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Market Report: Lift-off!

Fri, 02/12/2016 - 02:17

Gold and silver rallied strongly this week, particularly yesterday (Thursday), following a strong showing in Asian trading.

Gold had put on $20 in the Asian session, before putting on another $30 during American hours, closing a little below the best. Silver also rallied, but this is not where the action was. In the first six weeks of 2016, gold has risen by 18%, and silver by 14%, putting the gold/silver ratio at just under 80. Volatility continued in Asian trading, but prices were steady this morning in early European trade.

The relative volatility of silver, which is usually nearly twice that of gold, suggests that the gold/silver ratio should be falling when the gold price rises, and therefore given gold's performance, silver could have been expected to have risen by 30-35%. For whatever reason, it has been left behind, and given the change in sentiment in favour of gold, silver could justifiably catch up with a run to over $18.

On Wednesday and Thursday, Janet Yellen delivered her semi-annual testimony to Congress. She appeared to be less certain of the economic and inflation outlook than at the time of the December rate rise. This is hardly surprising, given the fall in stock markets, and the fall in long-term Treasury yields, which together indicate a deteriorating economic outlook. Listening to the Q & A session that followed on both days, it was hard not to feel sympathy for her. She was given a rough ride by committee members who questioned the December rise in the Fed Funds Rate, while others seemed keen to hear her say the Fed would consider negative interest rates. She was understandably cautious on this point.

The apparent undertone of many of the questions was that the Fed is facing a financial, and possibly systemic crisis. Indeed, this seems to be a widespread opinion in markets, which will either be confounded or alternatively turn into a growing sense of panic. And nowhere is this more likely than among depositors at some of the major European banks.

Gold in other currencies also performed well, particularly in sterling, which has been generally weak in recent months. This is shown in our second chart, which is updated to last night's close.

Demand for physical gold has picked up strongly. In London, ETF Securities reported buying of physical gold ETFs totalling over $710m since January 1st. Tales from high street bullion dealers are of record sales of bars and coins. And how often do we hear of record interest in places like South Korea?

With a sudden surge in public demand for physical gold, there is no knowing how it will be satisfied. There is a risk of a gathering snowball effect, with higher gold prices triggering yet more demand. Western vaults are only able to supply initial demand, but because bullion banks have unallocated accounts for customers not backed fully by gold, they will be forced to cover the risk of higher prices.

The swaps category in the futures markets, which we can take as proxy for the second division of bullion banks, is moderately short, and will have struggled not to increase this negative position. With western capital markets short of physical bullion, any sharper rises in the gold price can be expected to create difficulties for the major market participants.

 

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: Gold Surprises Market with Price Surge

Thu, 02/11/2016 - 13:36
This week has seen several clients selling gold and silver to take advantage of the extraordinary price gains on both metals. However, as the price increases have continued, we have seen a high interest from clients to purchase the yellow metal.

GoldMoney's clients have preferred the Singapore vaults this week, with the London and Switzerland vaults less popular.

Kelly-Ann Kearsey, Dealing Manager at GoldMoney, says gold and silver prices have remained strong this week despite the Chinese market being closed for the Chinese New Year.

After the week began strong for precious metals, with gold reaching almost USD1,200/oz due to a weaker US Dollar and a lower risk appetite, a dip in the price was experienced on Wednesday due to European shares rising. This was reversed after the Fed Chairwoman, Janet Yellen, spoke regarding interest rate hikes and stated that financial conditions 'have become less supportive to growth'. There appeared to be a more cautious outlook regarding the US economy but there was no sign of the Fed backing away from the expectation of gradual interest rate hikes.

Earlier this week, the US equity markets continued to be volatile along with disappointing data from the US economy, including the ISM Manufacturing Report which showed manufacturing activity was down for the fourth month.

Safe-haven demand for the metal was brought back as gold continued its price surge on Thursday, with gold leaping to a 1 year high, as equities plummeted in Asia and Europe and uncertainty continued over growth in the global economy.

More data is expected from the US over the next week; this could be positive for gold and provide further support for the precious metals going forward, if the data continues to be weaker.

11/02/16 16:00. Gold gained 11.7% to $1,246.00, Silver increased 5.9 % to $15.70, Platinum gained 5.9% to $952.74 and Palladium rose 5.7% to $522.47 Gold/Silver ratio: 79

 

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 outlook improves

Wed, 02/10/2016 - 17:33
There is a conflation of three related events that materially alter the prospects in favour of a higher gold price.

The change in the outlook for US interest rates has probably put an end to the dollar's four-year bull run, it is clear that there is a growing likelihood of negative interest rates in the future, and the global banking system is no fit state to manage the potential challenges of 2016. This article walks the reader through the likely economic effects relevant to the future purchasing power of the dollar, and therefore prospects for the gold price.

On the 5th February, the price action in gold was significant. At about 9.40AM New York time, a seller dumped 10,000 contracts on the Comex market, worth about $1.2bn. The price fell from $1162 to $1145, a fall of $17. Having risen over the course of the week, it was vulnerable to profit-taking, so in principal it was a good time to take the price down in order to take the steam out of the market. However, from that $1145 level, gold quickly and unexpectedly rose strongly, gaining nearly $30 into the close. Furthermore, the gold price has continued to rise this week.

Of course, we don't know who the seller was, but he will be nursing some serious losses. If it was the US Government's Exchange Stabilisation Fund, the cost won't matter; what would matter is that an attempt to put a cap on the gold price was a dismal failure, and merely exposed a major change in market sentiment, from extremely bearish to growing bullishness. This is backed up by increasing open interest on the Comex market, a clear indication that a rising gold price is no longer driven solely by the closing of short positions, but new buying is now driving the market.

The change in sentiment is notable, and coincided with the Bank of Japan reducing its deposit rate to minus 0.1%. There is a growing realisation that negative interest rate policy (NIRP) could also be on its way for the United States, so we must digress from considering the gold price to explore the potential effects of NIRP.

The best way to understand NIRP is to regard it as a tax imposed by the central bank. There are now an estimated $7 trillion of government bonds with negative yields, costing the global private sector $7bn for every 0.1% of negative redemption yield. Commercial banks will also seek to recover the cost of negative rates on their loan books by increasing their charges to customers, including borrowers, as the banks in Switzerland have already demonstrated. So paradoxically, negative interest rates will not stimulate economic growth, instead they will be an extra cost to bond investors, savers and borrowers, discouraging the expansion of bank credit and genuine investment in bonds. The only beneficiary is the central bank, which collects the NIRP tax and inflates the asset prices on its balance sheet.

Such tinkering always ends in the tears of unintended consequences. It is a measure of how desperate the extraordinary measures considered by central banks have become. A rational central banker surely recognises that there are potential downsides to NIRP, but fear of deflation is likely to be his or her dominant emotive force.

NIRP certainly has the potential to trigger a return towards the Fed's inflation target of 2%. If the Fed introduces it, the prices of all commodities, being priced primarily in dollars, will go into a natural state of backwardation, potentially making the cost of physical ownership of commodities such as precious metals less costly than holding bank deposits.

The objective of NIRP is a price effect that can best be described as designed to change the public's preference from holding money in favour of buying more goods. This should not be confused with a rise in prices reflecting a higher quantity of money and credit in circulation, predicted by conventional monetary analysis. It is likely, as will be demonstrated, that prices will start rising independently from any change in the level of bank credit.

Buyers of commodities, such as gold, do not extinguish their money, unless a bank physically sells them the commodity off its own balance sheet. Instead, the commodity supplier ends up with bank deposit money transferred to its account, which it then distributes to defray operational costs, ending up as smaller deposits in the bank accounts of the employees of and suppliers to commodity importers and domestic miners. In the case of imported commodities, the deposits are recycled through the foreign exchanges to be mostly reabsorbed into the banking system, where they will be mostly extinguished.

Besides commodities, this is also true of the other cost components in the manufacture of goods and the provision of services. With an understanding that the bulk of deposits continue to exist when private sector buyers acquire commodities and raw materials, we can now address the likely price effect of NIRP. Price stability with a fiat currency depends on the public's overall money-preferences, relative to owning goods. If prices fail to rise in line with monetary expansion as has been the case since the Lehman crisis, people must increase their deposits, unconsciously increasing their preference for money.

This is why an increase in the quantity of fiat money and credit does not automatically lead to price inflation. Since the Lehman crisis triggered the last set of "extraordinary measures", checkable and savings deposits at the banks have grown from $4.7 trillion to $9.9 trillion, implying ordinary people and their businesses have more than doubled their preference for money, while prices at the retail level have risen less than the expansion of money supply would have suggested.

This has happened because deposit money is the other side of the expansion of bank credit. Now imagine what happens if the private sector collectively reverses this trend of money-preference even slightly, always bearing in mind that people act as both producers and consumers. We now have a situation where the population, both as producers and consumers, desire money less than before, relative to goods. Prices for goods would then rise, without a significant change in economic activity. In short, the private sector reducing its overall preference for money is the root cause of stagflation, and is a process which once started can easily spiral out of control.

We need not speculate about how far negative interest rates will have to go to trigger this effect, because if NIRP is introduced, it will be extended until higher prices are stimulated. One would expect the likelihood of NIRP to be anticipated in the foreign exchanges first, as speculators begin to discount the damage it will bring to the dollar's purchasing power. So it is notable that from early December there have been significant falls in the dollar against the euro and yen, which has accelerated over the last fortnight.

This ties in with a growing awareness that the US economy is stalling and that many corporate borrowers will lack the future cash flow to finance debt repayments. The Fed's increase in the Fed Funds Rate in December is therefore increasingly seen as a bad mistake to be reversed, obviously making NIRP much more likely. But for investors, the question now arises: how does one hedge a fall in the dollar, when the other major currencies, particularly the yen and the euro, are already pursuing NIRP? For these currencies, a modest fall against the dollar is a measure of a successful and competitive monetary policy. And if the Fed goes nap on NIRP, we can expect other major central banks to increase their negative rates even more. So selling the dollar for other currencies must have limited hedging appeal. The focus therefore is likely to switch to accumulating commodities, including energy.

There is another reason for people to want to change their money-preferences: their bank deposits face the growing risk of being exposed to bank failures. Small depositors are theoretically protected by state-sponsored deposit protection schemes, but larger balances could become very mobile.

We have seen bank share prices fall heavily in recent weeks, and credit default swap prices for certain banks have also been rising alarmingly. There can be little doubt that banks are too fragile to survive the bad debts that will be the consequence of even a partial slide towards debt liquidation.

This is why central banks first introduced zero interest rates, and are now experimenting with NIRP. But as already described above, logically NIRP acts as a tax on bondholders and the banks. The cost is passed on to their customers, so it is not the economic stimulant central bank economists believe. It is a racing certainty that some of the $5 trillion growth in deposits and savings in bank accounts since the Lehman crisis will begin to move into gold and other non-fiat currency hedges.

We had a foretaste of how serious this situation can become with the Cyprus banking crisis in 2013. It was a bungled bail-in that resulted in a flight of deposit money from the banks on the Eurozone's periphery into the safely of German banks. That safety-net is no longer there, because German banks are unsound.

Less publicised was the attempt by customers of bullion banks to exchange their unallocated gold accounts for allocated bullion accounts and to seek delivery of physical bullion. To diffuse a developing gold run on the fractional-reserved bullion banks, a bear-raid was mounted in the futures markets on gold by western central banks, in league with the bullion banks. The intention was to convince the public that gold is an invalid hedge against risks in the financial system, and to unlock the gold holdings in physical ETFs. This safety-net is not available this time either.

This brings us back to last Friday's price action, which failed to depress the gold price. We can't know for sure if it was a US Government sponsored action, but even if it wasn't, it failed to defuse the beginning of what looks increasingly like a new bull market for gold. Admittedly, for the last two years, a post-December rally has ultimately failed, but this one really does look and feel different.

A more accurate assessment of markets is that we are entering a bear market for the US dollar, whose purchasing power could not only unexpectedly fall, but continue to fall at an accelerating rate, as the likelihood of the introduction of NIRP for the dollar increases. If the gold price goes to $2,000, or even $20,000, it will be above all else a symptom of the failure of the dollar.

