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Market Report: Dollar down, gold up

Fri, 04/29/2016 - 05:06
Silver continued its spectacular run, and gold had a good week as well.

Underlying this performance was a weaker dollar. So far this year, measured in dollars, silver is up 28% and gold up 20%. On the week, gold rose from a low of $1228 to $1275 by early this morning (London time), and silver from $16.82 to $17.75. Sentiment has continued to improve.

The dollar’s weakness coincides with a growing realisation that the Fed is trapped when it comes to raising interest rates. Following a two-day FOMC meeting, there was no change in the Fed Funds Rate, with the usual jaw-jaw about conditions not deteriorating, so we can expect a rise in rates perhaps mid-year.

The lack of action from the Fed is curiously disappointing, given there were two FOMC meetings under “expedited measures” and Ms Yellen went to the White House to brief the President. So what was all that about? A decision to keep rates on hold, and an unchanged outlook? Perhaps we will never know.

It is becoming apparent that the Fed is in as much of a bind as the BoJ and the ECB, the only difference being the Fed still has positive interest rates (just). One can only assume that the Fed’s analysts have worked out why it is that the euro and the yen have been strong, when they should have been weak. The most likely cause is the contraction of shadow banking in these currencies, leading to demand for cash. If this is so, negative dollar rates could depress financial activity in the US, with negative, instead of positive consequences. Equally, the Fed must be frightened to raise rates, for fear of setting off a debt liquidation.

As markets grasp these dangers, it is likely that the gold price will rise further. Market analysts will almost certainly attribute such a move to a receding fear of interest rate rises. If so, they will miss the probability that it is the dollar weakening, rather than gold rising. At least for European traders, this will clear the way for them to buy physical gold, with negative to zero cost of carry. It’s rather like being paid by the insurance company to insure yourself against financial disaster.

On Comex, demand for paper gold continues to be healthy, with open interest holding near record levels at the 500,000 contract mark. The next chart shows how the price and open interest are moving in tandem.

This is as it should be. Doubtless, price management by the bullion banks has diminished, partly as a result of the overall cut back on OTC derivative positions, and partly as a result of the discovery of earlier manipulation, to which Deutsche Bank has now confessed.

Deutsche Bank promised to spill the beans on its manipulation of both gold and silver markets, implicating other banks. That being so, we can expect outstanding OTC positions to continue to contract, a trend already established over the last two years as banks continue to downsize their trading activities. The fact that Comex open interest is at a record is only the visible part of this bigger picture.

Silver’s open interest on Comex is also behaving well, which is shown in our last chart.


 

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: FOMC Boosts Precious Metal Prices

Thu, 04/28/2016 - 13:25
This week, clients have been net buying gold, silver, and palladium.

Wednesday’s FOMC release seemed to spark more buying acitivity from our clients as they took advantage of the lower pricing in advance of the FOMC statement. Clients have also been net selling their platinum positions to take advantage of the current platinum price which has risen to over USD1,030/oz this week.

GoldMoney’s clients have been in favour of the Hong Kong, Swiss, and Singapore vaults this week with more or less preference being shown toward the London and Canadian vaults.

Kelly-Ann Kearsey, Dealing Manager at GoldMoney said that throughout the week the gold prices have been regaining their losses from last Friday, where a low of roughly $1,230/oz was seen. Silver has remained relatively stable to start the week, sitting at around USD17.00/oz.

The market has been watching for the FOMC statement which was released on Wednesday evening. In the last update, they confirmed that rate decision was to remain unchanged as was expected. They have now dropped comments of concern for the surrounding global outlook and remained confident of the labour markets but did also acknowledge that economic growth seemed to have slowed. They will continue to monitor as inflation is still below the 2% target.

Aftrer the comments released by the FOMC, gold made a quick recovery as it moved back towards USD1,250/oz moving into USD1,260/oz throughout Thursday. Silver also received support as it jumped to its highest in almost 1 year as it was boosted to roughly USD17.30/oz which has then increased to a spot high of USD 17.45/oz throughout the day.

The US dollar was also affected as it drifted lower against major currencies which also provided more support for the gold pricing. US data for pending home sales also had no impact in strengthening the US Dollar. The Dollar was then seen losing more than 2% against the Yen, as the markets were surprised by the Bank of Japan keeping its monetary policy steady.

28/04/16 16:00. Gold gained 0.5% to $1,256.11, Silver jumped 1.6% to $17.33, Platinum increased 0.9% to $1,033.74 and Palladium gained 2.1% to $616.00 Gold/Silver ratio: 72

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

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

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

GoldMoney currently has over 20,000 customers worldwide and holds over $1billion of precious metals in its partner vaults.

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

Visit: Goldmoney.com or view our video online

 

Taking the petro out of the dollar

Thu, 04/28/2016 - 07:01
Saudi Arabia has been in the news recently for several interconnected reasons. Underlying it all is a spendthrift country that is rapidly becoming insolvent.

While the House of Saud remains strongly resistant to change, a mixture of reality and power-play is likely to dominate domestic politics in the coming years, following the ascendency of King Salman to the Saudi throne. This has important implications for the dollar, given its historic role in the region.

Last year’s collapse in the oil price has forced financial reality upon the House of Saud. The young deputy crown prince, Mohammed bin Salman, possibly inspired by a McKinsey report, aims to diversify the state rapidly from oil dependency into a mixture of industries, healthcare and tourism. The McKinsey report looks like a wish-list, rather than reality, particularly when it comes to tourism. The religious police are unlikely to take kindly to bikinis on the Red Sea’s beeches, or to foreign women in mini-shorts wandering around Jeddah.

It is hard to imagine Saudi Arabia, culturally stuck in the middle ages, embracing the changes recommended by McKinsey, without fundamentally reforming the House of Saud, or even without a full-scale revolution. Nearly all properties and businesses are personally owned or controlled by members of the extended royal family, not the state, nor by lesser mortals. The principal exception is Aramco, estimated to be worth $2 trillion.

The state is subservient to the House of Saud. It is therefore hard to see how, as McKinsey recommends, the country can “shift from its current government-led economic model to a more market-based approach”. The country is barely government led: a puppet of the Saudis is more like it. But the state’s lack of funds is making it increasingly desperate.

It was for this reason the Kingdom recently placed a $10bn five-year syndicated loan, the first time it has entered capital markets since Saddam Hussein invaded Kuwait. It proposes to raise a further $100bn by selling a 5% stake in Aramco. The financial plan appears to be a combination of this short-term money-raising, contributions from oil revenue, and sales of US Treasuries (thought to total as much as $750bn). The government has, according to informed sources, been secretly selling gold, mainly to Asian central banks and sovereign wealth funds. Will it see the Kingdom through this sticky patch?

Maybe. Much more likely, buying time is a substitute for ducking fundamental reform. But one can see how stories coming out of Washington, implicating Saudi interests in the 9/11 twin-towers tragedy, could easily have pulled the trigger on all those Treasuries.

Whatever else was discussed, it seems likely that this topic will have been addressed at the two special FOMC meetings “under expedited measures” at the Fed earlier this month, and then at Janet Yellen’s meeting with the President at the White House. Yesterday’s holding pattern on interest rates would lend support to this theory.

The White House’s involvement certainly points towards a matter involving foreign affairs, rather than just interest rates. If the Saudis had decided to dump their Treasuries on the market, it would risk collapsing US bond markets and the dollar. Through financial transmission, euro-denominated sovereign bonds and Japanese government bonds, all of which are wildly overpriced, would also enter into free-fall, setting off the global financial crisis that central banks have been trying to avoid.

Perhaps this is reading too much into Saudi Arabia’s financial difficulties, but the possibility of the sale of Treasuries certainly got wide media coverage. These reports generally omitted to mention the Saudi’s underlying financial difficulties, which could equally have contributed to their desire to sell.

While the Arab countries floated themselves on oceans of petro-dollars forty years ago, they have little need for them now. So we must now turn our attention to China, which is well positioned to act as white knight to Saudi Arabia. China’s SAFE sovereign wealth fund could easily swallow the Aramco stake, and there are good strategic reasons why it should. A quick deal would help stabilise a desperate financial and political situation on the edges of China’s rapidly growing Asian interests, and keep Saudi Arabia onside as an energy supplier. China has dollars to dispose, and a mutual arrangement would herald a new era of tangible cooperation. The US can only stand and stare as China teases Saudi Arabia away from America’s sphere of influence.

In truth, trade matters much more than just talk, which is why a highly-indebted America finds herself on the back foot all the time in every financial skirmish with China. Saudi Arabia has little option but to kow-tow to China, and her commercial interests are moving her into China’s camp anyway. It seems logical that the Saudi riyal will eventually be de-pegged from the US dollar and managed in line with a basket of her oil customers’ currencies, dominated by the yuan.

Future currency policies pursued by both China and Saudi Arabia and their interaction will affect the dollar. China wants to use her own currency for trade deals, but must not flood the markets with yuan, lest she loses control over her currency. The internationalisation of the yuan must therefore be a gradual process, supply only being expanded when permanent demand for yuan requires it. Meanwhile, western analysts expect the riyal to be devalued against the dollar, unless there is a significant and lasting increase in the price of oil, which is not generally expected. But a devaluation requires a deliberate act by the state, which is not in the personal interests of the individual members of the House of Saud, so is a last resort.

It is clear that both Saudi Arabia and China have enormous quantities of surplus dollars to dispose in the next few years. As already stated, China could easily use $100bn of her stockpile to buy the 5% Aramco stake, dollars which the Saudis would simply sell in the foreign exchange markets as they are spent domestically. China could make further dollar loans to Saudi Arabia, secured against future oil sales and repayable in yuan, perhaps at a predetermined exchange rate. The Saudis would get dollars to spend, and China could balance future supply and demand for yuan.

It would therefore appear that a large part of the petro-dollar mountain is going to be unwound over time. There is now no point in the Saudis also hanging onto their US Treasury bonds, so we can expect them to be liquidated, but not as a fire-sale. On this point, it has been suggested that the US Government could simply block sales by China and Saudi Arabia, but there would be no quicker way of undermining the dollar’s international credibility. More likely, the Americans would have to accept an orderly unwinding of foreign holdings.

The US has exploited the dollar’s reserve currency status to the full since WW2, leading to massive quantities of dollars in foreign ownership. The pressure for dollars to return to America, when the Vietnam war was wound down, was behind the first dollar crisis, leading to the failure of the London gold pool in the late sixties. After the Nixon Shock in 1971, the cycle of printing money and credit for export resumed.

In the seventies, higher oil prices were paid for by printing dollars and by expanding dollar bank credit, in turn kept offshore by lending these exported dollars to Latin American dictators. That culminated in the Latin American debt crisis. From the eighties onwards, the internationalisation of business was all done on the back of yet more exported dollars, and wars in Iraq and Afghanistan echoed the earlier wars of Korea and Vietnam.

Many of these factors have now either disappeared or diminished. For the last eighteen months, the dollar had a last-gasp rally, as commodity and oil prices collapsed. The contraction in global trade since mid-2014 had signalled a swing in preferences from commodities and energy towards the money they are priced in, which is dollars. The concomitant liquidation of malinvestments in the commodity-exporting countries has been contained for now by aggressive monetary policies from China, Japan and the Eurozone. The tide is now swinging the other way: preferences are swinging out of the dollar towards oversold commodities again, exposing the dollar to a second version of the gold pool crisis. This time, China, Saudi Arabia and the BRICS will be returning their dollars from whence they came.

