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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

Goldmoney
Goldmoney is one of the world’s leading providers of physical gold, silver, platinum and palladium for private and corporate customers, allowing users to buy precious metals online. The easy to use website makes investing in gold and other precious metals accessible 24/7.

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.

Further information:
Visit: Goldmoney.com or view our video online

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

GoldMoney
GoldMoney is one of the world’s leading providers of physical gold, silver, platinum and palladium for private and corporate customers, allowing users to buy precious metals online. The easy to use website makes investing in gold and other precious metals accessible 24/7.

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 20,000 customers worldwide and holds over $1billion 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.

Further information:
Visit: Goldmoney.com or view our video online

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.


Dealing Desk: Metals Advance on Weak US Data

Thu, 06/09/2016 - 09:21
This week, clients have continued to net buy silver and platinum, whilst net selling gold and palladium.

Clients have been taking advantage of the lower pricing of silver and platinum. Silver had experienced lows of USD15.97/oz but, throughout the week, has steadily gained to soar above USD17.00/oz.

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

Kelly-Ann Kearsey, Dealing Manager at GoldMoney said: on Friday, we saw the release of the US employment situation data, which proved to be much weaker than expected in May. This led to a weaker U.S dollar and, in turn, led investors to watch for Janet Yellen’s announcement on Monday in order to provide more direction with respect to a possible rate hike.

In line with this news, Thursday saw gold rise more than 1% to reach a 3-week high as fears subsided for a rate hike and the US dollar continued to weaken to a five-week low against a basket of currencies.

Gold gains have lifted the precious metals as silver reached above the USD17.00/oz level, a level last seen three weeks ago, with both platinum and palladium following suit.

Week on week, silver has been the strongest performing metal followed by gold which has also seen a reduction in the gold-to silver ration back down to 73.

09/06/16 16:00. Gold gained 4.6% to $1,265.80, Silver increased 7.3% to $17.14, Platinum rose 3.8% to $996.49 and Palladium increased 3.7% to $555.47 Gold/Silver ratio: 73

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

GoldMoney
GoldMoney is one of the world’s leading providers of physical gold, silver, platinum and palladium for private and corporate customers, allowing users to buy precious metals online. The easy to use website makes investing in gold and other precious metals accessible 24/7.

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 20,000 customers worldwide and holds over $1billion 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.
Further information:

Visit: Goldmoney.com or view our video online

 

Market Report: Testing support levels

Fri, 06/03/2016 - 05:46

Gold and silver prices started the week at a low point, with gold touching $1200.

Round numbers such as this can take on an importance for traders. Silver found support at $15.90 before rallying, but on Wednesday, dipped below this level briefly, trading as low as $15.84. So the post-Monday rally in gold was not confirmed by silver, making the consolidation over the week just that, it being too early to say the May sell-off is over.

It is of minor interest that with London closed for a bank holiday, last Monday’s lows were set with reduced physical trading. In theory, this would have left bullion markets more than usually exposed to the vagaries of futures traders, suggesting a degree of artificiality in prices.

In early European trade this morning gold opened slightly firmer, at $1212, and silver at $16.06.

It would be a bold trader who rules out a further dip in precious metals prices, with gold perhaps testing the $1190 level. However, the reduction in gold’s open interest on Comex, which has fallen nearly 110,000 contracts since 16th May, informs us that speculative positions worth $13.6bn have been extinguished, and the Comex market is no longer overbought.

The underlying position in silver is more solid, with the sharp fall in price not shaking out the bulls so much as in gold, with only 20,000 contracts extinguished, worth about $1.6bn. Both industrial and investment demand for silver are reported to be healthy, while mine output, particularly where silver is a by-product, is expected to be subdued.

Be that as it may, traders will be concerned over gold’s technical position, which has obviously deteriorated. The gold price is now below the 55-day moving average, as shown in the next chart.


Traders could argue that the next support level is the 200-day MA, which is currently at $1163. This would test support in a band from $1190 down to $1150, last established in Q3 2015.

Whether or not this will happen is down to the dollar, with the Fed plainly preparing the ground for another rate increase. The Fed is trapped by its zero rate monetary policy, and must be frustrated at its powerlessness. The result is a 50-50 expectation of a quarter point increase either this month or in July.

