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Will That Be Cash, Lease, Gold or Silver?

For something a little different, today we present a brief but interesting story sourced from Greg Hunter's USA watchdog, a program that presents alternative news wrap-ups and hosts interviews with a variety of well known economic experts, traders and commentators. Recently, a member of the USA watchdog community presented news of a fascinating development at his employer which was shared on the channel. Wishing to keep his identity and that of his employer anonymous, the contributor submitted the following.

"I sell forklifts here in the US and just received a confidential form that shows our forklift company has just changed policy to accept gold and silver for payment options. Cash and lease were the only options in the past". Although the company was not named, it was said to be a major market participant that conducts business internationally. A redacted version of the "Competitive Discount Request" form was presented as pictured below with the accepted payment options shown to be cash, lease, gold and silver as pictured subsequently. Furthermore, it was clarified that payment must be in physical form which illustrates the worthlessness of contracts or ETF shares such as GLD or SLV in any real commodity exchange.

Although (or perhaps because) this information is the result of "grass roots" reporting, it does suggest that companies may be showing signs of nervousness with regards to accepting paper payments, whether that be for reasons related to exchange rates or for more systemic considerations. This would not be without precedent with Patrick Byrne, CEO of online retail giant Overstock.com openly stating in late 2015 that the company was stockpiling gold and silver coins to safeguard employee entitlements in preparation for another financial crisis. A similar approach to personal finances would seem to be a prudent move.

 

King of Bonds: "Don't Buy Bonds, Buy Gold"

Overnight we saw evidence of the gold and silver drop that followed last Friday's payroll data unwinding. This is entirely consistent with the larger trend suggested by the chorus of recommendations coming from investment legends. The reality is that governments are abusing the privilege of issuing trusted debt on a scale that is incomprehensible to many followers of classical economic teachings and the warnings are becoming hard to ignore. PIMCO founder Bill Gross has recently stated "I don't like bonds; I don't like most stocks; I don't like private equity. Real assets such as land, gold and tangible plant and equipment at a discount are favoured asset categories".

What's not to like about bonds? One simple answer is that the risk reward ratio is now unacceptably high, particularly in cases where the reward is guaranteed to be negative. Gross explains: "Sovereign bond yields at record lows aren't worth the risk and are therefore not top of my shopping list right now; it's too risky". Furthermore, "low yields mean bonds are especially vulnerable because a small increase can bring a large decline in price."

Share market participants will have noticed the inexplicable upward stock price trajectory in recent weeks and all in the context of horrible economic data and low volume. Those who took the opportunity to short what should have been a short-lived rally have been left bloodied in the process. Again, Bill Gross explains "The credit-fuelled economy is running out of steam, and central banks can continue with their easing but doing so will distort the markets. These two realities will eventually lead to disaster and terrible returns for investors unless there is serious GDP growth pickup."

The key take away is that gold's value is not linked to a government or central bank; something to ponder if any of the above sounds unsettling.

 

The reality is that government mints are abusing the privelege of issuing collectible legal tender at a premium, with the possibility of premium destruction through milkspotting, without due care for their customers.

Perhaps not as serious a breach of governmental responsibility, but all helps to diminish faith in government.

 

When Bad News Becomes Bad News Again

It was timely that we wrote yesterday of the risk associated with bonds at the moment. Just overnight, Stephen Isaacs of Alvine Capital appeared on CNBC and said "fixed income has absolutely no value". Yesterday we also briefly referenced the seemingly unjustified rally that the stock market is in the midst of and today we elaborate on that theme. The uncertainty of the Brexit decision, the appeasement exercise that was the Euro bank stress test and everything in between has had an overall positive influence on the equity market, illustrating that the "bad news is good news" mantra (referring to the subsequent expectation of further easing policies) is alive and well. Let's look at that view objectively however.
US non-farm productivity has just experienced its third consecutive quarterly decline something not seen since 1979. Why is this important? As the graph below suggests, productivity is historically well correlated with equity valuations and it makes sense that the share market reflects the underlying productivity of an economy. Our current distortion however is part of a bigger picture where obfuscation and mal-investment are primary drivers rather than more fundamental metrics. Again referencing the graph below, twice in recent history we've seen that bad news does ultimately become bad news again at some point and it would be hard to argue against the case for the third recession bar.