It would appear that finally we are approaching the destructive end of central bank monetary policies. We are about to discover the hard way, as desperation over the failure of monetary policy mounts, that when the state corrupts its own money it ultimately destroys it.

 

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 Iron Law of Money

Mon, 02/08/2016 - 06:18
The Iron Law of Money


The spread of negative interest rate policies around the world, heralded by economic officials as the answer to the disappointing results of zero-rate policies and quantitative easing, is in fact nothing of the sort. By degrading the nature of money, negative interest rates will have commensurately negative consequences. As savers and investors seek non-negative yielding monetary substitutes, gold and silver prices are likely to continue rising.

What is money? The spread of negative interest rate policies around the world, most recently to Japan, provokes this otherwise banal question. The answer might appear simple, in that textbook definitions of money normally list the following three properties:

- A medium of exchange
- A unit of account
- A store of value 

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


Let's consider the latter of these three carefully. A store of value must be something which retains its purchasing power over time with a reasonable deal of certainty. But by that definition, there are many currencies in the world today, including major ones, that don't measure up. While consumer price inflation is generally positive, if low, in many countries, outright negative interest rates imply that money will lose purchasing power at whatever stated, official rate. The more subtle erosion of purchasing power associated with negative real interest rates is thus morphing into a blatant, overt tax on cash balances.

It stands to reason, however, that anything purporting to function as a store of value must not be taxable when idle. Yes, if the money in question remains the mandated legal tender, it can still function as a medium of exchange. But it would be false to consider it a store of value.

In a way, this is just another iteration in the official abuse of money over recent decades. Following the spectacular global financial crisis of 2008-09 the global monetary base exploded in size, although for the most part this money has not been distributed outside of the financial system. Banks are not lending, due to a combination of weak new loan demand and stricter lending criteria. Indeed, in many countries, such as in the euro-area for example, there has been an outright contraction of bank lending taking place. While this is potentially deflationary of consumer prices, it is interesting to note that, so far at least, consumer price inflation remains positive in most major economies.

There remains an active debate out there regarding whether investors should be primarily concerned about inflation or deflation. Yet with monetary policy lurching from one unconventional policy to the next it is difficult to commit to one side or the other because there is just no way to know exactly what is going to happen on what time horizon. There might be periods of sudden inflation alternating with sudden deflation. But where we can be certain is that, as negative interest rate policies spread around the globe, fiat currencies cannot possibly be regarded as reliable stores of value, if indeed they ever were.

Looking back at how fiat currencies have fared as stores of value in general since the US formally abandoned the gold standard in 1971, one finds little reason for optimism. If most currencies didn't function well on average as stores of value from 1971-2007, when financial systems were stronger, monetary policy was more conventional and deficits and future entitlements were far lower, one should seriously doubt that those same currencies are going to fare any better in a world of negative interest rates, where cash balances are being taxed. The dollar, still holding pre-eminent reserve currency status, may be most at risk as the US has gone from being the world's largest creditor nation to the largest debtor. But the euro-area, Japan and most other developed and also emerging economies have serious issues of their own. Some investors may remain optimistic that the current, unprecedented level of government intervention in financial markets and economies is going to compensate for the accumulated misallocation of resources that has taken place via a series of progressively larger asset price bubbles and busts in recent years, but history suggests that this will not end well. In our opinion, negative interest rates are more likely to exacerbate than to ameliorate the current set of economic and financial challenges.

Figure 1: Fiat currencies' purchasing power vs gold has trended lower for decades
Index January 1971 = 100

Source: Federal Reserve, GoldMoney Research
THE UNINTENDED CONSEQUENCES OF NEGATIVE RATES

"Time is Money" is perhaps the simplest expression of the economic concept of opportunity cost: Forgoing one thing for something else. Interest rates represent nothing more than the "opportunity cost" of money, or of forgoing some amount of money today for the same at some future point in time. Assuming that cash in hand is normally used for consumption rather than savings, another way to look at interest rates is that they represent the opportunity cost of consumption today rather than at some point in the future: The higher the rate of interest, the higher the opportunity cost of consuming today, rather than tomorrow. This is the Iron Law of Money and Interest, inviolable in all aspects.

However, as interest rates go negative, the opportunity cost of cash in hand, or consuming today, rather than in the future, also goes negative. Why then don't consumers in negative rate economies just go to the bank, take out a huge, low-rate loan, and throw a big party? The answer should be obvious: Human beings, irrational as they may be, tend to have the sense that they should hold something in reserve for the future. After all, no matter how much you eat today, you are not going to be able to store these calories efficiently and slowly burn them off for the remainder of your life (which, indeed, might be cut rather short if you were to try). Nor is it practical or realistic to try and sort out your wardrobe or even shelter arrangements for the remainder of your life all in one big shopping spree. (For those with children or other responsibilities that will outlive them, there is also the desire to plan for what might be consumed by others, after we have gone off to happier places absent such inconveniences as the fundamental laws of economics.)

There is, therefore, a natural constraint on how much consumption will be brought forward in response to negative interest rates, even in the case of those considered rather profligate. For those who are relatively conservative financially, negative rates are not going to prevent them from continuing to save a significant portion of their income and, in response to a sharp economic downturn and loss of job security, many indebted individuals might decide to pay down some debt, notwithstanding the negative cost of rolling it over. Some might choose to walk away from their homes rather than service a mortgage greater than the market value of the property. Others might return a leased car to the dealer. A few might declare bankruptcy and start over. There is just no way to know exactly how individuals are going to respond to an economic crisis, especially one that occurs in an environment of negative interest rates.

These sorts of decisions are unpredictable and unquantifiable, yet naturally arise in response to changing economic circumstances. Characterized by Keynes as "animal spirits", they continue to be regarded as essentially irrational by neo-Keynesians today. But it is important to beware when an economist begins to talk about behavior being "irrational", because what this implies, in practice, is that their models simply cannot account for it.

Now in the same way that economists struggle to come to terms with supposedly "irrational" consumer behavior, they also find it troublesome that investors sometimes lose confidence in the sustainability of fiscal and monetary policies and, therefore, engage in "irrational" and supposedly damaging behaviors disparagingly referred to as "speculation" or "hoarding".

Rather than respond to negative rates by doing supposedly sensible things like ploughing their capital right back into a weak economy, notwithstanding soaring government deficits and central bank balance sheet deterioration, "irrational" investors might instead seek to reduce and diversify the risk of their investments. They might "hoard" physical cash (although the economic authorities may well ban this practice). They might "speculate" in monetary substitutes that may offer no interest but at least are not subject to the negative rates imposed on cash deposits and government bonds.

With the spread of negative interest rates from one major economy to another, such a move into monetary substitutes must now appear unusually attractive in a historical comparison. This is one way in which to understand why, in recent months, as sentiment has shifted toward expectations for outright negative interest rates in Japan, the euro-area and possibly the US, the price of gold has sharply reversed its previous bear market alongside other commodities. This is because gold, amongst all commodities, is the pre-eminent monetary substitute.

If the store of value function of all major currencies is substantially undermined, as indeed it is by negative interest rates, then investors are going to have to look for a non-national currency alternative. Historically, gold and silver have most frequently served as reliable, stable international stores of value, protecting against devaluations and default generally. But there have been many cases of other commodities serving as stores of value at certain times and places. There is no reason why, in an age of globalisation, that any commodity that is liquid and widely traded cannot offer some useful diversification. These commodities will thus increasingly be hoarded, eventually driving up commodity prices generally. But gold and silver will lead the way.

Which brings us to an important point: If currencies in general are offering negative rates of interest, then what, exactly, is the opportunity cost of diversifying into zero-yielding commodities? Zero! And if commodities offer greater diversification benefits than a basket of negative-yielding currencies, which should you overweight in a low-risk, defensive portfolio designed primarily to function as a store of value?

Diversification is held, rightly, to be the only "free lunch" in economics. Not Keynesian pump-priming; not central bank interest rate manipulation; not holding an asset for the long-term just because history has been kind (eg equities, housing). No, diversification is the only exception to this other Iron Law of economics. And in a world of negative rates the benefits of diversification into gold and silver are available at a favorable, non-negative yield. This is having the effect of shifting the demand function for gold and silver. With supply for both gold and silver growing only slowly and steadily over time as a result of costly mining production, however, negative interest rates thus imply potentially far higher prices in future.

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: Systemic risk and negative interest rates

Fri, 02/05/2016 - 07:07

It was a better week for precious metals, with gold and silver hitting new highs for 2016.

Last night gold closed at $1155.5 and silver at $14.91, and in early London trade this morning prices opened at these closing levels. The performance for 2016 so far represents a rise of 9% for gold, and 7.75% for silver. Normally silver is roughly twice as volatile as gold, which suggests that it is relatively under-priced in current market conditions.

The bears in precious metals markets were caught off guard by the Bank of Japan's introduction of negative interest rates earlier this week. Talk of negative interest rates deepening further has naturally spread to other major bond markets as well, and investment banks are downgrading their forecasts for economic growth, particularly for the US. The effect has been to increase the number of government bonds around the world with negative redemption yields. Five-year maturity Japanese Government Bonds yield minus 0.11% and five-year German Government Bunds minus 0.31%. Negative bond yields for anything other than ultra-short maturities are unprecedented, and can only reflect an extreme fear of investing in anything else.

The downgrading of GDP growth prospects for the US has led to sudden dollar weakness against other major currencies in an early sign of a significant reversal of last year's dollar strength, which was at least partly due to the Fed's signals that higher rates were on their way. It would appear that the Fed has badly misjudged the economic outlook, and will have to change course on interest rates, damaging its credibility. Of course, weak dollar equals strong gold price.

Whether or not the US actually reverses interest rate policy to the extent that negative dollar interest rates will be contemplated remains to be seen. Any move in this direction will boost precious metals prices, since holding physical metal avoids what amounts to the most effective way taxing bank deposits. It will probably take a little time for this to catch on with the wider public, but talk of banning hoarding of cash as a means of avoiding negative rates is likely to accelerate a move into bullion and physical gold ETFs.

As if that is not enough, bank shares have fallen heavily, as fears of a systemic crisis surface, focusing on some of the Eurozone's banks. The shares of Deutsche Bank have been badly hit, as have the shares of major Italian banks. The weakness of bank shares everywhere does suggest systemic risk is becoming an important factor again for investors.

While the gold price has been firm in all trading sessions this week, it is clear from the timing of the price rallies that demand for paper gold in US trading hours is driving the price action. The combination of negative interest rates and increased systemic risk has led to bears buying back some of their shorts, and it is only in recent days that some bullishness has crept into the futures market. The chart below of Open Interest and the gold price illustrates this point clearly.

Until last week, a rising gold price was matched by falling Open Interest. This tells us that contracts were being closed as bears reduced their positions. That changed this week as the gold price rose further while OI began to pick up. The increase in OI indicates that speculators were beginning to open new long positions, in the wake of the gold-positive news on negative interest rates and Eurozone banking concerns.

For any bullish action to progress, genuine buying has to develop, and the events of this week, coupled with the action on Comex, are a fair indication that this is now happening.

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: Precious metals gain strength as USD weakens

Thu, 02/04/2016 - 12:59
This week has seen clients selling gold and silver, taking advantage of the impressive gains on both metals.

However, many clients have also been purchasing precious metals in order to take advantage of the cheaper rates seen earlier this week. Overall, the week has been in favour of buyers.

The Singapore, Canadian, and London vaults have proven the most popular with GoldMoney's clients, with the Swiss and Hong Kong vaults the lesser preferred.

Kelly-Ann Kearsey, Dealing Manager at GoldMoney, says gold and silver have experienced an extraordinary week. Gold made its biggest daily gain in two weeks on Wednesday which continued into Thursday, edging to a 3-month peak.

Gold has seen highs of USD1,156.00/oz breaking its resistance level, with silver reaching USD 14.91/oz. This week, there has been weak data from the US economy which, in turn, has added to market expectations that the Federal Reserve will remain dovish, raising doubts of potential increases later in the year.