This is a tough call, because official statistics, particularly unemployment and core inflation suggests a hike should happen, while business surveys, which are generally downbeat, suggest otherwise. And if inflation continues to rise towards and through the two per cent mark, driven by rising energy and commodity prices, any delay in raising interest rates will be seen as a bad mistake.

Meanwhile, the Eurozone is badly stagnating, and the news from Japan is not good, with a Bank of Japan board member expressing renewed pessimism about the economy, driving the yen sharply higher in the process. The last thing the economists at the Bank of Japan and the ECB want to see is for the US to raise interest rates, when the world appears to be on the brink of recession.

Precious metals have surely discounted a possible rate hike in June/July. Whether or not it happens will probably decide in the short-term whether gold rallies from the $1200 level, or if it moves towards a test of the 200-day moving average.

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: US Data Weighs on Precious Metals

Fri, 06/03/2016 - 05:36
This week, clients have continued to net buy silver and platinum, whilst net selling gold and palladium.

Clients have been taking advantage of the lower pricing on precious metals, particularly silver and platinum. Silver is struggling to stay above the psychological level of $16.00/oz and platinum has retreated back below $1,000.00/oz.

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

Kelly-Ann Kearsey, Dealing Manager at GoldMoney said that U.S. data still continues to weigh on the precious metal prices. Today saw the release of the US May ADP employment report, which showed that employers had added 173,000 jobs; this was better than expected. Following this, the ECB has also concluded its meeting today, with the result that it will keep interest rates unchanged and expect them to remain for an extended period of time.

Platinum and palladium prices appear to have been weighed down by U.S vehicle sales and slower Chinese manufacturing data. Gold was seen turning negative on Wednesday after the US Dollar strengthened on the back of U.S manufacturing data, which has expanded for the third month. The yellow metal rebounded slightly on Thursday; however, silver is near its lowest point since mid-April.

02/06/16 16:00. Gold lost 0.9% to $1,210.64, Silver declined 1.8% to $15.97, Platinum decreased 3.1% to $960.10 and Palladium levelled 0% to $ Gold/Silver ratio: 75

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

GoldMoney
GoldMoney is one of the world’s leading providers of physical gold, silver, platinum and palladium for private and corporate customers, allowing users to buy precious metals online. The easy to use website makes investing in gold and other precious metals accessible 24/7.

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 20,000 customers worldwide and holds over $1billion 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.
Further information:

Visit: Goldmoney.com or view our video online

 

Gold – a reasonable correction?

Thu, 06/02/2016 - 07:48
Gold weakened during May by about $100, from a high point of $1300 to a low of $1200.

This, for technical analysts, is entirely within the normal correction zone of a third to two-thirds of the previous rise, which would be 84 to 167 points.

So the fall is technically reasonable, and doesn’t in itself signify any underlying challenge to the merits of a long position in gold. However, when looking at short-term considerations, we should look at motivations as well. And those clearly are the profit to be made by banks dealing in the paper bullion market, which they can simply overwhelm by issuing short contracts out of thin air. This card has been played successfully yet again, with the bullion banks first creating and then destroying nearly 100,000 contracts, lifting the profits from hapless bulls in the Comex market.

The banks get the money, the punters get the experience, and the evidence disappears. The futures market is demonstrably little more than a financial casino, where the house, comprising the establishment banks, always wins. Financial markets are not about free markets and purposeful pricing, which is why the vast majority of outsiders, including hedge funds, those Masters of the Universe of yore, usually lose. This leads us to an important conclusion: the fall in prices has less to do with a change in outlook for the gold price, and more with the way a casino-like exchange stays in business.

The lesson is that in today’s financial markets, it is monopolisation that drives short-term price relationships, not the genuine investment sentiment that we associate with technical corrections of overbought or oversold conditions. The fact is casinos need punters to continually punt. Let it be someone else.

Investors have to overcome another problem, and that is investing in money is not investing. Investment is what you do with your money. Investing is a process of accepting risk in return for a reward. When you buy Treasuries, you take a risk on your capital, in return for which you are paid interest. The money you use to buy Treasuries is not the investment. And with physical gold, there is no counterparty or issuer risk. It is therefore the ultimate non-investment, simply being sound money.