Furthermore, there is a simple chart made available by Bill Holter and originally posted by Peter Degraafwhich plots the US gold price as a ratio of the monetary base. It clearly identifies a number of themes including the impact of the debasement of the currency and the fact that gold is currently at a discount. Comparing the charts above and below, it's fairly obvious which investment is more attractively priced.

 

WGC Q2 Report For 2016

For the first time, investment demand has been the largest portion of total gold demand for two consecutive quarters according to the World Gold Council's Q2 report for 2016. Additionally, gold demand for H1 at 2,335t is the second largest now on record (and the strongest H1 performance for more than 35 years at 25%) following Q2's 15% growth.

As pictured below, Q2 saw huge ETF inflows, continuing the trend from the previous quarter. Interestingly, jewellery demand faltered in accordance with the rise in gold prices as measured in multiple key currencies also pictured below. Record H1 investment demand of 1,063.9t was 16% higher than the previous H1 high in 2009.

The total supply increased from 1,041.7t in Q2 2015 to 1,144.6t, a year-on-year increase of 10%. First half supply is just 1% higher year-on-year, constituting the slowest rate of H1 growth in 8 years. One of the main factors involved in this growth has been recycling which, along with hedging, is supported by higher gold prices. An indication of this is provided below with a plot of recycled tonnes vs the LBMA USD price.

 

Seasonality Says Gold Rises From Here

Right now marks a fairly predictable 'bottom' in the annual calendar of gold prices. As the chart below illustrates August tends to be the last visit to the Support line of price patterns for the year. Gold supply tends to be fairly constant so this is no seasonality out of supply but, rather, demand.

From now on (Autumn in the northern hemisphere) the gold price traditionally strengthens on a number of predictably sequential events.

Firstly we have the Asian harvest season after the monsoon rains and many of these Asian farmers place a large portion of their profits into gold. Straight after this we then get the Indian wedding season where gold and gold jewellery is the present and dowry of choice. That then heads into the 'western' festive season where jewellery demand then surges too.

This year is a little special too as we have a US stock market at nose bleed average trailing-twelve-month price-to-earnings ratio of 27.2x. Whilst the ETF GLD gold buying has taken a rest, any hiccup or crash in shares will almost certainly see them pile in again. As we reported Friday, ETF inflows have been at record levels to date. That financial crashes 'traditionally' happen in September and October and there is a highly charged US election in November just adds to the potential of this seasonal trend.

 

yeah, good for my gold stocks

 

A Trapped Financial System

In a void of any 'thing' happening in financial markets gold and silver have had the correction many expected after going so strongly this year. This has been particularly so for Aussies as our dollar continues to strengthen in a world of zero and negative rates. The RBA won't let that continue and the same low rates continue to make gold and silver very attractive. Gold is still up 20% and silver 37% today (26% and 44% in USD) but that is off from mid 20's and mid 40's % we saw just recently. So has anything changed?

Unlike any time before, because these are unchartered waters, 'hope' seems to be a fundamental market driver. Shares have rallied of late despite no real economic news to justify it. Share prices these days are propped up by debt funded corporate buy backs and central banks both directly buying shares and forcing people into financial markets by depriving them of interest in a bank account. So whilst share owners are enjoying this for now, it's disastrous for fixed income investors.

The New York Times just ran an article that US life insurance schemes and pension funds can't maintain promised returns because they were established when actuaries could not see interest rates being below 8% and now those same actuaries can't see near zero interest rates rising. Insurance companies are now sharply increasing premiums to fill the void, robbing people up front to pay them later because they have promised 4% returns when a 10 year US Treasury bond is paying 1.5%. That is a massive problem when of the $6.4 trillion life insurance funds are invested in such bonds. In Europe that bond 'return' is negative hence the article reporting "This year, the head of Allianz of Germany, the largest insurer in Europe, called the move by the European Central Bank to slash rates to zero "a catastrophe." "

You can't expect rates to rise when growth is so poor. Pundits selling you into equities will spruke "recovery". The graph below shows US growth is the worst since World War 2 not much of a 'recovery' The other reason rates can't rise is quite simply we can't afford the interest bill if they do. So we are damned if they stay low and damned if they rise Bill Holter (in response to that NYT article via JS Mineset) summarised it well

"Yes, there are those out there who believe rates will never rise again in our lifetime but this poses a problem of its own. Very low zero or even negative interest rates do not allow for the 8% growth necessary for retirement plans to perform as promised. Please remember the question Jim [Rickards] continually asks regarding derivatives. "What is a contract worth that cannot perform"? This question can, should, and finally is being asked of retirement plans/the insurance industry.

