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So 1970 - 1980 increase of 2382%, from 2000 - 2016 increase of 395% , so when is it going to increase by another 2000% , I must be missing something, why put up a shit graph.

 

just had another look ....you must be joking, stretching the top X axis to create a pattern is really stretching-it, why not keep the top and bottom X axes constant.

 

Gold Climbs Further as Reality Sets In

A picture paints a thousand words and as the New York business day comes to a close, the following gold and silver spot charts speak volumes. The metals have now achieved improvements over four consecutive sessions. With gold having knocked on the door of $1270 (the highest level since March) and silver breaching $17.60 (the highest in around a year), obviously something is at play.






As we discussed yesterday, we live in "confusing and risky" times and in support of this concept, the Bank of Japan overnight made an unexpected decision by withholding more stimulus and effectively making no change to its asset purchase program. BoJ Governor Kuroda expressed a willingness to take rates further into negative territory but stated that applying negative interest rates to lending facilities was not debated at the meeting. The aftermath of the announcement saw an equity selloff and a drop in the USD of around 3% against the Yen representing the biggest move in the currency pair in almost a year. The U.S dollar index fell sharply to 93.81 and precious metals climbed higher.

Prior to this, the Federal Reserve also announced no action regarding interest rates although this news was the consensus expectation. Furthermore, with statements such as "economic conditions will evolve in a manner that will warrant only gradual increases in the federal funds rate", no definitive guidance was given regarding its intention to move rates in June; contributing further to the financial fog.

To add further strain, the U.S. Commerce Department overnight announced sluggish figures for 1st quarter GDP. At a seasonally adjusted annualised rate of only 0.5% against expectations of 0.7% and with Barack Obama set to become the only president in history not to deliver a single year of 3+% economic growth, confidence in the U.S. dollar and the economy behind it has been under pressure.

This news suggests that the Federal Reserve will indeed be "gradual" in its approach to rate rises, although many commentators are now predicting a return to QE. Such low-rate environments look to be here to stay and are considered supportive for gold due to the lower differential costs with so-called yield bearing holdings. This wraps up a week that has provided an undeniably bullish sentiment for precious metals.

 

An Extraordinary Week

This week is proving to be arduous for Australian investors. With so many decision influencing catalysts, even the experts appear indecisive or conflicted. Let us start with the increasing dissemination of concern surrounding the Australian property market. Last night saw the ABC's Four Corners program to be the latest to report on the rising worry surrounding Australian property. The report focused in part on social issues born of the generational divide that high prices are seen to be creating and importantly again referenced accusations of predatory and fraudulent lending practices by our financial institutions. The latter observation was timely considering that earlier yesterday, Westpac's half year report was released. It indicated weakness both in terms of their return on equity, their dividend and in terms of their bad debts. The fact that the bank was sold off by around 4% for the day illustrates the pressure that Westpac is under in investors' eyes and Commsec is expecting all the major banks to be exposed in a similar way with ANZ and NAB half year results also due this week.

In a further warning, CommSec Advisory's Blair Hannon suggested that Iron Ore levels are unsustainable at their current prices with a lot of speculative futures trading happening in China and indicated that BHP and RIO are currently artificially propping up the market; especially considering that the banks are falling. Cumulatively, this sees the Aussie market currently at its most volatile in about 7 years.

Furthermore, the RBA hands down its interest rates decision today with current pricing at about 58% in favour of a cut; much higher than it was prior to the release of our recent CPI deflation. The outcome of this decision will likely impact equity markets and investment decisions more broadly. Thereafter is the pre-election federal budget tonight with Scott Morrison expected to lift the second highest tax bracket to address bracket creep, favourably adjust medium business tax, introduce superannuation changes and unveil a suite of multinational tax avoidance measures. The calendar this week makes for a volatile investment environment and emphasises the role of sound portfolio allocations that perform well in uncertain circumstances.

