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History repeating- quote of the week

At this point in history we find ourselves, where the leading economies of the world are rampantly printing money and holding interest rates to near zero at the same time that posturing's of war escalate, the famous and insightful words of Earnest Hemingway have rarely been more relevant

"The first panacea for a mismanaged nation is inflation of the currency; the second is war. Both bring a temporary prosperity; both bring a permanent ruin. But both are the refuge of political and economic opportunists."

One asset thrives on this and that is precious metals bullion gold and silver.

 

Another Hemingway quote:

 

September the good and the bad
Many people know of September's history of stock market crashes but fewer know it is historically the best month for gold. The first graph below (courtesy of Bloomberg) shows this for the whole year. This year that potentially takes on more potency when you look at the second graph showing a basket of sharemarket indices from around the world at record levels, compare that to a gold price that is in the doldrums, and then look at the brewing geopolitical issues coming to a head. One market looks over bought and one under bought. History is not a guarantee of future moves, and that as we always say is why you have a balanced portfolio, but some gold and silver in your portfolio is looking more and more compelling

Click through to see the graphs today >
http://goo.gl/VESSh3

 

Everything is Awesome!

Last night precious metals saw their biggest fall in some time on the back of indices showing US manufacturing expanded at its fastest pace in 3 years in August and the USD correspondingly jumping. The market sees this as proof of the US economic recovery and expectations of rates rising sooner rather than later and less need for the safe haven of gold and silver. This, all on one month's data

The famous Wall Street magazine, Barron's this week did a feature article on what we keep saying, and that is "The job market has made a comeback over the past year, but the American labor force hasn't and the prospects don't look good". They cite the percentage of adult American workers who are actually in the workforce is at its lowest level in 36 years with no rebound in sight. The Bureau of Labor Statistics themselves said it expects a further decline in labour force participation to just 61.6% by 2022. Barron's point out it is likely far worse with that study making no mention of the surge in disability filings that has already claimed millions of dropouts from the labour force and will likely claim more, and makes no mention of the Affordable Care Act's likely negative effects on incentives to work with already nearly one of every eight prime age men (aged 25 to 54) not in the work force. Remember too that roughly 1 in 6 families are on food stamps as well.

This has a number of implications. With such low participation rates the 6.3% unemployment rate is quite misleading and puts pressure on the Fed to raise rates because "Everything is Awesome" (thanks Lego movie & Nick Hubble) when it clearly is not, and they know it. It's not just employment but a continually struggling housing sector and poor consumer spending as well. The US also know they can't afford the interest bill on higher rates on all the debt they've accumulated (without printing even more money to do so. Ponzi scheme anyone?) especially if they lose the reserve currency status.

Maybe the scarier thing is it just compounds their deficit issue as there will be less tax payers supporting more people. We often remind you of the US's fiscal position and this just reinforces their issues. Our point? Gold and silver are being driven down by sentiment that dearly wants to believe "Everything is Awesome" but it just plain isn't as there are deep rooted structural issues beyond a few month's good news in an environment of near zero interest rates and (albeit tapered) printed money. Can it get better? Absolutely. But as Abigail Doolittle, founder of Peak Theories Research, told CNBC last week "As scary as it is, I think that we could see possibly a 50 percent or 60 percent correctionan equal and opposite reaction to all these unusual policy moves." A balanced portfolio keeps the gold and silver hedge at a time when everything is clearly not awesome.

 

Draghi Day

Tonight (today Euro time) all eyes will be on the European Central Bank and its chief, Mario Draghi, to see if this is the month they finally give in and launch their own QE style money printing program to spur their sick patient back into life. His reluctance, being the last major central bank to do it, may be his observation of it's real failure in Japan, the US and China. Printing money doesn't come free, especially when you are not the world's reserve currency. It adds more debt to a situation borne of debt burdens. If he does it we will know just how desperate they have become after failed attempts of targeted zero interest rate loans, neaqr zero interest rates, negative deposit rates and jawboning down their currency. This week saw their official inflation drop to just 0.3% as it continues its slide to deflation, territory they are desperate to avoid.

