - 05:22
This week, clients have been net selling gold, silver, and platinum.

Clients have been speculating on the market conditions with the FOMC statement being released on Wednesday and ahead of the Brexit referendum. Clients have been taking advantage of the higher pricing, particularly on Thursday when the price soared above USD1,300/oz, which was last briefly seen at the beginning of May 2016.

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

Kelly-Ann Kearsey, Dealing Manager at GoldMoney said that metal prices throughout the week have been steadily regaining momentum, with gold reaching a 6-week high on Thursday. The main support for the current price increase could be due to the FOMC as they announced on Wednesday that they would be holding the target rate at range of 0.25 to 0.50 percent, which was expected. However, FOMC had dovish views with regards to job gains as it was previously described as ‘continuing to strengthen’ but has now been described as ‘having diminished’.

Gold is being seen more as a safe-haven asset due to the uncertainty with regards to the upcoming Brexit vote, negative interest rates in Japan and Europe, along with a weaker US dollar.

Silver has also seen price increases this week as it reached a spot high of USD17.86/oz on Thursday. However, the move has been slightly weaker for silver as the gold to silver ratio increases back to 74.

16/06/16 16:00. Gold gained 3.7% to $1,312.56, Silver increased 3.6% to $17.76, Platinum lost 1.2% to $984.80 and Palladium decreased 3.8% to $534.40 Gold/Silver ratio: 74

NOTES TO EDITOR
For more information, and to arrange interviews, please contact Emily Cornelius, Communications & PR Tel: + 1 647 499 6748 or email: Emily.Cornelius@GoldMoney.com

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Brexit is getting the blame

Thu, 06/16/2016 - 06:23
Brexit is not the most important problem facing markets, it is mounting problems in the European banks.

But before looking at that systemic issue, I will summarise the Brexit position, from the trenches, in the last few days before the referendum.

In the run-up to Britain’s referendum on 23rd June, the Treasury was tasked with modelling the economy, post Brexit. The result was George Osborn claimed that a Brexit vote could cost every household £4,300. This is the underlying reason that markets, allegedly, are frightened of Brexit.

One suspects that if the Treasury models had suggested there is little cost to leaving, the result would have not been published and George Osborne would have contrived a different argument. Anyway, we all know that econometric models suffer from garbage in, garbage out, but the Treasury is meant to be authoritative and trusted. However, a new paper by Professor David Blake of the Cass Business school points out “the extraordinary abuse of economic models in the EU Referendum debate”, and he is moved to term the two Treasury reports that gave the Chancellor his facts as “dodgy dossiers”.i

Any good Austrian economist can tell you why economic models do not work. Without going into it here, models should simply be disregarded. Professor Blake’s paper exposes the techniques, as well as the statistical assumptions, employed by the British government when using econometric modelling to frighten voters into voting to remain. Separately, a new book co-authored by Dr Radomir Tylecote and Sir Bill Cash charts the history of the EU project, from America’s post-war strategy, implemented through the American Committee on United Europe in 1948, with strategic assumptions that persist to the present day.ii

The paper and the book taken together expose the truths withheld or obscured by the British government at the time of the first referendum, and the use of a similar approach today. This time, the vested interests and scare tactics used by the government appear to have begun to smell to the electorate like a long-dead rat. Instead, ordinary voters are more worried about the high levels of immigration and the strains placed on health and education services, the housing shortage, and the suppression of wages.

George Osborne has admitted that the Treasury is working with the Bank of England on Brexit contingency plans, but no plans have emerged so far to save the necks of cabinet ministers in the event of a Remain vote. A win for Remain will be only the start of their problems, unless, as seems most unlikely, Remain wins by a clear margin.

In the event of a narrow win for the establishment, which is the outcome pollsters currently expect, claims that it would be better to be inside the EU, where Britain can influence policy, will almost certainly be proved to be an illusion. The UK’s referendum will have threatened the future of the EU project, and it would be entirely natural for a very relieved Brussels to regard the British government as having lost its credibility and to treat it with disdain. Britain is easily out-voted in the Council of Ministers, having only 13% of the votes, and the Franco-German duopoly will surely ensure Britain is side-lined in all policy issues. The idea that Britain is protected by opt-outs will be exposed as wholly inconsistent with EU treaties, and therefore the facts.