This informs us how we should approach the subject of allocating wealth and liquidity to physical gold. We are reducing our risk, or avoiding exposure towards other assets and currencies. We can now tackle the subject most investors find so difficult to understand, and that is the relationship between gold and fiat currencies.

Bearing in mind that the risk-free asset is gold, all changes in price can in theory be deemed to come from the fiat currency side in the price relationship. We are putting to one side price manipulation for the purpose of our analysis, as well all debate over efficient market theory. Therefore, the correct expression of price is that the price of the dollar is 1/1200 (0.000833) ounces of pure gold, which is the reciprocal of the normal expression. The chart of the price of the dollar measured in gold from 1978 is shown below.


Looked at this way, it begins to make more sense, because the demise of the dollar as a rival currency to risk-free gold is shown here in its proper context. We can now see that instead of the gold price rising from 1979 onwards, the price of the dollar has been falling. And for confirmation, we only have to recall that the purchasing power of the dollar has declined by 72.3% over the last forty-six years, the period covered by the chart, as measured by the consumer price index.

This leads us on to the next question: do we expect the purchasing power of the dollar to continue to decline in the future? The answer has to be yes, if only because it is deliberate Fed policy.

The Fed has set itself an annual price inflation target measured by the CPI of two per cent. This implies a halving of purchasing power for the dollar in thirty-four years. But the CPI is widely recognised as understating the rise in prices, because the calculation methods have been changed to reduce the apparent price inflation. Shadowstats.com assesses price inflation to be currently running at about 8% using the calculation methodology of 1980, which is close to the Chapwood Index estimate, which is running at about 10%.i

It is clear from these independent reports that the cumulative loss of the dollar’s purchasing power has been and will be far greater than the CPI indicates. In a financial world, which takes the veracity of government statistics for granted without question, the effect has been to under-record the fall in the dollar’s purchasing power, and therefore to overvalue it. That being the case, if markets were discounting the future as they should if they were truly free, the dollar would have fallen significantly further. The base position is therefore the dollar, priced in gold, must be significantly overvalued.

Having established a base position, we now turn to the future relationship between the price of the dollar in gold, and the likely pace of the decline in its purchasing power. Since mid-2014, commodity prices measured in dollars fell sharply until last January, led by oil prices. The Bloomberg Commodity Index fell by 46% between April 2014 and January 2016, since when it has increased by 15%. The question is now whether or not this recovery in commodity prices will hold.

Given our base position has established the dollar’s overvaluation, it seems unlikely that the purchasing power of the dollar has room to increase much against the commodity complex, and certainly not on a sustainable basis. Furthermore, demand for dollars from actors in foreign markets seems set to decline, with the demise of the petrodollar, increasing use of the yuan for trade settlement, and subdued growth in global trade of finished goods, all leading to falling demand for dollars. Meanwhile, China is embarking on a plan to industrialise much of the Eurasian continent, which requires her to sell reserve dollars in return for energy and base materials. In short, a period of rising commodity prices measured in dollars seems set to replace the longer-term downwards drift of recent years.

The effect will certainly cause the CPI to rise at a faster pace. The negative effect of last year’s falling commodity inputs is now being replaced with that of rising price inputs. Not only will the CPI begin to rise to exceed the Fed’s target of two per cent, but market expectations of further rises to come will escalate as well.

The turnaround in sentiment for the dollar could therefore develop a negative momentum that will surprise. The Fed’s principal brake for too rapid a decline in the purchasing-power of the dollar is rising interest rates, and it will soon become apparent that it has too little room for manoeuvre in this regard, because of the high levels of debt in all sectors of the economy.

The future for the price of the dollar measured in gold is bound to reflect the Fed’s inability to raise interest rates sufficiently to slow its descent, because of the debt trap. If the Fed was in a position to raise rates to the point where holding gold as money becomes too costly compared with holding dollars as money, it would be a different matter. That was Paul Volcker’s strategy in 1981, and it simply cannot be repeated today without generating the grand-daddy of systemic melt-downs.

The Fed must have a growing awareness that this might be a problem in the coming months, which, though it won’t admit it, is the most important reason why it should normalise interest rate policy sooner rather than later. But after a series of baby-steps, taking the Fed Funds Rate to no more than one or two per cent, further rises are likely to trigger a global debt crisis. And if you can only raise rates by one or two per cent, how do you deal with a price inflation rate of four or five per cent, and rising? It should not take long for financial markets to become preoccupied with this dilemma, instead of fussing over the effects a minor rising interest rate trend has on the gold/dollar price relationship.

