Ainslie Bullion - Daily news, Weekly Radio and Discussions
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raven said:Clawhammer said:
put your seat belt on and hold on !
Seatbelts!?, I prefer to trust my life to airbags...no, wait! I mean Central Bankers... no, wait... which is the one that has killed more people than what they save?
AinslieBullion
Member
Economic Chaos v Gold & Silver
Yesterday and in Friday's Weekly Wrap we discussed the development of China dumping US Treasuries (bonds). An article by Greg Canavan (http://www.dailyreckoning.com.au/chinas-impossible-trinity/2015/08/31/) which is probably the best explanation we've read yet. If you haven't gathered, we think this is very important and not simplistically because gold is the safe haven alternative to bonds.
If you're reading the AFR today you will see a group of economists in the US are now back up again to 40% thinking the Fed will raise rates this month after dropping to 25% during the 'old news' of last week's market crashes. Indeed they state the Fed wants to, and is looking for excuses to do it, not otherwise. This is the conundrum we've discussed at length they know they need to, to stop this bubble getting bigger without fundamentals, but they also know if they do last weeks 'crash' could well be just a little correction before the real crash. Again - "bubbles don't correct, they explode".
There is support in the gold price on any scenario:
If the Fed raises rates, not only could this trigger a big crash that would see a flight to gold/silver (and particularly with bonds looking decidedly un-safe), but there is a robust view that in doing so they are effectively raising the discount rate by which all investments are measured in the US. That simply means less investments stack up and you get a declining USD. There is a strong correlation between falling USD and rising Gold/Silver price.
As above but the higher rates, in a world of zero, sees the USD strengthen, initially putting pressure on gold but then seeing US business decline through global non-competitiveness and easing (QE4) start all over again.
Should, as Greg and many others suggest, there is instead a QE4 response given all the US Treasuries that need buying in the absence of real buyers (but deficits to keep funding), you would expect a complete loss of faith by smart money and again a flight to gold.
There is an alternative thesis by Bill Holter who draws the distinction between QE which is the Fed printing money to buy off (and hence credit) its member banks and what would be needed in this situation. He calls it QT and its enormously bullish for gold:
"The Federal Reserve had to buy the $100 billion worth of bonds. This is "reverse" QE or as they now say "QT" (quantitative tightening). As the great credit unwind continues, more and more Treasuries from China and other sources will hit the market and force the Fed to buy them. This will take more and more "space" on the Fed's balance sheet but they will have NO CHOICE unless they want interest rates to skyrocket. In the end, the inflation we exported for so many years will come washing back on our shores like a tidal wave!".
Our commitment for these daily news pieces is to (normally) keep them relatively short and succinct. There are many more theories and indeed it is a complicated global financial web we find ourselves in. The fact is no one knows and that's why a balance of investments is the prudent way forward.
Yesterday and in Friday's Weekly Wrap we discussed the development of China dumping US Treasuries (bonds). An article by Greg Canavan (http://www.dailyreckoning.com.au/chinas-impossible-trinity/2015/08/31/) which is probably the best explanation we've read yet. If you haven't gathered, we think this is very important and not simplistically because gold is the safe haven alternative to bonds.
If you're reading the AFR today you will see a group of economists in the US are now back up again to 40% thinking the Fed will raise rates this month after dropping to 25% during the 'old news' of last week's market crashes. Indeed they state the Fed wants to, and is looking for excuses to do it, not otherwise. This is the conundrum we've discussed at length they know they need to, to stop this bubble getting bigger without fundamentals, but they also know if they do last weeks 'crash' could well be just a little correction before the real crash. Again - "bubbles don't correct, they explode".
There is support in the gold price on any scenario:
If the Fed raises rates, not only could this trigger a big crash that would see a flight to gold/silver (and particularly with bonds looking decidedly un-safe), but there is a robust view that in doing so they are effectively raising the discount rate by which all investments are measured in the US. That simply means less investments stack up and you get a declining USD. There is a strong correlation between falling USD and rising Gold/Silver price.
As above but the higher rates, in a world of zero, sees the USD strengthen, initially putting pressure on gold but then seeing US business decline through global non-competitiveness and easing (QE4) start all over again.
Should, as Greg and many others suggest, there is instead a QE4 response given all the US Treasuries that need buying in the absence of real buyers (but deficits to keep funding), you would expect a complete loss of faith by smart money and again a flight to gold.
There is an alternative thesis by Bill Holter who draws the distinction between QE which is the Fed printing money to buy off (and hence credit) its member banks and what would be needed in this situation. He calls it QT and its enormously bullish for gold:
"The Federal Reserve had to buy the $100 billion worth of bonds. This is "reverse" QE or as they now say "QT" (quantitative tightening). As the great credit unwind continues, more and more Treasuries from China and other sources will hit the market and force the Fed to buy them. This will take more and more "space" on the Fed's balance sheet but they will have NO CHOICE unless they want interest rates to skyrocket. In the end, the inflation we exported for so many years will come washing back on our shores like a tidal wave!".
Our commitment for these daily news pieces is to (normally) keep them relatively short and succinct. There are many more theories and indeed it is a complicated global financial web we find ourselves in. The fact is no one knows and that's why a balance of investments is the prudent way forward.
AinslieBullion
Member
USD AUD GSR - Gold & Silver
In the first of the scenarios we discussed yesterday, we touched on the correlation between rising Discount Rates in the US courtesy of the Fed and the USD falling. This is contradictory to a lot of commentary that predicts a rising USD this time. Over the last 42 years every time the Fed has increased the discount rate the USD has declined 10-12% and as discussed yesterday there is a strong correlation between a falling USD and rising gold and silver prices. Check out the chart below for silver.
Some might be thinking however that a falling USD will mean a rising AUD as in the recent past there has been a decent correlation to that effect. However the current market forces need to be considered. Last night we saw another crash on Wall Street and the USD coming off. But the very same cause of the crash also saw the AUD come down to just 70c. Why? Because it is the troubled Chinese economy (last night was due to bad manufacturing data) that looks like it might be the 'prick' for this unprecedented global financial assets bubble. Anyone listening to Ross Greenwood on Today this morning or indeed most commentary knows Australia is in for a very rough period ahead as the mining boom is over and we have little else to give us real growth. Canada is a worrying preview of what we have ahead of us. So there is little support for a higher AUD and indeed most are calling 60's. That is good news if you own gold and silver as you get the double whammy of a likely rising USD spot price, turbo boosted by a falling AUD. It potentially becomes a triple whammy for silver holders as the gold silver ratio is so high. The charts below show clearly the more volatile nature of silver seeing higher highs and lower lows.