The above is not ground breaking news, it is however another piece to the insolvent system our central bankers have forced us (and themselves) into. There is no way out of this. They cannot raise, lower or hold rates where they are and make the system solvent again. Solvency was the issue in 2008, they treated it with more and more liquidity. All this did was make the system more leveraged and more vulnerable to collapse. In essence, kicking the can these last 7-8 years did nothing but paint central banks and sovereign treasuries further into an inescapable corner."

Gold remains strong because history says it is one of the only routes out of this trap for investors with enough foresight to prepare for what now looks inevitable.

 

A Warning Signal Gold/Oil Ratio v VIX

It is said the 4 most expensive words in investment are 'this time is different'. With that in mind take a look at the chart below Over the last decade there has been a fairly strong correlation between the gold/oil ratio and the VIX (S&P 500 Volatility Index). The spikes you see coincide with financial market turmoil with the obvious GFC spike and more recently last August and this January/February's routs.

Within the circled area you will note a curious divergence underway with gold/silver high even after gold's recent minor correction but the VIX on the decline and well under the 'panic 20' line. Everything appears to be awesome



So in a world where we have just seen the amount of global negative yielding government bonds exceed $13.4 trillion, last week seeing the 667th interest rate drop since the GFC, quantitative easing (money printing) at all-time highs, central banks and companies themselves the big buyers of shares, debt levels more than 40% higher than before the GFC, insurance and pension funds becoming massively underfunded ($trillions), $1.5 trillion of bad debt in Euro banks, share indices reaching new highs and EPS measures sky high with falling earnings, and anaemic economic growth worldwide at rates less than the debt accumulated to achieve them which line do you think you should take as an indicator of what's about to come? What's your bet. red or black?

 

Happy 45th Birthday Credit Cycle

First an apology. We missed reporting a very special birthday on Monday, the birth of the greatest credit cycle the world has ever seen 45 years ago. On 15 August 1971 US President Richard Nixon "temporarily" ended the gold standard. Rather than the USD being backed by gold and the fiscal discipline that requires, Nixon ushered in an era of Fiat currency money backed by nothing more than the promise of the government. Remove the discipline of gold and governments go on a deficit funded spending spree.

Lets look at what's happened since

In 1971 US debt was $370b. It is now up 5,245% to $19.4 trillion or 117% per year
Nixon said this was "temporary" and that "Your dollar will be worth just as much tomorrow as it is today... " so how has that worked out? Well clearly 45 years later it is still Fiat and today the USD, measured against that gold it used to be pegged to, has gone from 1/35th of an oz of gold to 1/1350th. That simplistically looks like it has lost over 97% of its value since 1971 but in 1933 President Roosevelt suspended gold convertibility at $35. The graph below shows the decline in USD value more clearly.





To put it in clearer 'real' terms the US citizen has seen their dollar devalue by about 5 times and wages in real terms have declined while the top 1% of earners have profited from the credit cycle per the graph below





The other thing is when you abuse your Reserve Currency privilege to the extent the US has, you usually see a forced default and new Reserve Currency. This is not a new thing per the graph below we have shared many times:



History would indicate the USD's time is nearly up. The major posturing around the SDR (Standard Drawing Right) of late might indicate it is the planned successor.

This is not a new thing. Credit cycles or periods of currency debasement always end, and they always end very very badly. Throughout history, gold and silver have preserved people's wealth during such occurrences. Is there any coincidence that in 2016 with the real onset of the clear sign of distress with negative interest rates and record setting money printing the smart money (those 1%'ers) the central banks, hedge funds, banks etc - are piling into gold?