Andy Hoffman summarises it well as follows:

"As forThursday'smeeting, it is unclear whether the ECB will actually pull the trigger on the $1 trillion QE program it has been "preparing" the past three months. However, it is highly likely at leastsomeincremental easing will emerge, with the aforementioned QE program nearly guaranteed by year-end. To that end, Draghi can spout all he wants of "deflationary fallacies" - but inreality, Europeans are spending more to survive than ever, despite record high unemployment, record low economic output, and exploding entitlements provided by insolvent governments with unprecedented, rapidly escalating debts. Not to mention, ones that appear hell-bent on declaring war on Russia."

 

Sage advice

This week CNBC interviewed billionaire Equity Group Investments Chairman Sam Zell. When people like this talk you listen. Here's a bit of what he had to say:
"The stock market is at an all-time high, but economic activity is not at an all-time high, every company that's missed has missed on the revenue side, which is a reflection that there's a demand issue; andwhen you've got a demand issue it's hard to imagine the stock market at an all-time high."

"I don't remember any time in my career where there have been as many wildcards floating out there that have the potential to be very significant and alter people's thinking."
In today's radio we report on the Fed overnight announcing that only the top 10% wealthiest have seen an increase in their median income since 2010. Topically (and before this was released) Zell said:

"Part of the impact of these very, very low interest rates is that we're creating this disparity. The wealthy are benefiting from government policy and the nonwealthy aren't. So we have a president who says we've got to fight this disparity and we have a Fed who's encouraging it everyday."

Zell is just one of a number of billionaire investors calling an imminent crash. Gold and silver in your portfolio help protect you when, not if, this happens.

Also listen to Today's Ainslie Radio, a brief visit to the week that's been in Bullion - http://goo.gl/3ednfa

 

Applying logic and balance

Some might see us as "Chicken Little" when it comes to continual talk of a sharemarket crash when it just keeps going up and "Everything is Awesome". We don't for one minute know when it will happen but would challenge any independent thinker to deny it will happen and on any measure shares and property are looking a little 'toppy' right now. Case in point, just late last week the European Central Bank (ECB) announced cuts to interest rates to just 0.05% and deposit rates to -0.2% (yep, that's a minus sign) and a program of buying asset backed securities and covered bonds to inject liquidity into their sick and struggling economy (only German resistance prevented a full on US style QE program announcement although it looks inevitable).

What happens? Euro shares rally! On Friday night much weaker than expected official employment numbers came out of the US. What happens? US shares rally! Both markets rallied on poor economic news because that mean more cheap/free money from those central banks. By the way, on Friday the Australian Financial Review ran a feature story on our economy entering "the Danger Zone" predicting a painful downturn in 2015 as we face the reality of iron ore hitting just $85.70 (down from $190 and ore representing 20% of all out export income) They reported "falling prices for coal and iron ore, a slump in business investment, an overpriced housing market and high dollar had placed the Reserve Bank of Australia "between a rock and a hard place"'.

Whilst we have sharemarkets over inflated by central bank instigated purchases not economic health and reality, logic must dictate that will end badly. But no we don't know when, and that is why we preach balance. The key question for readers? Is your wealth balanced to weather the coming financial storm but profit now from the stimulus?

Missed last week's Ainslie Radio? Click here > http://goo.gl/8GJIjZ

 

One month to go
In late October the US Fed ends its biggest money printing exercise in history, Quantitative Easing. It commenced straight after the GFC and since then has seen the Fed's balance sheet go from $875b to 4.38 trillion i.e. they printed out of thin air $3.5 trillion! In its third guise QE3 was the only open ended program and the largest, and it ends on 29 October. So what could happen? Well on the completion of QE1 and QE2 the US sharemarket tanked with the S&P500 off 16% on QE1 and 19% after QE2. Why? Because the printed money was used to prop up the sharemarket whenever it naturally faltered. Take that money away and there is no one left. The graph below depicts the relationship of the S&P500 (blue line) and the QE program (red line). Many argue it's different this time but the Fed doesn't even have rates to play with if it's not, as they are near zero already. And it's not like things are necessarily 'better' now either as price earnings are as bad now as the last 2 corrections at nose bleed 26:1 levels. The second graph (ZeroHedge) too puts the current market into perspective. So whether to move some of your money out of shares into gold and silver is whether you really believe it is different this time (and yes these are US sharemarket graphs but we all know the US sneeze / Aussie cold saying).