In essence, this is the market argument in favour of gold. Over time, the price of commodities and their manufactured derivatives measured in grams of gold is relatively stable. It is the price measured in fiat currencies that is volatile, with an upward bias. The price of a barrel of oil in 1966, fifty years ago, was 2.75 grams of gold. Today it is 1.0 gram of gold, so the purchasing power of gold measured in barrels of oil has risen nearly three-fold. In dollars, the prices were $3.10 and $40 respectively, so the purchasing power of the dollar measured in barrels of oil has fallen by 92%. Expect these trends to resume.

This is also the difference between sound money and dollars, which has worked to the detriment of nearly all energy and commodity-producing countries. With a track-record like that, who needs dollars?

It is hard to see how the purchasing power of dollars will not fall over the rest of the year. The liquidation of malinvestments denominated in external dollars has passed. Instead, the liquidation of financial investments carry-traded out of euros and yen is strengthening those currencies. That too will pass, but it won’t rescue the dollar.

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: Silver roars, and gold stirs

Fri, 04/22/2016 - 10:32

Silver continued its stellar run this week, trading as high as $17.60 overnight in Asia on Thursday morning, and in mid-morning European trade today was 24.3% on the year, overtaking gold.

Gold finally caught a bid yesterday as well, running up as far as $1261 at the same time. Both metals opened strongly in US trading yesterday, with gold running up further still to $1270 and silver to $17.70, before someone dumped about 8,000 gold contracts and 3,750 silver contracts on Comex, driving prices down to $1250 and $17 respectively.

Preliminary Comex open interest figures for gold yesterday increased by 8,562 contracts on a net down day. This reflects the new bear sale described above, and is not symptomatic of profit-taking. At the same time there was an exchange of 9,251 June contracts for physical recorded. Could it be tied into an arbitrage into the new yuan contract, which requires the maintenance and delivery of physical metal in Shanghai?

Most likely, not. This is the first week of the Shanghai Gold Exchange’s yuan-denominated gold fix, which commenced on Tuesday. The price is fixed twice daily, morning and afternoon, priced in yuan per gram. There are thirteen fixing members, and six reference price members, of which the only foreign banks are Standard Chartered and ANZ. Any US bank dealing at the yuan fix will have to go through the fixing members.

Developments in Shanghai are for future consideration. In current markets, private sector physical demand in China has tailed off slightly, and a gold processing and jewellery strike (now just ended) had paralysed the Indian market. So overall demand for gold could have fallen significantly on these factors alone. However, there has undoubtedly been an offsetting increase in European demand, fuelled by negative interest rates.

The ECB yesterday announced no change in interest rates or to the €90bn monthly QE, though there was some currency volatility after the announcement.

But there is another factor, which may have had a more important market impact. Saudi Arabia appears to be in financial difficulties, stemming from last year’s collapse in the oil price and the sharp rise in state spending in recent years. Saudi Arabia is also fighting a proxy war against Iran in the Yemen, so is not surprising that Iran refused to attend the OPEC meeting in Doha this week, increasing the financial pressure on Saudi Arabia.

Saudi Arabia has two types of financial reserves, US Treasuries and gold. The rumours that she would sell USTs were very strong this week, and there have also been rumours in recent months that she has been selling bullion. That being the case, there was potential for China to lend Saudi Arabia yuan against future oil sales, perhaps as part of a package including the purchase of some gold. Saudi also announced a $10bn five-year loan, the first time it has entered credit markets for a very long time. This loan would have eased her immediate liquidity problems, given that any loan from China may take longer to put in place, and may involve time restrictions on selling yuan.

If Saudi Arabian sales of gold have come to an end, it might explain some of the recent strength in the gold price. It will be interesting to see if this is confirmed by price action in the bullion markets in the coming weeks.


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: White Metals Out Shine Gold

Thu, 04/21/2016 - 13:23
This week, clients have been net buying their metal positions; this was seen more so with the increased silver prices.

Clients have been speculating the market conditions and chasing the silver price as it increased. We have also seen an increase in the value of orders this week as clients take the opportunity to purchase gold at a lower rate.

GoldMoney’s clients have continued to favour the Singapore vault along with more interest being shown toward the Switzerland and Hong Kong vault and less preference being shown toward the London and Canadian vaults.

Kelly-Ann Kearsey, Dealing Manager at GoldMoney said, precious metals have continued in strength this week with spot gold reaching USD 1,285/oz. This was possible due to a weaker US dollar and a fall in oil prices. Today, silver exploded to reach a spot price of USD17.69/oz before falling to a low of USD16.72/oz and returning to a stable level of above USD17.00/oz. A possible reason behind silver’s gains this week is due to the gold/silver ratio. The ratio was up at 81 at the beginning of April but this has now been reduced to 73.

Precious metals were boosted by weaker dollar ahead of the ECB meeting today; however, it was confirmed by the ECB that they would leave rates unchanged.

On Tuesday, platinum climbed to its highest in six months and has broken past the psychological level of USD1,000/oz. This was supported by a weaker US Dollar due to US data being below the expected levels, including US housing stats. Palladium has received support from this news as it broke above USD 600/oz.

Week on week, palladium has been the top performer increasing 8.1% followed by silver with an increase of 5.7%. 21/04/16 16:00. Gold gained 1.5% to $1,250.26, Silver jumped 5.7% to $17.06, Platinum increased 3.1% to $1,024.49.00 and Palladium gained 8.1% to $603.56 Gold/Silver ratio: 73

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

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

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

GoldMoney currently has over 20,000 customers worldwide and holds over $1billion of precious metals in its partner vaults.

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

Visit: Goldmoney.com or view our video online

Dollar FMQ update

Thu, 04/21/2016 - 06:25
The Fiat Money Quantity continues to rise at an accelerated pace, and now stands at $14.286 trillion.

If it had continued to rise at the pre-Lehman crisis pace, it would be standing at only $8.474 trillion, a difference of $5.82 trillion. FMQ measures the quantity of money issued in return for the gold, first deposited in the forerunners to today’s commercial banks, and then transferred to the Fed after the creation of the Federal Reserve system. It is the sum of true money supply and the bank’s reserves held on the Fed’s balance sheet, adjusted for short-term distortions applied to the reserve total, particularly, but not limited to, repurchase and reverse-repurchase agreements.

FMQ should not be confused with conventional money supply measures, which record money in public circulation only. Its purpose is to quantify the distance of travel between sound and unsound money.

February’s increase was $166bn, a significant jump after a stagnant second half of 2015. We shall see if this is the start of a new acceleration. If so, it will be reflected in checking accounts, savings deposits, bank reserves at the Fed, reverse repos or any combination thereof. The recent trend before March had seen little or no growth in bank reserves, and an increase in checking and saving account balances. This is reflected in the difference between M2 and M1 money supply figures, which is the next chart.

The difference between these two measures of money supply approximates to bank lending. And here it can be seen that bank lending has increased above trend since early January. The cause for this move away from a remarkably tight correlation to the trend is potentially alarming, given a stagnating economic background. Without a noticeable increase in economic activity, increased bank lending can only be associated with lending for financial speculation, or for prolonging the life of distressed businesses.

The big jump in bank lending occurred when the S&P500 Index fell sharply in January, so it was not associated with increased financial speculation. However, at the quarter-end, there would have been financial difficulties emerging in the shale oil industry, and probably elsewhere, requiring loan extensions.

It would therefore appear that this increase in bank lending indicates financial difficulties in the non-financial sector.

Interest rates

On superficial analysis, the tendency for bank reserves at the Fed to stabilise, together with the increase in bank lending, suggests that the Fed should raise interest rates to control the pace of credit inflation. Alternatively, if this increase in bank credit is a reflection of debt distress, rate rises might be best deferred, and even negative interest rates considered. It is no wonder that the Fed initially called for gradually increasing rates, and then put the planned rate rises on hold.

From the Fed’s viewpoint, there is a potential nightmare unfolding, of which it is surely aware. Even if the increase in bad debts is confined to the energy sector, the recovery in the oil price is not yet sufficient to reduce the threat of widespread failures, compromising the capital of commercial banks. However, if the oil price rises much further it might take the financial pressure off shale oil producers. But if that happened, it would likely be accompanied by a significant rise in other raw material prices as well, pushing up price inflation later this year, potentially well above the Fed’s 2% target. Put another way, measured in a basket of commodities the dollar can be expected to weaken significantly in the absence of sufficiently aggressive interest rate rises.

On this analysis, rates should be raised sooner rather than later to discourage latent price inflation. But all surveys and anecdotal evidence point to a stagnating economy that requires monetary stimulus instead, if conventional macroeconomic policy were to be applied. It looks like a condition of developing stagflation, and we know how that ended in the 1970s. What makes it even more difficult for central bankers setting rates is that in modern macroeconomics, no sound explanation for stagflation exists. And if you don’t understand why a condition exists, how can you successfully formulate a policy response?

A better understanding of price theory is obviously required, but Fed economists instead will simply claim we are in uncharted waters. Today’s problems are a by-blow of the Fed’s earlier monetary policies, which along with the other major central banks, have been implemented to stop markets from properly assessing risk and clearing at realistic prices.

Instead of enquiring where it has all gone wrong, the Fed would rather take comfort from the US Government’s engineered statistics, particularly the lack of price inflation recorded by the CPI, despite the expansion of monetary aggregates since the financial crisis. The Fed seems likely to opt for the hope that interest rate rises can be continually deferred in the absence of recorded price inflation, and bad debts covered up by monetary policy for a while longer.

Implications for the gold price

As already stated, the purpose of FMQ is to quantify the distance of travel between sound money, which is gold, and unsound money, which is fiat currency and bank credit combined. FMQ can show the points at which the relationship between gold and fiat became too stretched in the past. The chart below shows the relationship between the nominal gold price and the price adjusted over time by both the increase in FMQ and above-ground stocks of gold.

In March, gold measured in 1934 dollars, and adjusted for above-ground gold stocks at that time, was the equivalent of $12.93. In other words, despite the increased risk of a collapse in the dollar’s purchasing power, in real terms gold is priced at about one third of the level President Roosevelt set in 1934. Therefore, on any monetary measure, gold is extremely cheap, and is back at the levels set in July 1976, and in 1999-2002.

This sort of historical perspective is useful, putting the first quarter rise in the gold price of only 20% in context. We should also note that China appears to be wresting control of the gold market from the US and London, since it now controls the physical market. Furthermore, by pricing physical gold in yuan at a twice-daily fix, China will be able to direct physical flows through Shanghai, instead of dealing in London and New York.

Perhaps, by moving pricing away from a dollar monopoly, gold’s enduring undervaluation is about to come to an end.

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.

 

Fiat Money Fairytales

Sun, 04/17/2016 - 08:31
Fiat Money Fairytales

Introduction

The financial media are beginning to entertain the viewpoint that the recent policies of the Federal Reserve, ranging from zero-rates to quantitative easing to bank bailouts, are an important cause of rising inequality not only in the US but around the world. This past week, multiple media sources published an op-ed by eminent scholar George Gilder to this effect.1 Yet articles such as these are the exceptions that prove the rule that the financial media remains strongly biased against the monetary discipline that could be restored by returning to a gold standard. By way of example, in a typically biased article previously published by Reuters back in 2013, Professor Charles Postel misreads history, misapplies economic theory, and employs not only rhetorical but also logical tricks to argue that a return to a gold standard would favor the wealthy, when in fact the opposite is demonstrably true. As this article is so typical of what we seek to rebut, we publish it here, and now.