 

Is The Crash Close? 'Smart Money' is Leaving


A bit of a longer one today but we think these are extraordinary times.

Gold and silver have consolidated, shares at new highs, and VIX/Volatility is in 'complacent' (everything is awesome, nothing to see here) territory. This is usually the set up before any crash. What also normally happens before a crash is irrationally and historically high valuations. The following is from Goldman Sachs showing various price earnings type metrics for the S&P500 in historical context and showing every one is sky high on the bell curve. (note this is from May 2016 and prices are higher now and more earnings results released showing declines as covered in today's Weekly Wrap).





If this table alone doesn't sound alarm bells, allow us to continue

The human temptation when a market is running hot is to jump in because you feel like you are missing out. The smarter investor buys before things take off and sells to the fools coming in late. These poor fools are chasing that last 5 or 10% but forget they are risking, say, 50% (like the GFC) when it crashes. And remember if your investment goes down 50% you need to make 100% on that balance to get back to evens

This is a market that is fuelled principally on cheap money, debt and monetary stimulus, not fundamentals. Businesses are spending on share buy backs not capital expenditure that ensures future growth. We learned last night that corporate debt in the US has doubled since the GFC to $6 trillion. This week multi-billionaire (one of the world's 50 richest) hedge fund manager Carl Icahn said this in an interview:

"[The market] is way overvalued at 20 times the S&P and I'll tell you why: a lot of it is a result of zero interest rates.You have zero interest and a lot of buybacks. Money is not going into capital.

So think of it as a rich family that just decides "we're just going to have a lot of fun, we're going to sit around in the pool, and we'll keep printing up IOUs to the town, we've got a good name." You keep doing it until you go broke. And this is what's happening in our economy. Zero interest rates are building huge bubbles." He also said "I am more hedged than ever" and warned "There's going to be a day of reckoning here".

Taking Carl's lead it is instructive to look at what the very managers of these companies are doing. From Bloomberg's last week:

"The number of officers and directors of companies purchasing their own stock tumbled 44 percent from a year ago to 316 in July, the lowest monthly total ever, according to data compiled by The Washington Service and Bloomberg that goes back to 1988. With 1,399 executives unloading stock, sellers outnumbered buyers at a rate that was exceeded only two other times.. The lack of interest among executives may be a warning signal for investors who just saw analyst estimates for third-quarter profits turn negative even as equity valuations swell to levels not seen since the aftermath of the dot-com bubble."

Apart from the table above we don't know if there is a more damning indictment on the market than that piece from Bloomberg.

The GFC saw the big banks pass the debt risk of all the sub prime mortgages on to innocent investors just before the crash. (watch the movie "The Big Short" if you haven't seen it yet). In a way these CEO's and Directors are doing the same thing set it up and pass it to the 'fools'. It's not just in shares either. We just learned this week that globally Central Banks have offloaded a record $335 billion of US Treasury bonds in the last year. The buyers? "Private Investors". All this whilst Central Banks continue to load up on physical gold at a cracking pace

What of the implication of a financial crash?

Shares and gold are notoriously uncorrelated (gold up when shares are down and vice versa), it is in large part why people buy gold. But it's not perfect, there are times when they are correlated. That said if you check out the chart below you can see how incredibly 'uncorrelated' they have been of late as things are getting 'interesting'. If you look at the 65 day correlation (the last few months) we are at a level not seen since the GFC




Likewise we mentioned VIX earlier at very low levels i.e. high complacency. As you'd expect there is the opposite to shares where gold and VIX are highly correlated. Who needs gold if you are relaxed right?



And again we are seeing the last few months hit highs not seen since the last 2 crashes.

So we are seeing shares at very elevated valuations and volatility at very low levels, but all within a market based on no fundamentals of earnings, economic growth, or consumption. It makes no sense. Even those in control are bailing! Let us remind you what gold did versus shares in the 5 worst years on the ASX in the last 50 years:



Finally, speaking of those in control, few have such 'pedigree' as the Rothschild's. So let us leave you with this

Rothschild Investment Trust Chairman, Lord Jacob Rothschild, had this to say this week:

"The six months under review have seen central bankers continuing what is surely the greatest experiment in monetary policy in the history of the world. We are therefore in uncharted waters and it is impossible to predict the unintended consequences of very low interest rates, with some 30% of global government debt at negative yields, combined with quantitative easing on a massive scale.