As a result, the US Dollar has weakened against all major currencies with the exception of British Pounds which has also become weaker due to news from Bank of England that they would also not heighten interest rates.

The Bank of Japan has also confirmed that, although it lowered interest rates to minus 0.1% last week, they would continue to drop them if necessary.

All these elements have been favourable to the precious metals this week. Gold has now gained nearly 8 per cent since the start of the year as uncertainty about the health of the global economy has made markets volatile.

04/02/16 16:00. Gold gained 3.2% to $1,115.51, Silver increased 4.1 % to $14.82, Platinum gained 4.4% to $899.91 and Palladium rose 3.7% to $494.50 Gold/Silver ratio: 77

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

Shorting the yuan is dangerous

Thu, 02/04/2016 - 05:38
Last Sunday (31 January) Zero Hedge ran an article drawing attention to the big names in the hedge fund community who are betting heavily that the yuan will suffer a major devaluation any time between the next few months and perhaps the next three years.

The impression given is that this view is universal, almost to the exclusion of any other.

A market cynic would point out that when everyone is short, there is no one left to sell, so it is a good time to buy. This may indeed be true, and gives the Chinese authorities the opportunity to squeeze the bears mercilessly should they so choose. However, as Zero Hedge points out, some bear positions are in the form of put options rather than naked shorts, so hedge fund losses in this case would be limited to option money if the trade goes wrong. Instead, whoever sold the options to them will ultimately absorb the losses to the extent they have not hedged their corresponding positions in turn.

The advantage of buying long-dated OTC put options is that you can wait for a financial strategy to come right. The motivation for buying them is therefore less to do with market timing, and more to do with economic expectations.

At its simplest, the common view appears to be that China is suffering from the debt problems that follow an excessive expansion of bank credit, the unwinding of which is expected to lead to crippling deflation. This view is variously informed by the findings of Irving Fisher in his analysis of the 1930s depression, and perhaps the Austrian school's description of credit-driven business cycles thrown in. To these can be added the experience of modern credit bubbles, particularly the aftermath of the sub-prime crisis of 2007/08, which remains fresh in hedge-fund managers' minds. It amounts to a rag-bag of impulsive thought, and consequently it is assumed a large devaluation will be required to reduce the prices of China's exports, so that China's labour force will remain competitive and employed.

There are many empirical examples that disprove the idea that devaluation is the route to export success, so it is something of a mystery why it should be seen as a certain outcome for the yuan. The root of the idea that devaluation for China is an economic cure-all is the supposed improvement it gives to the balance of trade. And here the mystery deepens, because the fall in prices for imported commodities has actually increased China's trade surplus, so much so that the trade surplus for all of 2014, which was $382bn equivalent, was exceeded by just the last seven months of 2015, while at the same time the economy was supposed to be collapsing. The total trade surplus for 2015 at $613bn was a record by a very large margin. A devaluation is definitely not required on trade grounds.

Instead, China's trade surplus is a secure platform from which to pursue market-based reforms. And here the objective is more about permitting the population to build personal wealth, increasing the numbers of the middle class instead of destroying it. This is an alien concept to western macroeconomists, leaving them uncomfortable with their anti-market, pro-interventionist ambitions. They have a monetarist and Keynesian notion that devaluation counters the price deflation they think China faces, encourages moderate inflation, and stimulates animal spirits. This depends on the broad question as to whether or not a retreat into monetary manipulation actually solves anything, and more importantly, whether or not the Chinese authorities also believe in these theories.

The Chinese authorities appear to show little interest in fashionable macroeconomic suppositions. Instead, the leadership's motivation runs counter to western political thinking. China is made up of over forty different ethnic groups, which without a strong central government, would probably be at each other's throats. Western-style democracy would simply lead to civil war and a disintegration of the state, as evidenced elsewhere in Iraq, Afghanistan, Egypt, Libya and now Syria. It is for this reason that the state communist party ruthlessly suppresses all political discord.

The Chinese leaders know that political oppression can only work if it is not in the masses' economic interest to oppose their government. For this reason, they use the market to enhance individual wealth, and are acutely aware that a failure to better the people's condition risks fomenting dissent. Economic factors align the leadership's interest with those of the people, not democratic representation.

This is what drives economic policy. The leadership is mercantilist in its approach, rather like the East India Company when it ruled India. Individuals working with John Company, as it was known, had the opportunity to accumulate great fortunes, and if they survived the diseases and fevers, these nabobs returned home to Britain and became landed gentry. The elite in China is motivated in a similar fashion and are conditioned on loyalty to the state and its commercial objectives.

This forms the basis of the cycle of five-year economic plans, which can be regarded as the equivalent of business plans, something unknown in western politics. The thirteenth version commences with the year of the monkey on Monday, the full details of which are due to be released in March. We already know that it will tell us how production will be directed to improve the earnings and the standard of living of the lowest paid workers. Greater controls will be imposed on pollution and the use of water resources. The internet will be accorded greater economic resources within the "Internet Plus" project. Social insurance will be increased and extended towards better healthcare and pensions. And lastly, financial reforms will continue to liberalise markets.

What will not be mentioned in these plans, which are for domestic consumption, is geopolitics, the financial war between China and America. It is this aspect of China's future about which the hedge fund managers seem woefully ignorant. And it is a bad mistake to ignore the importance of geopolitics to both China and America, because it has the potential to have a far larger effect on the CNY/USD exchange rate than anything else. If there is any doubt in the reader's mind that there is a financial war being waged, it is worth reading in its entirety a speech given last April by Major-General Qiao Liang, the Peoples Liberation Army strategist. There is a translation here. Of the many quotes available the best one to show why financial power is seen by the Chinese to supplant military power is the following:

"A few strokes on a computer keyboard can move billions or even trillions [of dollars] of capital from one location to another. An aircraft carrier can keep up with the speed of logistics, but it can't keep up with the flow of capital. It is thus unable to control global capital."

It is appropriate at this juncture to make a simple observation: you do not win a financial war by undermining your own currency. Instead, you should undermine the enemy's currency.

This is precisely what China is doing to the dollar. Last year China elevated her currency's standing on the world stage by forcing the IMF, against America's will, to include it in the SDR basket. This year she plans to establish gold and oil contracts priced in yuan, two key commodity markets which Chinese demand now dominates. China has also established the Asian Infrastructure Investment Bank to act as the financing arm for an Asia-wide industrial revolution, to be spearheaded by China. She has successfully replaced, for the purpose of this trans-Asia project, the various multinational organisations set up in the wake of the Bretton Woods agreement.

So 2015 was the year when China did the groundwork to replace the dollar throughout Asia, the Middle East and North Africa, as well as sub-Saharan Africa, which she also dominates commercially. 2016 will be the year when the dollar finds its hegemonic status is increasingly confined to the Americas, Western Europe, Japan, diminishing parts of South-East Asia and western financial markets.

This brings us to another consideration ignored by the US-centric hedge fund community: the dollar itself is likely to take a big hit in 2016. Besides the damage inflicted by the internationalisation of the Chinese currency and the loss of hegemonic status that it imparts to the dollar, deflationary forces are increasing in America's domestic economy, because it is suffocating under a debt burden now too great to bear. The analysis hedge funds are applying to China would be more appropriately applied closer to home, and in this case the Fed will probably seek ways to devalue the dollar to counter a gathering slump. And unlike China, which has a record trade surplus, the US has an increasing trade deficit.

American monetary policy is failing, and the Fed is on the back foot. China meanwhile has a plan, and that is to redeploy labour currently making cheap price-sensitive goods for America and elsewhere. The low-end of the labour force will be retrained and re-employed into both higher-value production and in the development of infrastructure on an Asia-wide basis. Asian development will be spearheaded by the yuan as the common currency for cross-border settlements.

In summary, a significant devaluation for the yuan is neither necessary nor desired by the Chinese authorities. The announcement that China will start targeting the yuan against a basket of currencies and not the dollar is consistent with the strategy of undermining the dollar's value. With dollar reserves accumulating at a record rate because of the trade surplus, China should have no problem maintaining a yuan rate of her choosing. If anything she will seek to dispose of dollars on the basis they are over-valued relative to the commodities she needs for the future. China will sell her dollars not to protect the yuan, but to dispose of an overvalued currency.

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: Silver fixed

Fri, 01/29/2016 - 05:22
Gold and silver continued their rise, feeding on the problems facing equities as they try to adjust to the downgrading of the US's growth prospects.

There was an attempt yesterday to mark the gold price down from Wednesday's rise, which persisted into this morning's early trading.

Silver remains a narrow market, which was dramatically proven at the midday fix yesterday (Thursday). Ahead of the fix, silver was trading at $14.42, and the fix itself, which took fourteen minutes, was finally settled at $13.58. The circumstantial evidence behind this extraordinary price behavior was there were over-the-counter market options expiring on the fix price. An unknown number of call options therefore expired worthless, having had considerable value at 11.59AM.

It is of course possible that there was a large genuine seller, but this looks like price-rigging. The LBMA has overall responsibility for the operation of the silver market, and it somewhat reluctantly agreed to modernize the market. The move of the daily fix to a new platform run jointly by CME and Thompson Reuters was meant to be an improvement on the old fix. Doubtless any manipulation of the price will have been done within the rules: after all, if you have a big seller which can push the market price down and subsequently benefit, is this not the normal cut and thrust of unregulated markets?

Those of us who value openness in markets will want this to be thoroughly investigated, as doubtless will the option-holders who lost money.

Time will tell. Meanwhile, in early trade this morning UK time, gold traded at $1115 for a rise on the year so far of 5.25%, and silver at $14.26 for a rise on the year so far of 3% in the wake of yesterday's fix. Overnight the Bank of Japan introduced negative interest rates, which had no immediate impact on precious metals prices.

Gold has outperformed nearly all alternative asset classes, with the 30-year US Treasury closest in performance, rising 4.4% since 31st December, against gold's rise of 5.3%. Meanwhile, the S&P 500 Index has fallen by 8% over the same time frame.

The next chart shows the performance of gold in the four major currencies since 31 December, and it is evident that sterling's weakness has given excellent returns of 8% for UK-based investors holding physical bullion.

We now turn our attention to the futures market where hedge funds, having recently held a record short position in gold futures, have been moderately squeezed. This is evident in the next chart, which is of the daily closing gold price and the open interest.

Since the peak in open interest of 425,659 contracts on 7 January, it plummeted to 382,000 on Wednesday, the last confirmed figure at the time of writing. At the same time the gold price rose $20 from $1107 to Wednesday's close at $1127. Normally, one would expect a rising gold price to be accompanied by increasing open interest, because buyers would be opening new long positions. However, the reverse is happening, which can only mean the bears are closing and there is not much genuine buying.

The mystery here is that with the hedge funds so wrong-footed, the market-makers would be be expected to ramp up the gold price to close their corresponding shorts for the most profit. The lack of this action is as unnatural as yesterday's apparent gaming of the silver fix. This leaves us with a question hanging in the air: why are the bullion banks sitting on the gold price when there is easy money to be made?

Lastly a brief mention of the Fed's statement on Wednesday: it thinks it was right to raise the Fed Funds Rate target in December, but further rate rises might be on hold. Given that central bankers regularly talk to each other, it would be interesting to know what they think of last night's negative interest rate move by the Bank of Japan, and whether or not the outlook is still hunky-dory for America.

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: No Rate Hike as Gold Remains Strong

Thu, 01/28/2016 - 08:21
This week has seen selling across all metals with the exception of platinum.


We have seen more buy orders into the Singapore, Canadian, and Swiss vaults this week. We have seen less of a preference for the UK, Swiss, and Hong Kong vaults this week.

Kelly-Ann Kearsey, Dealing Manager at GoldMoney, says clients have continued to steadily buy this week, with some higher volume selling. This could be due to the price increase experiences this week, with silver reaching a high of USD 14.50/oz and gold at USD1,127.00/oz on Wednesday evening before both retreated back their previous levels. Clients appear to have been taking advantage of this increase in the market.