To speak of such an investment, we reported on gold touching $1270 prior to the long weekend and last night saw gold take out the $1300 mark. In a sign of the times, it is now not uncommon for main-stream news outlets to not only report on gold but to do so favourably. To illustrate, we finish with CNBC's overnight assessment of gold's performance this year. Going further than simply covering the metal's circa 22% YTD rise, they draw a parallel between 2016 and 2007; the latter being the only other time in the last 36 years when gold has outperformed the S&P by 20% or more when the S&P was actually positive for the year. This is illustrated in the chart below. CNBC use this metric to conclude that gold as a bad-news-barometer is flagging warnings. In a comment that could easily be applied to the current Australian investment landscape, Max Wolf of Manhattan Venture Partners concludes that "fear about a lot of really negative news flow is probably driving people into gold".

 

RBA, AUD, ANZ, ASX & AU

Today we briefly cover the plethora of local news from the last day. A new historic low in rates was set at 2:30pm yesterday with the RBA opting to cut rates to 1.75%. This saw a significant drop in the AUD and Australian stocks rocket higher to close with a greater than 110 point (2.1%) gain after starting the day with a 0.5% fall. The chart below maps the fall of the AUD in reference to that resulting from our recent record inflation print.





With the AUD currently at about a 5 week low, consensus opinion now is that the RBA will pursue a further cut in August once the next quarterly inflation data is released. In support of this, ANZ representative Felicity Emmett commented that yesterday's cut is unlikely to be "one and done" in nature and Paul Dales of Capital Economics observed that "if inflation expectations fall again, as they have done in New Zealand, then rates may drop below 1.5 per cent". For context, the chart below illustrates rates over the last two and a half decades and an interesting observation about this rate move is that it has come prior to a federal election; a rare event.





Yesterday also saw ANZ release figures ultimately weaker than those just released by Westpac. The bank has seen first half profit slump 24% and opted to cut its dividend by 7 per cent. We observe that yesterday marked the first time since the GFC that the ANZ has cut its dividend.

As mentioned, share prices were exuberant yesterday, particularly in afternoon trade following the rate decision. ANZ enigmatically rose 5.6%; somewhat staggering considering that the bank was down by the most part of 4% in early trade. The NAB, CBA and Westpac also rose strongly. Commsec offered speculation of overseas short covering in an attempt to partially explain the stellar financial sector performance for the day and Mike Mangan of 2MG Asset Management observed it was "funny how all the banks tumbled on Monday on a poor WBC result, yet this morning after an even worse ANZ result, all the banks start rallying". Yesterday's rally is pictured below but is likely to be short lived with weakness overnight in European and U.S. markets pointing to an unwinding in stock prices here upon market open this morning.





Last night also saw Scott Morrison deliver his first budget, the details of which largely aligned with the topics we raised yesterday. Noteworthy however was the focus that analysts placed on the perceived discrepancy between the positive wording framing the budget and the RBA's rate cut born of negative inflation data; something the treasurer dismissed in interviews.

To touch on gold as a closing note, we have now seen the $1300 level breached thrice in the last two days. Bloomberg is reporting that the gold-backed SPDR saw a 20.8 tonne surge in holdings on Monday representing a single day increase not seen since 2011 and we highlight this article to demonstrate how positive commentary on the metal is now increasingly prevalent.

 

Gold "Currency" Before the Equities Crash


Stanley Druckenmiller is a hedge fund legend on Wall Street, whose Duquesne Capital fund yielded 30% returns annually from 1986 to when he closed it with $12b in assets in 2010. His call on the GFC saw him make $260m in 2008.

This week he continued his recent calls for an impending crash on equities markets saying:

"Three years ago on this stage I criticised the rationale of Fed policy but drew a bullish intermediate conclusion as the weight of the evidence suggested the tidal wave of central bank money worldwide would still propel financial assets higher. I now feel the weight of the evidence has shifted the other way; higher valuations, three more years of unproductive corporate behaviour, limits to further easing and excessive borrowing from the future suggest that the bull market is exhausting itself."