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I think the main difference this time when QE ends is that that there is a huge surplus from the $3T+ that it will take longer for the effects to be felt.

 

USD v Gold

This past week has seen a strengthening US dollar drag gold down but some analysts are suggesting this is just setting up a great buy opportunity for gold (and silver) as a large part of the reason for the USD strength is both not 'real' and is also bullish for gold itself. The USD has reached historical highs (see graph below) and is well into overbought territory spurred on by the ECB announcing its even lower "lower bound" near zero rates and commencement of asset purchases (money printing), the Scottish YES vote looking more likely, and then Japan revising down even further their Q2 results with GDP down (worst since Q1 2009), business spending worst since Q2 2009 and consumer spending the worst on record; all of which means the world's most aggressive monetary stimulus program will continue if not increase.

The ECB, Scotland and Japanese actions sent the Euro, Pound and Yen down and the USD up. The continual (misguided?) expectation of US interest rates rising too is a large factor. But the fact the USD is rising largely because others are falling and the fact that the very reason for the others falling (excepting the Pound) is the creation of too much paper money should give owners of gold and silver comfort as they hold real money which ultimately prevails. Oh, and of course sharemarkets rallied on the ECB and BoJ news as the free money show continues. The question is how long before this house of Fiat cards comes down?



Check the Ainslie site for up to the minute bullion pricing - https://www.ainsliebullion.com.au/
- and our special and rare items - https://www.ainsliebullion.com.au/products/special-bullion/tabid/85/type/4/default.aspx

 

Making History Quote of the Week
Highly regarded author and analyst Vern Gowdie had this to say yesterday:
"The world we now inhabit is going to occupy the pages of economic textbooks in years to come. We are making history for all the wrong reasons:
Unprecedented money printing efforts in the US, Japan and Europe
The lowest (and most sustained period of low) interest rates in history
Never before seen negative interest rates in Europe
Historically high levels of wealth concentration amongst the top 3%
Share indices reaching record highs
Record levels of youth unemployment
Historically high levels of public debt in both dollar terms and as a percentage of GDP
Valuation metrics (Tobin Q ratio, Shiller P/E 10) that exceed Great Depression levels
The greatest level of real income shrinkage since the Second World War
The lowest inflation readings in Europe since the Great Depression
Every meaningful economic and financial indicator is registering at the extremes. For obvious reasons these extreme periods are rare in history. They also all end very badly."

 

Large concentration of Stackeratti centred in Australia.

 

Gold supply to fall
We've written recently about Gold Supply and Peak Gold and now the CEO of one of the world's largest gold miners, GoldCorp says we will reach peak gold this year or next year and will never see production at these levels again. In the same week the world's 5th largest producer, Peru, said it is likely to see gold production fall 20% this year and then keep falling due in part to Government crackdowns on 'informal' mining. It is unclear at this stage what that will mean to silver production in Peru, one of the top 2 producers in the world.

 

Indian Tiger Stirs

When the Indian government brought in the 8% and then 10% import duties and the 80/20 import/export rule official imports of gold to the world's traditionally largest consumer plummeted as can be seen in the graph below. This graph does not capture the rampant smuggling which of course can't be quantified. However June was the strongest month of imports in a year, saw a 48% increase on May, a 75% increase on June 13 and reaffirmed an upward trend that started late last year.

Importantly too you can see below that premiums paid (faint green line) have reduced as imports increase indicating a constant and strong demand. The 80/20 rule means 20% of any imported gold must be exported which physically restricts imports beyond pricing. This trend is encouraging when considered alongside China's continuing strong demand and the tightening supply.


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Hey AinslieBullion can you let the folks in the office know they need to be a little more careful with Perth Mint coins in capsules? Last couple of times I've purchased I've gotten coins in capsules that are a little scratched. I'm not returning them because its only minor but it is a little annoying. Thanks!

 

Contrarian Investing

The investment approach we all know but few practice is as relevant today as it has ever been. We posted an excellent article by Adam Hamilton yesterday which highlights exactly this. The temptation now is to buy into US shares as Australia looks to be entering a period of hardship (whilst with an All Ords still nowhere near pre GFC highs) and the US, if you believe the hype, is taking off with new records being hit in various market indices and everything is awesome. Yesterday BIS (Bank for International Settlements) released a report that shows Australian house prices are the second highest in world. At a time when gold and silver are close to new lows one could feel despondent and like you're 'missing out' by not having all your wealth in shares and property. Here's some sage words you should remind yourself of.