In the first of the scenarios we discussed yesterday, we touched on the correlation between rising Discount Rates in the US courtesy of the Fed and the USD falling. This is contradictory to a lot of commentary that predicts a rising USD this time. Over the last 42 years every time the Fed has increased the discount rate the USD has declined 10-12% and as discussed yesterday there is a strong correlation between a falling USD and rising gold and silver prices. Check out the chart below for silver.
Some might be thinking however that a falling USD will mean a rising AUD as in the recent past there has been a decent correlation to that effect. However the current market forces need to be considered. Last night we saw another crash on Wall Street and the USD coming off. But the very same cause of the crash also saw the AUD come down to just 70c. Why? Because it is the troubled Chinese economy (last night was due to bad manufacturing data) that looks like it might be the 'prick' for this unprecedented global financial assets bubble. Anyone listening to Ross Greenwood on Today this morning or indeed most commentary knows Australia is in for a very rough period ahead as the mining boom is over and we have little else to give us real growth. Canada is a worrying preview of what we have ahead of us. So there is little support for a higher AUD and indeed most are calling 60's. That is good news if you own gold and silver as you get the double whammy of a likely rising USD spot price, turbo boosted by a falling AUD. It potentially becomes a triple whammy for silver holders as the gold silver ratio is so high. The charts below show clearly the more volatile nature of silver seeing higher highs and lower lows.
AinslieBullion
Member
Correction or Crash?
After shedding nearly 60 points or 3% Tuesday night, the S&P 500 regained 35 last night or 1.8%, ironically spurred along by more poor economic data out of the US, meaning less likelihood of Fed tightening (bad news is good news for pretend markets). Whilst there is no doubting the volatility of markets at present there is plenty of debate around "correction", "bear", or "crash". The S&P500 is now down 5.3% this year (by the way gold is up 11.1% and silver up 8.9% in AUD terms), that's nowhere near the 20% required to be technically a "bear". So where to from here? These 3 graphs tell a compelling tale (oh and why just US share talk? Because whilst the rest of the world is going backwards, the US is supposedly our saviour. You make your own mind up).
First crossing 'the line in the sand'
Second as we keep harping on these are not values based on fundamentals just an easy money bubble (Google CAPE it's the more instructive P/E measure out there). You only need one hand to count how many times it's been higher
Third they don't call this the "death cross" for nothing
After shedding nearly 60 points or 3% Tuesday night, the S&P 500 regained 35 last night or 1.8%, ironically spurred along by more poor economic data out of the US, meaning less likelihood of Fed tightening (bad news is good news for pretend markets). Whilst there is no doubting the volatility of markets at present there is plenty of debate around "correction", "bear", or "crash". The S&P500 is now down 5.3% this year (by the way gold is up 11.1% and silver up 8.9% in AUD terms), that's nowhere near the 20% required to be technically a "bear". So where to from here? These 3 graphs tell a compelling tale (oh and why just US share talk? Because whilst the rest of the world is going backwards, the US is supposedly our saviour. You make your own mind up).
First crossing 'the line in the sand'
Second as we keep harping on these are not values based on fundamentals just an easy money bubble (Google CAPE it's the more instructive P/E measure out there). You only need one hand to count how many times it's been higher
Third they don't call this the "death cross" for nothing
AinslieBullion
Member
Profiting From Australia's Woes
It's been a rough week for the Australian economy. We've see a 'surprisingly' weak GDP print of just 0.2% for the last quarter or 2% for the year, but in nominal terms (with the effects of inflation excluded) GDP growth was just 1.8%, that's the weakest figure since 1962 and it saw our AUD drop momentarily into the 60's. What makes this look even worse is our current account deficit blew out to $19billion for the same quarter. To put that simply we had to borrow $19b to produce just 0.2% of economic growth. Yesterday we saw retail figures fall for the first time in a year as well which is worrying as it is a sign we are 'going to ground' which will only worsen GDP. This shouldn't really come as too big a surprise as our real disposable income fell 1.2% per person for the same quarter (and is down 2.3% for the year!).
This is our new post mining boom norm and its why we are seeing headlines like today's AFR quoting Deutsche Bank predicting a 66c AUD by the end of this year and 50c next year. That's great for our exporters but will raise the cost of living for the rest as imported goods (and a $19b trade deficit highlights how much we do that) go up in cost. It's also great news for gold and silver holders. Most understand (and yes we've written of it many times) this relationship but few get the gravity of it. So here is another example to highlight it. Today we are at 70c, gold spot is at USD1126, and gold in AUD is $1605. If the USD spot does not move an inch and if Deutsche (and they are certainly not alone) are correct, your gold will be worth A$1706 (up 6.3%) by Xmas and A$2252 (up 40.3%) next year!
On a final note, this week we saw both Canada and Brazil slip into outright recession. Like us they are heavily reliant on the commodities at a time when commodities across the board are in the can. At 0.2% we are not far off a negative print. Let's hope we keep it that way
It's been a rough week for the Australian economy. We've see a 'surprisingly' weak GDP print of just 0.2% for the last quarter or 2% for the year, but in nominal terms (with the effects of inflation excluded) GDP growth was just 1.8%, that's the weakest figure since 1962 and it saw our AUD drop momentarily into the 60's. What makes this look even worse is our current account deficit blew out to $19billion for the same quarter. To put that simply we had to borrow $19b to produce just 0.2% of economic growth. Yesterday we saw retail figures fall for the first time in a year as well which is worrying as it is a sign we are 'going to ground' which will only worsen GDP. This shouldn't really come as too big a surprise as our real disposable income fell 1.2% per person for the same quarter (and is down 2.3% for the year!).
This is our new post mining boom norm and its why we are seeing headlines like today's AFR quoting Deutsche Bank predicting a 66c AUD by the end of this year and 50c next year. That's great for our exporters but will raise the cost of living for the rest as imported goods (and a $19b trade deficit highlights how much we do that) go up in cost. It's also great news for gold and silver holders. Most understand (and yes we've written of it many times) this relationship but few get the gravity of it. So here is another example to highlight it. Today we are at 70c, gold spot is at USD1126, and gold in AUD is $1605. If the USD spot does not move an inch and if Deutsche (and they are certainly not alone) are correct, your gold will be worth A$1706 (up 6.3%) by Xmas and A$2252 (up 40.3%) next year!
On a final note, this week we saw both Canada and Brazil slip into outright recession. Like us they are heavily reliant on the commodities at a time when commodities across the board are in the can. At 0.2% we are not far off a negative print. Let's hope we keep it that way
AinslieBullion
Member
US Employment v Rate Rise
As we mentioned in Friday's Weekly Wrap, all eyes were on the US's Non Farm Payroll (NFP) employment figures Friday night, especially after the prelude of Initial Jobless Claims (Thurs night our time) which rose for the 5th time in 6 weeks by 12,000, up to 282,000, its highest in 2 months. We then heard Challenger forecast that 2015 is set to see the most layoffs by US businesses since the GFC, being on track to exceed 650,000. So it should have been little surprise that the NFP printed just 173,000 new jobs, well below expectations of 217,000. Of course all rejoiced the headline unemployment rate of only 5.1% but part of the underlying reason is that another 261,000 Americans simply dropped out of (gave up on) the work force, now totalling an incredible, and record setting 94m (the lowest participation rate since 1977). This takes the increase in the number of eligible workers not participating in the workforce to 14.9m since the GFC started whereas only 4m new jobs have been created. The only shining light is that average hourly earnings rose 0.3% against expectations of 0.2%.