Democracy is not only ignored by the EU’s unelected commissioners; it is written out of the EU’s constitution. There should be no doubt about Brussel’s view of democracy and referenda. Jean-Claude Junker, President of the European Commission, is reported to have said, “There can be no democratic choice against the EU treaties”, and Celia Malmstrom, the EU Commissioner for Trade, said “I don’t take my mandate from the European people”.

Therefore, a British government minister rooting for Remain today will be in an untenable position in the event that Remain actually wins. Unless it is the overwhelming public choice, a public which feels cheated by the political establishment will turn against it, as will the members of the parliamentary party that campaigned for Brexit. The Conservatives would be bound to face a severe internal crisis. It appears likely that so long as the polls indicate a close result, we can expect the self-interests of the political class to wane in its support for Remain, and to drift towards Brexit, because both the party and power are more important to many of the Remainers than the European issue.

This development is not currently discounted by the media, and jumping ship is always risky in politics. But if this analysis is correct, it may further boost the Brexit cause. Already, the opinion polls are moving Brexit into the lead, and if this momentum continues in the short time left, Brexit could actually win the day. But, as they say, a week is a long time in politics, and we have one week to go before the referendum.

Surprisingly perhaps, Brexit would therefore be the least contentious and therefore the best outcome for the Conservative Party, for the reasons mentioned above. This would end an argument which has split the party since Macmillan was Prime Minister, and when Conservative voters were first persuaded the Common Market was a free market. If the referendum result is for Brexit, politicians in favour of Remain will simply submit to the wishes of the electorate, adapt to the new reality, and wait for the controversy to blow over. Nothing will happen immediately anyway, because it is likely to take at least two or three years to disengage from the EU.

The danger of this outcome to the EU project is suddenly becoming a real threat to the Brussels establishment. Donald Tusk, the Polish politician and historian, who is the current President of the European Council, warned earlier this week in an interview with Germany’s Bild that Brexit “could be the start of the process of destruction of not only the EU, but also of the Western political civilisation”. A bit over the top perhaps, but bear in mind that Poland feels insecure with its Eastern neighbours.

It’s all about the banks

Political instability for the EU is a significant and visible threat, but is not the immediate problem, which is financial. As a result of savings and spending imbalances, none of the core Eurozone states can stand on their own. Substantially, Germany’s private sector savings are loaned to the governments of, and businesses in, France Italy Spain Portugal and Greece. None of these governments are able to repay German savers, nor are they able to roll over increasing debts indefinitely. Furthermore, bad debts are piling up in their private sectors, with Italy now a basket case, where non-performing private sector bank loans officially amount to nearly 20% of GDP.iii

Caught in the middle of these imbalances are the private sector banks. Because of the scale of these problems, it is no longer a patch-and-mend issue, but a serious systemic problem. The European banking system has been struggling for survival ever since the Lehman crisis, reflected in the dismal performance of share prices for nearly all the major banks.

The chart below illustrates how these problems are reflected in just three leading banks’ share prices over the last twelve months.

Since this time last year, UniCredit, Credit Suisse and Deutsche Bank have seen their share prices more than halve. Worryingly, the crisis lows of last February, when the Italian banking system’s current difficulties began to surface in the financial press, are being breached.

Analysts at Morgan Stanley are also worried. According to a recent article published by Reuters, they believe that UniCredit and Deutsche Bank may struggle to pay coupons on their Additional Tier 1 capital, or contingent capital bonds (cocos). Morgan Stanley added that cocos issued by Credit Agricole, BNP Paribas, and Credit Suisse could also be at risk.v

The other evidence of banking woes is the flight of investment capital into government bonds from cash and deposits held within the banking system, so much so that Germany’s 10-year bund now carries a negative redemption yield. The flight into tangible bonds is so pronounced, that €400bn of investment grade corporate bonds are also on negative redemption yields. Market commentators are blaming this on fear of Brexit, but one look at the financial condition of the European banks tells us a different story. The banks must be struggling with deposit contraction on their balance sheets, fuelled by a combination of negative interest rates and systemic fears, at a time when their loan books are burdened with bad and irrecoverable debts. It looks like the modern equivalent of an old-fashioned run on the banking system, led by the pension and insurance companies, which are becoming increasingly concerned about leaving balances with the banks.