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

Frequently one can tell by the title of an opinion piece whether it is going to consist of quality arguments or just meretricious mudslinging. Professor Charles Postel of San Francisco State University boldly announces the latter in choosing to title his recent tirade against sound money, Why Conservatives Spin Fairytales About the Gold Standard.2

Indeed, right from the start, the reader is presented with the following rhetorical feint:

At few points since the Fed's founding in 1913 has it taken such sustained fire. It's taking fire from the left, because its policies favor Goldman Sachs, Bank of America and the other financial corporations that are most responsible for the 2008 financial meltdown and the Great Recession. But it is also taking fire from the right.

While acknowledging that the Fed is under attack from the left, he then proceeds to focus exclusively on debunking hard-money Fed criticism from the right, which is supposedly based on ‘fairytales’. While politics is largely if not entirely about fairytales, history shouldn’t be. As a historian, Mr Postel should know the difference. But as one reads further into the article it becomes clear either that he doesn’t, or that his anti-gold-standard agenda is best advanced by spinning fairytales of his own. For a start, he completely ignores the fact that elastic, fiat money is both what facilitated the bubble that caused the 2008 meltdown and what enabled the subsequent bank bailouts, neither of which would or could have occurred had the Fed been constrained by a fixed money supply.

REWRITING THE HISTORY OF THE FEDERAL RESERVE ACT

Moving farther back into history, Mr Postel writes the following fairytale about how the American public felt about the creation and early years of the Federal Reserve System:

In the years after 1913, the need for a flexible and regulated money supply was widely accepted across the political spectrum.

This is complete poppycock. First of all, the Federal Reserve Act was initially drafted in secrecy by a small group of elite Wall Street bankers and Senators on Jekyll Island, deliberately out of the public eye. Second, it was passed at the start of the Christmas holidays in 1913, with a large number of Representatives and Senators absent. In the Senate there were 43 'yeas’, 23 ‘nays’ and 27 absent (and more on the record as opposed than not). This hardly implies widespread support. Indeed, it suggests that the Act was conceived in secret and brought to a vote during holidays precisely because public opinion was opposed. Did this change dramatically in the following years? Well, given that the Fed did not begin to actively manage the money supply until the late 1920s, it is fallacious to argue that (non-existent) monetary activism was ‘widely accepted’ at this time.

(The eventual onset of Fed activism had its roots in WWI, which left the European economies devastated and led to a series of European currency devaluations and associated capital flight into the US, leaving the dollar by far the strongest currency in the world and contributing to a stock market bubble. By 1927, the ‘Roaring ‘20s’ were in full-swing in the dance halls and on Wall Street. But that was when the Federal Reserve finally became activist, goosing the financial markets with a jolt of easy money at the request of Great Britain, mired in recession as a result of Chancellor of the Exchequer Churchill’s horribly botched re-pegging of sterling to gold in 1925. The result, we know, was an investment boom which turned to bust in late 1929, a key contributing element to the Great Depression which followed.)

IS CHEAP FOOD A GOOD THING, OR BAD?

Mr Postel also highlights the prominent political debate about monetary policy that took place in the late 19th century. Indeed, monetary policy was such an important issue by the late 1800s that William Jennings Bryan famously won the 1896 Democratic nomination for president with his ‘Cross of Gold’ speech advocating inflationism.

Inflationism was popular with farmers, who were struggling to service debts they accumulated years earlier when grains prices were soaring due to the lingering inflationary effects of the Civil War. The introduction of mechanized agriculture put an end to rising crop prices as farm productivity soared. This innovation, arguably the greatest technological advancement in human history, enabled a more widespread industrial revolution through urbanization.

Mr Postel primarily blames the gold standard for the plight of indebted farmers at the time. That they suffered during this period is lamentable. But to 'blame' the gold standard for the breathtaking technological advancement, rapid economic growth and rising living standards in general that took place around the end of the 19th century is a bizarre rhetorical twist indicating an agenda.

He then observes, not incorrectly, that inflationism benefits borrowers generally. But then he makes the mistake of assuming that savers are necessarily the 'haves' and the borrowers are the 'have nots'. Is he unaware that the most leveraged borrowers in the economy today are the biggest, too-big-too-fail banks? That were those banks to fail, the losses would fall disproportionately on their predominantly wealthy bondholders?! Perhaps this explains his confusion that somehow a gold standard would benefit Wall St and the wealthy, when in fact the exact opposite would be the case.

Additional fairytales follow. He claims the recent effort to audit the Fed is some radical conservative policy, even though there is bipartisan support for increasing transparency into the Fed's shadowy dealings, including those with foreign banks, which have been the largest recipients of the Fed's various emergency lending facilities. Would he prefer that the public continue to be kept in the dark about such matters? (One wonders how he feels about the recent NSA spying revelations and lack of public transparency in that area.)

A CLOSET CRONY-CAPITALIST?

Mr Postel goes on to characterize David Stockman's tour de force critique of crony capitalism, The Great Deformation, as a 'jeremiad'. Is he secretly in favor of crony capitalism? Perhaps not, but does he disagree that the Fed's unprecedented financing of bank bail-outs and ongoing money manipulations have enriched primarily the crony capitalists that have taken over Wall Street, as Mr Stockman demonstrates in detail in his book?

While his piece relies primarily on historical example to push his money manipulation agenda, Mr Postel's ignorance of monetary theory is also evident. For example, he suggests that gold should not serve as money because it can be subject to speculative bubbles. Well, so can the price of paper. Whether in order to make something the legal tender you place a stamp on a piece of paper or on a coin of gold is largely beside the point. What is not is that the supply of paper money is potentially infinite, yet the supply of gold is relatively fixed. Now which of these two, stable versus manipulated money, do you think, encourages more speculation? The question answers itself, which may explain why Mr Postel fails to ask it.

A TOUGH ACT TO FOLLOW

Having demonstrated in this piece his tendency to historical omission, his poor understanding of monetary theory, and his proclivity for rhetorical feints and ad hominem attacks, one is left wondering what will follow. Perhaps Mr Postel's next effort will 'blame' the introduction of the computer, modern telecommunications and the internet for pushing down prices for a huge range of goods and services. Perhaps he will omit any mention of the rampant monetary inflation that continues enriching the asset-rich, crony-capitalist 'haves' on Wall Street at the expense of the asset-poor 'have nots' on Main St. Perhaps he will suggest that, given low price inflation, the monetary inflation still isn't rampant enough. But no matter how hard he tries, he will fail to convince that the gold standard, long since abandoned, caused the Second Great Depression.

This failure, of course, might lead his readers to ask themselves: If the Second Great Depression has occurred under an activist, fiat money regime, should we still blame a rigid gold standard for the First Great Depression? Now how do you think they will answer that, Mr Postel? Well, I have an idea.

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

1. George Gilder, The Federal Reserve is a god that has failed, CNBC, 6 April 2016. Link here.

2. Why Conservatives Spin Fairytales About the Gold Standard, Reuters, 17 September 2013. Link 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: Silver stars

Fri, 04/15/2016 - 05:47

The gold price rose strongly on Monday and Tuesday, before drifting lower on Wednesday and Thursday.

In early European trading this morning, gold opened slightly stronger at $1230, up $2. Silver was the star performer this week, rising strongly to correct this year’s underperformance, as shown in our headline chart, and it broadly held its ground while gold lost about $30 from this week’s highs.

Silver’s strength in recent days is an illustration of how the mixture of regulated futures, forwards, and over-the-counter instruments creates analytical difficulties. The only reliable trading figures we have are from the CFTC’s Commitment of Traders Reports, issued after a delay of three days. Those indicate silver is very overbought, with hedge funds holding near-record net longs. Yet silver’s outperformance has the clear characteristics of a bear squeeze. What is hidden from us are the off-market deals in physical, OTC and forwards, which on the basis of silver’s performance this week, indicates an overall shortage exists despite being overbought on Comex.

A possible answer came yesterday, when it was announced that Deutsche Bank admitted to silver manipulation and agreed to implicate the other banks. Could it be that those in the know, or to-be-alleged fellow conspirators, decided to close their bears? It later transpired that Deutsche has also admitted rigging the gold market. That had no immediate effect on the gold price, but then gold is a far more liquid market.

Deutsche appears to be trying to put the past behind it. Gone are the days when it participated in both the gold and silver fixes, but the paper trails should still exist. The potential implications could be very serious indeed, and almost certainly will involve the London market and the LBMA.

There are signs of considerable stress building in the shadow banking system, which may be leading to synthetic positions in precious metals being wound down. Shadow banks are financial intermediaries which facilitate these paper transactions, and if they are forced to curtail their activities, the ability of traders to deal in markets is reduced in turn.

These traders tend to run a short book overall, so their ability to finance short positions is likely to be restricted. That being the case, trading in physical metal should begin to determine prices to a greater extent. Market liquidity in derivatives is bound to suffer.

The principal counterpart driving the gold price this week has been dollar weakness followed by dollar strength. While these fluctuations are always a feature of price progression, underlying demand for physical metal appears robust. Negative interest rates in the Eurozone must be having an effect, and if European demand continues to build it will be a new bullish factor.The stronger euro and yen certainly make gold attractive to Europeans and Japanese, as the next chart shows.




Elsewhere, Chinese demand in the first quarter was 516 tonnes, running below the comparable period in 2014, which was 625 tonnes. The Indian jewellery industry was on strike from the beginning of March until this week, protesting against a proposed 1% government levy on non-silver jewellery. The relative decline in Asian gold demand, compared with last year, may be compensated for by other buyers, but Indian demand should pick up again now the jewellers are back at work.


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: Silver Strengthens as USD weakens

Thu, 04/14/2016 - 13:05
This week, clients have been net selling their silver positions.

This is most likely due to clients speculating on the market and taking advantage of the higher silver prices seen earlier in the week. Most clients have favoured buying gold this week, and some have favoured the purchase of platinum and palladium.

GoldMoney’s clients have continued to favour the Singapore vault along with more interest being shown for the Switzerland vault. Less preference has been shown for the London and Canadian vaults.

Kelly-Ann Kearsey, Dealing Manager at GoldMoney said that precious metals had a strong start to the week, with gold jumping to a three week high on Tuesday when it reached over USD1,260/oz. This was supported by a weaker US Dollar, which has been affected by the doused expectations for hikes in the US interest rates.

Silver reached a 5 ½ month high, with prices breaching the USD16.00/oz level and, in doing so, has narrowed the gold-to-silver ratio back down to 76. On Wednesday, Platinum tested the key psychological level of $1,000/oz and was seen at an intra day high of USD999.00. Palladium had also been trading higher following a release of data from China’s Association of Automobile Manufactures in which over 2 million cars had been sold in Asia during March.

There was more downbeat economic data from the EU on Wednesday, followed by US economic data which had very little impact on the market. This, in turn, has helped gold regain safe-haven demand.

Thursday then saw the US dollar rebound to extend to its biggest one-day rally in over a month, which has eroded most of the gains made by the precious metals earlier in the week.

07/04/16 16:00. Gold dropped 0.2% to $1,232.05, Silver gained 5.6% to $16.14, Platinum increased 3.9% to $994.00 and Palladium gained 4.5% to $558.20 Gold/Silver ratio: 76


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

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Roy Sebag & Josh Crumb Interview with Real Vision TV

Thu, 04/14/2016 - 11:36
Roy Sebag, CEO of GoldMoney and Founder of BitGold, and Josh Crumb, CSO of Goldmoney and Co-Founder of BitGold, recently sat down to talk with Real Vision Media.

Roy and Josh explain how ZIRP prevents retail investors from preserving their wealth, and the foundations of how BitGold uses blockchain inspired technology to provide a currency alternative, backing POS transactions with secure, physical gold.  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.