In other words the easy money policies (near or sub zero interest rates and money printing / QE) we have and continue to see from central banks, and recall our RBA this week upped their participation in the same, have seen strong gains in the recent past on Wall Street. As we've discussed recently, you can't keep taking on more debt to fuel growth that is occurring slower than the rate of debt you are taking on. He talks about the escalating accumulation of debt and artificial inflation of markets as essentially robbing from the future to 'improve' the present rather than taking the medicine and implementing structural reforms and highlights:

"the fed has borrowed from future consumption more than ever before."

Tellingly Druckenmiller upped his call to buy gold. He sees gold a little differently to some, saying:

"Some regard it as a metal, we regard it as a currency and it remains our largest currency allocation"

Pending any overwhelming news overnight, tomorrow we will show you a couple of charts that illustrate exactly what Druckenmiller is saying about central bank supported equities markets.

 

Debt Funded Share Buybacks v Earnings

Yesterday we wrote about Stanley Druckenmiller's views that central banks have exhausted their influence on further gains on US equities.

The following charts paint a very clear picture reinforcing his points. As we've reported before (here, explaining the mechanics and here, a more recent update) a lot of what boosted the price of shares in the lead up to the GFC and then since the GFC, is companies themselves using this cheap debt to buy back their own shares. This first chart demonstrates this very clearly:



Where this goes horribly wrong is when you can't generate enough cash to service all this new debt. Regular listeners to our weekly podcast will know that this is exactly what is playing out broadly in the US. Growth is moribund at best and in manufacturing is contracting. The elephant in the room is then what happens when interest rates are raised as we saw leading up to the GFC. The next chart shows the alarming divergence of earnings and debt accumulation for US non financial companies. Now ask yourself if that, in any way, looks sustainable and whether a billionaire who MADE $260m during the GFC might just be onto something.



As a postscript, when you click on the second link above re share buy backs (here if you didn't) you can see we talked of the 'lower high' as a warning for further falls on US shares. Well that's exactly what happened on 19 April and it has been trending down since..

 

These 3 Graphs Scream 'Sell Shares Now'

On Friday we presented graphs showing the deployment of record corporate debt into buying back shares and hence artificially inflating share prices. We finished Thursday's article mentioning the S&P500 had recently formed its second 'lower high', something that normally precedes big losses ahead. To show that was not just a US-centric phenomenon this chart (across all major global indices) shows the same:





In early December last year we presented the analysis of John Hussman and it's due an update given this topic. Please read the link for a recap of how this is done and the incredible historic correlation. When you look at the first graph you will see that previous visits to the current range resulted in the six crashes of 1901, 1906, 1929, 1937, 2000 and 2007. Those crashes saw falls of between 45% and 89%.





The next chart (again, explained in December) illustrates the expectation that US shares would return around 2% per annum for the next 12 years.





When one considers the 3 charts above together it would be a completely logical conclusion that right now we are potentially in the late warning signs of an imminent crash. That crash historically would see you lose 45-89% of your wealth (though most are predicting the next one to be unprecedentedly big). Now you don't 'lose' until you sell, but it would take 12 years to get back to just a 2% return less than inflation. Alternatively you could get out of shares now, buy safe haven assets such as gold and silver and maybe some cash, and buy shares again at the bottom, after the crash, and with something that normally goes up while the shares have been going down. As a final reminder of that last point in our last crash (GFC), shares halved and gold doubled over that period.

It is any coincidence that Managed Money long gold contracts just hit a 5 year high on COMEX?

 

Clear Warning from the IIF

The Institute of International Finance (IIF) in Washington last week issued a report spelling out clear warnings around record high corporate debt both in the west and emerging markets, each presenting its own cocktail of threats to the global economy. We summarise the key points as follows:

- Emerging markets corporate debt has ballooned 5-fold to $25 trillion in the last decade, most of that since the GFC.

- The west has been on the same binge and the US in particular has seen reckless borrowing to buy back shares and pay dividends despite profits being in decline since 2014.