Some argue this was the most important NFP yet as it is the last before the Fed's September meeting (16/17 Sep) where bets are now running at 50% there will be a rate rise.
Employment and inflation (2% target) are held out there as the main drivers for rates movement. Despite all but the average earnings print and last week's poor inflations figures many argue the Fed has finally realised they can't keep waiting, further inflating markets with free money, and now is the time to rip the bandaid off despite the carnage that inevitably follows.
As we mentioned in Friday's Weekly Wrap, all eyes were on the US's Non Farm Payroll (NFP) employment figures Friday night, especially after the prelude of Initial Jobless Claims (Thurs night our time) which rose for the 5th time in 6 weeks by 12,000, up to 282,000, its highest in 2 months. We then heard Challenger forecast that 2015 is set to see the most layoffs by US businesses since the GFC, being on track to exceed 650,000. So it should have been little surprise that the NFP printed just 173,000 new jobs, well below expectations of 217,000. Of course all rejoiced the headline unemployment rate of only 5.1% but part of the underlying reason is that another 261,000 Americans simply dropped out of (gave up on) the work force, now totalling an incredible, and record setting 94m (the lowest participation rate since 1977). This takes the increase in the number of eligible workers not participating in the workforce to 14.9m since the GFC started whereas only 4m new jobs have been created. The only shining light is that average hourly earnings rose 0.3% against expectations of 0.2%.
Some argue this was the most important NFP yet as it is the last before the Fed's September meeting (16/17 Sep) where bets are now running at 50% there will be a rate rise.
Employment and inflation (2% target) are held out there as the main drivers for rates movement. Despite all but the average earnings print and last week's poor inflations figures many argue the Fed has finally realised they can't keep waiting, further inflating markets with free money, and now is the time to rip the bandaid off despite the carnage that inevitably follows.
AinslieBullion
Member
New record on COMEX OI to Registered Gold
As these markets get more and more strung out we start to see more telling signs of what may be in store. Back in early August we brought to your attention (and explained) https://www.ainsliebullion.com.au/g...squeeze-on-comex/tabid/88/a/1005/default.aspx a record number of futures contracts per registered ounce of gold. Well that record has now been surpassed. We now have a situation on COMEX, the world's futures platform for gold, where we have a staggering 1 ounce of registered gold backing127.6 claims on that single registered ounce. The graph below illustrates very clearly this epic set up.
Now some may say 'but that is just registered stock, there is also eligible stock'. That is true, but consider that even then there is only less than 8m oz of eligible as well so we still have over 40m contracts for a total of little over 8m oz of gold in total when adding the measly 325,000 oz registered, immediately available gold. But there is a big difference between registered and eligible gold stocks. Hebba Investments make these insightful points:
"Of course eligible inventories could be converted into registered gold, but investors should remember that there is nothing that requires eligible gold holders to do this to satisfy delivery requests - after all there is a reason they are keeping their gold in eligible status and not available for delivery. In fact, it would make more sense for eligible gold holders not to transfer gold into registered status to satisfy delivery requests as that would mean more of an opportunity to force contract-holders to accumulate physical gold outside of the COMEX to satisfy delivery requests - an obvious way to boost the gold price and the value of their holdings.The biggest takeaway here is that gold bulls should look at COMEX inventories as a major positive despite the gold price as gold inventories available for delivery continue to drop. That is why we think that investors should consider keeping a large exposure to gold with positions in physical gold."
As these markets get more and more strung out we start to see more telling signs of what may be in store. Back in early August we brought to your attention (and explained) https://www.ainsliebullion.com.au/g...squeeze-on-comex/tabid/88/a/1005/default.aspx a record number of futures contracts per registered ounce of gold. Well that record has now been surpassed. We now have a situation on COMEX, the world's futures platform for gold, where we have a staggering 1 ounce of registered gold backing127.6 claims on that single registered ounce. The graph below illustrates very clearly this epic set up.
Now some may say 'but that is just registered stock, there is also eligible stock'. That is true, but consider that even then there is only less than 8m oz of eligible as well so we still have over 40m contracts for a total of little over 8m oz of gold in total when adding the measly 325,000 oz registered, immediately available gold. But there is a big difference between registered and eligible gold stocks. Hebba Investments make these insightful points:
"Of course eligible inventories could be converted into registered gold, but investors should remember that there is nothing that requires eligible gold holders to do this to satisfy delivery requests - after all there is a reason they are keeping their gold in eligible status and not available for delivery. In fact, it would make more sense for eligible gold holders not to transfer gold into registered status to satisfy delivery requests as that would mean more of an opportunity to force contract-holders to accumulate physical gold outside of the COMEX to satisfy delivery requests - an obvious way to boost the gold price and the value of their holdings.The biggest takeaway here is that gold bulls should look at COMEX inventories as a major positive despite the gold price as gold inventories available for delivery continue to drop. That is why we think that investors should consider keeping a large exposure to gold with positions in physical gold."
AinslieBullion
Member
BOJ End Game & US Hike
Whilst bets on a September US rate hike are now down to 30%, that is still nearly a third of the market betting it will happen despite the realities we describe on the US economy and the world in which is belongs. Recently Zero Hedge hypothesised why the Fed may be in a hurry to do so despite their economy still limping. It's worth repeating [we've added explanations for newer readers]:
"When considering that by 2018 the BOJ [Bank of Japan] market will have become the world's most illiquid (as the BOJ will hold 60% or more of all issues), the IMF's final warning is that "such a change in market conditions could trigger the potential for abrupt jumps in yields."
At that moment the BOJ will finally lose control. In other words, the long-overdue Kyle Bass scenario will finally take place in about 2-3 years, tops.
But ignoring the endgame for Japan, and recall that BofA [Bank of America] triangulated just this when it said that "the BOJ is basically declaring that Japan will need to fix its long-term problems by 2018, or risk becoming a failed nation", what's worse for [Prime Minister] Abe is that the countdown until his program loses all credibility has begun.
What happens then? As BNP [French bank BNP Paribas] wrote in an August 28-dated report, "Once foreign investors lose faith in Abenomics, foreign outflows are likely to trigger a Japanese equities meltdown similar to the one observed during 2007-09."
And from there, the contagion will spread to the entire world, whose central banks incidentally, will be faced with precisely the same question: who will be responsible for the next round of monetization and desperately kicking the can one more time.