 

The IMF’s Special Drawing Rights, the RMB and gold

Thu, 04/14/2016 - 09:02
The IMF's Special Drawing Rights, the RMB and gold

Introduction

At the latest G20 meeting, China’s central bank vowed to promote the use of SDRs in the Chinese economy, just four months after the IMF decided to include the RMB as part of the currency basket underlying SDRs. Adding the RMB marks only the 5th time the Fund changed the composition of the basket since formally moving away from a gold based system in 1974. However, as history shows, the SDR has been unable to maintain value as gold has. Adding the RMB to the basket will hardly change that.

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

On April 1, 2016, China's central bank Governor Zhou Xiaochuan announced that the Chinese government will take actions to promote the use of SDRs in its domestic economy. The announcement was made at the end of a meeting of the G20 in Paris, which is hosted by China this year. China will start to use both the USD and SDRs when reporting its foreign reserves. In addition, the country will also consider issuing bonds denominated in SDRs. This comes five months after the International Monetary Fund (IMF) decided to include the Chinese Renminbi as a fifth currency to the basket of Special Drawing Rights (SDR) along with the U.S. dollar, the Euro, the Japanese yen and the British pound. The change takes effect on October 1, 2016. This marks the first major change of the constituents of the basket since 1981 when the IMF dropped 11 out of 16 currencies in the original basket. However, when the SDR was introduced in 1969, it was not based on a basket of currencies but linked to gold, 0.888671 grams to be precise, which, at the time, equaled exactly 1 US dollar. The SDR basket based on the original weighting of 16 currencies declined around 87.7% in value vs gold until today. Similarly, the basket introduced in 1978 has lost 84.4%. The smaller 5 currency basket introduced in 1981 is down 55.5% and the current basket is down 77.0% since its introduction in 2001.

Taking interest payments into account hardly changes the outcome. It is obvious today that for net holders of SDRs, breaking the link to gold had a negative impact on their reserve value. This is hardly surprising as any currency has underperformed gold over the past 10 years and any timeframe beyond that. Hence, it's not that the currencies in the basket were Summary poorly chosen or poorly weighted, no combination would have managed to do better than gold, whether the RMB would have been part of the basket all along or not. While it is far too early to conclude that China is challenging the dollar's dominant reserve position, RMB inclusion in the SDR will nevertheless have a profound impact on perceptions not only of China's growing economic power generally but monetary power specifically. But while the impact of the inclusion of the RMB should not be underestimated, it is unlikely that this will change the trend that gold outperforms any fiat currency.

 

The IMFs Special Drawing Rights, the RMB and gold

In 1969 the International Monetary Funds (IMF) introduced the Special Drawing Right (SDR) in order to supplement reserve assets of member countries. At the time the US was tightening their monetary policy which meant there was a shortage of USD as a reserve currency and the hope was that the introduction of SDRs could alleviate the issue. An SDR is the equivalent of foreign exchange reserves for a member country. It can only be held and used by member countries, the IMF itself (which uses it as a unit of account), and certain designated official entities. It cannot be held by private entities or individuals - although private SDRs could be created and used, that market never developed. SDRs can be created only through an allocation by the Fund and the stock can only be reduced by a cancellation by the fund. An allocation gives the member country a low cost way to add to its international reserves. SDRs have played a minor role of global reserve assets in the past. In 2009 the fund sharply increased the allocation to the equivalent of SDR 204 billion (equivalent to about USD318 billion) as a response to the global financial crisis (see Figure 1).

Since then the number of SDRs has been stable again. Even with this nearly 10-folding of SDR allocation, SDRs make only about 3% of global reserves at this point according to the IMF. In 1972, SDRs accounted for 9.5% of all non-gold reserves.

On November 30, 2015, the International Monetary Fund (IMF) decided to include the Chinese renminbi as a fifth currency to the basket of Special Drawing Rights (SDR) along with the U.S. dollar, the Euro, the Japanese yen and the British pound. This marks the first major change of the constituents of the basket since 1981 when the IMF dropped 11 out of 16 currencies in the original basket. However, when the SDR was introduced in 1969 it was not based on a basket of currencies but linked to gold. 0.888671 grams to be precise, which, at the time, equaled exactly 1 US dollar. In other words, the SDR and the US dollar were equal in value, because both were defined in gold. However, as the USD was devalued against gold and other currencies several times over the coming years while SDRs continued to reflect 0.888671g of gold, SDR values in USD terms rose steadily.

When the US, under President Nixon ended the convertibility of the USD to gold in 1971, SDRs continued to be linked to gold for a while but eventually the IMF abandoned the link in favor of a basket of currencies in June 1974. The original basket consisted of 16 currencies of the world's largest exporters at the time. 16 was chosen because that brought the cut-off point to be included in the basket to 1% of global exports. While the weightings have changed more often, the constituents of the basket has changed only a handful of times. In 1978 the basket was altered by excluding the Danish krone and the South African rand and including the Saudi Arabian and Iranian riyal. Importantly, in these early days, the interest rate on the basket was not determined on the weighted interest rate of the currencies in the basket but on a much smaller basket of just 5 currencies, the USD, JPY, DEM, FRF and the GBP which at the time had the most developed financial markets. This increasingly led to dichotomy between the valuation of the basket and the interest calculations and thus in 1980 the IMF board decided to unify the two baskets, including only the 5 currencies of the G5. And until recently, the composition of basket has remained unchanged for 35 years, apart from merging the DEM and the FRF into the EUR in 2001.

On November 30, 2015, the IMF announced to include the RMB in the SDR basket, starting October 1, 2016. The RMB will have has an initial weighting of 10.9% in the basket. The IMFs decision to include the RMB came mainly at the expense of the EUR and the GPB. The EUR weighting was reduced from 37.4% to 30.9% and the GBP weighting from 11.3% to 8.1%. The USD weighting was only slightly reduced from 41.9% to 41.7% and the Japanese yen went from 9.4% to 8.3%. Apart from prestige, the Chinese will benefit from being in included in the SDR in that central banks will now be more willing to hold RMB as part of their reserves.

We would like to use this historical event to examine how the value of the SDR evolved over time, from the time it was linked to gold to the current basket. Figure 3 shows how the value of the original baskets evolved over time, measured in gold.

The SDR basket based on the original weighting of 16 currencies declined around 87.7% in value vs gold until today. Similarly, the basket introduced in 1978 has lost 84.4%. The smaller 5 currency basket introduced in 1981 is down 55.5% and the current basket is down 77.0% since its introduction in 2001.

The fund pays interest to SDR holders and charges the equivalent rate on the net cumulative allocations of each participant. Hence, a member country with more SDR holdings than allocation is a net interest payment receiver. The interest rate is determined by the IMF and published weekly on its website, back to January 2000. This allows us to account for interest payments as well when comparing to the performance in gold. We used the 4 currency basket introduced in January 2001 as it is the only one where the IMF provides a full set of interest rates throughout the baskets existence.  We find that even including interest rates, the currency basket declined 73.6% vs gold over the nearly 15 years since introduction.

It is obvious today that for net holders of SDRs, breaking the link to gold had a negative impact on their reserve value. This is hardly surprising as any currency has underperformed gold over the past 10 years and any timeframe beyond that. Hence, it's not that the currencies in the basket were poorly chosen or poorly weighted. No combination would have managed to do better than gold, whether the RMB would have been part of the basket all along or not. While it is far too early to conclude that China is challenging the dollar's dominant reserve position, RMB inclusion in the SDR will nevertheless have a profound impact on perceptions not only of China's growing economic power generally but monetary power specifically. But while the impact of the inclusion of the RMB should not be underestimated, it is unlikely that this will change the trend that gold outperforms any fiat currency.

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

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

The ECB and shadow banking

Thu, 04/14/2016 - 04:37
Markets have fully adjusted to a financial world which reflects the leadership and management of money by central banks, and are increasingly frightened of any prospect of their control failing.

Every time the system stumbles, the response has been for central banks to force greater control and regulation upon the monetary system to the detriment of free markets. It is the financial version of the Road to Serfdom. Central banks have become ill-equipped to allow markets to price risk, and in the case of the ECB, it is downright hostile to market-determined prices.

The ECB is a creature of the EU. The EU super-state has legal primacy over the consumer in determining consumer, market and monetary affairs. I was alerted to the full implications of this fact when I recently chaired a presentation of a remarkable paper written by a barrister, Ben Wrench, sponsored by the Institute for Direct Democracy in Europe. Wrench’s paper is worth reading to appreciate its full implications, and it can be found on the IDDE’s website.

He describes EU citizens as being subject to rule by law. Unelected representatives legislate and regulate whatever they wish, and democratically elected representatives have no right to challenge them. This is why referendums and parliamentary votes are ignored, because they have no right of challenge in law. This contrasts with the UK’s rule of law, whereby everyone, including the state, has to abide by laws and regulations decided by democratically elected representatives.

On the EU mainland, the Code Napoléon applies, where the underlying legal approach is that everything is illegal unless it is permitted by law. The UK’s laws are diametrically opposed, because everything is permitted unless it has been made specifically illegal. The EU is all about the primacy of the state over the people, while in the UK the basis is one of laissez-faire. This is the difference between rule by law and the rule of law.

Having made this important point, we must move on to the economic implications. Legally, the Anglo-Saxon market-based approach, which is applied to global markets, has its basis in English law. The EU regards markets, in which consumers determine their free choice, as an Anglo-Saxon culture that is rife with unwelcome financial speculation and profiteering, and must be suppressed. This is what informs the ECB. When Mr Draghi famously remarked that he would do “whatever it takes”, he was empowered to do so, because of the rule by law, with which the ECB governs markets under its control.

In Europe, it is the Anglo-Saxon approach to the rule of law that is out of step with the ECB. While there is everywhere a tendency for the state to gravitate towards central planning of markets, at the ECB it is also enshrined in that institution’s legal approach. There is no mechanism to stop the ECB from intervening to set prices in financial markets, wherever and whenever it chooses, despite the grumbles emanating from Germany. The ECB will take no lessons from the speculators and profiteers, and as a result has become wholly detached from understanding what markets are about.

It is this institution that presides over the individual central banks of the Eurozone members, which are equally bound by the Code Napoléon. Any hope, that the ECB and the national central banks are culturally capable of handling the developing financial crisis in Europe, must be abandoned. It will only be a matter of time before the monetary embodiment of the Code Napoléon, the euro itself, is finally confounded by market reality.

Markets always win in the end, but the journey to the euro’s destruction will have twists and turns. The management of markets by the ECB is causing a hidden run on the shadow banking system, which is leading to demand for cash to replace credit. No one knows the true size of the Eurozone’s shadow banks, partly because they are hard to define, and partly because attempts to quantify it focus on only six Eurozone member states. But we are talking of huge numbers.

According to the most recent report on shadow banking by the Financial Stability Board[i], the six Eurozone countries[ii] included in its assessment of total shadow banking assets is 23% of the $80 trillion global total[iii], amounting to some $18.4 trillion equivalent. At the heart of the euro area’s shadow banks is sovereign debt, which because of the ECB’s quantitative easing purchases, is being priced substantially in excess of risk-determined levels.

By depriving the shadow banks of this vital collateral, they are being forced to reduce their activities in the areas where it forms the basis of their business. To appreciate the importance this effect has, an understanding of the purpose of shadow banking is required, and it can be summed up in one sentence:

Shadow banking facilitates the creation of credit for the purpose of deferring settlement of transactions from the present into the future.