- The ratio of net debt to earnings (EBITDA) for US companies has literally doubled to 1.4 from the 0.7 reached at the top of the pre GFC subprime bubble. In case you missed that, they have borrowed 1.4 times more than they earn. The cash to debt ratio is just 0.24.

- Companies have issued $1.9 trillion in junk bonds over the cycle, double that of just pre GFC. Junk bonds are already under stress with yields spiking to 20% in February (as we explained and reported here) and defaults at the highest level since the GFC.

- Corporate debt alone is 70% of GDP in the US, 100% in Europe, and 175% in China (the highest in the world). They estimate China's total debt to GDP has reached 295% and rising fast.

- Most of the $25 trillion in company debt is in local currencies. Whilst that lessens the chance of a '98 style currency crisis, the Bank for International Settlements (BIS) warns any rate rises by the US Fed could set off an emerging markets crash. When one considers this against the moribund US 'recovery' it paints a very grim picture for a Fed who knows they need to raise rates to bring back some normality but also know doing so could spark the next, and potentially biggest ever, financial crash.

That's why Stanley Druckenmiller last week said China was in the midst of an "extremely rare and quite dangerous" explosion of debt and compared the situation with "subprime mania" in the U.S. back in the mid-2000s, adding: "We know how that ended." No wonder he bought $300m worth of gold last year.

 

Trump and Gold

A scant few would have predicted Donald Trump would get this far. Fewer expect he will make it to the White House. But the guy has left a trail of such predictions in his wake and as they say, in America anything can happen. So let's flirt with some speculation on what it would mean for gold and silver should he actually pull it off

Firstly though, let's revisit why he's got this far in the first place. If you were to pick one overarching reason it is that he is anti-establishment. That oligarchy establishment has not done main street Americans much good for some time now. We often write how all the $3.5 trillion of printed money (via QE) and zero interest rates has done is enrich the top 1% - Wall St not Main St. The NFP employment figures Friday night (which we will discuss at length in this week's podcast) reinforced the theme we often report on of better paying full time productive jobs being replaced with poorer paying part time services jobs. This trend sees the bottom 90% of American families with no more net worth today than 30 years ago and with lower real household incomes than 25 years ago. That sort of stuff can create a groundswell of discontent. Add to that questionable war entries enriching major donors etc etc. Enter Mr Trump beholden to no one and the catchphrase "we aren't winning anymore".

Its early days but he has made 2 positions clear that already have major implications for gold (not, of course, discounting that a global loss of faith / fear could well inflate gold alone).

Firstly, he has just bluntly said he would consider essentially partially defaulting on the massive and burdensome $19t US debt. This guy has had 4 bankruptcies himself where creditors get paid a fraction of what they were owed and he moves on to make more millions. What he may be missing is US Treasuries are considered the world's risk free 'investment'. The 3 month T bill rate is used as the base risk free rate around the world. Should he decide to 'give them a haircut' you could well imagine what would happen to yields. In fact you don't need to imagine, just cast your mind back to August 2011 when Congress nearly saw the US default on its debt as they refused yet another debt limit increase. That saw US Treasuries yields reach a 29 month high (and hence price crash the same) and gold (the world's other safe haven) spike 25% in just 2 months. And that was just on clear political posturing in Congress. Should Trump actually go through with his default plan who knows where gold could go

His other position is that he will markedly increase spending and decrease taxes. Simplistically that would see inflation come about (and the risk of hyperinflation with that $3.5t of freshly printed money that to-date has had no Main St velocity) and a further increase in the already unprecedented and gargantuan US $19t debt. The former would see the Fed forced into raising rates more quickly. That would have the 2-fold effect of higher servicing costs on that debt but also the bigger elephant in the room (as we mentioned yesterday) the pressure on the mountain of Emerging Market debt in the system through the higher USD. That could force the biggest EM player, China, to devalue the Yuan and/or set off an EM crash. We got just a glimpse of the effects of a Yuan devaluation last August when the S&P500 fell 11% in a couple of days. Gold rose around 9%...