But before we get to the QE endgame, we first need to get the interim point: the one where first the markets and then the media realizes that the BOJ - the one central banks whose bank monetization is keeping the world's asset levels afloat now that the ECB has admitted it is having "problems" finding sellers - will have no choice but to taper, with all the associated downstream effects on domestic and global asset prices.
It's all downhill from there, and not just for Japan but all other "safe collateral" monetizing central banks, which explains the real reason the Fed is in a rush to hike: so it can at least engage in some more QE when every other central bank fails"
This is a great commentary not just on why we may see a rate rise but more broadly the flawed nature of long term central bank market intervention to the extent we've seen. Further to yesterday's article, no wonder people are keeping their gold closer to hand on COMEX.
Whilst bets on a September US rate hike are now down to 30%, that is still nearly a third of the market betting it will happen despite the realities we describe on the US economy and the world in which is belongs. Recently Zero Hedge hypothesised why the Fed may be in a hurry to do so despite their economy still limping. It's worth repeating [we've added explanations for newer readers]:
"When considering that by 2018 the BOJ [Bank of Japan] market will have become the world's most illiquid (as the BOJ will hold 60% or more of all issues), the IMF's final warning is that "such a change in market conditions could trigger the potential for abrupt jumps in yields."
At that moment the BOJ will finally lose control. In other words, the long-overdue Kyle Bass scenario will finally take place in about 2-3 years, tops.
But ignoring the endgame for Japan, and recall that BofA [Bank of America] triangulated just this when it said that "the BOJ is basically declaring that Japan will need to fix its long-term problems by 2018, or risk becoming a failed nation", what's worse for [Prime Minister] Abe is that the countdown until his program loses all credibility has begun.
What happens then? As BNP [French bank BNP Paribas] wrote in an August 28-dated report, "Once foreign investors lose faith in Abenomics, foreign outflows are likely to trigger a Japanese equities meltdown similar to the one observed during 2007-09."
And from there, the contagion will spread to the entire world, whose central banks incidentally, will be faced with precisely the same question: who will be responsible for the next round of monetization and desperately kicking the can one more time.
But before we get to the QE endgame, we first need to get the interim point: the one where first the markets and then the media realizes that the BOJ - the one central banks whose bank monetization is keeping the world's asset levels afloat now that the ECB has admitted it is having "problems" finding sellers - will have no choice but to taper, with all the associated downstream effects on domestic and global asset prices.
It's all downhill from there, and not just for Japan but all other "safe collateral" monetizing central banks, which explains the real reason the Fed is in a rush to hike: so it can at least engage in some more QE when every other central bank fails"
This is a great commentary not just on why we may see a rate rise but more broadly the flawed nature of long term central bank market intervention to the extent we've seen. Further to yesterday's article, no wonder people are keeping their gold closer to hand on COMEX.
AinslieBullion
Member
Rate Hikes Historically No Threat to Gold
We wrote yesterday about the 30% market segment that is currently betting on a rate rise this month and it's easy to appreciate how anticipation over the Fed's first rate-hike cyclein 9 yearshas contributed to the gold price slide in recent times. While precious metals offer attributes well suited to safety and diversity in a portfolio, they do not generate an income stream.Gold's sterile nature fuels a common belief that demand for it falls as rates rise due to the increased yields on offer and mainstream exergasia (many readers will recall the "pet rock" comment) has helped to support this notion in recent years.
Superficially this bearish hypothesis seems sound but reality tells us a different story. Investors all over the world have utilised gold effectively throughout history as an investment with full knowledge thatit lacks yield and Adam Hamilton's recent study that compares federal funds rate-hike cycles to gold over nearly half a century illustrates this well.
In the attached graph, the red plot shows the free-market FFR (as opposed to the target rate which the FOMC sets this accounts for the noise in the data) and the blue plot is the gold price in US dollars. The study defines a hike cycle as 3 or more consecutive increases and identifies 11 such cycles since 1971. The data shows that gold appreciated by 638% in the decade ending August 2011 which far surpasses the return offered by the dividend-rich S&P 500 (which depreciated by 1.9% over the same interval).Looking at the 1970s we see a 2332% appreciation in gold at a time when the federal funds rate was upward trending and bond yields were high. In all, gold actually rallied an average of 61% through 6 of the 11 US rate-hike cycles. The losses over the remaining 5 cycles averaged only 13.9% showing that gold is historically very resilient. Indeed 2 of gold's 5 negative hike cycle periods followed times of strong gold performance so a price adjustment during these stages is somewhat expected.
The study offers a simple explanation for why gold investment demand is positive in rising-rate climates, stating that Fed rate-hikes have detrimental impacts on stock and bond markets; which is a scenario that we've previously written about. Certainly the notion that something other than yield is the dominant pricing force in these circumstances makes sense and is supported by the fact that commentary never focuses on increased rates having the consequence of devastating non-dividend stocks. Applying that same argument to gold then seems unfounded.
The lessons from history tell us that gold investors should not fear the prospect of entering a tightening cycle should the Fed decide to depart from ZIRP this month and indeed a diversification into gold could be a good investment in such a scenario.
We wrote yesterday about the 30% market segment that is currently betting on a rate rise this month and it's easy to appreciate how anticipation over the Fed's first rate-hike cyclein 9 yearshas contributed to the gold price slide in recent times. While precious metals offer attributes well suited to safety and diversity in a portfolio, they do not generate an income stream.Gold's sterile nature fuels a common belief that demand for it falls as rates rise due to the increased yields on offer and mainstream exergasia (many readers will recall the "pet rock" comment) has helped to support this notion in recent years.
Superficially this bearish hypothesis seems sound but reality tells us a different story. Investors all over the world have utilised gold effectively throughout history as an investment with full knowledge thatit lacks yield and Adam Hamilton's recent study that compares federal funds rate-hike cycles to gold over nearly half a century illustrates this well.
In the attached graph, the red plot shows the free-market FFR (as opposed to the target rate which the FOMC sets this accounts for the noise in the data) and the blue plot is the gold price in US dollars. The study defines a hike cycle as 3 or more consecutive increases and identifies 11 such cycles since 1971. The data shows that gold appreciated by 638% in the decade ending August 2011 which far surpasses the return offered by the dividend-rich S&P 500 (which depreciated by 1.9% over the same interval).Looking at the 1970s we see a 2332% appreciation in gold at a time when the federal funds rate was upward trending and bond yields were high. In all, gold actually rallied an average of 61% through 6 of the 11 US rate-hike cycles. The losses over the remaining 5 cycles averaged only 13.9% showing that gold is historically very resilient. Indeed 2 of gold's 5 negative hike cycle periods followed times of strong gold performance so a price adjustment during these stages is somewhat expected.