Even though the ECB’s Mario Draghi has committed to do “whatever it takes,” the Eurozone has become a dangerous place for savings and investment.

Whatever the outcome of the Brexit referendum next week, it would appear that nothing can stop a systemic crisis developing in Europe. The two issues are unrelated, though Brexit could be blamed as a trigger. Brexit will come and go, but a European banking failure will remain with us, whatever happens on June 23rd.

[i] The phrase “dodgy dossiers” first surfaced in allegations that the British Government fabricated intelligence over Iraq’s weapons of mass destruction, which never existed.  I’m grateful to Professor Keven Dowd for drawing this important paper to my attention.

[ii] From Brussels with love. Duckworth, 2016.

[iii] See my article, The Eurozone is the greatest danger, Goldmoney Insights, 19 May.

[iv] See https://uk.finance.yahoo.com/news/deutsche-bank-unicredit-at1-coupons-105358608.html

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.

Blueprint for a bright British future post-Brexit

Tue, 06/14/2016 - 12:31
Blueprint for a bright British future post-Brexit

Introduction

As polls are beginning to show a growing lead for the ‘Leave’ campaign in the upcoming Brexit referendum, investors need to consider the potential implications of a ‘Leave’ vote for the British and EU economies, sterling and euro currencies and financial markets generally, as there could be potentially broader spill-over or contagion effects. Most mainstream financial media conclude that Brexit would be almost unambiguously bad. This facile view fails to imagine the possibility, however, that unshackled from the increasingly bureaucratic and highly-regulated EU, Britain might use her renewed independence to undergo a dramatic economic restructuring, thereby restoring the dynamism and high growth rates of Victorian times. In this report we consider what actions Britain could take in this regard, focusing on five policy areas. The results could be dramatic.

View the entire Research Piece as a PDF here...

FIVE ELEMENTS FOR POST-BREXIT ECONOMIC SUCCESS

Britain was at the center of the industrial revolution which over the course of roughly a century completely transformed the European and North American economies. While associated naturally with technological advances, the industrial revolution nevertheless required a high rate of investment. This was enabled in large part by strong British private property rights and economic policies such as the gold-standard which encouraged a high rate of saving. While many new and promising technologies are coming online today and promise to do so in future, without sufficient savings Britain will not be able to sustain the rates of investment required to realize their potential. Moreover, it stands to reason that you aren’t saving sufficiently if you carry around a massive, accumulating national debt. Debt service is also a drag on future growth. Thus if the British want to prosper long-term, whether inside or outside the EU, they are going to need to reduce the national debt as a share of national income. This is the first, essential element for an independent Britain to thrive.

THE FIRST ELEMENT: DEBT REDUCTION THROUGH INVESTMENT- RATHER THAN CONSUMPTION-LED GROWTH

Of course, this is easier said than done. It is also highly preferable to pay down debt out of a growing rather than stagnating income. Thus the key to successful debt reduction is strong growth. But by ‘growth’ we mean the growth of the capital stock, not the growth of consumption. This is the first element for success.

Although period novels and films may encourage us to see high Victorian culture as one of lavish consumption, the growth of Britain into the world’s premier industrial power by mid-19th century has far more to do with high rates of investment rather than consumption. As mentioned above, Britain was as the heart of the industrial revolution, the most rapid accumulation of productive capital in recorded human history. But how could the British best facilitate comparably high rates of investment today?

There are several policies that would quickly create an investment boom. Most important, Britain should do better than Celtic tiger Ireland, with its low corporate tax rate, and abolish the corporate income tax altogether. Yes, you read that right: The effective corporate income tax rate in many countries now approaches zero anyway, due to all manner of creative cross-border accounting techniques. But while it might be creative, international tax arbitrage accounting and associated legal work is also expensive. Corporations the world over would far prefer to put clever employees to work on real productive activities if possible, rather than on elaborate accounting schemes requiring constant updating, a dead-weight loss for their customers who pay higher prices as a result.