To date, at least in stock market terms, the policy has been successful with markets near their highs, while volatility on the whole has remained low. Nearly all classes of investment have been boosted by the rising monetary tide. Meanwhile, growth remains anaemic, with weak demand and deflation in many parts of the developed world.

Many of the risks which I underlined in my 2015 statement remain; indeed the geo-political situation has deteriorated with the UK having voted to leave the European Union, the presidential election in the US in November is likely to be unusually fraught, while the situation in China remains opaque and the slowing down of economic growth will surely lead to problems. Conflict in the Middle East continues and is unlikely to be resolved for many years. We have already felt the consequences of this in France, Germany and the USA in terrorist attacks."

" we have reduced our [equities] exposure from 55% to 44%. Our Sterling exposure was significantly reduced over the period to 34%, and currently stands at approximately 25%. We increased gold and precious metals to 8% by the end of June."

 

Are We Heading Toward Stagflation?

The front page of the Financial Review carries the headline "Auction frenzy puts heat on RBA". Just a couple of weeks after the RBA cut our interest rate to an all-time low, confident it wouldn't further inflate the property bubble, it is not a headline they would want to see.

This comes at a time when we are seeing the Vancouver market seeing big corrections after a similar cheap credit, Chinese investment, and mining boom fuelled property run.

The implications are clear. Our broader economy is weak, our unemployment rate, whilst the headline is looking ok, is becoming heavy in part time employment, wage growth at historic lows, and our dollar stubbornly higher than our economy needs it to be to compete in a world in a currency war. The pressure is definitely on to 'stimulate' through dropping rates.

On the flip side those low rates are causing asset inflation in shares and, in particular, property to bubble like levels against those poor fundamentals. The economic fact remains that you can't have property prices consistently outperform wage growth as that, by definition, means it is debt funded growth and at some stage that debt becomes too great a burden particularly when rates start to rise. That scenario is a pretty good summary of the broader global economic set up as well.

This is starting to look like a 'stagflation' set up where you get high inflation against a slow growth economy. It's exactly what happened in the 1970's. In that decade we saw gold go from $36 to $678 or 1883% or 188% per year.

Our broader deflationary environment means this is not a simple question or clear path, we are, after all, in unchartered territory, but it is certainly something to keep an eye on.

 

Negative Real Rates & Inflation

Yesterday we floated the concept of us heading toward stagflation, where inflation rises against a week economic back drop lose lose. Yesterday and overnight there was fresh talk of the US Fed readjusting their target inflation rate from their current 2% to 4%. Such a move would (in their mind) justify maintaining monetary stimulus policies now that they have hit their original target whilst clearly the economy is still very anaemic. The same can be said for their hitting their unemployment target whilst the details behind the headline show that the low rate is helped hugely by people simply giving up (and not being counted 'non participants') combined with full time jobs being replaced by lower paying part time jobs. They clearly need new 'targets' to keep the ruse going.

In part the concept is - let inflation go 'too' high then you can justify raising rates and so then have the ability to lower them again should it all fall apart again. Ingenious stuff. IF you can reign in that inflation snow ball rolling down the hill.

Like Australia, Norway is a country that rode the commodity boom fuelled by China's money printing response to the GFC. Like Australia that saw Norway enjoy a remarkable property boom. The following charts (courtesy of ZeroHedge) paint a path that Australia could well follow. First the property boom:



But when property prices run away from fundamentals you get the situation where the debt needed to buy that property far exceeds wage growth (using all that lovely cheap debt available because the rest of the world is not doing so great). Now ask yourself if the trajectory of this chart looks sustainable?