The study offers a simple explanation for why gold investment demand is positive in rising-rate climates, stating that Fed rate-hikes have detrimental impacts on stock and bond markets; which is a scenario that we've previously written about. Certainly the notion that something other than yield is the dominant pricing force in these circumstances makes sense and is supported by the fact that commentary never focuses on increased rates having the consequence of devastating non-dividend stocks. Applying that same argument to gold then seems unfounded.
The lessons from history tell us that gold investors should not fear the prospect of entering a tightening cycle should the Fed decide to depart from ZIRP this month and indeed a diversification into gold could be a good investment in such a scenario.
AinslieBullion
Member
Today's Ainslie Radio is available here ~ https://www.ainsliebullion.com.au/g...15-ainslie-radio/tabid/88/a/1041/default.aspx
Retail silver is freezing up
Well known macroeconomist and author David Morgan was interviewed earlier this week about how he sees the silver markets and the economy more generally at the present time. In the interview he disclosed the results of a recent survey that he had conducted of many of the top silver wholesalers and retailers in the US and concluded that the retail side of the market is basically seized up. One of the largest US mints has a current product backlog of about 4 million ounces and two other main (government) mints are on halt trying to catch up.
According to David, scarcity in the US dealer to dealer wholesale market is resulting in silver transactions at almost US$5/oz over the spot price for silver bags (or what is known in the industry as junk silver an informal term referring to fair condition silver coins valued for their bullion content alone). That equates to a cost of a little over US$19/oz, a significant margin over the current spot price. His comments highlight the difference between real and paper pricing which we wrote about in July.
Obviously there is a huge demand that can't be met. [As a side note, this sentiment can currently be found echoed by many other sources including Mexico based Jeff Berwick of The Dollar Vigilante. Jeff wrote last Tuesday of his efforts to purchase physical silver from his usual source at the Azteca bank in Acapulco, only to be told that they didn't have any. Not an outcome you'd expect in the world's largest silver producer.]
In the commercial bar market, there are indications of COMEX category changes or inventory adjustments which means that owners of silver in commercial bar form are moving it from the registered category (where dealers can sell it in support of contract delivery) into the eligible category where they cannot. David states that he's seeing some movement out of the COMEX into what he calls "stronger hands" stating that "at these inflation-adjusted low prices, silver investors are buying up all available supply and demand exceeds supply on the retail side". It makes sense for precious metal owners to hold their stock in the eligible category as it can create an environment that boosts the value of their holdings.
When questioned about broader topics, David suggests that there is a need for portable wealth that's outside the banking system, especially given that global equity markets are currently in what's known as an indecision pattern, meaning high volatility. Today's weekly wrap discusses an example based on this week's ASX performance. When taking about the world's debt issues, David states that "nothing has been solved since 2008".
Regarding interest rates, the prediction is that the Fed will raise by a token quarter percentage point (or less) by the end of the year (readers are encouraged to read yesterday's article on gold's historical performance during rate tightening cycles) but that this will be purely for cosmetic reasons.
Lastly, David cites very strong silver buy signals at the present time, one of which being the spot price in relation to current production costs. Although the cost of mining silver varies from company to company it was previously around the US$22/oz point. With oil prices dropping however, it's now at about US$15/oz. In most cases the spot price would indicate that "you're buying at less than the best producers on the planet can supply".
Retail silver is freezing up
Well known macroeconomist and author David Morgan was interviewed earlier this week about how he sees the silver markets and the economy more generally at the present time. In the interview he disclosed the results of a recent survey that he had conducted of many of the top silver wholesalers and retailers in the US and concluded that the retail side of the market is basically seized up. One of the largest US mints has a current product backlog of about 4 million ounces and two other main (government) mints are on halt trying to catch up.
According to David, scarcity in the US dealer to dealer wholesale market is resulting in silver transactions at almost US$5/oz over the spot price for silver bags (or what is known in the industry as junk silver an informal term referring to fair condition silver coins valued for their bullion content alone). That equates to a cost of a little over US$19/oz, a significant margin over the current spot price. His comments highlight the difference between real and paper pricing which we wrote about in July.
Obviously there is a huge demand that can't be met. [As a side note, this sentiment can currently be found echoed by many other sources including Mexico based Jeff Berwick of The Dollar Vigilante. Jeff wrote last Tuesday of his efforts to purchase physical silver from his usual source at the Azteca bank in Acapulco, only to be told that they didn't have any. Not an outcome you'd expect in the world's largest silver producer.]
In the commercial bar market, there are indications of COMEX category changes or inventory adjustments which means that owners of silver in commercial bar form are moving it from the registered category (where dealers can sell it in support of contract delivery) into the eligible category where they cannot. David states that he's seeing some movement out of the COMEX into what he calls "stronger hands" stating that "at these inflation-adjusted low prices, silver investors are buying up all available supply and demand exceeds supply on the retail side". It makes sense for precious metal owners to hold their stock in the eligible category as it can create an environment that boosts the value of their holdings.
When questioned about broader topics, David suggests that there is a need for portable wealth that's outside the banking system, especially given that global equity markets are currently in what's known as an indecision pattern, meaning high volatility. Today's weekly wrap discusses an example based on this week's ASX performance. When taking about the world's debt issues, David states that "nothing has been solved since 2008".
Regarding interest rates, the prediction is that the Fed will raise by a token quarter percentage point (or less) by the end of the year (readers are encouraged to read yesterday's article on gold's historical performance during rate tightening cycles) but that this will be purely for cosmetic reasons.
Lastly, David cites very strong silver buy signals at the present time, one of which being the spot price in relation to current production costs. Although the cost of mining silver varies from company to company it was previously around the US$22/oz point. With oil prices dropping however, it's now at about US$15/oz. In most cases the spot price would indicate that "you're buying at less than the best producers on the planet can supply".
Well in that case, Is my unallocated silver safe? Will I get it when I need it?
AinslieBullion
Member
SGE to accept gold as collateral
We often talk about the fact that gold has been used as money for thousands of years. Since the financial crisis of 2008, there have been efforts made to increase the quality of collateral for derivatives and gold's lack of counter party risk makes is well suited to this scenario. In fact, the 2nd of this month marked 2 years since the release of the Basel Committee on Banking Supervision and the International Organisation of Securities Commissions report on margin requirements for non-centrally cleared derivatives. Part of the report focused on what was considered acceptable for collateral; and gold was included in the list.
Now, the Shanghai Gold Exchange has announced that it plans to start accepting precious metals as trading collateral beginning on the 29th of this month. Under the arrangement, trading entities opening contract positions will be permitted to utilise certified gold bars as margin collateral for up to 80% of the margin value. Unsurprisingly, physical metal will be required and the definition of the collateral extension will also include silver. Additionally, the exchange will not be applying fees for gold collateral until early next year.