For those concerned about the tax revenue implications of a zero corporate tax rate, don’t be. What is not paid by corporations in tax is eventually paid out in profits (dividends). Those can be taxed instead, as ordinary income like anything else, thereby simplifying the local personal income tax, which ideally should be a flat amount, say 20%, prepared on a single sheet of paper once a year. So not only will international corporations want to relocate to and invest in Britain; skilled workers will be attracted by the only ‘One-Rate, One-Page’ personal income tax in the entire Anglosphere. Those already residing in Britain will benefit most from the boost to economic activity and the associated general expansion of the domestic labor market.

Another tax policy that would both attract global investment and simplify things would be to tax capital gains at the same flat rate as on ordinary income. Capital gains are really nothing more than deferred investment income anyway, so by leaving the interim income untaxed, a huge incentive to save is created, thereby providing for the domestic savings required to fund the high investment rates enabling strong and sustainable growth.

As for other taxes, there is much more that Britain could do to attract investment and support healthy, sustainable growth. For example, Britain might sharply reduce duties on airfares currently mandated by EU law. This would have the effect of re-routing much transcontinental air traffic, including profitable connecting flights, from continental hub airports to Britain.

THE SECOND ELEMENT: DEVELOPING HUMAN CAPITAL AT HOME; ATTRACTING HUMAN CAPITAL FROM ABROAD

Developing human capital, at which the British excelled in the 19th century, is the second element. Consider which industries are most likely to relocate to take advantage of Britain’s highly favorable tax regime: Those requiring neither natural resources nor extensive industrial infrastructure, that is, those comprised primarily of human capital. Although financial services come to mind, there is currently tremendous overcapacity in this area, including in unproductive yet risky activities. Better would be to concentrate on health care, for example, an industry faced with soaring costs and stifling regulation in much of the world.

Britain could, inside of just a few years, become the world’s premier destination for so-called ‘healthcare tourism’. Britain lies directly under some of the world’s busiest airline routes, an ideal location. Medical professionals from all over the world would be attracted by the zero tax rates on their small businesses and low tax rates on paid-out profits, passing much of the savings along to their patients. In turn, patients from all over the world would travel to Britain, attracted by the low cost and high quality of healthcare. To further lower costs, the British could leverage off their strong legal traditions to reduce opaque malpractice liability disputes to a minimum, thereby making certain that the healthcare industry remains centered around doctors, nurses and patients, rather than lawyers, regulators and insurance companies, as has become the case in the US, for example.

By attracting much global healthcare talent, Britain could easily become a leading global location for medical research, development, training and education to rival the US, where costs are now soaring out of control. Healthcare could thus provide the 21st century equivalent of, say, farm machinery or shipbuilding in the 19th: A central industry that, in turn, facilitated the development of many other associated industries.

No doubt, in addition to healthcare, at a minimum a handful of other human capital rich industries would take advantage of attractive British tax policies. Software firms, nearly devoid of anything other than human capital, would almost certainly respond. Film makers and artists of all stripes would be enticed by the low tax rates on their creative productions. Accountancy and business services firms would follow all of the above.

THE THIRD ELEMENT: SOUND MONEY AND BANKING

A third essential element for success is to implement traditional British principles for sound banking. This is of utmost importance due to the potential monetary and financial instability of the UK and much of the broader Anglosphere.

As a first step, Britain should re-introduce the traditional Scottish ‘free-banking’ model, which insulated Scotland from the serial financial crises arising in England as a result of the excessive risk-taking encouraged by the ‘lender of last resort’ function of the Bank of England. As George Selgin observes, although Victorian financial journalist, Walter Bagehot, is famous for his dictum: “Lend freely, against good collateral, at penalty rates of interest,” in fact Bagehot held that this was, at best, an expedient measure to discourage excessive reliance on the Bank. In fact, he preferred the Bank be abolished by an act of Parliament and he admired the alternative Scottish model for its comparable stability.

Operating under a ‘free banking’ model, banks would find they were under tremendous pressure from shareholders (or bondholders) to maintain a large capital buffer in the event of financial turmoil arising from other banks’ activities. Any bank perceived by its peers as taking excessive risks would find it faced a higher cost of access interbank liquidity. As such, the system could self-regulate. What worked so well in Scotland in the 19th century (and in Canada during the 20th) could easily be replicated by an independent Britain today subject to writing the appropriate banking legislation.