This week, the market was focused on the Federal Open Market Committee (FOMC) on Wednesday evening, awaiting news of the next interest rate hike. In the lead up to this event, the US dollar strengthened against the British Pound. It was then announced that the US interest rates would be kept on hold between 0.25% - 0.50% and it was expected that rates would remain unchanged; however, the FOMC have stated that global economic and financial developments would continue to be closely monitored. This release saw gold slip from its 12-week high due to stronger US dollar against a basket of currencies; silver reacted in a similar way, despite this news not being unexpected.

Over the course of the next week, we can look forward to some more data from the US economy to include the Existing Home Sales, Durable Goods Orders and also the US GDP. This should provide us with some interesting insights to the US economy and possibly offer more support for gold.

28/01/16 16:00. Gold gained 1.9% to $1,115.36, Silver increased 2.4 % to $14.23, Platinum rose 6.6 % to $862.25 and Palladium sunk 0.5% to $492.00 Gold/Silver ratio: 78

 

NOTES TO EDITOR
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Surprises in store….

Thu, 01/28/2016 - 06:37
The month of January has been a wake-up call for complacent equity investors.

From the peaks of last year stock indices in the major markets have fallen 10-20%, give or take. On their own, these falls could be read as healthy corrections in an ongoing bull market, and doubtless there are investors hanging on to their investments in the hope that this is true.

The conditions that have led to the fall in equities are tied up in the realization that global economic activity has contracted sharply. This is now reflected in the performance of medium and long-dated US Treasury bonds, where yields have declined, despite a rise in the Fed Funds Rate. The problem equity markets face is not just a reaction to growing evidence of recession, it is that the normal Fed solution, lower interest rates, is exhausted. The Fed's put option is now being questioned.

Far from this being an equity correction in the early stages of a credit cycle, which is what the small step towards normalization of US interest rates would have had us believe, the evidence points to a developing debt crisis, whose future course we can now tentatively map, though there are important differences to observe compared with a normal credit cycle.

In a normal credit cycle, bank credit stimulated by artificially low interest rates leads to rising consumer prices and rising bond yields. The recovery in nominal GDP growth supports equity prices, which will have already anticipated recovery, and benefited from the lower interest rates set earlier by the central bank. Eventually the equity bull market starts to lose momentum, when it becomes apparent that monetary policy favours tightening. Interest rates are then increased by the central bank to the point where demand for money is curtailed and the economy stops growing due to debt liquidation.

The dynamic that is missing from this simplistic description of an orthodox credit cycle is the level of outstanding debt. The higher it is, the less of a rise in interest rates is required to trigger a downturn in economic activity. So over a long period of increasing accumulations of outstanding debt, the levels of interest rate peaks on successive credit cycles will decline. This is clearly evident in the chart below of the yield on 13-week US Treasury bills.

The pecked line shows these declining peaks, and that a short-term interest rate of less than 3% today would now appear to be enough to trigger a downturn. With such a small margin for error, it is clear that any increase in the yield spread between this, the highest quality debt, and corporate debt yields could trigger a cyclical debt liquidation. Bear in mind that this credit cycle has seen an acceleration of corporate debt issuance, in order to enhance earnings to stockholders without requiring an underlying improvement in operating profits. The result of this financial engineering has been to increase the growth rate of corporate debt and significantly reduce the interest-rate level that will result in widespread corporate debt defaults.

Bare information on corporate bond yields confirms the danger is now acute. Over the last year, the Finra-Bloomberg Investment Grade Index yield has risen from 3.25% to 4.2%, while the High Yield index yield has risen from 5.75% to 9%. While there is no precise level at which rising interest rates will result in debt defaults, it is clear that the margin over the sub-3% interest rate trigger in the chart above is already exceeded by a significant margin.

The financial condition of US companies is therefore under considerable pressure. Corporate America has raised its operational gearing by increasing its debt-to-equity ratio to enhance earnings per share, and is facing adverse economic conditions that will undermine the ability to finance the debt burden. Increased gearing enhances profits, but it also enhances losses. Cost-cutting measures are becoming an urgent priority for over-geared corporations, leading to rising unemployment, which should become evident in the coming months.

Bankers are acutely sensitive to these developing problems. They are already faced with dollar-denominated commodity-related loans that have gone sour, particularly in energy. In order to preserve their own capital and control risk, the banks are likely to reduce leverage by calling in other loans where they can. So we have a classic financial bust in the making with a notable difference: instead of the Fed raising interest rates to take the steam out of the economy, the sheer weight of debt is enough to trigger a slump on its own.

This is an outcome which is becoming more likely every day and impossible to avoid. Thankfully, since the financial crisis of 2008, the commercial banks in the US have limited their operational gearing, mostly through moderating the expansion of bank credit. That moderation will certainly persist in an economic downturn, and probably intensify further into outright contraction. The Fed will feel it has no option but to expand its own balance sheet to compensate. To get the Fed's newly-issued money into the non-financial economy can best be achieved through accelerated debt issuance and maintaining government spending, assuming whacky ideas like helicopter drops can be dismissed.

The US Government in a presidential election year will certainly be keen to maintain spending and to dismiss talk of austerity. And with declining tax revenues from a deteriorating economy, the deficit to be financed can be expected to increase, placing a floor under medium and long-term US Treasury yields. Furthermore, these difficulties might even force the Fed to briefly consider the introduction of negative interest rates, to kick-start reflation.

The Eurozone

So much for the Fed's difficulties, more of which later. There are two other major economies of a similar scale measured on a purchasing-power parity basis, the Eurozone together with its periphery, and China. We will look at the Eurozone first.

The time available to repair the Eurozone's financial system since the Lehman crisis has been wholly wasted. Eurozone governments have refused to address their parlous finances, and the banks have done little to improve their balance sheets, with an average assets-to-equity ratio according to the ECB's figures of 24:1, admittedly including off-balance sheet obligations. The ECB's attempts to stress-test the banks have been bogged down in politics and vested interests, with banks, such as Dexia, actually collapsing soon after being declared sound. Furthermore, the share prices of key Eurozone banks appear to be discounting yet more financial turbulence.

This is hardly surprising. The Eurozone banks have always been the principal channel through which profligate European governments finance themselves. The regulators under Basel III have supported this relationship by deeming that government debt requires no risk-weighting. This is why the stress-tests failed to identify Dexia's troubles, because Dexia had overloaded itself with highly-rated but worthless Greek debt. The politics say Eurozone sovereign debt is inviolate, and politics triumphs over financial reality.

The function of Eurozone politicians has become solely to prolong the fairy-tale of never-never land, and with their electorates equally divorced from financial reality, they have succeeded remarkably well. Greece has been covered up, and is out of the headlines, for the moment. The rebellions against austerity in Spain, Italy and Portugal are fudged, and France, which on any dispassionate analysis is a financial basket-case, keeps her head down. The Eurozone is like a dysfunctional family living in a house which is about to collapse, and no one wants to admit it, let alone fix it.

There are at last signs that this bizarre situation is beginning to fail. The Italian banking system is in a developing crisis, as is Portugal's. Even Germany has a well-publicised problem with its largest bank. It is also a certainty that government deficits will increase, as the Eurozone economy begins to be affected by the global slump. The likely consequence is that yields on Eurozone government debt will start rising this year, exposing highly-geared banks, including the ECB itself, to portfolio losses that will quickly wipe out their inadequate capital.

This looks like being the year when the Eurozone could plunge the world into a second financial crisis, eight years after America's sub-prime crisis ignited the first. This time, the Eurozone's financial condition is the obvious catalyst, rather than China which is discussed next.

China

The general opinion in western capital markets is that China is the greatest danger to global financial stability. China's stock markets continue to slide, despite government attempts to ban or restrict selling. Her debt bubble, which is unwinding, has been a massive economic distortion. And while Keynesian economists seem to think the consequences of a credit bubble can be ignored in western economies, they have no hesitation in pointing an accusatory finger at China's.

Western financial analysts are hardly consistent in their approach to monetary matters, which is a bad start. It is more sensible to look at things from the Chinese Communist Party's point of view, and what matters to it is the long-term health of the economy. Last year China was on course ahead of the new five-year plan, gaining SDR status for its currency. We know that the CCP's long-term objective is to foster the industrial revolution of the whole Asian continent. The yuan is now positioned to be the argent Asiatique, accepted by nearly four billion people in place of the US dollar. Only this week we saw President Xi Jinping visit both Iran and Saudi Arabia, sworn enemies, but with a common desire to trade with China, doubtless settling in yuan.

For the yuan to be the currency of Asian trade, it must be stable. Western analysts who think China will devalue to "save the economy" ignore this vital point. China is not only prepared to maintain the yuan rate within a fairly narrow band against a basket of currencies, she sees a sound currency as a necessary condition for evolving from low-value trade and for the redeployment of scarce capital and labour resources in favour of her strategic objectives.

China does not share with western economies many of the financial problems of a deflating credit bubble, because the banks are state-owned and will not fail. Furthermore, it is a Chinese tradition to wind down obligations before the new year, so Chinese demand for dollars to pay down debt should diminish from now on. There are problems nonetheless, and while it would be a mistake to dismiss them, it should be noted that the Chinese government has the control required to manage its planned economic transition. And more so than most governments, she spins her own statistics, which will continue to be spun through the planned transition, making it difficult for yuan bears to attack the currency.

It should not surprise us if China's economy shows greater than expected resilience in the coming months, typical with the start of a new year. There will be more bankruptcies in legacy industries for sure, but the demand for and importation of industrial commodities will soon begin to pick up as the thirteenth five-year plan starts to be implemented.

The effect on global markets should be significant, given the overwhelming bets on a bullish dollar. Commodity prices, particularly for energy, will surprise on the upside. That is why President Xi visited both Iran and Saudi Arabia, to secure oil supplies. And when the threat of a further collapse in commodity prices is removed, the dollar can be expected to weaken, particularly against the emerging economy currencies. Shorting the yuan, or the Hong Kong dollar for that matter, is likely to prove to be very costly.

Conclusion

China's economy will probably begin to stabilise after the Chinese new year, which will wrong-foot bears of industrial commodities, and therefor bulls of the US dollar. This being the case, expectations of further falls in precious metals prices will be dashed, and based on dollar weakness alone, the current rally in gold and silver prices looks set to continue.

While a return to rising commodity prices, particularly for energy, will be positive for emerging market currencies, the destruction of extraction capacity heretofore is likely to push oil and commodity prices significantly higher by the end of 2016. The unwinding of bull positions in the US dollar is an additional factor that will unexpectedly increase prospective price inflation in the US. The Fed is therefor faced with the medium-term prospect of developing stagflation, a combination of an economy hampered by the unwinding of corporate debt together with the rise in unemployment this infers, while price inflation gathers steam. It remains to be seen if the Fed will have the courage to raise interest rates sufficiently to address price inflation, while deliberately bankrupting borrowers unable to pay high nominal interest rates. This will be a problem in sharp contrast to China, which should be on the road to an investment-led recovery, with a currency gaining in international status. If so, it will leave the US dollar vulnerable to even greater weakness. Currency traders will quickly realise that the risk is in holding dollars, and not yuan as commonly supposed today.

The Eurozone is the most immediate systemic danger, with a banking system creaking badly, and wildly overvalued government bond markets. Either a rise in US Treasury yields or a threatened sovereign default could set off a systemic crisis in the banking system. Furthermore, if the UK referendum for an EU exit is held mid-year and, as current polls suggest is possible, the UK votes for an exit, the European experiment will be dealt a mortal blow.

The phoenix rising from the ashes of 2015 will be comprised of China, the yuan and gold, a wholly unexpected outcome for mainstream financial analysts who are betting heavily the other way. Meanwhile equity markets in the developed world will have to struggle against stagflation, and the prospect of rising interest rates to curb the dollar's falling purchasing power. By the end of the year it should be clear that the dollar has finally had its day, along with its hegemony and the currencies tied to it.

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.