The chief analyst at Shandong Gold Financial Holdings Capital Management, Jiang Shu, was quoted as saying that the initiative attempts to "increase volumes and attract more investors from other markets". This is consistent with Bloomberg commentary focusing on China's efforts to "challenge the dominance of London and New York".
According to the Shanghai Gold Exchange announcement, the initiative has been made to "boost market services", but given that the SGE is the largest physical bullion marketplace in the world, it has the consequence of providing significant credibility to the concept of gold as money.
We often talk about the fact that gold has been used as money for thousands of years. Since the financial crisis of 2008, there have been efforts made to increase the quality of collateral for derivatives and gold's lack of counter party risk makes is well suited to this scenario. In fact, the 2nd of this month marked 2 years since the release of the Basel Committee on Banking Supervision and the International Organisation of Securities Commissions report on margin requirements for non-centrally cleared derivatives. Part of the report focused on what was considered acceptable for collateral; and gold was included in the list.
Now, the Shanghai Gold Exchange has announced that it plans to start accepting precious metals as trading collateral beginning on the 29th of this month. Under the arrangement, trading entities opening contract positions will be permitted to utilise certified gold bars as margin collateral for up to 80% of the margin value. Unsurprisingly, physical metal will be required and the definition of the collateral extension will also include silver. Additionally, the exchange will not be applying fees for gold collateral until early next year.
The chief analyst at Shandong Gold Financial Holdings Capital Management, Jiang Shu, was quoted as saying that the initiative attempts to "increase volumes and attract more investors from other markets". This is consistent with Bloomberg commentary focusing on China's efforts to "challenge the dominance of London and New York".
According to the Shanghai Gold Exchange announcement, the initiative has been made to "boost market services", but given that the SGE is the largest physical bullion marketplace in the world, it has the consequence of providing significant credibility to the concept of gold as money.
SilverPete said:
Yeah I've heard that's what will be said. Along with;
Price will solve everything, &
What bars?
AinslieBullion
Member
Last week we brought you David Morgan's current assessment of the silver market. It's timely then that an interview with macroeconomic analyst Michael Pento was released yesterday where issues surrounding gold and the broader global economy were discussed.
In the lengthy interview, some key points were raised. Firstly, Michael describes the issue that we wrote about last Tuesday regarding the record number of COMEX claims against each ounce of physical gold as being indicative of a very highly leveraged physical gold market. This he sees as a dangerous situation. For those who missed it, see the graph of the COMEX paper gold claim ratio below. Secondly, Michael recommends buyers take physical possession of gold, recommending the use of a local and ideally independent vault. He claims that the more physical demand there is, the more likely liquidation and margin calls are to expose manipulation in the metal market through short covering. Lastly, Michael sees us rapidly approaching a point where COMEX will be required to settle in cash due to the fact that "they're absolutely running out of physical gold and silver" and that in this event, the likely fallout will not be contained to the metal market.
Speaking more broadly, Michael discusses the now 200 trillion dollars of global debt and the fact that China alone since 2007 is up 300% on their debt. Most of this was by government edict resulting in the construction of empty cities, airports without planes, bridges without cars and other economically unproductive outcomes. Michael's warning is that there is no isolation from these problems any more. China was responsible for almost all of the global demand since 2008 and now that this demand is collapsing, regions such as Brazil, Russia, Japan, Europe and Australia are "either in recession or growing with a 1% handle".
With the FOMC rate decision being all topical this week, Michael talks about what he calls the myth of a "one-and-done rate hike" citing limited historical examples of such with previous rate hikes "generally being around 300 basis points and the last cycle being 425". There are precedents then for a protracted hike cycle and the Federal Reserve by means of its own median dot-plot projection wants to be at 1.6% by the end of 2016. Michael forecasts that this target will never be achieved however because "the global economy is imploding" and supports this by highlighting that the Atlanta Fed is on record saying that Q3 growth will be just 1.5%.
As a final note to readers, the change of Prime Minister last night overshadows the fact that today marks 7 years since the collapse of Lehman Brothers in 2008. Buried in the main stream media this morning are warnings of investor complacency as the lessons of past are forgotten with time.
In the lengthy interview, some key points were raised. Firstly, Michael describes the issue that we wrote about last Tuesday regarding the record number of COMEX claims against each ounce of physical gold as being indicative of a very highly leveraged physical gold market. This he sees as a dangerous situation. For those who missed it, see the graph of the COMEX paper gold claim ratio below. Secondly, Michael recommends buyers take physical possession of gold, recommending the use of a local and ideally independent vault. He claims that the more physical demand there is, the more likely liquidation and margin calls are to expose manipulation in the metal market through short covering. Lastly, Michael sees us rapidly approaching a point where COMEX will be required to settle in cash due to the fact that "they're absolutely running out of physical gold and silver" and that in this event, the likely fallout will not be contained to the metal market.
Speaking more broadly, Michael discusses the now 200 trillion dollars of global debt and the fact that China alone since 2007 is up 300% on their debt. Most of this was by government edict resulting in the construction of empty cities, airports without planes, bridges without cars and other economically unproductive outcomes. Michael's warning is that there is no isolation from these problems any more. China was responsible for almost all of the global demand since 2008 and now that this demand is collapsing, regions such as Brazil, Russia, Japan, Europe and Australia are "either in recession or growing with a 1% handle".
With the FOMC rate decision being all topical this week, Michael talks about what he calls the myth of a "one-and-done rate hike" citing limited historical examples of such with previous rate hikes "generally being around 300 basis points and the last cycle being 425". There are precedents then for a protracted hike cycle and the Federal Reserve by means of its own median dot-plot projection wants to be at 1.6% by the end of 2016. Michael forecasts that this target will never be achieved however because "the global economy is imploding" and supports this by highlighting that the Atlanta Fed is on record saying that Q3 growth will be just 1.5%.
As a final note to readers, the change of Prime Minister last night overshadows the fact that today marks 7 years since the collapse of Lehman Brothers in 2008. Buried in the main stream media this morning are warnings of investor complacency as the lessons of past are forgotten with time.
AinslieBullion
Member
JP Morgan loses 45% of gold stock in 1 day
COMEX data is a regularly featured metric in our daily news articles and this is partly due to the fact that it helps to illustrate investment behaviour. Of late, the decline in COMEX inventory seems to be getting particularly dire and main stream reporting on this topic is near invisible.
Of particular interest was the category adjustment reported yesterday (Australian time) to JP Morgan's COMEX gold holdings. As the spreadsheet below highlights, the bank lost 8,941oz from its registered stockpile representing just over 45% of the bullion that it has available for delivery. Readers of last Friday's news will recognise this as exactly the type of adjustment referenced by David Morgan. Astute readers will notice in the below spreadsheet that JPM additionally suffered a 122,124oz withdrawal from its eligible stocks. This is not the first time that a significant daily withdrawal from JPM's eligible category has been observed with the 30th of July this year being one example. Then, according to the CME Group an impressive 200,752oz of gold was seen removed. At that time, JPM's registered category clocked in at 115,754oz of gold compared to the current 10,777oz highlighted in the spreadsheet.