No banking system can be truly sound, however, if it operates with a flawed currency. It is no coincidence that the industrial revolution and success of the British Empire over many decades took place while Britain operated under the classical gold standard. Indeed, it was only when the gold standard was abandoned to finance WWI that Britain began to chronically underperform other economies, including that of the United States. (Britain would subsequently experiment with socialism in the 1960s and 1970s, leading to further relative underperformance.)

THE FOURTH ELEMENT: DECENTRALIZATION AND ACCOUNTABILITY

The fourth element is a traditional British skepticism of central authority, which includes a fear of conquest from a continental power. Indeed, post-imperial British national pride rests to a great extent on the British success in retaining its independence through the 20th century world wars. How ironic it is, when viewed in that historical context, that the Brexit debate of today takes place because Britain has in recent decades willingly ceded material sovereign powers to the European bureaucracy in Brussels.

There are an increasing number of European countries and regions who are skeptical that the EU continues to operate in their respective interests. The British independence movement is thus not merely a local phenomenon. There are peoples throughout the EU seeking greater autonomy. The Belgian Flemings have been at it for decades, as have the Spanish Basques and Catalonians. Various regional organizations in northern Italy have pressed for degrees of independence in recent years. It stands to reason that national or local government tends to be more responsive and accountable to the citizenry than supranational. More efficiency and effectiveness in government is the result.

THE FIFTH ELEMENT: PRIVATE CHARITY

Finally, there is the fifth element: A strong tradition of private charity. There are few countries in the world in which private charity and volunteering work are held in such high regard. Yes, as with most all Europeans, the British have become more secular in recent decades and charity has far fewer of the religious associations it once had.

The charitable tradition is misinterpreted by some to support a unique form of British socialism, but this contradicts the Protestant (ie Church of England) concept of man’s direct relationship with God. Protestantism holds that to work hard, to be thrifty, to be charitable, is to do God’s work and thus all three can be understood as forms of worship in their own right. However, genuine faith in God, genuine worship, cannot somehow be coerced by a central authority. It must be left to the individual, through their direct relationship to God, to find enlightenment, albeit with the strong support and influence of the local community. To put it somewhat humorously, an English vicar (or Scottish minister) might say to a British socialist: “Jesus told YOU to help the poor, not to create a centralized government bureaucracy to coerce others into doing so on your behalf!”

Nowhere in the developed world today is private charity taken so seriously as in the United States. Notwithstanding the wayward cultural traits of modern America, active private charity remains an integral part of the social fabric. This is without doubt a legacy of the Protestant cultural tradition from Britain and other northern European countries: Limited government yes, but with limited government comes far greater private and personal responsibility to help the poor or otherwise needy in the community.

So in the home-ruled Britain of the future, in which national sovereignty reasserts itself and government becomes more limited as per British tradition, so the vacuum can be filled by private charitable initiative. This will serve to assist those who struggle to wean themselves off a shrinking public sector safety net, notwithstanding the strong labor market associated with high rates of domestic and foreign investment.

Yes, some Brits might be intimidated by this ambitious plan, notwithstanding its firm rooting in British historical and cultural traditions. But with polls showing a growing number of British citizens prepared to countenance the uncertainties associated with reasserting their national sovereignty, perhaps those traditions could be about to make a comeback. If so, Britain may end up astonishing EU member countries and the rest of the world with a historic economic renaissance.

View the entire Research Piece as a PDF here...

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: Sharp recovery

Fri, 06/10/2016 - 04:15
Gold and silver enjoyed a strong recovery in the wake of an atrocious jobs report last Friday.

Gold and silver prices were given further upside momentum when Janet Yellen, speaking at the World Affairs Council in Philadelphia on Monday, consequently took a softer line on interest rate rises. Gold, which had bottomed at $1200 on Wednesday last week, took off like a scalded rabbit on last Friday’s jobs release, gaining $22 in seven minutes. If nothing else, the sharpness of the move reflected the high level of short-term bearishness. Anyway, it appears that the consolidation phase of this year’s gains may well be over – until, that is, we get the next interest rate scare.