Trump is on record as loving gold. He may well nicely feather his nest, so to speak.

 

Dow Gold Ratio Turning Point?

There is a quote and chart from Egon von Greyerz (Founder and Managing Partner of Matterhorn Asset Management AG) doing the internet rounds now as follows:

"I have previously talked about the importance of the Dow Gold ratio. This ratio peaked in 1999 when the Dow was at a high and Gold at the $250 low. The ratio then declined by 87% until September 2011. This means that the average investor in the US stock market was a massive 87% worse off compared to owning gold instead. Between 2011 and the end of 2015, the ratio recovered 25% of the fall since 1999. Technically it is very clear that the dead cat bounce in this ratio is now finished and that it is on the way to new lows. Since December last year the Dow has fallen 18% against gold. Eventually I see the ratio going well below the 1 to 1 ratio in 1999 [we think he means 1976?] (Dow 800 and Gold $800). But even if the ratio only went to 1 that would mean a fall of the Dow versus gold of 92% from here. So gold in the next few years will not only preserve investors wealth but also enhance it. Holding stocks on the other hand will not only lead total despair but also to total wealth destruction."





It is probably clearer we think to look at 50 years of the Dow Gold Ratio per the chart below we've taken from Macrotrends.net charting site. Note the clear inference of Egon that, just like the gold price trending in general, it looks and feels a lot like 1976 right now, i.e the end of a 'dead cat bounce' before the real drop.

 

WGC Q1 2016 Demand Trends Report

The World Gold Council yesterday released their quarterly Gold Demand Trends for Q1 2016. As usual we summarise for you as follows:

Demand 1,289 tonne

- Gold demand was up 21% to 1289 tonne and marked the second strongest quarter on record after Q1 2009 (GFC)

- Gold saw a 17% price rise over the quarter, the biggest quarterly rise in 30 years

- Inflows to ETF's reached a near record 363.7 tonne as negative interest rates and investors seeking security "due to the negative interest rate environment in Europe and Japan, combined with uncertainty over the Chinese economy, anticipation of slower interest rate rises in the US and global stock market turmoil."

- Global investment demand was 618 tonne, up 122% year on year and 201% on last quarter

- Jewellery saw a 19% drop off a combination of poor consumer confidence in the face of a weakening Chinese economy and a 42 day strike by Indian jewellers in protest of proposed further Government restrictions and exacerbated by the higher price. They believe Q2 will see that largely recovered due to pent up demand

- Technology demand weakened further, down 3% to 81 tonne, again exacerbated by higher prices

- Central Bank buying dipped slightly to 109 tonne compared to 112 tonne, but clearly the world's central banks continue their unabated buying since the GFC this the 21st consecutive quarter of net purchases.

Supply 1,135 tonne

- Total supply was up 5% to 1,135 tonne. Mine supply was up 8% to 774 tonne and hedging was up to 40 tonne, whilst recycling continued its downward trend.

As we've written before these figures need to be taken with a little grain of salt as they don't appear to reflect the true consumption out of China via the SGE. That said, Chinese consumption has eased a little this year as we report in today's podcast.

Oh. and for those mathematically challenged Supply of 1,135 less Demand of 1,289 is yet another supply/demand deficit.

 

China When Stimulus is Turned Off

It could be a rough day on the Aussie share market today. Like it or not, but we catch the cold when the Chinese market sneezes. April data released over the weekend showed a slowdown in industrial production, property investment, and retail sales. That (for listeners of our weekly podcast) is nothing new but it was just after an incredible $1 trillion injection from the Chinese Government in the first quarter after their assertion they will maintain strong growth even if that meant more stimulus. And stimulate they did, with annual credit growth hitting 15% in the first quarter.