Warren Buffett
"I will tell you how to become rich. Close the doors. Be fearful when others are greedy. Be greedy when others are fearful."

John Templeton
"To buy when others are despondently selling and to sell when others are euphorically buying takes the greatest courage, but provides the greatest profit."

Baron Rothschild
"The time to buy is when there's blood in the streets."

Gold and silver are at low prices due to poor sentiment, they are negatively correlated to the very assets that are peaking. As stated above, gold and silver as a contrarian, portfolio balancing purchase has rarely made more sense than now.

 

Sentimental
Further to yesterday's contrarian investing article, we've come across another graph that sums it up beautifully. Have a look where sentiment of gold and silver was precisely at the beginning of the current secular bull market that started in 2001 when gold was around $250 and went to $1900 in 2011. Conversely have a look where sharemarket sentiment sits right now as they reach new highs. If you haven't read yesterday's article please do. We are also sitting now at the 6 year anniversary of the Lehmans collapse that many pinpoint as the 'date' of the GFC. ZeroHedge posted a few telling graphs yesterday to commemorate this milestone and oh how telling they are. Interestingly, even after the corrections in silver and gold prices over the last 18 months, since the close before that fateful day silver is up 71%, gold up 61% and the S&P500 up 58%. Here in Australia our All Ords is still down about 20% on the pre GFC high as we haven't had a central bank printing money hand over first propping it back up and unfortunately don't have a great look forward with a post resources boom struggling economy.


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US stalls and passes QE baton
Gold declined again last night as the US Fed gave a little more indication of raising rates next year. That said Chair Yellen went to lengths to continue the "considerable time" weasel words as their growth remains only "moderate" and inflation remains low, and pointed out time wasn't "calendar" time rather is "highly conditional" on the economy recovering to the extent it needs to before they will consider raising rates. Still, many heard what they wanted to hear and the USD rallied, along with bond yields and down came the gold price. Many remain sceptical about their ability to raise rates without re-crashing the economy and the realism of paying more interest on the US's $17.7t of debt. On this, the graph below shows fiscal 2014 (of which they are nearly finished) will see more than $1t added to that debt. They also announced a reduction of QE by another $10b/month and remain on target to end it next month. But whilst the US finishes its (official) money printing program Europe is likely to announce the details of its program commencing tomorrow, China yesterday announced it was injecting another Y500b ($81b) now, and Japan and the UK continue unabated. So the easy 'money' party continues, and so does the debt accumulation.


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It's the party to end all parties.

[youtube]http://www.youtube.com/watch?v=DWmoq5KR6UA[/youtube]

 

BIS warns of complacency

The Bank for International Settlements (BIS), the central banks of the world's central bank, this week issued yet another warning of the consequences of all the "unusually accommodative" easy money stimulus happening. This stimulus of near zero interest rates and pumping of liquidity (money printing) was first introduced to stave off recession during the GFC but has remained as it fights depressed growth around the world. Claudio Borio, who heads the BIS's monetary and economic unit says these policies have created an "illusion of permanent liquidity" and..

"The longer the music plays and the louder it gets, the more deafening is the silence that follows,"
"Markets will not be liquid when that liquidity is needed most," he warned, urging "sound prudential policies (and) extra prudence on the part of market participants themselves".
YOU are a market participant and here is a world authority warning you to apply prudence right now. Prudence is balancing your risks against the sort of systemic collapse he warns of. Gold and silver are generally not correlated to the very shares and urban property that will bear the brunt of this collapse and they are at historically low prices because everyone is complacent.

But as Mr Borio says:
"markets have shown exceptionally subdued volatility" at levels similar to before the GFC, "a sign of high risk-taking" and "a common mistake is to take unusually low volatility and risk spreads as a sign of low risk when, in fact, they are a sign of high risk-taking".

Also listen to today's Ainslie Radio - for a quick summary of the week in bullion. https://www.ainsliebullion.com.au/g...ay-19th-september/tabid/88/a/731/default.aspx