As a consequence of this latest adjustment, total COMEX registered gold tumbled to its lowest in history. Currently, the COMEX holds 163,334oz or just over 5 metric tons in its registered category for all banks.
Just days before this data was available, Canadian economist, author and metals expert Rob Kirby of Kirby Analytics was interviewed regarding the COMEX inventory situation and that interview raised an interesting perspective on how easily current COMEX registered stock could be consumed. At the time of the interview, the inventory levels were higher so the following figures have been adjusted for accuracy. The concept however was that although 5 metric tons may sound like a significant amount, one must keep in mind that with only 163,334oz remaining and the fact that 1,000oz isn't a big deal to a rich individual, at current pricing it would only take around 180 millionaires (or equivalent) to wipe out the COMEX completely. Rob points out that this calculation is based on the assumption that the COMEX actually holds what they report to, referring to the rather suspicious disclaimer relating to numerical accuracy that accompanies these inventory prints. Furthermore, there is also the fact that these ounces may have any number of claimed owners. Rob also states that "it's just a matter of time before the paper markets declare force majeure and settle in fiat currency" which is precisely as predicted by Michael Pento.
To view the 5 metric tons from a different perspective again, year-to-date India has imported around 666 metric tons of gold which is a 69% increase year on year. Annualised imports are on track to hit 998 metric tons (as an aside, this is the second highest amount recorded and roughly one third of world production).
We mentioned yesterday that this week's FOMC announcement is looking to be one of the most anticipated in terms of media commentary and these developments in COMEX inventories are interesting to observe at this time; perhaps indicating that the smart money is searching for protection. As such, we'll leave you with an overnight quote which is actually the title of an article by Jeffrey Snider. "The World Isn't Crazy, It Just Has To Live In 2015".
COMEX data is a regularly featured metric in our daily news articles and this is partly due to the fact that it helps to illustrate investment behaviour. Of late, the decline in COMEX inventory seems to be getting particularly dire and main stream reporting on this topic is near invisible.
Of particular interest was the category adjustment reported yesterday (Australian time) to JP Morgan's COMEX gold holdings. As the spreadsheet below highlights, the bank lost 8,941oz from its registered stockpile representing just over 45% of the bullion that it has available for delivery. Readers of last Friday's news will recognise this as exactly the type of adjustment referenced by David Morgan. Astute readers will notice in the below spreadsheet that JPM additionally suffered a 122,124oz withdrawal from its eligible stocks. This is not the first time that a significant daily withdrawal from JPM's eligible category has been observed with the 30th of July this year being one example. Then, according to the CME Group an impressive 200,752oz of gold was seen removed. At that time, JPM's registered category clocked in at 115,754oz of gold compared to the current 10,777oz highlighted in the spreadsheet.
As a consequence of this latest adjustment, total COMEX registered gold tumbled to its lowest in history. Currently, the COMEX holds 163,334oz or just over 5 metric tons in its registered category for all banks.
Just days before this data was available, Canadian economist, author and metals expert Rob Kirby of Kirby Analytics was interviewed regarding the COMEX inventory situation and that interview raised an interesting perspective on how easily current COMEX registered stock could be consumed. At the time of the interview, the inventory levels were higher so the following figures have been adjusted for accuracy. The concept however was that although 5 metric tons may sound like a significant amount, one must keep in mind that with only 163,334oz remaining and the fact that 1,000oz isn't a big deal to a rich individual, at current pricing it would only take around 180 millionaires (or equivalent) to wipe out the COMEX completely. Rob points out that this calculation is based on the assumption that the COMEX actually holds what they report to, referring to the rather suspicious disclaimer relating to numerical accuracy that accompanies these inventory prints. Furthermore, there is also the fact that these ounces may have any number of claimed owners. Rob also states that "it's just a matter of time before the paper markets declare force majeure and settle in fiat currency" which is precisely as predicted by Michael Pento.
To view the 5 metric tons from a different perspective again, year-to-date India has imported around 666 metric tons of gold which is a 69% increase year on year. Annualised imports are on track to hit 998 metric tons (as an aside, this is the second highest amount recorded and roughly one third of world production).
We mentioned yesterday that this week's FOMC announcement is looking to be one of the most anticipated in terms of media commentary and these developments in COMEX inventories are interesting to observe at this time; perhaps indicating that the smart money is searching for protection. As such, we'll leave you with an overnight quote which is actually the title of an article by Jeffrey Snider. "The World Isn't Crazy, It Just Has To Live In 2015".
AinslieBullion
Member
This week's Radio ~ https://www.ainsliebullion.com.au/g...-radio-snapshot-/tabid/88/a/1047/default.aspx
And...
FOMC announces no rate hike
Recent market turmoil, increasing global risks and lacklustre official inflation figures have given the FOMC the excuse required to keep rates on hold this morning as was widely expected. The announcement saw a jump in both Wall Street and the Aussie dollar but despite the latter, gold priced in Australian dollars for the week remains unchanged as described in today's weekly audio wrap. The Fed's usual tightening bias was still retained for December despite a downgrading of the long-term economic outlook.
In its released statement, the committee noted that "recent global economic and financial developments may restrain economic activity somewhat and are likely to put further downward pressure on inflation in the near term". The Fed dot plot shows some interesting developments. Where June saw 15 Fed policymakers predicting a rate hike in 2015, current data now sees that drop to 13. Note that as we are only 3 months away from the last opportunity to do so, there really needs to be significant change for this to eventuate given the reasoning behind today's announcement. Furthermore, for the first time ever, one FOMC policymaker is predicting negative rates in 2015 and 2016 as illustrated by the red highlights in the chart of the September economic projections courtesy of ZeroHedge below. This fact has not been broadly identified in the media but some commentary this morning focuses on the need to first impose cash and capital flow controlsprior to such a decision.
In what has become quite a public show of open central bank communication as we reported in last Friday's weekly wrap, recent months have seen public endorsements of a September rate lift by some Fed officials including Atlanta Fed president Dennis Lockhart. Ultimately however, today's decision seems to be the result of a confusing official picture of low unemployment with apparently steady economic growth but an absence of on-target inflation. One economist in New York supported this by saying "The case for not going is that the inflation picture is still extremely murky, especially in light of developments in China". The PCE index (the Fed's preferred measure) has printed below the Fed's target for more than three years now. Again, issues abroad seem to sway the balance with the committee release noting that "the committee continues to see the risks to the outlook for economic activity and the labour market as nearly balanced but is monitoring developments abroad".