 

Financial Crises and Newton’s Third Law

Wed, 01/27/2016 - 12:25
Financial crises and Newton's Third Law

"For every action, there is an equal but opposite reaction," is the familiar formulation of Sir Isaac Newton's Third Law of Motion. However, history demonstrates that financial crises frequently meet not with equal but rather disproportionately large policy responses, fueling asset bubbles and thus contributing to even larger crises in future. The 2008-09 global financial crisis is no exception. Recent developments may suggest an even larger crisis may be now unfolding.

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

Sir Isaac Newton knew a thing or two about physics. In one example of his genius, he demonstrated that the same force that causes things to fall to earth, gravity, also keeps the planets in motion around the sun. How did he manage to figure that out? Like all great scientists, he excelled at the scientific method. For those not familiar, the fundamental precepts of the scientific method are the following:

  • Begin with an observation or experience;
  • Form a conjecture (or hypothesis);
  • Make a specific prediction based on the conjecture;
  • Design an experiment to test the conjecture.

If all goes according to plan and the experiment confirms the prediction based on the conjecture, then you have a theory. The scientific method, properly followed, must also allow for others to reproduce the experiment and obtain similar results. However attractive a theory may be at first glance, if it cannot be independently and repeatedly verified in a controlled manner, it cannot properly be called a scientific theory; it remains a conjecture only. In the event that the experiment produces inconsistent results over time, then either the theory needs to be modified or a new conjecture conceived.

It is important to remember that science does not purport to "prove" things in an absolute sense, even though well-established theories are referred to as "laws". Theories—even those achieving "law" status, must be "falsifiable" through experimentation. From time to time, they are. 

Many are familiar with the apocryphal story of how Newton came to arrive at his conjecture of a force of universal gravitation operating both on earth and in the heavens: Whilst daydreaming beneath an apple tree, staring up at the sky, an apple fell down on to his head. Thus startled, it seemed in that moment as if the apple had fallen right out of the heavens... Regardless of whether this pretty fable is correct, once Newton had made his conjecture he needed to design an experiment to test his predictions.

Fortunately it was already widely known at what rate of acceleration objects fall to earth; and the work of Johannes Kepler some years before had demonstrated the relationships between the distance of planets to the sun and the speed and size of their orbits. The experiment, as it were, had already been performed, only in separate pieces that no one had thought to combine. All Newton had to do was to put pen to paper and show that the same equation predicted both the rate at which objects fall to earth and Kepler's laws of planetary motion. He was referring to Kepler, among others, when he made his famous, humble claim that his achievement was nothing more than "standing on the shoulders of giants." Indeed. Yet he too was a giant.

It would be over two centuries before Newton's Law of Universal Gravitation would be disproved via the scientific method. Albert Einstein did so with his theories of relativity. Fast forward to today: Apparent discrepancies between the predictions of relativity and the observations taking place in particle accelerators are significant enough that many scientists believe that even the theory of relatively will be shown, in due course, to be inaccurate. The search for truth, at least via the scientific method, is still very much on.

Newton was known for much more, of course. His Third Law of Motion was that for each and every action there is an equal and opposite reaction. While applicable to the natural world, it does not hold with respect to the actions of financial markets and the subsequent reactions of central bankers and other economic officials. Indeed, the reactions of regulators are consistently disproportionate to the actions of financial markets. In sinister dialectical fashion, the powers assumed and mistakes made by policymakers tend to grow with each crisis, thereby ensuring that future crises become progressively more severe.

***

Things were looking rather grim for the US economy in mid-1987, soon after Paul Volcker left his job at the helm of the Federal Reserve. The dollar was falling, fast. Inflation and inflation expectations were rising. It was clear that the Fed was going to need to start raising interest rates soon, perhaps sharply. Having successfully broken the back of inflation and supported the dollar in the early 1980s with monetary targeting, double-digit interest rates and the most severe post-WWII recession to date, financial markets were naturally increasingly fearful that the Fed might follow a similar if less severe script again. While the exact trigger will perhaps never be known, this was the fundamental background that led to the great stock market crash of 19 October 1987, on which day the Dow Jones Industrial Average declined by 23%.

Figure 1: A falling dollar was part of the fundamental background to the 1987 crash
Index March 1973 = 100

Source: Federal Reserve, GoldMoney Research

Alan Greenspan, a veteran of US economic policy-making circles but a neophyte at the Fed, sensed correctly that an emergency easing of interest rates and other liquidity-enhancing measures would help to restore confidence in the equity market and prevent a possible recession. Sure enough, equity markets bounced sharply in the following days and continued to climb steadily in the following months. It was most certainly a baptism by fire for Greenspan and one which, no doubt, taught him at least one important lesson: If done quickly and communicated properly to the financial markets, emergency Fed policy actions can provide swift and dramatic support for asset prices. But what of the consequences?

While Greenspan might consider this his first, great success, was the Fed's policy reaction to the 1987 crash proportionate or even appropriate? Was it "an equal but opposite reaction" which merely temporarily stabilized financial markets or did it, in fact, implicitly expand the Fed's regulatory role to managing equity prices? Indeed, one could argue that this was merely the first of a series of progressively larger "Greenspan Puts" which the Fed would provide to the financial markets during the 18 years that the so-called "Maestro" was in charge of monetary policy and, let's not forget, bank regulation.

Having received a shot in the arm from the abrupt easing of monetary conditions in late 1987 and combined with the lagged effects of a much weaker dollar, US CPI rose to over 5% y/y in early 1989 and the Fed raised rates in response, eventually tipping the economy into a recession. One aspect of the 1990-92 recession that received much comment and analysis was the "double-dip". Whereas the initial phase of the recession looked like a fairly typical business investment and inventory cycle, the second phase was characterized by a general "credit-crunch" that constrained growth in most areas of the economy. What was the cause of this credit-crunch? Why, the long-forgotten Savings and Loan crisis.

The American dream of homeownership, although associated with the US economy's capitalist traditions, is apparently something that cannot be achieved without ever-growing government regulation and subsidies. Politicians just love finding ways to assist their constituents with home purchases. In some cases, there is so much government "help" available that homeowners end up owning homes they can't afford. In the 1980s, Congress decided that, in order to help make housing more affordable, it would ease certain regulations previously restricting the lending activities of Savings and Loans. Credit would thereby become more widely available to a range of borrowers who previously might not have qualified. Importantly, this included risky commercial lending.

Seeking higher returns, some S&Ls broadened their lending activities, expanding their balance sheets and focusing more and more on the riskiest, most lucrative opportunities. As S&Ls were financed primarily by deposits, they needed to offer more attractive deposit rates to expand. But because all deposits were insured in equal measure by the FSLIC (the Savings and Loan equivalent of the FDIC), depositors would shop around, seeking out the best rates. Deposits therefore flowed from the more conservative to the riskiest institutions offering the highest rates on deposits—fully insured, of course. Some of the most aggressive S&Ls went on a shopping spree, snapping up their more conservative counterparts and deploying their newly-acquired deposits into the latest, greatest, high-risk, high-return ventures.

The results were predictable. By the late 1980s, a huge portion of the S&L industry was insolvent. The recession of 1990-91, made a bad situation worse. FSLIC funds were rapidly depleted. But a federal guarantee is supposed to be just that, a guarantee, so Congress put together a bailout package for the industry. A new federal agency, the Resolution Trust Corporation (RTC), issued bonds fully backed by the US Treasury and used the proceeds to make insolvent S&L depositors whole.
All of this took a while, however, and as the bad assets of the S&Ls were being worked off, the economy entered part II of the "double dip" and the credit-crunch intensified. The Fed, however, knew what to do. By taking the Fed funds rate all the way down to 3%, real interest rates were effectively zero for the first time since the 1970s. The Fed then held them there for nearly two years, finally raising them when it was absolutely clear that the economy was recovering strongly and the credit-crunch was over in early 1994.
The Fed's hiking cycle was abruptly aborted, however, when Mexico plunged into crisis in 1995. There was a scramble to shore up Mexico and Latin American debtors generally, the effort led by the so-called 'Committee to Save the World', comprised of Treasury Secretary Robert Rubin, his Deputy Secretary Larry Summers, and Fed Chairman Greenspan himself. One of the measures taken, not surprisingly, was for the Fed to reverse a recent interest rate hike. The stock market responded favorably and, by 1996, Fed officials were concerned that a bubble might be forming in the equity market.

It was around this time that Greenspan uttered his infamous 'irrational exuberance' comment before Congress. This spooked the equity market somewhat, as it was unusual for a Fed Chairman to speak officially of market valuations at all, much less in a way with potentially negative implications. Greenspan later backpedalled, however, and the stock market kept right on rising, as indeed it would do, notwithstanding the occasional correction, into the great dotcom-inspired valuation crescendo of 1999-2000.

Figure 2: Real interest rates were effectively zero in 1992-93
%

Source: Federal Reserve, GoldMoney Research

When that great equity bubble finally burst, the Fed responded aggressively and, yet again, disproportionately. There is now general agreement that the origins of the 2003-08 boom and bust in housing and credit generally can be traced back to the highly accommodative Fed policy implemented in the wake of the dotcom bust in 2001-2003. By late 2003 there was clear evidence that the US housing market was surging due in part to homeowners extracting record amounts of equity from their homes, thereby stimulating the broader economy. However, amidst relatively low consumer price inflation, the Fed determined—incorrectly we now know—that interest rates should rise only slowly notwithstanding the large surge in housing and other asset prices.

With the Fed moving slowly and predictably, risk premia for essentially all assets plummeted. Greenspan referred to the "conundrum" of low term premia for bonds. But low credit spreads and low implied volatilities for nearly all assets were clear evidence of inappropriately loose Fed policy all the way into 2007. By the time the subprime crisis hit in mid-2007, the economic damage had been done. There had been vast overconsumption at home and over-investment abroad resulting collectively in perhaps the most monumental global misallocation of resources in history. There was no avoiding the crash; the new challenge quickly became how to prevent a complete collapse of the financial system. At this point, the crisis acquired an overt political dimension as taxpayers were asked, in various direct and indirect ways, to bail out those institutions at risk of insolvency and default.

In retrospect, the entire S&L debacle, from its origins in regulatory changes and government guarantees, through the risky lending boom, bust, credit crunch and fiscal and monetary bailout can be seen as a precursor to the far larger global credit bubble and bust of 2003-2009: Just replace the S&Ls with Fannie/Freddie and the international shadow banking system. But there is no need to change the massive moral hazard perpetrated by economic officials, including of course the Fed, and the reckless financial firms who played essentially the same role in both episodes.

Those surprised by the aggressive post-2008 efforts by the Fed and other central banks and regulatory bodies in the US and abroad to expand their power over the financial system and the economy in general have not been paying attention to history: For every market action there is a disproportionate economic and monetary policy reaction which increases the moral hazard of the system. History may not repeat but it certainly rhymes.

Figure 3: See the pattern? For every crisis there is a bailout (S&P500 index)
Index level

Source: Bloomberg, GoldMoney Research

Today, there are ample signs that another such boom cycle, the result of the disproportionate policy response to 2008-09, is nearing its conclusion. There is no way to know just how the bust will play out, but play out in some form it will. Investors sensing this danger should be unusually conservative in their investment posture. As history demonstrates so clearly, this should include an allocation to physical gold. Rather than be perceived as a speculative, alternative asset, gold should thus play a central role in a conservative portfolio.

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

 

1. Several triggers for "Black Monday" have been proposed in a number of papers. One relatively recent study was prepared by Federal Reserve staff and listed rising global interest rates, a weaker dollar and rising US trade deficit as potential fundamental, macroeconomic causes and a proposed corporate tax change, listed options expiry and large redemptions from a prominent mutual fund group as potential immediate triggers. See A Brief History of the 1987 Stock Market Crash with a Discussion of the Federal Reserve Response by Mark Carlson, Federal Reserve Board of Governors Finance and Economic Discussion Series, 2006. http://www.federalreserve.gov/pubs/feds/2007/200713/200713pap.pdf

2. A reasonably complete timeline of the key events leading up to the S&L crisis is provided by the FDIC at http://www.fdic.gov/bank/historical/s&l/

 

 

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.