If a central bank starves the shadow banks of high-quality collateral against which it issues credit, the system’s ability to expand credit goes into reverse gear, restricting their ability to defer settlements. Demand for cash must therefore rise. That is why euros, and yen for that matter, have become today’s strongest currencies in recent months as this effect has begun to bite.

It is assumed by financial commentators that the ECB, by introducing an interest rate penalty on cash and bank deposit balances, is encouraging spending to increase and for the euro to weaken against the dollar. That may or may not be the case, but it is not the major issue. Far more important is the ECB’s continuing need to assert tight control over euro-denominated bond markets. This means that bond prices must not be allowed to fall. And having already mispriced the whole market structure to suit its own ends, the ECB is fully committed to continuing with this monetary policy. It therefore cannot allow the evil Anglo-Saxon speculators and profiteers to act beyond the law, under which the ECB imposes its customary control. Nor can it modify monetary policy to help out the shadow banks.

Things are coming to a head. The share prices of systemically important banks are reflecting this new stress, and they are under considerable pressure. The Italian banking system is closer than ever to collapse, and Austria last week was forced to bail-in Heta, a bad bank created out of the Hypo-Alpe-Adria bail-out six years ago. The inconvenient truth is that notwithstanding the ECB’s whatever-it-takes hype, markets always prevail in the end, and that is the reality the culturally different ECB is now facing.

It is a similar situation in Japan. According to the FSB’s report, Japan’s shadow banking system is approximately $5.5 trillion equivalent, and the Bank of Japan is squeezing markets even harder. JGB bonds of up to twelve-years’ maturity have negative yields. As in the case of the euro, the yen is immensely strong, because contracting credit in the shadow banking system is forcing deferred settlements into cash.

In Japan’s case, the BoJ has a very bad dose of deficit-financing religion, and has followed the advice of similarly-afflicted macroeconomists to increase monetary and fiscal reflation until it works. It hasn’t worked since the stock market collapsed in 1990, and Japan’s failed economic policies have driven her into a massive debt trap from which there can be no other escape, other than to collapse the currency.

It would appear the ECB similarly has no exit other than the destruction of the euro. So far, both central banks have deferred the consequences of their monetary policies by banning risk. They dare not permit bond markets to price risk properly, nor can they cease their bond purchase programmes in order to ease the pressure on the shadow banks. Otherwise, a lethal combination of falling bond and asset prices, sharply escalating perceptions of risk, and higher borrowing costs for over-indebted borrowers could require the major central banks to underwrite the entire global banking system. The distance between where markets are priced now and where they would be without monetary intervention appears to be unbridgeable.

Instead, the ECB and BoJ can only continue to muddle along, suppressing all attempts by markets to price risk for what it actually is. The best outcome, if it were possible, would be for a carefully planned and gradual retreat to market pricing, in the hope the pace of value destruction will not be destabilising. Good luck to that. The chances of pulling this off are negligible, not least because of the anti-market culture in the central banks generally, and at the ECB in particular.

Shadow banks, commodities and gold

Restrictions on the creation of credit in the shadow banks are bound to reduce liquidity in futures, forwards and over-the-counter derivative markets, restricting synthetic supply of commodities. This could be a recent factor influencing commodity markets generally, and why they might continue to rise more sharply than underlying economic conditions suggest is reasonable. The gold price as a bell-weather seems to be defying the normal checks on its price, and appears to have entered a new bull phase.

The Bank for International Settlements’ Table D5 derivatives report confirms that the notional amounts outstanding of OTC gold contracts at the banks has contracted from $341 billion to $247bn between H2 2013 and H1 2015. The current position will only be revealed in about a year’s time, but it does indeed appear that the days of putting a cap on commodity prices by inflating outstanding derivative quantities is over.

Given that this is the case, together with the growing risk of a second banking crisis, a future can easily be envisaged whereby perceptions of risk shift against bonds, equities, property and currencies, and in favour of commodities, particularly gold.

[i]Global Shadow Banking Monitoring Report 2015
[ii] Ireland, France, Germany, Netherlands, Italy and Spain.
[iii] The FSB has changed its methods to estimate a narrow and a broad measure. This figure is comparable with prior methods.

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: Firm undertones

Fri, 04/08/2016 - 07:47
The dollar gold price rose this week from Monday's low of $1215 to close last night (Thursday) at $1240, and silver rose from $14.90 to $15.20.

Silver's performance compared with gold reflects lower than normal silver volatility, a trend that has featured from the start of this year, which can be discerned in the underperformance shown in the headline chart above.

In early European trade this morning gold and silver opened moderately lower, reflecting a slightly firmer dollar.

There is much happening on the subject of money, and to an extent, even gold is a bystander in a developing monetary train wreck. In recent weeks we have seen sterling come under pressure on fears of Brexit, plus some appalling trade figures. If Brexit happens, it will be the end of the grand European project, and the euro could disintegrate, but markets are not yet reflecting this possibility.

The dollar has been losing ground against both the euro and the yen. In the last eight trading sessions, the yen has gained 5% against the dollar, breaking the important 110-yen level (a strong yen means a falling JPY rate). Both the yen and the euro feature negative interest rates, so these moves are counter-intuitive. Could it be that negative interest rates are leading to a contraction of bank credit, forcing currency shortages on the markets for these two currencies?

The bank credit numbers will be reported in due course, but even then they will not tell the whole story. Demand for currencies with negative interest rates is certain to emanate from the shadow banking system, due to the lack of available collateral. With the BoJ and the ECB buying everything in sight, it is the shadow banks that are being squeezed.

The simplest way to understand this arcane subject is as follows. The principal function of shadow banking is to finance the deferral of settlement on a full range of financial instruments and securities. If you remove the means to do this by contracting the quantity of collateral available, then you are going to force earlier settlements of financed positions than would otherwise occur. This means that liquidation cash is demanded by the shadow banks and their customers to replace the credit which is no longer available. And cash, where the credit has been very cheap to the point where it even pays you to borrow, is demanded in the currencies with the lowest interest rates, because that is where the collateral is being drained from the system.

Both the BoJ and the ECB are hoovering up nearly all available collateral. The suggestion that gold is side-lined while this bizarre situation unfolds is apt. We are in uncharted territory, and few people understand the potential consequences, so how can you evaluate the purchase of anything?

Back to common sense. The price of gold has risen less in yen and euros than in dollars or sterling. Once the shadow banks have found a new balance by contracting their credit sufficiently, doubtless the euro and the yen will begin to reflect some fundamentals. And gold is cheap in these currencies, as demonstrated in the next chart.

So far, from the beginning of this year gold in dollars is up 17% and in sterling 23%. But in euros it is up only 12% and in yen a meagre 5%. And if buyers in these currencies need further encouragement, the technical background, admittedly measured in dollars, shows the consolidation of recent weeks could be nearly over, because the rising 55-day moving average should begin to underwrite the gold price.

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: Firm undertones

Fri, 04/08/2016 - 07:47
The dollar gold price rose this week from Monday's low of $1215 to close last night (Thursday) at $1240, and silver rose from $14.90 to $15.20.

Silver's performance compared with gold reflects lower than normal silver volatility, a trend that has featured from the start of this year, which can be discerned in the underperformance shown in the headline chart above.

In early European trade this morning gold and silver opened moderately lower, reflecting a slightly firmer dollar.

There is much happening on the subject of money, and to an extent, even gold is a bystander in a developing monetary train wreck. In recent weeks we have seen sterling come under pressure on fears of Brexit, plus some appalling trade figures. If Brexit happens, it will be the end of the grand European project, and the euro could disintegrate, but markets are not yet reflecting this possibility.

The dollar has been losing ground against both the euro and the yen. In the last eight trading sessions, the yen has gained 5% against the dollar, breaking the important 110-yen level (a strong yen means a falling JPY rate). Both the yen and the euro feature negative interest rates, so these moves are counter-intuitive. Could it be that negative interest rates are leading to a contraction of bank credit, forcing currency shortages on the markets for these two currencies?

The bank credit numbers will be reported in due course, but even then they will not tell the whole story. Demand for currencies with negative interest rates is certain to emanate from the shadow banking system, due to the lack of available collateral. With the BoJ and the ECB buying everything in sight, it is the shadow banks that are being squeezed.

The simplest way to understand this arcane subject is as follows. The principal function of shadow banking is to finance the deferral of settlement on a full range of financial instruments and securities. If you remove the means to do this by contracting the quantity of collateral available, then you are going to force earlier settlements of financed positions than would otherwise occur. This means that liquidation cash is demanded by the shadow banks and their customers to replace the credit which is no longer available. And cash, where the credit has been very cheap to the point where it even pays you to borrow, is demanded in the currencies with the lowest interest rates, because that is where the collateral is being drained from the system.

Both the BoJ and the ECB are hoovering up nearly all available collateral. The suggestion that gold is side-lined while this bizarre situation unfolds is apt. We are in uncharted territory, and few people understand the potential consequences, so how can you evaluate the purchase of anything?

Back to common sense. The price of gold has risen less in yen and euros than in dollars or sterling. Once the shadow banks have found a new balance by contracting their credit sufficiently, doubtless the euro and the yen will begin to reflect some fundamentals. And gold is cheap in these currencies, as demonstrated in the next chart.

So far, from the beginning of this year gold in dollars is up 17% and in sterling 23%. But in euros it is up only 12% and in yen a meagre 5%. And if buyers in these currencies need further encouragement, the technical background, admittedly measured in dollars, shows the consolidation of recent weeks could be nearly over, because the rising 55-day moving average should begin to underwrite the gold price.

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 not Surprised by FOMC Minutes

Thu, 04/07/2016 - 13:48

This week has been in favour of the sellers with clients net-selling their silver positions whilst gold positions have remained neutral.

GoldMoney's clients have continued to favour the Singapore vault along with more interest being shown toward the Hong Kong, Swiss, and Canadian vaults and less preference being shown toward the London vault.

Kelly-Ann Kearsey, Dealing Manager at GoldMoney said that this week has seen more uncertainty in the market as both the US Federal Reserve and the European Central Bank made announcements along with another decline in oil prices and the worries of negative interest rates around the world.

The results of the FOMC were in line with expectations as members wanting to raise rates were easily out-voted by a large majority. Due to this, gold could benefit as it is more competitive against interest-bearing assets. Tuesday saw silver prices rebound after data released from the Eurozone was weaker than expected, which added to the fears of a slowing global economy. This was then followed by the US dollar turning lower against a basket of currencies.

Week on week prices have remained relatively stable, with palladium being the weakest performer.

Next week will see the release of the US Retail sales which may provide more direction for the gold price.

07/04/16 16:00. Gold gained 0.4% to $1,234.41, Silver lowered 0.5% to $15.29, Platinum decreased 2.1% to $957.00 and Palladium dropped 6.5% to $533.97 Gold/Silver ratio: 81

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

 

Dealing Desk: Precious Metals not Surprised by FOMC Minutes

Thu, 04/07/2016 - 13:48

This week has been in favour of the sellers with clients net-selling their silver positions whilst gold positions have remained neutral.

GoldMoney's clients have continued to favour the Singapore vault along with more interest being shown toward the Hong Kong, Swiss, and Canadian vaults and less preference being shown toward the London vault.

Kelly-Ann Kearsey, Dealing Manager at GoldMoney said that this week has seen more uncertainty in the market as both the US Federal Reserve and the European Central Bank made announcements along with another decline in oil prices and the worries of negative interest rates around the world.

The results of the FOMC were in line with expectations as members wanting to raise rates were easily out-voted by a large majority. Due to this, gold could benefit as it is more competitive against interest-bearing assets. Tuesday saw silver prices rebound after data released from the Eurozone was weaker than expected, which added to the fears of a slowing global economy. This was then followed by the US dollar turning lower against a basket of currencies.