So, for those of us who persist in looking at gold as an investment, the fall in the gold price in May is simply within the bounds of a normal correction. But they would be missing a vital point, and that is by buying gold they are only selling an inferior form of money.

All the commentary one hears from the media and financial institutions is based on the fallacy that fiat currencies, led by the dollar as reserve currency, are the ultimate measure for all prices. This explains the commonplace error of regarding gold as an investment asset instead of money. It is a mistake reinforced by central bank and commercial bank attitudes, desperate to protect their seigniorage for base money and bank credit respectively, as well as their profitable casino businesses. But measured by relative performance as competing forms of money, not only is the dollar already demonstrably overvalued when priced in gold, but there is a growing inevitability of a further, substantial decline over the rest of the year.

iSee www.shadowstats.com and www.chapwoodindex.com respectively.

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.

Market Report: PMs consolidating further

Fri, 05/27/2016 - 06:06


Gold and silver drifted lower this week, dollar prices falling approximately 2.5% and 1.5% respectively.

It is a continuation of the previous week’s trend, which saw larger falls. To date, from 1st January the dollar price of gold this morning in early European trade is up 15.14%, and silver 17.7%. So even though prices have fallen this month, holders of precious metals have done better than those exposed to other asset classes.

A notable feature has been the sharp contraction of gold’s open interest on Comex, which over the last eight trading sessions has contracted 71,400 contracts to a more normal 525,094 figure. This contraction broadly correlates with the fall in the gold price, as shown in our second chart.


The relationship between price and open interest shows that the ramp-up at the end of April, having initially failed to stop the price rising, managed to suppress it from the 4th May onwards. As an operation to stop the gold price rising, it appears that the bullion banks not only succeeded, but made substantial profits as well, closing their bears from the $1275 level into a falling market from 17th May onwards. This is beautifully illustrated in the next chart, of net swap positions, which rose to a record net negative 141,232 contracts on 17th May (the last recorded date at the time of writing).



At a guess, this category alone will have reduced its net position by about 50,000 contracts since 17th May / $1279, making profits between $150-200m. Oh, for the joys of being able to print short contracts without limitation!

The position in silver is notably different, with silver remaining overbought and open interest hardly reducing at all. This is shown in the next chart.


Notice the divergence between price and open interest. OI has fallen only 5,500 contracts since 17th May, while the price has dropped 8%. Could it be that the swaps will target silver next?

It cannot be ruled out, because the hedge funds are still net long to a significant degree. However, in day-to-day trading, silver has recently held up well when gold has been weak, which might indicate a pick-up in industrial demand, relative to physical supply, at current levels.

In analysing market trading in precious metals, we cannot ignore developments in the US dollar. After all, speculators do not so much buy or sell gold, rather they sell or buy the dollar. Gold is just one of the counterparty assets involved, the others being in a number of categories: US Treasuries, if it is an inflation or interest rate play, currencies for factors specific to the pairs, commodity indices for interest rates and prospective economic demand, and gold for interest rates and systemic risk. So it is no coincidence that the Fed’s attempts to jaw-bone markets away from negative dollar rates and back to “normalisation” has softened precious metals.

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.

Dealing Desk: Clients Take Advantage of Lower Market

Thu, 05/26/2016 - 10:28
This week, clients have continued to net buy silver and platinum, whilst net selling gold and palladium.

Clients have been seen taking advantage of the lower pricing on precious metals as silver still remains below $16.50/oz.

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

Kelly-Ann Kearsey, Dealing Manager at GoldMoney, said that this week has seen a continued pressure on the market, due to the release of the FOMC minutes for April. The odds of an early rate hike have now increased from 4% two weeks ago to 34% this week.

Precious metals have seen a downward fall over the past week, with gold seeing six consecutive days of losses, which was mirrored by silver. Platinum was seen back under the psychological level of $1,000/oz. However, on Thursday the downward rally paused before the release of the US Jobless figures.

The news of the FOMC had sent the US Index to a two month high and, to support this further, the US Jobless Claims released today showed the data had been better than originally expected.