This is not 2008 – at least not for gold

Tue, 01/26/2016 - 12:30
This is not 2008 – at least not for gold

What a difference a month makes. As the market reassess growth and asset prices under renewed volatility – and with a more passive response from Central Banks thus far – the USD-gold price has remained remarkably stable and range-bound for over 10 weeks. Compared to most currencies and assets however, gold has had a remarkable past month: XAU/WTI +31%, XAU/S&P500 +14%, XAU/CAD +8%, XAU/RNB +6%; by the time of writing, the list goes on.


With markets in a sharp correction to start 2016, market commentators nevertheless still hold a downside bias for gold. The rationale for this downside has shifted however, from a fear of FED normalization to a fear that deflation and associated asset-capitulation would take gold lower in a "dollar short squeeze", reminiscent of gold's sell off in 2008. With a well-grounded framework for analyzing the gold price, we fear neither rationale; we still view a significant fall from today's level an unlikely outcome, or temporary at best. In fact, as many other asset classes are mired in wide valuation outlooks at either extreme (a binary outcome: normalization or capitulation), the three core drivers of the gold price remain firmly in gold's favor.


Ultimately, we believe that fear and speculative-sentiment flows have little if any lasting impact on gold - a $7 trillion money stock - and fundamentals are in fact supportive when compared to 2008. Given the asymmetry from these levels in the three main drivers of the gold price - energy, real interest rates, and Central Bank policy - we continue to see gold-price risk being skewed to the upside. We also conclude that gold is highly unlikely to move lower in the anecdotal "dollar short squeeze" absent real interest rate changes or dislocations in energy fundamentals, both coming off very different levels than 2008.

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


This is not 2008 – at least not for gold

The investing crowd seems to be split in half. There are those who believe that this is just another brief correction in the broader markets, as we saw last August, and that this is now the time to buy as markets will recover quickly. The other side fears that things are unfolding as in 2008 all over again given the significant losses that could accrue from oil- or China/RMB devaluation-related credit shocks. Many believe that the unprecedented interventions from central banks around the world have inflated all asset classes and that these bubbles are now deflating, with the FED content to sit this one out and let animal spirits play their course given US labor market strength. The result, they fear, is that equity markets will come crashing down once again. 

What these scenarios have in common however, is that they both apparently pose downside risk for gold prices in the anecdotes of most analysts. In the first scenario, further FED rate hikes seemingly create headwinds for gold. In the second scenario, gold would decline amidst a broader asset sell off, just as it did in 2008. We disagree in both cases. Rather, the three core drivers of the gold price are today firmly in gold's favor, regardless the path of equities or other asset classes. In this note we will use the 2008 gold-sell off to illustrate what the key drivers are that took gold prices down back then and explain why the same drivers are unlikely to push gold much lower from here in either scenario above.

Ultimately, real interest rates matter for gold, not nominal rates, and energy markets have virtually priced out future supply growth following an unprecedented supply glut. These factors help provide a solid floor for gold price fundamentals (in both supply and demand) under either market scenario.

The 2008 scenario

While gold has held up well over the past months, some people express concerns that gold might not be immune if markets deteriorate further. They are quick to point out that 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%.

The common narrative in the gold market is that gold prices are driven mainly by fear or greed. So why then back in 2008, amidst the greatest market panic in nearly a century, did gold not go higher, and actually declined in USD terms? The explanation we often hear is that the credit crisis lead to a flight to "quality", and the quality in 2008 was apparently the USD and government bonds. US investors liquidated foreign assets en masse and repatriated the money back to the USD, thus creating demand for USD. The story goes that not just did that not lead to more gold demand, gold was outright sold to meet margin calls. While we are not denying that these flows can have a short term impact on gold futures and push the price of gold above or below the fundamentally justified price over short periods of time, one does not need any of the above explanations to understand the drop in price in 2008. In fact, two variables – neither having anything to do, at least not directly, with either fear or greed - can explain almost the entire move.

Figure 1: At the beginning of the 2008 credit crisis, gold sold off as equities moved lower $/ozt (LHS); $ value index (RHS)

Source: Bloomberg, GoldMoney Research

We like to recall for our readers that we published our framework note on gold pricing last fall: Gold Price Framework Vol. 1: Price Model, where we presented our findings on how gold prices form. Solving for gold in US dollars, we found that the majority of price movements can be explained by just a few key drivers: real interest rate expectations, central bank policy, and changes in long-term energy prices. More specifically, the monthly change in the price of gold is primarily a function of monetary demand and supply for gold (COMEX net speculative positions, ETF and Central Bank net sales) and changes in the markets expectations for future energy prices, consistent with the view that gold is a store of value (money) with an energy intensive replacement cost. The first three factors impact gold prices because they directly affect the price of currency and demand for gold in portfolios, while energy feeds into production and replacement costs and derives its monetary proof of value.

Figure 2: Gold prices are mainly driven by real interest rates, central bank policy and longer-dated energy prices $/ozt

Source: Bloomberg, GoldMoney Research

Before 2008, gold had been on a steady rise, supported by the factors described above. Longer-dated energy prices had been rising for nearly a decade while real interest rates had declined for a decade. But these trends came to a sudden halt and a sharp reversal when the credit crisis started.

Longer-dated Energy prices moved lower....

The 5-year forward price for WTI went from $21/bbl in 2001 all the way to $85/bbl by the end of 2007. From there it moved higher in early 2008 but collapsed into year-end as the credit crisis hit full force, crippling global economic growth and thus the outlook for oil demand. Longer-dated oil prices as measured by the 5-year forward price fell 20% from $101/bbl (interim gold price peak in March) to $82/bbl (gold price trough in November). Our model predict that this has pushed gold prices lower by about $140/ozt (see Figure 3).

Figure 3: The decline in longer-dated energy prices and the sharp and sudden increase in real rates amidst the credit crisis created strong headwinds for gold $/bbl (RHS), % (LHS)

Source: FRED, Bloomberg, GoldMoney Research


...and real interest rates sharply higher

Real-interest rates, as measured by 10-year TIPS (Treasury Inflation Protected Securities), declined from an average 3.75% in the year 2000 to 1.8% by the end of 2007 and hit a low of 0.95% on March 12, 2008, exactly two days before the peak in the gold price. But as the credit crisis unfolded, inflation expectations waned and volatility increased. The result was that real-interest rates rose sharply to over 3% by October. On November 12, 2008, 10-year TIPS were 2.79%. Our model implies that this move had impacted gold prices by about $135/ozt.

The combined impact from a decline in longer-dated energy prices and the sharp move higher in real-interest rates explain about $275/ozt of the $282/ozt move lower in gold in 2008. From there the paths of the two drivers split. Longer-dated oil prices continued to move lower for a while, eventually hitting a low at around $66/bbl in spring 2009. This further decline in oil prices was offset by the sharp decline in real interest rates as the FED began to intervene in the markets, pushing real interest rates to new lows.

The takeaway is that the decline in the price of gold in 2008 can be explained quite well without the need of Malthusian thinking or the notion of "fear and speculation" which are typically cited when gold prices move against what common wisdom would predict. But more importantly, it helps us understand the current environment we are in and whether there is presently the risk that gold prices sell off in a broader market sell off.

In fact, the situation this time couldn't be more different in our view. First of all, energy prices have already sold off sharply. And by that we don't mean the decline in spot prices from $110/bbl to now under $30/bbl over the past 18 months. As we have shown in our framework note, it's not the oil spot price that drives gold, it's the market's expectation for future energy prices. Longer-dated oil prices peaked back in 2011 and have been on a downward trend since. 5-year forward WTI prices have dropped to $45/bbl, about 30% below the lowest levels during the credit crisis. These price levels now hold a significant asymmetry as well, as the entire oil curve prices below levels needed to arrest oil production declines and maintain the industry infrastructure required to meet future demand, as we will explain in more detail later in this report.

Figure 4: Long-dated energy prices are one of 3 important drivers for gold prices % change year-over-year

Source: Bloomberg, GoldMoney Research


Figure 5: While in 2008 long-dated energy prices were at a peak, they now at a low $/bbl

Source: Bloomberg, GoldMoney Research

Similarly, real-interest rates are not coming out of a multi-year decline as was the case in 2008. While they have declined for decades, for nearly 3 years they actually have been going up. Real-interest rates troughed in 2013 at -0.74% and have since recovered steadily back to 0.67% on the back of expectations for a series of FED hikes (see Exhibit 6&7).

Figure 6: The second important driver are real-interest rates, which are inversely correlated to gold
% change y-o-y (lhs), absolute change y-o-y (rhs)

Source: FRED, Bloomberg, GoldMoney Research


Figure 7: Real-interest rates have been going up over the past years and are now at a high $/oz (lhs); % (rhs)


Source: Bloomberg, GoldMoney Research


The multi-year decline in the price of longer-dated oil combined with the recovery in real-interest rates was responsible for the gold price decline since its peak in 2011. While this created major headwinds for gold prices, it also implies that they are now behind us.

What are the risks to long-dated energy prices from here?

In our upcoming Framework Report Vol. 2 we will examine the energy side of the gold price equation in greater detail. But in a nutshell, long-dated oil prices have dropped to a level where a large share of future oil projects are no longer economical. US shale oil production, which was the main cause for the current oversupply, cannot grow over the next few years at the prices embedded in the forward curve and thus will continue to decline. The result is that future demand cannot be met with oil supply projections at the price levels currently embedded in the forward curve. Thus longer dated oil prices are unlikely to remain at these levels for an extended period. In a 2008 type scenario with broad based asset sell offs and a collapse in global economic growth would be bad news for oil spot prices. Relentless production growth have pushed global petroleum inventories already to all-time record highs on the back of falling oil prices, despite the fact that demand growth has been really strong. A slowdown in demand due to weaker global economic growth would lead to further builds, even production growth has slowed down dramatically by now. But as we explain in our framework report, inventories drive time-spreads and thus spot prices, not long-term prices. In a 2008 type scenario it would certainly be hard for long-dated oil prices to rally over the coming months, but again, given production economics for future supply, most of the decline in long-dated prices is likely behind us. Thus any further decline in long-dated prices would only have a very limited impact on gold. For example, were the 5-year forward price to drop by another 20% from here, it would take gold down a further $60-65/ozt. But at that point, a very large part of global oil production would be cash negative for the indefinite future and 100% of all future projects would be uneconomical.

What about real-interest rates?

Real-interest rates bucked their longer term downward trend over the past two years and recovered from negative -0.7% to +0.7%. The recovery was on the back of an apparently improving economy and the outlook for FED rate hikes after years of near zero interest rates. The FED finally came though and hiked rates by 25bp in December and held out further hikes in prospect through 2016. However, real-interest rates didn't rally after the hike, despite the fact that the market was divided whether the FED would actually be able to push further hikes through. In fact, expectations for FED interest rates levels by December 2016 have been on a downward trend for a while now. They spiked briefly approaching the Dec 15 FOMC meeting but since then have declined sharply again. The market is questioning whether the FED will be able to hike rates if markets continue to decline.

Figure 8: Expectations for FED funds rate by the end of 2016 as implied by the futures market have declined sharply %

Source: Bloomberg, GoldMoney Research

Importantly, should equity markets continue to sell-off, real-interest rates are unlikely to show a sharp move up comparable to 2008 again. With further sell-offs in equity markets, the market might start to price in lower growth, which in turn would put downward pressure on inflation expectations. However, in such a scenario, it's unlikely that the FED would continue hiking rates. A sharp deterioration in the economic outlook would most likely lead to a U-turn in the FEDs policy and the markets will anticipate that. We would expect that real-interest rates would be pushed lower again.

What if this was just a blip and equity markets recover, just as in August?

What about the scenario in which equity markets recover and the FED keeps hiking rates? As we have outlined above, what really matters for gold is real-interest rates, not nominal rates. To recall, real interest rates are measured as nominal interest rates minus inflation expectations. The easiest way to track real interest rates is via Treasury Interest Protected Securities (TIPS). There are two reasons why we think that even if the FED continues with further rate hikes, real-interest rates are unlike to go much higher.