The front page of today's AFR includes a headline story on reports that the Chinese President, Xi Jinping, is not in favour of more stimulus, and hence in direct contradiction to Premier Li Keqiang's policy. He reiterated the need for a consumption based, not investment based, economy something that hasn't worked to date, and certainly not good for Australian miners. This was reflected in a more than halving of new loans in April and possibly already those aforementioned poor figures from the weekend.

Of course iron ore has fallen sharply in the last week and that is not good news for an Aussie government basing budget forecasts on $55 ore. But more broadly it could see an end to the commodities bounce in general. The much bigger elephant in the room is the question of how the world's second biggest economy fares without all that stimulus.

For gold and silver there are a number of implications. If the Chinese turn to more risk-off investments we may see a rebound in gold consumption after demand this year has slipped back to 2013/14 levels off the record highs last year. Should their market crash in response, the worldwide contagion, especially if accompanied by a big Yuan devaluation, would of course see a flight to gold and silver. History would suggest they would intervene regardless of this 'stance' but that would just add more debt to the already 300% of GDP burden they are trying to get down. That just makes the inevitable crash all the bigger. In the short term, if commodities all come off, we may even see a decline in the silver price, presenting more of this wonderful buying opportunity before its 'monetary' use outweighs its industrial use. It's the beauty of silver. It wears two hats. However keep in mind Aussies have another dual dynamic and that is our Aussie dollar. A decline in commodities would see a decline in the AUD and hence a lift in your metals price.

 

Bank of America's Top 9 Reasons to Worry

Australia's ASX shrugged off the China stimulus news yesterday as low interest rates reign supreme and last night we saw $2.3b of gold contracts dumped onto the market in 10 minutes, wiping USD11 off the USD1286 spot process in the process (because that is how one sells when one wants to maximise profit huh?). These, dear reader, are not normal times. Topically Bank of America Merrill Lynch Global Research yesterday joined the chorus of majors posting warnings of an imminent crash. BofAML list their top 9 reasons:

1) Stress in the High Yield bond market as we reported in Friday's weekly wrap, high yield 'junk' bond yield spreads (or Distress Ratio) have spiked again as they did in February.

2) Corporate buybacks peaking not since the previous peak in 2007 have we seen the amount of companies (65% of the S&P500!) buying back their own shares (using debt).

3) Jump in expected negative profits - not since the GFC have we seen so many companies with 12 month projected negative EPS (earning per share). Remember too, that buying back your own shares improves your EPS growth.

4) Risks around Fed tightening In the context of 3) previous times of rate hiking during profit recessions have not ended well Bets are still running on a rate hike as soon as June.

5) Weak IPO activity Year to date IPOs (Initial Public Offerings new public listings of companies) are at the lowest level since the GFC, and in dollar terms the lowest since 2003 after the dot.com crash.

6) Tightening bank lending Banks have tightened credit standards for the last 3 consecutive quarters. That hasn't occurred since the onset of the GFC. Put that in the context of all the freshly printed money in the system too.

7) Further weakness in oil BofAML are predicting another plunge in oil in Q3 this year, taking equities down with it.

8) US Election Uncertainty to be sure the Trump factor is at play, but it goes well beyond that. The US Policy Uncertainty Index, one closely aligned with the market's VIX (volatility index) hasn't been this high since the 2013 Government Shutdown. BofAML are predicting it to increase in the lead up.

9) BREXIT risks 23 June is getting close for the vote on the UK leaving the EU and polling is very close. Should the vote come in favour they predict a 15% fall in markets on that alone. (Outside of BofAML there are far worse predictions in terms of contagion from EU).

 

Soros Heavy Gold and Shorter Equities

Whilst media attention has been on Buffett's disclosed Apple share holdings, the other big reveal from the "13F" regulatory filings reports in the US was that of George Soros. For newer readers Soros is a global hedge fund legend who built a $24billion fortune with savvy bets on major market moves. Of late he has been vocal in his warnings on China's economy, saying its debt fuelled and overburdened economy resembles that of the US just prior to the GFC. In January he stated a hard landing in China was "practically unavoidable" and that a market crash would ensue.