Like Australia, Norway imports (for consumption) more than it exports (for income). When your dollar weakens against the US, things become more expensive (on top of that growing loan interest bill):



And finally because your central bank lowers interest rates to compete in the global currency war you start to see your real interest rates, that is nominal interest rates less inflation, head lower into negative territory. Our nominal rate just got lowered to 1.5%, Norway is down to 0.5%, a number we are likely headed towards. In Australia, whilst we are already just in negative real rates territory, we haven't yet seen that surge in inflation, however the Norway / Australia story indicates we may be on the way



PS gold and silver LOVE negative real interest rates.

 

$25,000 Gold

There is one technical analyst we have been following for some time, Avi Gilbert, who is an Elliot Wave analyst. To be honest we are a little sceptical of technical analysis when we are in such a manipulated market with such unprecedented economic influences as the world faces now. However within that same setting (post GFC) Mr Gilbert quite accurately called the top in 2011 when everyone was calling $2000+ gold and then the bottom in December 2015 when everyone was calling sub $1000 gold.

In June 2015 he had this to say:

"I am seeing this correction finally completing (but at much lower levels) and starting a major bull market phase that can last the next 50 years.

So, while many that have read my analysis over the last three years have viewed me as being the staunchest of bears in the metals world, I will be switching sides and moving strongly into the bull camp, especially after we see the next and final decline which will likely take place over the next half a year.

In fact, if you look at the Gold Bugs Index HUI, chart linked at the bottom of this column, you will see that our projections are calling for an almost tenfold increase in this index over the next decade or so, which will likely increase to a fifty-fold increase in the index over the next 20 or so years, and well beyond that in 50 years. Ultimately, we see the HUI over 15,000.

Yes, I know that this is quite a bold prediction. However, please remember that, for me, it is all a matter of mathematics and nothing more."

Finally on the current price (from yesterday):

"And, as it relates to gold, this same mathematically based price projection (which is based upon the same methodology that identified the top in 2011 and the recent bottom) suggests that gold can conservatively reach the $25,000 mark."

"This past week, we have seen the metals continue their consolidation. There is nothing I have seen in the price structure over the prior month that is suggestive of a bearish pattern in the metals complex, so I will maintain my larger degree bullish perspective"

$25,000 seems fanciful but such macro calls often do. The founder of the Elliot Wave analysis, Ralph Nelson Elliott made such a 'fanciful' call in 1941 amid WW2 raging around him and sentiment at historic lows. He said:

"[1941] should mark the final correction of the 13 year pattern of defeatism. This termination will also mark the beginning of a new Supercylce wave, comparable in many respects with the long [advance] from 1857 to 1929. Supercycle is not expected to culminate until about 2012."

He called the 70 year secular bull market that did indeed rage from that time on. So here we are in 2016 just 4 years after that 'about 2012' call (a reasonable margin of error in the context of 70 years), just 7 years after a major 'correction' (pre-cursor?) in 2008/9 and potentially on the precipice.

 

Avi has been looking for a bull market for a long time but has been hedging his bets. He seems to be always looking for one more leg down. Can't say he has been very accurate calling the bottom. With such a long time frame however I think he might be right and people will be surprised how far gold will rally in the long run.

 

Lowest Rates in 5000 Years, and More

We report occasionally when the 'big money' make public calls on gold or shares. Every quarter the US requires hedge funds to release their 13F which outlines their market positions. That has just come and gone and we wrote an extensive piece on Friday on this (it's a must read if you missed it). In that article we reported Carl Icahn, one of the world's 50 richest, is now an incredible 149% net short the US sharemarket. Jeff Gundlach ($100b Doubleline Capital) is 100% net short too. No one else is close to that but we saw George Soros double his short 'Put' exposure to the S&P500 to $839m in his $4.7b fund and then Paul Tudor Jones (head of the (also) $4.7b Tudor Investment Corp) nearly quadrupled his S&P500 puts to $1.7b. For those new to markets (from Wikipedia) "- a put or put option is a stock market device which gives the owner of the put the right, but not the obligation, to sell an asset (the underlying), at a specified price (the strike), by a predetermined date (the expiry or maturity) to a given party (the seller of the put)." In other words it is a bet on the market dropping. Now keep in mind these disclosures were as of 30 June and the market really kicked up after that date to even greater highs against the backdrop of more declining earnings. So whilst they look superficially to have made the wrong call these guys are seeing the bigger picture and you could well expect a further increase in their put options since. The smart ones don't get caught up in the hype, they look at sentiment as contrarians and the bigger picture.