Week on week prices have remained relatively stable, with palladium being the weakest performer.

Next week will see the release of the US Retail sales which may provide more direction for the gold price.

07/04/16 16:00. Gold gained 0.4% to $1,234.41, Silver lowered 0.5% to $15.29, Platinum decreased 2.1% to $957.00 and Palladium dropped 6.5% to $533.97 Gold/Silver ratio: 81

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

 

Interest rates and gold analysis

Thu, 04/07/2016 - 07:03
It is commonly assumed that the gold price and interest rates move in opposite directions. In other words, a tendency towards higher interest rates is accompanied by a lower gold price.

Like all assumptions about prices, sometimes it is true and sometimes not.

The market today is all about synthetic gold, gold which is referred to but rarely delivered. The current relationship is therefore one of relative interest rates, because positions in synthetic gold, in the form of futures and forwards, are financed from wholesale money markets. This is why a rumour that interest rates might rise sooner than expected, if it is reflected in forward interbank rates, leads to a fall in the gold price.

To the extent that this happens, the gold price has been captured by the modern banking system, but it was not always so. The chart below shows that rising interest rates were accompanied by a higher gold price in the 1970s after 1971.

 

We can divide the decade into four distinct phases, numbered accordingly on the chart. In Phase 1, to December 1971, interest rates fell and gold increased in price, much as today's market expectations would suggest, but from then on until the end of the decade a strong positive correlation between the two is clear. So why was this?

Those of us who worked in financial markets at the time may remember the development of stagflation in the late sixties and into the first half of the seventies, whereby prices appeared to be rising without a corresponding increase in underlying demand for the goods concerned. This put central banks in a difficult position. In accordance with post-war macroeconomic thinking, monetary policy was (as it is to this day) one of the principal tools for promoting economic growth, and so the lack of growth was put down to insufficient stimulus. Therefore, monetary policy was diametrically opposed to the higher interest rates needed to counter increasing price inflation. The result was central bankers wished for low interest rates but were forced by markets into raising them, which they did reluctantly and belatedly. This is the logical reason the gold price rose to discount the increasing rate of price inflation, instead of being suppressed by increasing interest rates. This was Phase 2 on the chart.

Stagflation was very evident up to the end of 1974. Dollar price inflation measured by the producer price index increased by over 25% that year, reflecting higher oil prices imposed by the OPEC cartel. Inflation measured by the CPI peaked at 12%. Equity markets collapsed, with the Dow halving and London's FT30 falling by over 70% from its 1972 high. In London, the secondary banking crisis, triggered by rising interest rates, led to the failure of banks which had loaned money to property developers, resulting in a financial crash in November 1973. Again, mainstream economists were confounded, because the collapse in demand following that crisis should have led to deflation, but prices kept on rising.

The gold story was not just a simple one of belated and insufficient rises in interest rates, as the economic runes suggest. The riches endowed on the Middle East from rising oil prices benefited, in western terms, a backward society which invested a significant portion of its windfall dollars in physical gold. This was natural for the Arabs, who believed gold was money and dollars were a sort of funny paper. Investing in physical gold was also recommended to them by their Swiss private bankers. The recycling of petrodollars into gold routinely cleaned out the US Treasury's gold auctions, which failed to suppress the rising gold price.

The financial crisis and the associated collapse of stock markets in 1974 lead us into Phase 3 on the chart. Interest rates declined after the stock markets began to recover from the extreme depths of negative sentiment at that time. The gold price also declined, with the price almost halving from just under $200 in December 1974 to just over $100 in August 1976. It had become apparent that the financial world would survive after all, so bond yields fell while stockmarkets recovered their poise during that period. Fear subsided.

Again, the gold price had correlated with interest rates, this time declining with them. We then commenced Phase 4. From 1976 onwards, economic activity stabilised and price inflation picked up later that year, with the dollar CPI eventually hitting 13% in 1980. Interest rates rose along with price inflation, and gold ran up from the $100 level to as high as $850 at the London PM fix on 21 January 1980. For a third time, the gold price correlated with rising interest rates.

From the history of the 1970s, we have learned that today's non-correlating relationship between gold and interest rates cannot be taken as normal in future market relationships. Admittedly, derivative markets and the London bullion market were not as well-developed then as they are today. But they certainly were in gold's next bull market, from the early 2000s to 2011. However, the comparison with the seventies is the more interesting, particularly given the emergence of stagflation at that time.
While official inflation figures today show the relative absence of price inflation, much of that is down to changes in the way it is calculated. John Williams of ShadowStats.com estimates that inflation today, calculated as it was in the eighties, runs consistently higher than official figures suggest. He reckons it is currently at about 5%. And the Chapwood Index, compiled quarterly including 500 commonly bought items in 50 American cities, records price inflation at 1970s levels, closer to 9%.

As always, official statistics such as the CPI should be treated with immense caution, as John Williams's and the Chapwood inflation estimates confirm. But even the suppressed official CPI is likely to rise beyond the Fed's 2% target within a year from now, if the recent increases in prices of raw materials and energy hold. This is because the negative factors that have suppressed the index, such as the oil price, will soon be dropping out of the back-end of the statistic, giving the CPI an upward boost. Furthermore, rising raw material and energy prices will have little to do with the level of economic demand in the US, because the US economy is no longer the driver for commodity prices. That role now belongs to China, which plans to use vast quantities of raw materials for domestic economic and Asia-wide infrastructure development, and accordingly is beginning to stockpile them.

On this simple analysis, we can see how domestic US prices could record a significant rise without any increase in domestic demand. In other words, the conditions now exist for the stagflation that became so pernicious from the late 1960s onwards. The question then arises as to how the Fed will respond.

One thing hasn't changed over the decades, and that is central bankers' assumptions that prices are tied, however loosely, to demand. This is the text-book basis of the inflation target, which assumes that a 2% inflation rate is consistent with sustainable economic growth. There is, in conventional macroeconomics, no explanation for stagflation, despite evidence the condition exists.

No one is more surprised than the forward-thinking members of the Fed's policy-making committees, who anticipate the same dilemma that their predecessors faced in Phase 2 of our chart of the 1970s. The US economy will be stagnating, while price inflation is rising. The Fed will be torn between the need to keep interest rates low to stimulate credit demand, and raising interest rates to control price inflation. Only this time, a rise in interest rates and bond yields averaging no more than two per cent could be curtains for the Fed itself, because the losses on its bond investments, acquired in the wake of the financial crisis and through quantitative easing, will easily exceed its so-called capital.

The dynamics behind the gold market are however different now from the early seventies. Debt levels today are so high they risk destabilising the whole financial system, making it impossible for the Fed to raise interest rates much without causing a financial wipe-out. Asian governments, such as the Chinese and the Russians are known to have been accumulating strategic positions in physical gold, and the Chinese and Indian populations along with other Asian people have also exhibited notable appetites for physical metal. Instead of starting from a position where the US Treasury on its own in 1969 still held 14% of estimated above-ground stocks, its holding is officially at less than 5% of them today. That is, if you believe it still has the stated 8,134 tonnes.

This time, the gold price is likely to be driven by physical shortages in the old world, as American and European investors wake up to stagflation, their central bank's interest rate dilemma, and the loss of physical liquidity from their vaults.
Today's market set-up, particularly if Chinese demand for energy and commodities materialises in accordance with her new five-year plan, looks like replicating the early stage of Phase 2 in the introductory chart to this article. Gold increased fivefold from $42 to a high of about $200 in three years. The circumstances today have notable differences, not least the launch-pad of negative interest rates. But we can begin to see why, despite the near infinite growth of derivatives as a price-control mechanism, it could be mistaken to assume that the link between interest rates and gold is normally one of non-correlation, and will continue to be so.

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.

 

Interest Rates and Gold

Thu, 04/07/2016 - 06:15
It is commonly assumed that the gold price and interest rates move in opposite directions.

In other words, a tendency towards higher interest rates is accompanied by a lower gold price. Like all assumptions about prices, sometimes it is true and sometimes not.

The market today is all about synthetic gold, gold which is referred to but rarely delivered. The current relationship is therefore one of relative interest rates, because positions in synthetic gold, in the form of futures and forwards, are financed from wholesale money markets. This is why a rumour that interest rates might rise sooner than expected, if it is reflected in forward interbank rates, leads to a fall in the gold price.

To the extent that this happens, the gold price has been captured by the modern banking system, but it was not always so. The chart below shows that rising interest rates were accompanied by a higher gold price in the 1970s after 1971.

We can divide the decade into four distinct phases, numbered accordingly on the chart. In Phase 1, to December 1971, interest rates fell and gold increased in price, much as today's market expectations would suggest, but from then on until the end of the decade a strong positive correlation between the two is clear. So why was this?

Those of us who worked in financial markets at the time may remember the development of stagflation in the late sixties and into the first half of the seventies, whereby prices appeared to be rising without a corresponding increase in underlying demand for the goods concerned. This put central banks in a difficult position. In accordance with post-war macroeconomic thinking, monetary policy was (as it is to this day) one of the principal tools for promoting economic growth, and so the lack of growth was put down to insufficient stimulus. Therefore, monetary policy was diametrically opposed to the higher interest rates needed to counter increasing price inflation. The result was central bankers wished for low interest rates but were forced by markets into raising them, which they did reluctantly and belatedly. This is the logical reason the gold price rose to discount the increasing rate of price inflation, instead of being suppressed by increasing interest rates. This was Phase 2 on the chart.

Stagflation was very evident up to the end of 1974. Dollar price inflation measured by the producer price index increased by over 25% that year, reflecting higher oil prices imposed by the OPEC cartel. Inflation measured by the CPI peaked at 12%. Equity markets collapsed, with the Dow halving and London's FT30 falling by over 70% from its 1972 high. In London, the secondary banking crisis, triggered by rising interest rates, led to the failure of banks which had loaned money to property developers, resulting in a financial crash in November 1973. Again, mainstream economists were confounded, because the collapse in demand following that crisis should have led to deflation, but prices kept on rising.

The gold story was not just a simple one of belated and insufficient rises in interest rates, as the economic runes suggest. The riches endowed on the Middle East from rising oil prices benefited, in western terms, a backward society which invested a significant portion of its windfall dollars in physical gold. This was natural for the Arabs, who believed gold was money and dollars were a sort of funny paper. Investing in physical gold was also recommended to them by their Swiss private bankers. The recycling of petrodollars into gold routinely cleaned out the US Treasury's gold auctions, which failed to suppress the rising gold price.

The financial crisis and the associated collapse of stock markets in 1974 lead us into Phase 3 on the chart. Interest rates declined after the stock markets began to recover from the extreme depths of negative sentiment at that time. The gold price also declined, with the price almost halving from just under $200 in December 1974 to just over $100 in August 1976. It had become apparent that the financial world would survive after all, so bond yields fell while stockmarkets recovered their poise during that period. Fear subsided.

Again, the gold price had correlated with interest rates, this time declining with them. We then commenced Phase 4. From 1976 onwards, economic activity stabilised and price inflation picked up later that year, with the dollar CPI eventually hitting 13% in 1980. Interest rates rose along with price inflation, and gold ran up from the $100 level to as high as $850 at the London PM fix on 21 January 1980. For a third time, the gold price correlated with rising interest rates.

From the history of the 1970s, we have learned that today's non-correlating relationship between gold and interest rates cannot be taken as normal in future market relationships. Admittedly, derivative markets and the London bullion market were not as well-developed then as they are today. But they certainly were in gold's next bull market, from the early 2000s to 2011. However, the comparison with the seventies is the more interesting, particularly given the emergence of stagflation at that time.