Silver’s gain was more dramatic, as can be seen in the chart above. Only Wednesday last week, silver sold off to as low as $15.84. This week, it had recovered to $17.33 at its best yesterday, a gain of over 9%. Volatility of this sort can be taken as evidence of tight underlying physical supplies.

The make-up of physical demand this year has been very different from 2015, with Chinese deliveries to the general public from the Shanghai Gold Exchange dropping off from the record levels of last year. This is illustrated in the following chart, of monthly gold deliveries in tonnes.

Total deliveries in the first five months of 2016 totalled 834.6 tonnes, compared with 982.73 tonnes for the same period last year. It still represents the bulk of global mine output, but given this decline it is remarkable that the gold price has performed so well. The answer is that western demand, evidenced in increased ETF investment, is more than making up the difference, with GLD, the largest physical ETF, adding 240 tonnes alone. That Chinese demand seems to be cooling probably reflects a decline from the record levels of last year, and also, perhaps, because a series of small devaluations for the yuan has made gold more expensive when priced in yuan.

This change in market dynamics was very much in evidence this week, because the daily trading pattern has been for gold to rise in European and US trading hours, and to consolidate the previous day’s rises during Asian trading. However, the sheer speed of this week’s price rise can be expected to generate some mild profit-taking in European and US trading later today.

Measured in the major currencies, gold’s performance in sterling is now up 22% on the year, aided perhaps by the swing towards a Brexit vote. Gold in euros is up 15%, and in yen 7%. The prices, being lower in these two currencies than in the dollar (up 20%), should generate physical demand from these two currencies, both of which have negative interest rates.

Put another way, gold priced in yen is theoretically too low, because the yen is too strong for its monetary stimulation, compared with gold priced in dollars, where the monetary conditions are more restrictive. It is an anomaly that applies to a lesser extent in euros. So long as these anomalies persist, it is likely to lead to growing demand for physical gold in both Japan and the Eurozone, though any change in Japanese demand so far has been too small to make a material difference.

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 pensions mess: can gold help?

Thu, 06/09/2016 - 11:25
The British have recently seen two unpleasant examples of the cost of pension fund deficits.

A deficit at British Steel, estimated to be about £485m, was followed by a deficit at British Home Stores of £571m. In both cases, pension fund deficits have scuppered corporate rescue plans, because understandably no buyer will take on these liabilities.

These two cases are the small tips of a very large iceberg, and reflect problems not just in Britain, but anywhere where pension schemes exist. They have been brewing for some considerable time, but have escalated as a direct consequence of central banking’s monetary policies. They are a crisis whose cause is concealed not only from the pensioners, but from trustees and investment managers as well.

This article lays out the problem and its scale, so far as it is known, and notes that a pension fund that has a holding in gold is a very rare animal. Indeed, one of the best known examples, the Teacher Retirement System of Texas, holds less than 1% of its $130bn assets in gold.

A short recap of the industry’s post-war development will give the pension issue its context, before commenting on the role gold can play. Pensions have existed for some time, but they really took off after the Second World War, driven by tax policy. Corporations were encouraged to set up pension funds for their workers, with employer and employee contributions being tax deductible.

From a government’s point of view, the tax relief granted cost little in terms of current expenditure, because it replaced the tax income forgone from corporations and employees, with deficit funding through bond markets. Furthermore, the demand for government bonds from accumulating pensions meant that there would always be demand for government debt, and interest paid would be less than otherwise. While governments have generally increased taxes on savings, pension schemes have been encouraged. They have become a material component in the financial system, and the only savings channel encouraged by governments.

In setting up a pension fund, the advising actuaries would have taken all variables into account. Of the many variables, the principal ones are the period of employment required for a full pension, the life expectancies of the scheme members, and the expected return on investments.

We are all aware that pensioners live longer, and that life expectancies have generally been underestimated. This has certainly been a problem. Some countries have responded by raising the retirement age. It is also obvious that rising or falling bond and stock markets have a direct impact on portfolio valuations. However, investment returns in the early days were relatively simple to calculate: they would be the average gross yield to redemption of the bonds that comprised the whole fund. These were mostly government and municipal bonds, and therefore unlikely to default. Bond prices didn’t matter, because they were nearly always held to final redemption at par.