A common theme from these guys is that this 'unprecedented' world of zero and negative interest rates, negative yielding bonds and the associated inflation of asset bubbles is going to end badly. It is interesting to look at just how unprecedented this really is. Back in June BofA Merrill Lynch had a look back, way back and discovered we haven't seen global interest rates this low in 5000 years!





It doesn't end there either. Try the following on for size:

"lowest UK base rate since 1705; a negative Japanese bond yield for the 1st time since 1870; all-time highs in corporate bond returns; slowest Chinese nominal growth in over 20 years; US stocks at 60-year highs vs Europe; bank stocks at 75-year relative lows; largest losses from commodities since 1933." We are also in the 2nd longest bull market run in US shares in all of history.

And that dear reader was back in June. Since then those US shares have gone higher to all time records, there are over $13.4 trillion in negative yielding bonds not just Japan but across Europe as well (in June it was 'only' $9.9t), and at that time there had 'only' been 654 rate cuts since the GFC (we've now passed 668).

Over that 5000 years Fiat currencies have come and gone, Reserve Currency status changed hands many times, and Kingdoms built and destroyed. There have been two monetary constants in all that time, two assets that have preserved value gold and silver.

But it's probably different this time, huh.

 

Fire in The (Jackson) Hole

In this central bank stimulus fuelled global financial market all eyes are on US Fed Chair Janet Yellen's annual address from Jackson Hole tonight.

They will pick apart every word looking for cues. Will it be hawkish, signalling tightening monetary policy through rate rises soon, or will it be dovish, seeing rates on hold and possibly a change in data targets to justify it. Citi bank's latest poll has 85% of respondents betting it will be a 'dovish hike' scenario, that is, a deferred rate rise in December. As we discussed in today's Weekly Wrap, there have been more hawkish speeches through the week by other Fed members and this has helped see downward pressure on gold and silver all week. Bond implied bets are up to around 30% for a September hike and 65% for December.

The dovish scenario being bandied about is maybe the Fed announcing new (more distant) targets for inflation and GDP growth to justify keeping rates on hold. That Citi survey has respondents giving that only 10% chance.

We still believe there are $25 trillion reasons why they won't raise rates any time soon. That figure is the sum of all financial assets (bond, shares etc) that central banks now own through all their money printing. Raising rates whilst the world as a whole, and even the US, is stuck in anaemic growth and record debt threatens the value of those assets. Remember assets on the central banks' balance sheets are corresponding debts on which higher interest rates see higher interest payments and the effect of which sees corresponding lower values.

They remain in between that rock and the hard place. Conceivably, though with different timeframes gold wins on either scenario. Hike rates now before the world is ready and is hooked on cheap money and you threaten a crash. Leave as is or even slacken monetary policy and in the short term the financial and property bubbles get bigger, but you see an increased loss of faith (as has been the theme of 2016 and gold and silvers big price gains) and also set yourself up for the inevitable and now bigger pop of those bubbles.

 

Fed Speak Roller Coaster

You may have woken Saturday morning and seen a gold and silver price not hugely changed despite the much anticipated Jackson Hole speech from US Fed Chair Janet Yellen. If you looked at the chart for the night however you'd have seen the huge rollercoaster the prices rode. That ride is interesting to break down on the flow of information.



When the speech transcript was first released it looked a bit hawkish (i.e. tighter monetary policy) as she seemed to talk up the possibility of rate hikes soon:

"in light of the continued solid performance of the labor market and our outlook for economic activity and inflation, I believe the case for an increase in the federal funds rate has strengthened in recent months."

On that initial reading you can see above the price started falling. But then it seems they got to the real juicy bit of the speech, buried much deeper in the transcript and the price bolted vertically up. This is what she said:

"future policymakers might choose to consider some additional tools that have been employed by other central banks, though adding them to our toolkit would require a very careful weighing of costs and benefits and, in some cases, could require legislation. For example, future policymakers may wish to explore the possibility of purchasing a broader range of assets. Beyond that, some observers have suggested raising the FOMC's 2 percent inflation objective or implementing policy through alternative monetary policy frameworks, such as price-level or nominal GDP targeting."