First, Inflation expectations have been on a steady decline since the peak in gold in 2011, from around 3.6% to 2.6%. In our view the FED is unlikely to raise rates further in 2016 if this quells the last bit of inflation expectations.

Second, and more importantly, much of the expected further FED hike is already priced into TIPS yields. It was the outlook for rate hikes that brought TIPS yields from -0.7% to +0.7%. But over the past months, TIPS yields haven't moved much despite the fact that the FED actually did hike rates in December. Hence, further rate hikes as telegraphed by the FED probably won't have much impact on TIPS yields from here. Even if we assume there will be further rates hikes by 1% and if we assume they push 10-year Treasury yields up by a full percent with no change in inflation expectations, this would push 10-year TIPS yield only up 40bp. The impact on the gold price would be only about -$30/ozt, or about 3% from today's level. That is in a range of weekly volatility, hence it would be nearly just noise, rather than a meaningful fundamental decline in price. Arguably, the market seems to increasingly discount these rates hikes. At this point, the markets expectations embedded in the futures market for FED fund rates by the end of 2016 are at just 0.6%, much lower than the formal analyst consensus of 1.25% as reported by the Wall Street Journal and lower than the FEDs own guidance of a further 1% hike in 2016 bringing the FED fund rate to 1.25-1.5%. However, while the probabilities for 2016 rate hikes implied by the futures market have declined significantly, TIPS yields have not followed. TIPS yields continue to reflect higher FED funds expectations (or inflation expectations have declined, which would be a headwind for future FED hikes if correct). Hence, should the markets worries about a broader asset-sell off subside and probabilities for future FED rate hikes increase, it would most likely not impact TIPS yields much.

On the other hand, a rebound in confidence about the outlook from global growth would be positive for energy prices. Demand would remain strong on the back of low prices and accelerating economic growth, and, combined with continued slowdown in production growth, would lead to lower inventories. But more importantly, the market would have to reassess the outlook for future demand growth and the increasing risk that future supply will not be able to meet demand,. The result would be a recovery in long-dated energy prices, which would be positive for gold.

Hence, both low energy prices and higher real interest rates are already reflected in the current gold price. As longer-dated oil prices cannot remain below industry costs indefinitely, nor real interest rates rise much higher given a data dependent FED, this creates an asymmetry to gold prices, regardless of broader market normalization - or capitulation.

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.

John Butler Interview with Real Vision TV

Mon, 01/25/2016 - 10:39
Head of GoldMoney Wealth Services, John Butler, sat down with Real Vision TV to discuss blockchain, gold and new thinking on financial and monetary matters.

 Click the image below to watch the interview on RVTV.  If you don't have a subscription there is a free trial available. 

Real Vision is the video-on-demand platform for finance, where the world's best investors share their ideas; in essence, they are the Netflix of Finance. Their content features exclusive in-depth interviews and presentations from the world's sharpest independent analysts, fund managers, geopolitical strategists, economists and investors. Fresh content is released several times each week and subscribers also have access to the ever-expanding video vault. Free from groupthink, agenda, and sensationalism, Real Vision presents its viewers with the very best economic information and financial insight available and then allows them to make up their own minds, and profit from knowledge.

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: Gold steady, equities volatile

Fri, 01/22/2016 - 03:29

Gold and silver had a better week, before yesterday afternoon (Thursday), when gold steadied and silver slid 20 cents back below the $14 mark.

However, in early European trade this morning gold was level at $1097 and silver slightly better at $14.07. This was relatively subdued, given that US crude oil dropped to under $28 at one point this week, but recovered to $30.60 per barrel this morning. However, the real action was in equities.

The contrast between the soothing tones of the great and the good at Davos, and the carnage in equity markets was as if Davos is a village on another planet. The Dow at its worst was down 2,000 points since 31 December, and there were big falls on all equity markets. The yield on government bonds dropped, indicating that deflationary forces now dominate markets.

The situation is not helped by dollar strength, dramatically reflected in sterling which has dropped to multi-year lows. Other currencies, particularly the rouble, are also hitting new lows. The result of currency moves is that gold priced in the other major currencies has actually performed reasonably. The next chart is of gold indexed to end-2013.

While the USD price of gold is down 8% since 31 December 2013, it is up 16% in euros, 2% in yen and 7% in sterling.

Gold is a grave concern to western central banks at a time of considerable market uncertainty on two counts. Firstly, a rise in the gold price is seen to be evidence of growing worries about the financial system, and therefor to be discouraged. And secondly, with the bullion banks unable to obtain physical cover for their gold liabilities, a rise in the gold price could easily become self-feeding. The Fed in particular, with its responsibility for the reserve currency, will be acutely aware of the risk physical gold presents for the entire fiat money system.

This is why the short position in futures markets is important. The next chart shows the futures position of the second division of bullion banks, represented by the Swaps category on Comex.

At first sight, there is no problem, with swap dealers net long of 8,230 contracts, bearing in mind that the average net position since 2006 has been about -50,000 contracts. Unfortunately, on the other side of the deal are the hedge funds, which is the next chart.

In this chart we are looking at a longer time scale to show how the hedge funds have progressively reduced their net position so that they too are more or less level as a category. Then we look at the gross short position for this category, because this is where the trouble will start.

The short position is extreme on any historical basis, which is why the net position is so low. Now imagine what happens if there is a systemic shock: 83,000 contracts will have to be bought back, and there is not the liquidity in the swaps to accommodate it. We have a classic situation, where after years of profitable trading on the bear tack, the futures market is not in a position to handle a change in trend, without incurring some serious losses. The swaps would be forced to hedge their short positions in other markets, which will lack liquidity on the upside.

This is why both central banks and bullion banks are keen to keep a lid on the gold price, but things are going awry in markets for regulated investments, starting with equities, which suggests that the time when this control over the gold price ends is approaching.

 

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 Supporting Gold

Thu, 01/21/2016 - 13:06
This week has seen clients supporting gold and platinum whilst selling silver and palladium.

GoldMoney's clients have been buying into the Singapore and Canadian vaults again. There has also been more buy orders into the Swiss vault this week.

Kelly-Ann Kearsey, Dealing Manager at GoldMoney, says that gold has climbed to a two-month high earlier in the week along with silver which resumed its position above USD14.00/oz. This is due to global uncertainty which appears to have triggered demand for the metal as a safe-haven. After falling on Tuesday due to a stronger US dollar, equity markets rose after data was released from China showing the weakest economic growth in years.

Gold has struggled through the week to push above USD1,100/oz due to the threat of further US interest rate increases, along with a stronger dollar. It has now retreated due to the news posted today by the ECB who have hinted at further stimulus. This,in turn struck the Euro, weaking it against the US dollar whilst oil prices have fallen to their weakest since 2003.

Platinum has fallen to a seven year low, hovering just above of the lows experienced in 2009. Palladium has also seen five year lows. The industrial metals have been hurt by fears over global growth. Being that these metals are industrial and used heavily in the automobile sector, it more exposed to concerns over economic weakness than gold.

21/01/16 16:00. Gold gained 1.1% to $1,094.36, Silver increased 0.8 % to $13.90, Platinum declined 3.5% to $808.99 and Palladium rose 1.3% to $494.50 Gold/Silver ratio: 78

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

 

Out of the mouths of babes....

Thu, 01/21/2016 - 06:34
Parents will tell you the most difficult questions to answer sometimes come from their children.

Here are some apparently innocent questions to ask of economists, journalists, financial commentators and central bankers, which are designed to expose the contradictions in their economic beliefs. They are at their most effective using a combination of empirical evidence and simple, unarguable logic. References to economic theory are minimal, but in all cases, the respondent is invited to present a valid theoretical justification for what invariably are little more than baseless assumptions.

A pretence of economic ignorance by the questioner is best, because it is most disarming. Avoid asking questions couched in anything but the simplest logical terms. You will probably only get two or three questions in before the respondent sees you as a trouble-maker and refuses to cooperate further.

The nine questions that follow are best asked so that they are answered in front of witnesses, adding to the respondent's discomfort. Equally, journalists and financial commentators, who make a living from mindlessly recycling others' beliefs, can be great sport for an interrogator. The game is simple: we know that macroeconomics is a fiction from top to bottom, the challenge is to expose it as such. If appropriate, preface the question with an earlier statement by the respondent, which he cannot deny; i.e. "Last week you said that..."

Commentary follows each question, which is in bold.

1. How do you improve economic prospects when monetary policy destroys wealth by devaluing earnings and savings?

Central bankers and financial commentators are always ready to point out the supposed merits of monetary expansion, but are never willing to admit to the true cost. You can add that Lenin, Keynes and Friedman agreed that debasing money destroyed wealth for the masses, if the respondent prevaricates. Often politicians will duck the question with the excuse that monetary policy is delegated to the central bank.

The argument in favour of devaluation relies on fooling all of the people some of the time by encouraging them through lower interest rates to spend instead of save. However, monetary debasement has become a permanent and continuing fixture today, instead of a short-term fix.

2. What makes you think that targeting a continual rise in the general price level allows you to overturn the normal price relationship between supply and demand?

Simple price theory posits that higher prices reduce demand, while lower prices stimulate it. For evidence, look no further than the electronics and data industries. Look no further than any product, which a salesman will offer at a discount in order to sell it. The confusion over price formation is highlighted by economists' response to falling energy prices. Far from being a bad thing, unlike falling prices of other goods, apparently it leaves more money to spend on those other things!

Enjoy the subsequent attempt to justify the impossible. Animal spirits may be mentioned as an escape, which is the focus of the next question.

3. What are "animal spirits", and how do you measure them?

The reference to animal spirits, which cannot be actually defined, is supposed to be a reflection of consumer confidence. However, an increase in animal spirits can only mean a change in overall preference towards buying goods and against holding cash, usually driven by a growing fear of a falling purchasing power for money, and not consumer greed. This is the route to runaway price inflation, and if the policy succeeds in promoting so-called animal spirits, the outcome is impossible to control, without raising interest rates to a level that crashes the economy. It is also impossible to quantify animal spirits, because they are a bad concept.

The reference to animal spirits was always a cop-out for effects that refuse to be modelled. It is in its own small way an admission that the mathematical treatment of economics is fundamentally flawed.

4. It's commonly believed that a lower currency stimulates production. If this is the case, how did Germany and Japan in the post-war years develop into the strongest economies despite their currencies consistently rising against those of their trading partners?

This should stump all mainstream macroeconomists, except perhaps the few remaining sound-money practitioners in Germany. While Germany's and Japan's economies developed successfully, Britain actively weakened the pound, the French the franc and the Italians the lira as a matter of competitive policy with abysmal results. Furthermore, since Japan implemented aggressive Keynesianism following its financial crisis in 1990, its economic record has been appalling. It is time for this canard to be well and truly nailed.

5. Experience of government intervention in the economy clearly shows that it usually fails. Why do you continue to support intervention, when the evidence is so clearly against it?

Central bankers and economists in the pay of governments are conditioned to believe that the state can fix the apparent shortcomings of free markets. Furthermore, politicians will always promote an advisor who comes to them with a positive solution involving intervention, and demote one that argues the merits of doing nothing. They usually argue something on the lines that it is unfair to ordinary people to expose them to the uncertainties and brutality of markets when they go wrong. In which case, follow up with Question 1, since they obviously care so much about ordinary folk.

6. The difference between national socialism and communism was that the former controlled people through regulation, while the latter compulsorily acquired their property. Is the government at all troubled to be pursuing the economic policies of the fascists?

This one is best used for poking fun at left-wing journalists. When Tony Blair was seeking office in the 1990s, the British Labour Party did away with Clause 4 in its constitution, the commitment for the state to acquire the means of production. From that moment, British socialism embraced the previously fascist policy of regulation as the means of state control. Not one commentator picked up on this aspect of a change that was heralded as necessary to make Labour electable.

7. You say you are a socialist and yet you despise communism. Isn't socialism just a milder form of communism? Please explain where, other than in their degree, these beliefs differ in their economic effect.