Yesterday's 13F showed he slashed his long equity holdings by more than 25% to $4.5billion as at the end of March 2016, his lowest since 2013. He also more than doubled his short position on US shares with a 2.1million share Put on SPY worth around $430m.

Not surprisingly then, he has gone heavy into gold, both taking a 1.7% stake in Barrick Gold (the world's largest gold miner, and making him the biggest US listed holding) and a 1.05 million share call (long) option on SPDR Gold Trust worth about $124m.

On how to make money, George Soros once famously said:

"Find a widely held precept that is wrong and bet against it".

When others were calling gold a 'pet rock' the likes of George Soros were increasing their positions. That's how you get to $24biliion.

 

Fed Flags June Rate Rise!

Markets reacted strongly last night on the release of the US Fed minutes for the April meeting where they held rates steady. The reaction came from the surprise that "most" on the (FOMC) Fed committee expected the next hike to be in June. This took June hike odds from just 4% to 28% before and after the news. September is now running at 60%.

The minutes illustrated a Fed painted into a corner. They acknowledged the growing threat of asset bubbles fuelled by their easy money (note to RBA.), they made it clear any hike in June would be 'data dependent' (listeners to our weekly wrap podcast know that is not great), and moreover they continue to be greatly concerned by the global economy and the knock-on effects of a rate rise. Indeed the April meeting minutes mention 'global' 15 times. They specifically mentioned the Brexit referendum on 23 June and "unanticipated developments associated with China's management of its exchange rate". The latter is the real elephant in the room. Since the market routs caused by the Yuan devaluations in August last year and earlier this year, China have 'played nice' and not ventured there again helped of course by a falling USD. A rate rise, as we saw just on the expectation alone last night, sees a stronger US Dollar. A stronger US Dollar when you are pegged to it like China's Yuan and you are a major exporter is not a great thing. Add in growing tensions in the South China Sea and China have at their disposal a pretty big stick.

In the short term, as we again saw last night, a stronger USD can see downward pressure on gold. It came off USD20 on the news last night alone as the USD jumped. The key thing investors might want to remind themselves of is the bigger picture of the 'unintended consequences' of that rate rise and the higher USD and ask a. Will they actually do it?; and b. What will happen to global markets afterward. It might be timely to look at the market action in January after December's rate hike

This is by no means a simple situation. The Fed knows they must at some stage hike or otherwise continue to fuel the biggest debt binge based asset bubble in history. On the other hand there is probably the realisation they have left it too late and any hike could well trigger one of the biggest crashes in history it is a globally connected system of debt, derivatives and currency wars like never before. A couple of mentions of 'history' there. There is one asset class that has a few thousand years of history of being the safe haven asset of choice.

Finally this diagram sums up the other outcome courtesy of Bank of America Merrill Lynch



Source:

 

Central banks, Gold & The Wakeup Call

Lets take a little walk through recent history When we left the gold standard (where money was backed by gold) in the early 70's central banks (in theory) didn't need gold in their reserves and they became net sellers. That also marked the beginning of the biggest credit expansion in history as the discipline of gold was abandoned and debt was used to 'fix' politically inconvenient but 'financially natural' phenomena (take note of all the spending promises here in Australia until 2 July election its ALL deficit funded). The credit expansion party was awesome, the rich got much richer and everyday people borrowed off their mortgage to feel just as rich. Then a little thing called the GFC happened. This was the first serious wakeup call that maybe all this debt wasn't such a great thing. Of course, since then global debt has expanded by another 40% to try and double down and reflate the economy (ironically lagging under said debt) to the point where global debt sits at around $200 trillion and growth is moribund at best.