26/05/16 16:00. Gold lost 2.2% to $1,221.85, Silver declined 0.8% to $16.27, Platinum decreased 1.8% to $990.85 and Palladium reduced4.6% to $535.72 Gold/Silver ratio: 72

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

GoldMoney
GoldMoney is one of the world’s leading providers of physical gold, silver, platinum and palladium for private and corporate customers, allowing users to buy precious metals online. The easy to use website makes investing in gold and other precious metals accessible 24/7.

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 20,000 customers worldwide and holds over $1billion 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.
Further information:

Visit: Goldmoney.com or view our video online

 

Regulation – the hidden curse

Thu, 05/26/2016 - 05:37
Regulations are nearly always introduced with the best intentions.

In financial services, they aim to stop unscrupulous brokers and banks from ripping off the public through bad practices. Manufacturers are banned from making products which are dangerous to children, the environment, or which might fail through shoddy workmanship. However, state intervention in commercial matters is based on shaky grounds, consistent with denial of the role and workings of markets, and an overriding desire to interfere.

This contrasts with a true understanding of why free markets work, and the control the consumer exercises over prices and choice, subordinating them to his subjective decisions. Consequently, regulation is based on an unreasoned belief that the individual needs state intervention to ensure standards are maintained, and that bad practices will be eliminated. The incorrect assumption is that free markets encourage unscrupulous manufacturers and service providers to defraud the consumer, when in fact, reputation becomes the paramount relationship in trade.

Because private sector regulation tends towards monopoly practices, the state naturally sees itself as the independent arbiter to ensure fair play. But the state, having initially imposed regulations, finds it very difficult to stop there, with political pressures always to modify and intensify bureaucratic control. Furthermore, unintended consequences of earlier regulations are never corrected by abolishing them. Instead, more layers of regulatory control are introduced in an attempt to address ensuing problems. We therefore drift into greater and greater regulation, without being aware of the true economic cost.

Anyone who favours regulation needs to explain away Germany’s post-war success. Her economy had been destroyed, firstly by the Nazi war machine, and then by Allied bombing. We easily forget the state of ruin the country was in, with people in the towns and cities actually starving in the post-war aftermath. The joint British and American military solution was to extend and intensify war-time rationing and throw Marshall aid at the problem.

Then a man called Ludwig Erhard was appointed director of economics by the Bizonal Economic Council, in effect he became finance minister. He decided, against British and American misgivings, as well as opposition from the newly-recreated Social Democrats, to do away with price controls and rationing, which he did in 1948. These moves followed his currency reform that June, which contracted the money supply by about 90%. He also slashed income tax from 85% to 18% on annual incomes over Dm2,500 (US$595 equivalent).

Economists of the Austrian school would comprehend and recommend this strategy, but it goes wholly against the bureaucratic grain. General Lucius Clay, who was the military governor of the US Zone, and to whom Erhard reported, is said to have asked him, “Herr Erhard, my advisers tell me what you have done is a terrible mistake. What do you say to that?”

Erhard replied, “Herr General, pay no attention to them! My advisers tell me the same thing.”i

About the same time, a US Colonel confronted Erhard: “How dare you relax our rationing system, when there is a widespread food shortage?”

Erhard replied, “I have not relaxed rationing, I have abolished it. Henceforth the only rationing ticket the people will need will be the deutschemarks. And they will work hard to get those deutschemarks, just wait and see.”ii

The US Colonel did not have to wait long. According to contemporary accounts, within days of Erhard’s currency reform, shops filled with goods as people realised the money they sold them for would retain its value. People no longer needed to forage for the basics in life, so absenteeism from work halved, and industrial output rose more than 50% in the second half of 1948 alone.

Erhard had spent the war years studying free-market economics, and planning how to structure Germany’s economy for the post-war years. It goes without saying that his free-market approach made him a long-standing and widely recognised opponent of Nazi socialism, a fact that enhanced his credibility with the military authorities tasked with repairing the German economy. He became an early member of the Mont Pelarin Society, a grouping of free-market economists inclined towards the Austrian School, founded in 1947, and whose first President was Hayek.

Erhard simply understood that ending all price regulation, introducing sound money and slashing the burden of taxation, were the basics required to revive the economy, and that the state must resist the temptation to intervene and had to reduce its role in the economy. He remained a highly successful finance minister for fourteen years, before succeeding Adenauer as Chancellor in 1963.