While official inflation figures today show the relative absence of price inflation, much of that is down to changes in the way it is calculated. John Williams of ShadowStats.com estimates that inflation today, calculated as it was in the eighties, runs consistently higher than official figures suggest. He reckons it is currently at about 5%. And the Chapwood Index, compiled quarterly including 500 commonly bought items in 50 American cities, records price inflation at 1970s levels, closer to 9%.

As always, official statistics such as the CPI should be treated with immense caution, as John Williams's and the Chapwood inflation estimates confirm. But even the suppressed official CPI is likely to rise beyond the Fed's 2% target within a year from now, if the recent increases in prices of raw materials and energy hold. This is because the negative factors that have suppressed the index, such as the oil price, will soon be dropping out of the back-end of the statistic, giving the CPI an upward boost. Furthermore, rising raw material and energy prices will have little to do with the level of economic demand in the US, because the US economy is no longer the driver for commodity prices. That role now belongs to China, which plans to use vast quantities of raw materials for domestic economic and Asia-wide infrastructure development, and accordingly is beginning to stockpile them.

On this simple analysis, we can see how domestic US prices could record a significant rise without any increase in domestic demand. In other words, the conditions now exist for the stagflation that became so pernicious from the late 1960s onwards. The question then arises as to how the Fed will respond.

One thing hasn't changed over the decades, and that is central bankers' assumptions that prices are tied, however loosely, to demand. This is the text-book basis of the inflation target, which assumes that a 2% inflation rate is consistent with sustainable economic growth. There is, in conventional macroeconomics, no explanation for stagflation, despite evidence the condition exists.

No one is more surprised than the forward-thinking members of the Fed's policy-making committees, who anticipate the same dilemma that their predecessors faced in Phase 2 of our chart of the 1970s. The US economy will be stagnating, while price inflation is rising. The Fed will be torn between the need to keep interest rates low to stimulate credit demand, and raising interest rates to control price inflation. Only this time, a rise in interest rates and bond yields averaging no more than two per cent could be curtains for the Fed itself, because the losses on its bond investments, acquired in the wake of the financial crisis and through quantitative easing, will easily exceed its so-called capital.

The dynamics behind the gold market are however different now from the early seventies. Debt levels today are so high they risk destabilising the whole financial system, making it impossible for the Fed to raise interest rates much without causing a financial wipe-out. Asian governments, such as the Chinese and the Russians are known to have been accumulating strategic positions in physical gold, and the Chinese and Indian populations along with other Asian people have also exhibited notable appetites for physical metal. Instead of starting from a position where the US Treasury on its own in 1969 still held 14% of estimated above-ground stocks, its holding is officially at less than 5% of them today. That is, if you believe it still has the stated 8,134 tonnes.

This time, the gold price is likely to be driven by physical shortages in the old world, as American and European investors wake up to stagflation, their central bank's interest rate dilemma, and the loss of physical liquidity from their vaults.

Today's market set-up, particularly if Chinese demand for energy and commodities materialises in accordance with her new five-year plan, looks like replicating the early stage of Phase 2 in the introductory chart to this article. Gold increased fivefold from $42 to a high of about $200 in three years. The circumstances today have notable differences, not least the launch-pad of negative interest rates. But we can begin to see why, despite the near infinite growth of derivatives as a price-control mechanism, it could be mistaken to assume that the link between interest rates and gold is normally one of non-correlation, and will continue to be so.

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.

 

Interest rates and gold

Thu, 04/07/2016 - 06:15
It is commonly assumed that the gold price and interest rates move in opposite directions.

In other words, a tendency towards higher interest rates is accompanied by a lower gold price. Like all assumptions about prices, sometimes it is true and sometimes not.

The market today is all about synthetic gold, gold which is referred to but rarely delivered. The current relationship is therefore one of relative interest rates, because positions in synthetic gold, in the form of futures and forwards, are financed from wholesale money markets. This is why a rumour that interest rates might rise sooner than expected, if it is reflected in forward interbank rates, leads to a fall in the gold price.

To the extent that this happens, the gold price has been captured by the modern banking system, but it was not always so. The chart below shows that rising interest rates were accompanied by a higher gold price in the 1970s after 1971.

We can divide the decade into four distinct phases, numbered accordingly on the chart. In Phase 1, to December 1971, interest rates fell and gold increased in price, much as today's market expectations would suggest, but from then on until the end of the decade a strong positive correlation between the two is clear. So why was this?

Those of us who worked in financial markets at the time may remember the development of stagflation in the late sixties and into the first half of the seventies, whereby prices appeared to be rising without a corresponding increase in underlying demand for the goods concerned. This put central banks in a difficult position. In accordance with post-war macroeconomic thinking, monetary policy was (as it is to this day) one of the principal tools for promoting economic growth, and so the lack of growth was put down to insufficient stimulus. Therefore, monetary policy was diametrically opposed to the higher interest rates needed to counter increasing price inflation. The result was central bankers wished for low interest rates but were forced by markets into raising them, which they did reluctantly and belatedly. This is the logical reason the gold price rose to discount the increasing rate of price inflation, instead of being suppressed by increasing interest rates. This was Phase 2 on the chart.

Stagflation was very evident up to the end of 1974. Dollar price inflation measured by the producer price index increased by over 25% that year, reflecting higher oil prices imposed by the OPEC cartel. Inflation measured by the CPI peaked at 12%. Equity markets collapsed, with the Dow halving and London's FT30 falling by over 70% from its 1972 high. In London, the secondary banking crisis, triggered by rising interest rates, led to the failure of banks which had loaned money to property developers, resulting in a financial crash in November 1973. Again, mainstream economists were confounded, because the collapse in demand following that crisis should have led to deflation, but prices kept on rising.

The gold story was not just a simple one of belated and insufficient rises in interest rates, as the economic runes suggest. The riches endowed on the Middle East from rising oil prices benefited, in western terms, a backward society which invested a significant portion of its windfall dollars in physical gold. This was natural for the Arabs, who believed gold was money and dollars were a sort of funny paper. Investing in physical gold was also recommended to them by their Swiss private bankers. The recycling of petrodollars into gold routinely cleaned out the US Treasury's gold auctions, which failed to suppress the rising gold price.

The financial crisis and the associated collapse of stock markets in 1974 lead us into Phase 3 on the chart. Interest rates declined after the stock markets began to recover from the extreme depths of negative sentiment at that time. The gold price also declined, with the price almost halving from just under $200 in December 1974 to just over $100 in August 1976. It had become apparent that the financial world would survive after all, so bond yields fell while stockmarkets recovered their poise during that period. Fear subsided.

Again, the gold price had correlated with interest rates, this time declining with them. We then commenced Phase 4. From 1976 onwards, economic activity stabilised and price inflation picked up later that year, with the dollar CPI eventually hitting 13% in 1980. Interest rates rose along with price inflation, and gold ran up from the $100 level to as high as $850 at the London PM fix on 21 January 1980. For a third time, the gold price correlated with rising interest rates.

From the history of the 1970s, we have learned that today's non-correlating relationship between gold and interest rates cannot be taken as normal in future market relationships. Admittedly, derivative markets and the London bullion market were not as well-developed then as they are today. But they certainly were in gold's next bull market, from the early 2000s to 2011. However, the comparison with the seventies is the more interesting, particularly given the emergence of stagflation at that time.

While official inflation figures today show the relative absence of price inflation, much of that is down to changes in the way it is calculated. John Williams of ShadowStats.com estimates that inflation today, calculated as it was in the eighties, runs consistently higher than official figures suggest. He reckons it is currently at about 5%. And the Chapwood Index, compiled quarterly including 500 commonly bought items in 50 American cities, records price inflation at 1970s levels, closer to 9%.

As always, official statistics such as the CPI should be treated with immense caution, as John Williams's and the Chapwood inflation estimates confirm. But even the suppressed official CPI is likely to rise beyond the Fed's 2% target within a year from now, if the recent increases in prices of raw materials and energy hold. This is because the negative factors that have suppressed the index, such as the oil price, will soon be dropping out of the back-end of the statistic, giving the CPI an upward boost. Furthermore, rising raw material and energy prices will have little to do with the level of economic demand in the US, because the US economy is no longer the driver for commodity prices. That role now belongs to China, which plans to use vast quantities of raw materials for domestic economic and Asia-wide infrastructure development, and accordingly is beginning to stockpile them.

On this simple analysis, we can see how domestic US prices could record a significant rise without any increase in domestic demand. In other words, the conditions now exist for the stagflation that became so pernicious from the late 1960s onwards. The question then arises as to how the Fed will respond.

One thing hasn't changed over the decades, and that is central bankers' assumptions that prices are tied, however loosely, to demand. This is the text-book basis of the inflation target, which assumes that a 2% inflation rate is consistent with sustainable economic growth. There is, in conventional macroeconomics, no explanation for stagflation, despite evidence the condition exists.

No one is more surprised than the forward-thinking members of the Fed's policy-making committees, who anticipate the same dilemma that their predecessors faced in Phase 2 of our chart of the 1970s. The US economy will be stagnating, while price inflation is rising. The Fed will be torn between the need to keep interest rates low to stimulate credit demand, and raising interest rates to control price inflation. Only this time, a rise in interest rates and bond yields averaging no more than two per cent could be curtains for the Fed itself, because the losses on its bond investments, acquired in the wake of the financial crisis and through quantitative easing, will easily exceed its so-called capital.

The dynamics behind the gold market are however different now from the early seventies. Debt levels today are so high they risk destabilising the whole financial system, making it impossible for the Fed to raise interest rates much without causing a financial wipe-out. Asian governments, such as the Chinese and the Russians are known to have been accumulating strategic positions in physical gold, and the Chinese and Indian populations along with other Asian people have also exhibited notable appetites for physical metal. Instead of starting from a position where the US Treasury on its own in 1969 still held 14% of estimated above-ground stocks, its holding is officially at less than 5% of them today. That is, if you believe it still has the stated 8,134 tonnes.

This time, the gold price is likely to be driven by physical shortages in the old world, as American and European investors wake up to stagflation, their central bank's interest rate dilemma, and the loss of physical liquidity from their vaults.

Today's market set-up, particularly if Chinese demand for energy and commodities materialises in accordance with her new five-year plan, looks like replicating the early stage of Phase 2 in the introductory chart to this article. Gold increased fivefold from $42 to a high of about $200 in three years. The circumstances today have notable differences, not least the launch-pad of negative interest rates. But we can begin to see why, despite the near infinite growth of derivatives as a price-control mechanism, it could be mistaken to assume that the link between interest rates and gold is normally one of non-correlation, and will continue to be so.

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.

 

Rebutting Matt O'Brien's and the Washington Post's Misguided Attack on Gold

Fri, 04/01/2016 - 11:09
Rebutting Matt Obriens and the Washington Post's Misguided Attack on Gold

It is our mission to rebut any mainstream article that spreads misinformation about gold and/or shows a gross misunderstanding of monetary history.  In Matt O’Brien’s “Wonkblog” in the Washington Post on February 23, 2016, titled “This might be Ted Cruz’s worst idea“, he does both. The ‘worst idea’ in this case refers to the Texas Senator’s view that it would be to the benefit of the US economy to return to a gold standard. One of O’Brien’s main arguments against the gold standard, aside from his claim that apparently nobody on the “University of Chicago's ideologically diverse expert panel” thinks it a good idea, is that he believes goods and services priced in gold are more volatile than goods priced in US dollars and, behold, sometimes prices can even decline substantially.


source: Washington Post

Obviously what O’Brien completely omits is that under a gold standard, the dollar and gold are one and the same. With the same argument, O’Brien could have shown that prices for US goods and services have been even more volatile when measured in euros, Canadian dollars or Japanese yen, and then conclude that euros, Canadian dollars and yen are much too volatile to be used as money (see Figure 1). Needless to say, more than 500 million people use those currencies every day. If gold would have been the official currency of the United States since 1988, the price chart would have looked just as smooth, with the difference that it would not be pointing up but it would be simply a flat horizontal line, pretty much the way it was before 1971.