Central banks clearly saw the GFC for the wakeup call it was. The chart below shows net central bank purchases. You might notice a change in behaviour since the GFC




Now we are not saying for one minute all central banks have been fiscally prudent since the GFC. Indeed it is arguably the opposite. They have printed money at a reckless pace and suppressed rates to even negative territory to fuel that debt expansion. What the chart above might indicate is they are putting their 'hedge' in place for what they've done in the chart below (hint an 'asset' on a central bank's balance sheet is in fact debt . It is the bonds associated with all the money they've printed):



Most of the commentary explaining gold's big rise in 2016 has been around a growing loss of faith in these very same central banks. That the Fed might raise rates in June with the obvious ramifications reinforces that. And that is why this final chart shows first-quarter-only sales of investment gold this year approaching full year sales since 2013. This is the flight to safety that always happens in times of trouble.

 

Rising US Rates and Gold

The recent World Gold Council demand trends report for the first quarter of this year (that we summarised here) shed light on the enormous inflows of gold into ETF's this year. The chart below puts that into perspective in comparison to the last quarter.



Gold had a bit of a rough week last week. Much of the pressure came courtesy of hawkish (less accommodative and more likely to put rates up) comments from the US Fed with growing expectations now of a June rate hike. This is interesting given what we've seen since the December rate hike. i.e. gold and silver UP around 20% after the initial dip. Wall St is going hard on gold and it's not letting up with last week seeing the biggest weekly inflows to the gold ETF GLD this year. In the futures market too, the managed money category just hit another high in long gold positions. All this AFTER a December rate rise. The table below sheds interesting light on the misconception by some that rising rates means falling gold:



So the gold price and interest rates are positively correlated most of the time. The main exception is gold rising as interest rates fall (the second over the GFC). Indeed casting the net even further back and over 60 years we have never seen an increased interest rate resulting in lower gold prices.

We've reported before too, that the Fed have a shocking record of raising rates too late or when the market's not ready. That is arguably more true now than any time before. There is a reason why Wall St is jumping so heavily into gold and silver (albeit via paper trades like ETF's and futures). That reason may simply be history.

 

SMSF's & Billionaire's Crash Bets

We've recently written of Wall St legends Druckenmiller and Soros, and investment banking giant BofA Merrill Lynch all warning of a major crash soon.

Another Wall St giant, Carl Icahn of Icahn Enterprises (a $5.8b fund that he personally owns 90% of, making him one of the world's 50 richest people) has just positioned himself for a major crash. His themes are similar to the above. He talks of companies addicted to debt and financial engineering to artificially make profits look bigger on paper. He also reinforces the belief that all this cheap and printed money by the Fed simply inflated financial markets and not the broader economy. He sees how this experiment will fail:

"I've seen this before a number of times And I think a time is coming that might make some of those times look pretty good."

Only one quarter ago he was already very bearish with his fund carrying a "net short exposure" of 25% on shares. Simply put he has 25% more short (betting, and profiting, on a drop in markets) positions than long. That is pretty bearish. But last quarter's report, recently released, shows he has increased that short position by 600% to an incredible net 149%! In his words

"We're much more concerned about the market going down 20% than we are it going up 20%."

Such drops on Wall St almost certainly will be reflected here in Australia. Now you may well be relaxed about this as you are 'out of the sharemarket' and own some gold and silver personally. But what about your Superannuation? The reality is most super funds are still very heavily invested in shares it's all they know how to do.

For some reason many people don't give much thought to Super. It's something that just happens in the background and, besides, retirement is a long way off. Wrong. There has arguably never been a more important time to take control of your super yourself through a Self Managed Super Fund (SMSF). What few people 'get' is that should the shares that make up the majority of your industry or investment house super fund drop by 50% (ala GFC), you need to make 100% gains on the resultant value just to get back to where you started before the drop. Whilst retirement may be a long way off for some, it can take a LONG time to make 100% on your money. Learn a little more here and take control of your future. The hurdle of the cost to set one up may well pale to what you could lose by doing nothing. When the likes of Druckenmiller, Soros and Icahn are protecting themselves from a major crash, it's time to protect yourself too.

 

When the likes of Druckenmiller, Soros and Icahn are protecting themselves from a major crash, it's time to protect yourself too.

Amen brother!