Erhard not only allowed unfettered free markets to rapidly turn Germany around from economic devastation, but being publicly credited with this success he presided over the economy long enough to ensure that bureaucratic meddling was kept at bay subsequently. His legacy served Germany well, despite the generally destructive actions of his successors.

The contrast with Britain’s economic performance was stark, where rationing was not finally lifted until 1954, and her post-war socialist, anti-market government was nationalising key industries. The contrast between Germany’s revival and Britain’s decline could not have been more marked.

The point is that free markets are demonstrably more successful than regulated markets as a means of ensuring economic progress. The same phenomenon was observed in Hong Kong, where John Cowperthwaite succeeded in stopping his own local officials and London’s Colonial Office from imposing regulations on the island’s economy in the post-war years. Cowperthwaite was roughly contemporary with Erhard, retiring as Hong Kong’s Financial Secretary in 1971. Yet despite this indisputable evidence that free unregulated markets actually work best, the political class can never resist the compulsion to regulate.

Regulations are intended to take risks out of life, an objective at which the state demonstrably fails. Established businesses are happy to collude with the state in setting regulations, partly because they get to influence their scope, and partly because it allows them to disregard the emphasis they otherwise have to place on their reputations in a free market.

I will always remember a lunch I had with the managing director of a well-known spread-betting business before spread-betting became regulated in the UK. When I enquired of him if he saw proposals to regulate his business as an imposition, he replied to the contrary. He was looking forward to the legitimacy that regulation by The Securities and Futures Authority, which was the regulator at the time, would give to his business. And to this day, spread-betting and similar products remain regulated as investment products. It is a legitimate mainstream financial activity, instead of a casino for financial products.

A regulated business clearly does not have to trade on its reputation, since its customers are theoretically guaranteed by the regulations. The intention is that ordinary people no longer have to consider whether this or that broker, or bank, is safe to deal with. Equally, the broker and the bank no longer views the client or customer as their uppermost consideration. That relationship is with the regulator.

Clients and customers are now so used to regulation they find it hard to imagine how things would work without them. Who wouldn’t want the protection of a government regulator to ensure fair play? Well, there are some who have become disillusioned. Ask those who entrusted their money to a regulated Bernie Madoff, or those who found their margin deposits lost in a black hole called MF Global.

Doubtless there will always be those who suffer from business failures, when they thought they had the protection of the state. Of course, we cannot know the counterfactual, how many failures there would be in an unregulated financial services industry, but we do know that state regulations routinely fail to protect the public.

Regulations have also become extremely complex and costly, and to a large extent regulators have to trust regulated businesses to work within the spirit of the regulations. How naïve is that. It suits big businesses very well, because they can easily afford the lawyers to advise them how best to work the regulations they themselves drafted to advantage.

Smaller competitors, the principal threat to established businesses in free markets, are practically excluded from setting the rules. Take the arcane subject of the EU Biocide Directive. Manufacturers using elemental silver for the last twenty years have been required to work towards gaining EU-wide approval for its use as a biocide, despite this safe non-toxic use being already thoroughly proved and established. The legal and bureaucratic processes have required the businesses affected to spend roughly €1m each so far, and counting. Small beer perhaps to members of the silver task force such as Dow Chemical and BASF, but wholly disproportionate and unaffordable for smaller competing enterprises.

The battle between a business establishment that games regulation to the disadvantage of its less powerful competitors is the same underlying principal that governs relations between governments in the advanced and developing nations. Complex and costly regulation has long been a handy deterrent against cheaper, foreign competition. But uncompetitive practices only work for a time, and foreign upstarts, based in more efficient, unregulated or lightly regulated markets, have become too powerful for the western bureaucrats to deter. The same free-market dynamics that benefited Germany and Hong Kong in the post-war years are today exploited by a whole host of countries, notably led by China, Russia, and now India.

This is the underlying reason the west faces economic failure, while the newly-industrialised nations are so dynamic. The old world is sinking into a quicksand of bureaucratic, anti-competitive regulation, while the new order is based on the firmer ground of free markets.

Future historians recounting the relative decline of the EU, America and Japan will have some easy copy, assuming they make the connection between economic success and lack of regulation, so plainly demonstrated by Ludwig Erhard and John Cowperthwaite.

iEdwin Hartrich: The Fourth and Richest Reich.
iiibid. Both quotes recounted in The Concise Encyclopaedia of Economics: The German Economic Miracle, article by David Henderson.