That was fine, until portfolio managers began to explore other investment possibilities in the 1960s. Portfolio allocations started to migrate from low-risk government debt and high-quality corporate bonds, into blue-chip equities. This was the era of the nifty-fifty, and diversification was rewarded with enhanced capital returns over the redemption yield on government bonds. The seventies were somewhat different, with portfolio losses mounting on equities in the savage 1972-74 bear market, but compensation was found in the compounding effect of higher bond yields, which still comprised the dominant portfolio allocation. And we still haven’t mentioned on the most significant factor.

Increasing bond yields over the seventies decade benefited pensions because they allowed actuaries to sign off on lower amounts of capital required to cover pension obligations. This is because the capital required to fund a given income stream is lower when interest and dividends accrue at a high rate of interest, compared with when it accrues a lower rate. For example, an annual commitment to pay pensioners $100m from a portfolio yielding 10% requires it to have a minimum invested value of $1,000m. But a portfolio yielding only 5% has to be worth at least $2,000m to cover the same payment obligation. This is why the assessment of future returns is the most volatile component, leading to unexpected surpluses and deficits as reality unfolds.

Obviously, pension funds which are invested in high quality bonds produce a reasonably certain return, because they are held to maturity, so gross redemption yields are what matter. Equities used to be valued on dividend payments, originally yielding more than government bonds, reflecting their credit risk. That changed in the late 1950s, when portfolio managers began to take a different view, attracted by the potential that equities offered for capital gain. And over time, the potential for returns on equity investments even came to be defined as total returns, de-emphasising the dividend element.

Consequently, actuaries were progressively forced to move from the certain world of gross redemption yields into the uncertain world of guessing future returns on equities. By the 1990s many pension funds, faced with declining bond yields, were increasing their allocations in equities, property and even alternative investments such as art, to the point where bonds were often a minor component of pension portfolios. Inherently speculative capital gains on investments were generating valuation surpluses large enough to allow companies to take contribution holidays.

The outperformance of equities drove the shift from bonds to equities. This is illustrated in the chart below, which clearly shows why over the long term, allocations in favour of bonds have decreased, while allocations in favour of equities have increased.



However, the 2000-02 bear market created the first significant set of difficulties for pension funds. Not only did equity markets roughly halve, but bond yields continued their decline as well, when the Fed lowered the Fed funds rate from 6 ½% in December 2000 to only 1% eighteen months later. This created a double problem for the pension fund industry, because the sharp decline in equity markets was accompanied by a record low in interest rates. Unlike the seventies, falling equities were not compensated by rising bond yields.
Faced with triggering a wave of insolvencies of large labour-intensive businesses, pension actuaries in the US came under considerable pressure not to show large valuation deficits. The solution was to endorse incautious long-term estimates of total returns in equities. This at least got corporate America off the hook, and actuarial practice elsewhere followed this example. Fortunately, the stock market performed well, doubling between September 2002 and October 2007.

The Lehman crisis that followed hit the pensions industry hard a second time. In the fifteen months to February 2009 the S&P 500 Index more than halved, as did the yield on the long bond. Following this sharp sell-off, valuation problems were partially covered by a stock market recovery, and there was the prospect of higher bond yields when monetary stimulus normalised economic activity. The latter never materialised, and the prop of rising equity markets, after an impressive run, now appears to be stalling. The big problem now, the elephant in the room, is realistic assessments of total return on the amount of capital required to pay existing and future pensioners.

In summary, since the dot-com bubble, we have seen a ratchet effect of declining bond yields, a doubling and then halving of equity markets, leading to alternate periods of deficit reductions followed by deficit increases. This problem has been totally ignored by central banks when setting monetary policy. You could describe the current situation as one of a massive wealth transfer from pension funds to debtors, storing up yet another savings crisis. The idea that monetary policy assists and encourages businesses to grow, ignores the detrimental off-balance sheet effects on the pension liabilities that the same companies now face.