This is a simple point not hard to understand. Anyone who has spent a little bit of time studying currencies, gold and economic principles in general understands it.

US goods measured in foreign currency are much more volatile than in USD (or gold for that matter). It doesn’t mean much, which is why normally nobody would bother showing such a chart.

source: Bloomberg, GoldMoney

Let us ignore all that for a moment and assume that for the past 30 years prices for US goods and services under a gold standard would have indeed moved the way in which they did when measured in gold. This reveals another flaw in O’Brien’s tirade against gold. He claims that:

“After all, it's not like the price of gold matters to a middle-class family. It has nothing to do with the price of food or housing or education or anything else that anyone who isn't preparing for the end of the world would need.”

That is simply just plain wrong. O’Brien tries to prove his point of view in his chart shown above that supposedly represents how prices changed since 1988 (a completely arbitrary starting point) and how they would have changed under a gold standard. As source he quotes the St. Louis Fed’s FRED database, but it doesn’t say what the data actually show. One can only assume the creator of the chart used the CPI deflator and overlaid it with the gold price. The problem is, that doesn’t really reflect – to use Matt O’Brien’s own words – “what matters to a middle class family.” This is because the CPI (and not gold) seems to have actually quite little if not exactly “nothing to do with the price of food, or housing or education or anything else to anyone”. So let’s look at how prices for goods and services that are of particular relevance for the middle class would have changed in gold. And we shall use O’Brien’s arbitrary starting point of 1988 (and not the end of the gold standard in 1971 which would have made sense or simply the end of the 20th century or anything else more intuitive than 1988. 1988 could well be coincidentally most likely the mathematically best starting point to support his flawed argument).

Let’s start with energy. O’Brien doesn’t specifically mention energy even though it certainly matters for a middle class family. According to the US Energy Information Agency (EIA), 3.2 billion barrels of gasoline were consumed each year in the United States on average during the past five years. At an average price of USD3.30/gal, this equates to roughly USD1,400 per person (including every child and retiree). But that is only half the bill, as total US crude oil consumption is roughly seven billion barrels per year. This doesn’t mean that an average household of four outright spends USD10,000 on fuel, because a lot of fuel is consumed by company cars, trucks and other commercial vehicles and machines. But in the end, those commercial costs drive the costs of products and services consumed as well. Add bus tickets and airfares and the houses in the northeast that rely on heating oil in the winter and you understand that crude oil costs account for a large share of consumer expenditures, both directly and indirectly. Overall, the US has spent roughly 6% of its GDP on crude oil over the past five years. It clearly matters for the average middle-class family. The chart below shows retail gasoline prices including taxes. As one can see, gasoline prices tend to be somewhat less volatile when priced in gold. This becomes even more evident if the time horizon is extended back to the end of the gold standard in 1971. (For those who are interested in finding out why, you can read our gold price framework report here.)

Prices for petroleum products are somewhat less volatile when measured in gold

source: Bloomberg, Energy Information Administration, GoldMoney

But maybe oil is the outlier, and O’Brien is right when it comes to other important consumption goods? Well let’s look at food then, because every middle class family needs food. The Economist magazine publishes the price of a BigMac Burger for different countries in their BigMac index. The idea is to compare the purchasing power of different countries’ currencies. But this also a great tool to compare how food prices have changed over time. After all the Big Mac is a staple, served the same anywhere in the US, a commodity that really didn’t change much since 1988, which makes it perfect for our comparison. This chart looks a bit different. Prices do rise a bit when measured in gold between 1995-2000, but are nowhere near as volatile as O’Brien’s chart suggests. Then prices come down and eventually they end up slightly below where they started in 1988.

This is nothing but a continuation of a trend that has been present in human history for hundreds of years. It shows that society is able to push the boundaries of scarcity with technological progress. Think of how many calories per day the average American was able to purchase in 1800, in 1900, and how that has improved until 1950. It is a good thing that the average American no longer has to spend half of his daily income for food as it was in the past. Does it make sense to be afraid that expectations of declining food prices will lead to lower aggregate demand because people will push the purchase of food to a future date? Of course not. Is it a problem when the average American has to spend a larger share of his disposable income for food? It certainly is. The price of a BigMac has increased by 101% in dollar terms since 1988. In comparison, the median household income has only increased by 97%. It might not look like much, but this runs completely contrary to the upward trend in prosperity consumers enjoyed over the previous 200 years, during most of which the US dollar was pegged to gold (or silver).

Even as the Price for a BigMac has risen faster than pretax household disposable income, the price for a BigMac measured in gold is slightly below the price in 1988

source: The Economist BigMac Index, Bloomberg, GoldMoney

Falling prices (ie deflation) are the boogeyman of today’s mainstream economic doctrines. The conventional wisdom is that it was deflation that pushed the US economy from a normal recession into the great depression in the early 1930s. If consumers expect the price for a good to be lower in the future, so the argument goes, they will delay the purchase, which in turn will lower aggregate demand, deepen the recession and possibly turn in into a prolonged depression. Hence, price deflation has to be avoided at all costs. While this might make some sense, consumers don’t always behave the way economist believe they should. Take the iPhone for example. One can be sure that a year from now there is a new model, and the current model will sell for half the price. Yet people can’t seem to get enough of the newest one. Indeed, falling prices for computers and most electronic goods have been the norm for years and yet sales continue to rise.

Fact is, falling prices are for most people a good thing. After decades of stagnating real wage growth, lower prices are welcomed by the majority of US consumers. And despite the claims of mainstream economists that there is strong link between deflation and depression, historical data seems to prove otherwise. In a 2004 research report for the National Bureau of Economics, UCLA’s Andrew Atkeson and Patrick Kehoe from the Research Department of the Federal Reserve Bank of Minneapolis analyzed economic data over a period of more than 100 years for 17 countries and found that “the only episode in which we find evidence of a link between deflation and depression is the Great Depression (1929—34). But in the rest of the data for 17 countries and more than 100 years, there is virtually no evidence of such a link.” It seems deflation doesn’t automatically lead to a recession or even a depression, and even in regards to the great depression, Austrian School economists would argue that Keynesian economists confuse cause and effect, that deflation was primarily the result of the recession, rather than the other way round.

O’Brien also brings up housing as an important part of the costs for a middle class family and we are happy to cover that as well. Housing differs from a consumer good in the sense that you don’t buy a house every day. You start saving for a house and save over a very long time period until you have saved enough to make the purchase, or at least the down payment. Hence volatility in prices month-to-month are less of a concern. What really matters is how long you have to save to buy the house (or pay it off if you finance it). Inflation is a real problem however. If you put USD1,000 aside and 20 years later the purchasing power of that USD1,000 is cut in half, it will become a Sisyphean task to save enough money to buy a house.

Imagine a young worker had just entered the workforce in 1988. His dream is to buy a house one day. For that he puts USD250 aside at the end of every month. He thinks he can get a mortgage and the bank will lend him 50% of the value of the house when the time comes. He has now two choices: he can save in US dollars, or he can save in gold. The below chart shows how long he has to save to achieve his goal. If the had decided to make his savings in gold in 1988, it would have taken him a bit under 20 years to accumulate enough wealth. But had he decided to save in US dollars, house prices would have risen too fast for him to ever reach his goal. By 2007 (the time he was able to buy the house was he smart enough to save in gold), property prices had risen 102% in US dollar terms according to data from the US census bureau. That means the first USD250 he saved in 1988 had lost 50% of its purchasing power. In contrast, the average house in 1988 cost about 10kg of gold and by the time our house buyer was able to afford the house in 2007, it had risen to only 10.6kg. Hence the first gram he put aside in 1988 still bought him roughly the same amount of house.

Now these calculation above ignore bank interest and you will argue that he would have been stupid to save his dollars by storing them under his mattress. Surely the interest earned from his money would have been enough to offset the loss in purchasing power? Think again. We used the 12 month deposit rate and even though in theory there was a brief moment where he actually would have been able to purchase the house, it would have been a bold move right into the crashing housing market, and it was probably not that easy to get a mortgage at the time.

As house prices rise fast, saving for a home becomes a Sisyphean task. Saving in gold has proven to be much more efficient

source: US Census Bureau, Bloomberg, GoldMoney

The Gold Standard as it existed prior to 1971 certainly had its flaws. But nothing of what Matt O’Brien wants to make us believe is one of them. The main flaw in the gold "standard" to which O'Brien and the ”ideologically diverse panel of economists” refer was that it was fractionalized via a central bank rather than being fully-reserved. People must remember that even though gold as base money is superior to fiat, the gold standard of the 1920's was still flawed as the gold was held as base money by the Central Bank and the Commercial Banks were able to extend or fractionalize that base money as commercially circulating money at a factor of 6-8 times. Therefore, instead of actually owning and using gold, citizens owned a fraction of a base of gold depending on the ebbs and flow, booms and busts in the economy and business cycle. As we know, a particularly large bust took place in 1929-1932 and the US banking system, being only fractionally reserved, became subject to a bank run and many banks thus failed.

Before the central bank model was introduced in the US in 1914, the commercial banks themselves were also generally only fractionally-reserved. That was a recipe for occasional financial instability, known at the time as “Panics”. That stands in sharp contrast to the gold standard we promote at GoldMoney Inc.: one that is fully reserved and decentralized as there is no central controlling entity extending or contracting credit against the gold. Rather, in our gold standard framework, decentralized actors such as ourselves would use their fully reserved gold to engage in commerce, trade, and productive activities. Extending credit would be left to other institutions inclined to take such risk and, of course, subject themselves to the risk of default or failure. But under this framework the failure of credit institutions would not threaten the broader financial system, the money itself—gold—or the economy more generally. There would be no such thing as “Too Big To Fail”, as it were.

Together with our sister company BitGold, we allow everybody to own physical gold stored under their own name and use it for transactions, down to 0.03cts. It’s our customers’ gold. It’s not a promise of future delivery, ownership in an obscure financial vehicle that owns gold or some sort of token that represents gold. It’s your gold, which nobody can encumber or debase.

The gold standard was an effective way to combine the proven superiority of gold as base money with the utility of paper currency for transactions (e.g. small denominations, ease of exchange, efficiency etc.). To transact in actual gold coin, especially for smaller transactions, was simply not practical at the time. But technology now enables us to overcome all of that and to use gold not only as a monetary reserve for circulating currency but as actual, transactional money. In 2016, gold is now as easy and efficient to use for transactions as the dollar or other major currencies are. In fact, it is actually more efficient: In what other currency can you transfer one dollar of value within seconds from any point on the planet to another with no costs occurring or no need to create or extend credit?

The technology now exists to save, transfer, remit, redeem and otherwise conduct one’s personal business and financial activities in gold. Hence, whether governments decide to go back to a formal gold standard or not someday, people already have the choice. So what do you say Mr O’Brien? Why not join our 800,000+ and rapidly growing gold client base, now spread over 100 countries? Something tells us that they are substantially more “ideologically diverse” than that panel of “experts” who are telling them that they are wrong.

 

 

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

 

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