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.

Market Report: Interest rate scare

Fri, 05/20/2016 - 09:02

Gold and silver had a down week, correcting some of their overbought condition.

Gold fell from Monday’s peak of $1288 to a low point yesterday (Thursday) of $1245, and silver from $17.40 to $16.35. Both metals rallied into Thursday’s close, and in early European trade this morning (Friday) gold was $1254 and silver $16.51.

Having been massively overbought in the futures market, it is hardly surprising that a correction of some sort has occurred. The correction was given added impetus when the Fed’s FOMC minutes were released, which caught complacent markets on the hop. It was generally expected that there would be no rise in interest rates following the June meeting, but these minutes were more hawkish. So much so, that unless there is a definite turn for the worse in the economy, it appears that the Fed funds rate will be raised in June, by one quarter of one per cent.

The result was US Treasury yields rose, and equities fell, with the S&P 500 Index sliding below the 2,040 level, breaching this technically important level. China didn’t help, because she devalued the yuan’s official fix the following day, a move that is best described as a forced revaluation of the US dollar, reminding investors of the time the PBOC did this last August. That move led to a nasty fall in global equity markets.

It therefore appears that the Fed is being controlled to a degree by the PBOC’s foreign exchange interventions. China is trying to manage a deflating credit bubble, and appears to have taken the view that she would rather have interest rate and currency stability while this happens. This is because she wants capital to be reallocated from legacy export industries to businesses dedicated to the Chinese consumer. Presumably, she does not want to see a weaker currency lending support to those legacy sectors. A possible threat to her plan is rising US interest rates at this critical juncture.

But there is another larger problem that appears to have been glossed over in the FOMC minutes, and that is price inflation expectations as measured by the CPI. The input from commodity prices has dramatically reversed in recent months, and it can be expected to drive the CPI higher more rapidly than consensus forecasts expect. This may be because US economic data and business surveys indicate a softening economy, so analysts do not generally believe the recent recovery in commodity prices will continue. If they do continue their recovery, it will be because of a fall in the purchasing power of the dollar, rather than an increase in manufacturing demand. This is a tough call for analysts who naturally understand price changes that emanate from commodities, and fail to identify changes that come from the currency.

If the purchasing power of the dollar is being called into question, then commodity and precious metal prices will benefit, after the short-term shock of a change in the interest outlook has been absorbed. Another way of gaining perspective is to look at a chart of the gold price, and this is the next chart.



Returning to our opening theme, it becomes obvious that after a run up of $250 from the December lows, some price consolidation would be natural. The consolidation so far has only been relatively minor, testing the 55-day moving average currently at $1250, with real support coming in at the $1200 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 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.

Dealing Desk: Hawkish Tone Shakes Market

Thu, 05/19/2016 - 09:12
This week, clients have been net buying in silver and palladium, whilst net selling gold and platinum.

Clients have been speculating the market and have been taking advantage of the price reduction as silver dipped below the psychological level of $17.00/oz

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

Kelly-Ann Kearsey, Dealing Manager at GoldMoney, said that all eyes were on the release of the US Federal Reserve minutes from the April meeting. Gold dropped more than 1% on Wednesday after the release, hitting a spot session low of $1,262.45/oz whilst the US dollar reached a three-week high.

Markets had already priced in the expectations of an interest rate hike this year but the minutes provided a hawkish tone toward raising rates. This implied that the rate hike could be as soon as June, providing that economic data points to a stronger second-quarter growth compared to the 0.5% growth recorded for the first quarter.

On Tuesday, the US Housing starts data and industrial production data was released, which had been strong, potentially giving added support to the early rate hike, as stated by the FOMC.

Platinum prices have remained steady at around $1,000/oz. There is a possible expectation of stronger demand for platinum as it is used in catalytic converters. Due to the recent tighter environment controls, Europe will be applying Euro 6 emissions standards to all new diesel cars.

19/05/16 16:00. Gold lost 1.8% to $1,249.36, Silver declined 5.2% to $16.40, Platinum decreased 4.9% to $1,008.55 and Palladium reduced 6.8% to $561.45 Gold/Silver ratio: 72

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

GoldMoney
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