The result is pension fund deficits today stand at record levels, even after a doubling of equity markets over the last five years. A Financial Times article (10 April) reported the deficit on US public pensions at the end of 2015 was $3.4 trillion, and in the UK, the aggregate deficit of some 5,000 pension schemes is estimated at £805bn (FT 27 May). Bear in mind that these numbers are based on total return estimates that are likely to turn out to be far too optimistic, because of the valuation effect described in this article.

Goodness knows how bad it must be for pension funds in countries where negative interest rates have been imposed. The cost in Japan will be reflected in $1.2 trillion of pension assets, and in the Eurozone a further $2.33 trillioni. Of particular concern must be the liabilities faced by the banks in these regions, bringing in a direct systemic element into the equation.

Can gold help?
We can see that pension funds have an enormous and accumulating problem of capital shortfalls, which through over-optimistic assessments of future total returns are likely to be understated. The cost will be swallowed by pensioners in all the advanced nations, who have been promised a certain income in their retirement. It amounts to the impoverishment of the elderly, and the prospective insolvency of companies unable to cover their pension deficits. The question we now need to ask ourselves is whether or not an allocation of gold and related investments can help ameliorate the situation.

Essentially, we are now moving our analysis from considering nominal returns to real returns adjusted for price inflation. At the moment, roughly a third of all sovereign debt carries negative interest rates, but adjusted by consumer price indices, this increases to almost half. Furthermore, if we take into account the simple fact that standardised CPI estimates understate true price inflation, negative real yields probably apply to over three quarters of all sovereign debtii.

The only salvation for pension funds is for global equities to continue to rise at significant rates, yet this seems unlikely given that equities on an historical basis are already extremely expensiveiii. The Grim Reaper is knocking more insistently on the pension fund door.

In the medium to long term, gold has a track record of enhancing investment returns. The reason is very basic: the economic costs of production tend to be considerably more stable measured in gold than in fiat currencies. Given monetary policies are explicitly designed to reduce the purchasing power fiat currencies over time, the price of gold measured in these depreciating currencies is set to rise. With bonds reflecting negative real yields and stock markets wildly overvalued, gold, along with other tangible non-depreciating assets, is therefore the only game in town.

The explanation why gold performs well in deflation is equally simple. With falling prices, the purchasing power of gold tends to rise. Whether or not this is reflected to the same extent in a fiat currency is mainly a function of the rate of monetary expansion in the currency relative to the expansion of the quantity of gold available for monetary use. No prizes for guessing which can be expected to expand fastest.

Therefore, gold has a place in portfolios irrespective of inflationary or deflationary expectations. There is, however, a problem. Global pension fund assets are estimated to have been valued collectively at over $26 trillion at the end of 2014iv, and a one per cent increase in allocation into physical gold is the equivalent of 64,000 tonnes at today’s prices, about 40% the estimated above-ground stocks. Investing in gold mines is similarly constrained.

For an investment in gold, a balanced pension fund portfolio would have to consider an allocation closer to 10%, which on an industry-wide basis is impossible at anything like current prices. Furthermore, the average investment manager has difficulty categorising gold as an investment, unsure if it is a commodity, money, or a hedge against future uncertainty. Ironically, the oldest asset class is now being described as the newest asset class by the few managers showing an interest in gold. There is a considerable educational challenge involved.

Nothing educates more rapidly than experience. If bond yields remain low, and equity markets spend some time just consolidating the rises of the last five years by moving sideways, pension fund deficits will continue to increase to new record levels of deficits. That is probably best-case. Anything else is likely to accelerate the crisis, encouraging investment demand for gold, particularly if, as has been the case so far this year, it continues to outperform both equities and bonds.

The best solution for any pension fund will be to get in early, ahead of its peers.

iSee Pension funds in figures, OECD, May 2015. Other estimates put the figure as high as $36 trillion
iiThese estimates are found in Chart 1 of an article in the June issue of the World Gold Council’s Gold Investor, Too much risk, too little gold: Pension funds and NIRP by Juan Carlos Artigas.
iiiIbid. See Chart 3: ratio between Shiller’s CAPE and 10-year Treasury yield.
ivPension funds in figures, OECD, May 2015.

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 form 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.


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