The root of this problem was encapsulated in the socialist calculation debate, where it was proven beyond any doubt that the state could never organize production and prices effectively. Socialists like to think that the obvious failure of state control under communism does not apply to modern socialism. They usually argue that modern socialism is based on Christian ethics and has nothing in common with the godless statism of Lenin and Mao. They overlook the fact that the problem is one of government economic intervention.

8. Keynesians believe that deficit spending is necessary to make free markets work when they fail. If deficit spending is needed to supplement free markets when this apparently happens, why is it not appropriate at other times as well?

Deficit spending is almost always introduced in an attempt to deal with the results of earlier policy errors, usually made by central banks allowing credit booms to develop. It may sound reasonable to stop a recession from throwing people out of work needlessly, but the state is merely permitting past errors to accumulate. The purpose of the question is to expose the lack of any economic basis for deficit spending, and to expose the policy as purely political.

And lastly, a Royal question:

9. If these things [signs of financial failure] were so large, how come everyone missed them?

This was the question Queen Elizabeth famously asked the professors at the London School of Economics about the symptoms that foretold the financial crisis in 2008, when opening the LSE's New Academic Building later that year. The result was that a group of the foremost British economists met seven months later for a roundtable discussion to answer her question. You read that right: it took seven months to cook up a reply.

This was it: "Risk calculations were most often confined to slices of financial activity, using some of the best mathematical minds in our country and abroad. But they frequently lost sight of the bigger picture."

It is a public admission that macroeconomists are unable to see the big picture. This defies the meaning of the word macro.

 

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.

 

GoldMoney® 2016 Outlook & Roundtable Discussion - James Turk, Alasdair Macleod, John Butler.

Fri, 01/15/2016 - 11:35
GoldMoney® Founder James Turk, GoldMoney® Research Head Alasdair Macleod, and GoldMoney® Wealth Services President John Butler sat down for a round-table discussion to review 2015 and their 2016 outlook. 

Watch as they discuss the 2015 growth of a global recession, interest rates and the prospect of negative interest rates in 2016, credit crisis and debt in an over-leveraged system, collateral transformation, backwardation and commodities markets, debased currencies, collapse in industrial production, and so much more. 

 

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: Silver’s rollercoaster

Fri, 01/15/2016 - 05:20
Our headline chart says it all.

The first two weeks of 2016 have been volatile for precious metals, with gold ending up 2.3% and silver exactly unchanged by this morning (Friday) European time. All markets have been volatile this week, with energy particularly so. West Texas Intermediate hit a low of just under $30, down 21% since January 1st. Measured against oil and other industrial commodities, precious metals have therefore held up reasonably well.

It has been a bad time for lesser currencies, notably the Canadian dollar, South African rand, the Turkish lira and Saudi riyal. These four currencies started with not much market kudos, the CAD and SAR were also badly hit by the falling oil price, and in all four cases there is a negative political dimension on top. Precious metals will have performed well in these currencies.

Bearish comment in financial circles is still dominated by worries over China, with analysts fixated on stock market traumas and a slowing economy. However, they were surprised on Wednesday by China's trade data, which showed exports increasing for the first time since last June. Separately, some evidence has emerged that many Chinese companies have already addressed their corporate debt problems, with the Institute of International Finance reporting a significant reduction in Chinese dollar-denominated debt. The implication is that bearishness over China, and therefore the whole commodity complex, may be overdone.

This comes at a time when Russia, doubtless fed up with the oil price being priced and controlled in US dollars, is introducing rouble pricing for its oil markets. In today's bearish environment this may seem unimportant, but when the oil price starts rising, as it surely will, the dollar's hegemony will be badly compromised.

We now turn to silver, which has been behaving unusually in recent weeks, as if the market is dominated by a single buyer at $13.80 and a single seller at $14.40. So what is going on? The chart below shows the gross short position in the money manager category (hedge funds) on Comex.

Besides these short positions being historically high, it is noticeable how the swings from a 10,000-contract base-line since the first half of 2013 have become progressively wilder. Thus, it appears that the hedge funds are placing increasingly large bets on the bear tack. It therefore appears that the futures market has become polarised towards this unstable activity.

Silver has been weaker than gold for some considerable time, mostly a function of relative volatility, which is reflected in the gold/silver ratio, shown in the next chart.

So long as the price downtrend for silver relative to gold remains intact, the gold/silver ratio uptrend will persist. However, the progressive increase in speculation by hedge funds suggests this game is long in the tooth and ripe for reversal. Watching the price action day to day tells us that there is a solid floor at about $13.80, underwritten doubtless by a major buyer.

When gold strengthens and the dollar weakens, which will only be a matter of time, the price action in silver could be sudden and explosive. With the ratio close to 80, it is worth bearing in mind that the old monetary relationship was approximately 16.

Physical gold deliveries through the Shanghai Gold Exchange into public hands last year totaled 2,596.37 tonnes, a 7.62% increase on 2014 and a new record.

 

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: Gold resumes safe haven stance

Thu, 01/14/2016 - 12:56
This week has seen net buying in both gold and silver, with platinum and palladium experiencing some selling.

GoldMoney's Singapore vaults have continued to be the most popular this week alongside our Canadian vault, which has received renewed interest from clients. Sell orders have been seen mostly in the Swiss vault this week.

Kelly-Ann Kearsey, Dealing Manager at GoldMoney, says that this week we have continued to experience a vollitile market. While last week saw the rise of gold to over USD1,100/oz, this week has seen gold trading between USD1,080.00/oz and just below USD1,100.00/oz. There has been a similar effect with silver trading between USD 13.75/oz and over USD14.00oz.

Both gold and silver prices have been put under pressure due to the recent stabilization of the Chinese stock markets in which they have tested their levels of resistance. This has been offset by the safe haven demand that has supported the metals due to continued tensions in the Middle East. This has also been supported due to a falling global equity market and weakness in the US Dollar, which fell against a basket of major currencies.

According to the World Gold Council, central banks have added 55 tons of gold to their reserves in November 2015 which is an increase from the 29 tons added in October 2015, which will also provide more guidance for the yellow metal.

Platinum and Palladium have experienced some larger price losses this week. On Tuesday, platinum was trading at its cheapest price compared to gold since 1987. At this point, clients were purchasing one ounce of platinum for 0.77 ounces of gold which was the lowest point.

Platinum has been underperforming gold since 2014 as it has been considered more of an industrial metal than an investment asset. The metal has suffered due to the slowdown in China alongside the Volkswagen incident which decreased consumer demand for diesel fueled vehicles.

Palladium has slipped to a 5 year low which was affected by weaker demand for the metal from China, who is one of the world's biggest buyers of the metal and also Chinese car sales figures had increased at their slowest pace in three years.

14/01/16 16:00. Gold lowered 1.9% to $1,082.01, Silver decreased 2.2% to $13.79, Platinum declined 4.2% to $838.64 and Palladium dropped 1.3% to $488.30 Gold/Silver ratio: 78

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

 

Austrians get (some) mainstream credibility

Thu, 01/14/2016 - 03:12
Well, well: who would have believed it. First the Bank for International Settlements comes out with a paper that links credit booms to the boom-bust business cycle, then Britain's Adam Smith Institute publishes a paper by Anthony Evans that recommends the Bank of England should ditch its powers over monetary policy and move towards free banking.

Admittedly, the BIS paper hides its argument behind a mixture of statistical and mathematical analysis, and seems unaware of Austrian Business Cycle Theory, there being no mention of it, or even of Hayek. Is this ignorance, or a reluctance to be associated with loony free-marketeers? Not being a conspiracy theorist, I suspect ignorance.

The Adam Smith Institute's paper is not so shy, and includes both "sound money" and "Austrian" in the title, though the first comment on the web version of the press release says talking about "Austrian" proposals is unhelpful. So prejudice against Austrian economics is still unfortunately alive and well, even though its conclusions are becoming less so. The Adam Smith Institute actually does some very good work debunking the mainstream neo-classical economics prevalent today, and is to be congratulated for publishing Evans's paper.

The BIS paper will be the more influential of the two in policy circles, and this is not the first time the BIS has questioned the macroeconomic assumptions behind the actions of the major central banks. The BIS is regarded as the central bankers' central bank, so just as we lesser mortals look up to the Fed, ECB, BoE or BoJ in the hope they know what they are doing, they presumably take note of the BIS. One wonders if the Fed's new policy of raising interest rates was influenced by the BIS's view that zero rates are not delivering a Keynesian recovery, and might only intensify the boom-bust syndrome.

These are straws in the wind perhaps, but surely central bankers are now beginning to suspect that conventional monetary policy is not all it's cracked up to be. For a possible alternative they could turn to the article by Anthony Evans, published by the Adam Smith Institute. Their hearts will sink, because Evans makes it clear that central banks are best as minimal operations, supplying money through open market operations (OMOs) on a punitive instead of a liberal basis. Instead of targeting inflation, Evans recommends targeting nominal GDP. Evans's approach is deliberately sound-money-light, on the basis that it is more likely to be accepted than a raw sound-money approach. But he does hold out the hope it will be an interim measure towards sound money proper: initially a Hayekian rather than a Misesian approach.

Targeting nominal GDP is not a perfect answer. As Evans points out, changes in government spending distort it, and by targeting output, there may be less control over inflation, if control was ever the right word. However, my own researches are generally supportive of Evans's approach to managing the money supply. This is because, logically, nominal GDP, which is impossible to measure accurately by the way, is simply the total amount of money deployed in the part of the economy included in GDP. The reason this must be so is Say's law, the law of the markets, tells us that we produce to consume, and production is balanced by the sum of consumption and savings. Therefore, if new money or bank credit is introduced into the economy, it will temporarily increase both demand and supply for goods, until the spread of rising prices for the goods affected negates the impact.

In managing the total money supply, a central bank would have to take into account fluctuations in bank credit, and adjust its own operations accordingly. No MPC, no FOMC, and no convoluted analysis of inflation prospects are required. The true Austrian approach is to welcome a corrective crisis as the most efficient and rapid way to unwind malinvestments. Nominal GDP targeting of a few per cent can be expected to soften this process without unduly discouraging it.

While I support the concept of targeting nominal GDP, Evans's paper is necessarily complicated, written for an audience that denies Say's law. He argues his case on a modified equation of exchange, M+V = P+Y, where M is the growth rate of the money supply, V is the change in its velocity, P is the inflation rate, and Y is the growth rate of output.

My worry is that the faintest suggestion of sound money policies will be blamed for a developing economic crisis, without being adopted at all. Within one month of the Fed raising the Fed Funds rate by a miniscule 0.25%, it seems the whole world is falling apart. The usual market cheerleaders are now on record of expecting a global crisis to develop, the signs being too obvious to ignore. Markets are over-valued relative to deteriorating economic prospects. Collapsed energy and commodity prices tell their own story. Shipping rates and the share prices of US utilities (including rails and freight) are falling. The days of blaming China for a contraction of world trade are over: the downturn is now far larger and more widespread.

Decades of accumulated market distortions appear to be on the brink of a great unwind, most of which can be blamed on expansionary monetary policies. If so, the banking crisis of 2008 was a prelude, rather than the crisis itself. The Fed will almost certainly reduce interest rates back to zero, and reluctantly will have to consider imposing negative rates.

The Keynesians will blame the Fed for a complete policy failure. They will argue in retrospect, as they did following the banking crisis, that the financial and economic crisis of 2016 was made immeasurably worse by the Fed raising the Fed funds rate and not pumping yet more money into the economy at such a crucial time. It's like saying alcoholics must drink more to be cured. The monetarists will simply say that the Fed got it wrong, and that monetarism was not to blame. They will both blame advocates of inflexible sound money.

The reality is, that by implementing conventional policies on the recommendation of group-thinking macroeconomists, the central banks have dug a hole too deep to escape. Recognition of the merits of Austrian sound money theory will simply expose this reality sooner than later.

 

1. BIS Working Paper 534: Labour reallocation and productivity dynamics: financial causes, real consequences.
2. ASI: Sound money: An Austrian proposal for free banking, NGDP targets, and OMO reforms. 

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

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