This was a very dovish statement as it not only anticipates reintroducing QE (money printing) but extending it to buying corporate bonds and shares (as done in Japan, EU, etc). It also contemplates raising inflation targets and price level targeting which sees injecting money until you get the GDP you want because, you know, that has worked so marvellously in Japan.

But then to quell these dovish market expectations, out comes fellow Fed director Stan Fischer in a post speech interview where he said "Yellen's comments are consistent with a possible September hike." and indeed said 2 were possible with the second in December. and down went the price again almost back to where it started. Such is this market based on Fed speak not fundamentals.

There is plenty of speculation now that she may well raise rates soon, trigger what seems like an inevitable crash, and then unleash this now vocalised new stimulus. We are not so convinced about September as it is just before the US election and a crash could well hand the presidency to Trump, something they will be desperate to avoid. Wall St bond king Bill Gross summarised this beautifully:

"She is opening the door to creating even greater asset bubbles as have the BOJ and ECB and SNB by purchasing corporate bonds and stocks.This is not capitalism. This is providing a walker or a wheelchair for an ailing economy. It may never walk normally again if monetary policy continues in this direction."

All eyes are now on Friday night's NFP employment figures with a strong print being seen as significantly raising the odds of a September, or at least December hike. Strap yourselves in for the ride.

 

Gold - Where To From Here?

Early this year gold and silver commenced their next bull market cycle. Technically a bull market is called when the price rises over 20%. Both gold and (especially) silver have cooled off lately but in USD terms they are still up 25% and 37% so far this year. Our strengthening AUD has turned that into 20% and 32% for us. Such cooling off spells are completely normal in bull markets, it's the overall trajectory that counts. It's why we call them bull markets not train markets, it's a bumpy ride. But hang on, buy on the dips, and the rewards are there.

So let's take look at exactly where we are when comparing the last 3 bull markets courtesy of the following graph from Casey Research:



So that's the big picture Let's zoom in a little. We mentioned the difference between USD and AUD returns earlier and it could well be important going forward. As this is written we have an AUD of 75.7c and are 3 sleeps away from the US NFP employment figures (easily the most anticipated since last November) that will dictate the next shift in the market. So what could the next buck of the bull look like?

If the NFP is strong it will be a hawkish sign, get the crowd expecting a rate hike as early as September, and rush to USD which would ordinarily put pressure on gold. However there are two key things to consider here. Firstly the stronger USD will likely see a weaker AUD in kind, and likely wash out most AUD gold losses in the process. Secondly such hawkishness would likely see a considerable correction in US (and then global) shares (because they are supported by little other than monetary stimulus and a whole lot of debt). PE's are so elevated right now it could even trigger a crashit is September after all. That in turn could see a flight to gold, in which case gold may rise with the USD, a win win for Aussies. If that crash is protracted, the Fed already outlined there would be more monetary stimulus beyond low interest rates. That is very bullish for gold. Just remember this bull market for gold and silver started the month after the last rate hike in December.

If the NFP is weak it will unleash dovishness expectations of sustained low interest rates and promises of more stimulus fresh in people's minds. That would likely see the USD resume the slide it has seen most of this year, and both gold and shares rally (the former off the beginning of a bull market, the latter already over valued and nearing the end). However, that lower USD could likely see the AUD climb further, and wash off some of the AUD gains as has been the case this year as pointed out at the beginning of this article. The important bigger picture thing to remember here is that our central bank, the RBA, will not sit idly and let that happen. You would likely see further drops in rates here to force the AUD down and see you eventually enjoy more of those gold and silver gains.

Finally let's all just remember that gold doesn't care so much about nominal interest rates set by a central bank. Gold is all about real interest rates. i.e. nominal rates less inflation. Even a rate hike of 0.25% to 0.5%, less say 2% inflation = -1.5% real rates. And that, in part, is why this gold bull market is still running, a bull market that started after the first rate rise in 9 years.

 

Cool graph, I hope if it reaches $7000 If it approaches anything like that I would have no gold left. But will buy back when it get to a thousand something again