In an attempt to illustrate how skewed the metrics are in current times, see the graph below which is data from Bloomberg amended this morning for conciseness. It displays various metrics comparing current official data with previous tightening cycles of the 1990s and 2000s and some noteworthy observations are evident. Firstly is the fact that, excluding growth and unemployment, data for the previous tightening cycles was generally more consistent than it is now. The duration of expansion currently far exceeds that of the previous cycles and the current export to GDP ratio is much higher than it was previously; the latter point highlighting the Fed's comments on exposure to global downside risk. What arguably sticks out the most however is the official inflation measure which is anaemic.
And...
FOMC announces no rate hike
Recent market turmoil, increasing global risks and lacklustre official inflation figures have given the FOMC the excuse required to keep rates on hold this morning as was widely expected. The announcement saw a jump in both Wall Street and the Aussie dollar but despite the latter, gold priced in Australian dollars for the week remains unchanged as described in today's weekly audio wrap. The Fed's usual tightening bias was still retained for December despite a downgrading of the long-term economic outlook.
In its released statement, the committee noted that "recent global economic and financial developments may restrain economic activity somewhat and are likely to put further downward pressure on inflation in the near term". The Fed dot plot shows some interesting developments. Where June saw 15 Fed policymakers predicting a rate hike in 2015, current data now sees that drop to 13. Note that as we are only 3 months away from the last opportunity to do so, there really needs to be significant change for this to eventuate given the reasoning behind today's announcement. Furthermore, for the first time ever, one FOMC policymaker is predicting negative rates in 2015 and 2016 as illustrated by the red highlights in the chart of the September economic projections courtesy of ZeroHedge below. This fact has not been broadly identified in the media but some commentary this morning focuses on the need to first impose cash and capital flow controlsprior to such a decision.
In what has become quite a public show of open central bank communication as we reported in last Friday's weekly wrap, recent months have seen public endorsements of a September rate lift by some Fed officials including Atlanta Fed president Dennis Lockhart. Ultimately however, today's decision seems to be the result of a confusing official picture of low unemployment with apparently steady economic growth but an absence of on-target inflation. One economist in New York supported this by saying "The case for not going is that the inflation picture is still extremely murky, especially in light of developments in China". The PCE index (the Fed's preferred measure) has printed below the Fed's target for more than three years now. Again, issues abroad seem to sway the balance with the committee release noting that "the committee continues to see the risks to the outlook for economic activity and the labour market as nearly balanced but is monitoring developments abroad".
In an attempt to illustrate how skewed the metrics are in current times, see the graph below which is data from Bloomberg amended this morning for conciseness. It displays various metrics comparing current official data with previous tightening cycles of the 1990s and 2000s and some noteworthy observations are evident. Firstly is the fact that, excluding growth and unemployment, data for the previous tightening cycles was generally more consistent than it is now. The duration of expansion currently far exceeds that of the previous cycles and the current export to GDP ratio is much higher than it was previously; the latter point highlighting the Fed's comments on exposure to global downside risk. What arguably sticks out the most however is the official inflation measure which is anaemic.
AinslieBullion
Member
2016 silver Kanga's are ready for pre-order / https://www.ainsliebullion.com.au/p...2b4b-77d8-4de0-b061-b96cdc3bc3b1/default.aspx
Russia & China reaction to inaction
One could be forgiven for thinking that there is a certain "better the devil you know" sentiment guiding economic developments of late. FOMC inaction was last week's major news. Commentary was prevalent on Friday and over the weekend with AFR reporter Vesna Poljak noting that "there are children who have seen more rolled Prime Ministers than they have Fed hikes". The Greek elections have seen Alexis Tsipras returned to power, notwithstanding the acceptance of European demands for bailout measures that he once opposed.
How are the big players acting amidst this backdrop of inertness however? At a time when the media is rife with discussion relating to topics such as those listed above, Russia's central bank released the most recent data on its gold reserves; something that went largely unnoticed. The numbers showed that August saw a 31.1 metric ton increase in gold holdings amounting to one of the biggest acquisitions for 2015. Although data on China's reserves is broadly viewed with a pinch of salt (with many commentators citing evidence of it being significantly underreported) their official August increase came in at just under 16 metric tons. See the following two plots on Russian and Chinese gold reserves respectively to illustrate.
These acquisitions are of interest in isolation, but consider the environment in which this is occurring. Both Russia and China have had need to support their currencies recently, resulting in negative foreign exchange flows. This is due to a multitude of factors including sanctions, currency devaluation and falling oil prices. What we typically expect to see in the case of foreign reserve drawdowns is a tendency to halt acquisition or even liquidate gold reserves. Deriving more than 95% of its export revenue from oil, Venezuela is a good example of the temptation to do so. Despite this, Russia and China remain strong gold buyers. Keep in mind that August saw China liquidate $94 billion of foreign reserves.
Some points to take away from this include:
Current gold pricing is very attractive.
There is increasing risk involved with holding foreign denominated bonds and currencies.
Last week's FOMC report further supports these risks.
It is advantageous to draw down on foreign bond and currency reserves in order to bolster gold holdings.
Such acquisitions are bullish for the gold price.
We mentioned in April that it is important to keep an eye on the big picture when attempting to evaluate real investment demand and value. The continued positioning into bullion displayed by Russia and China amidst foreign currency drawdowns and more broadly a lack of global structural reform is just such an example to heed.
Russia & China reaction to inaction
One could be forgiven for thinking that there is a certain "better the devil you know" sentiment guiding economic developments of late. FOMC inaction was last week's major news. Commentary was prevalent on Friday and over the weekend with AFR reporter Vesna Poljak noting that "there are children who have seen more rolled Prime Ministers than they have Fed hikes". The Greek elections have seen Alexis Tsipras returned to power, notwithstanding the acceptance of European demands for bailout measures that he once opposed.
How are the big players acting amidst this backdrop of inertness however? At a time when the media is rife with discussion relating to topics such as those listed above, Russia's central bank released the most recent data on its gold reserves; something that went largely unnoticed. The numbers showed that August saw a 31.1 metric ton increase in gold holdings amounting to one of the biggest acquisitions for 2015. Although data on China's reserves is broadly viewed with a pinch of salt (with many commentators citing evidence of it being significantly underreported) their official August increase came in at just under 16 metric tons. See the following two plots on Russian and Chinese gold reserves respectively to illustrate.
These acquisitions are of interest in isolation, but consider the environment in which this is occurring. Both Russia and China have had need to support their currencies recently, resulting in negative foreign exchange flows. This is due to a multitude of factors including sanctions, currency devaluation and falling oil prices. What we typically expect to see in the case of foreign reserve drawdowns is a tendency to halt acquisition or even liquidate gold reserves. Deriving more than 95% of its export revenue from oil, Venezuela is a good example of the temptation to do so. Despite this, Russia and China remain strong gold buyers. Keep in mind that August saw China liquidate $94 billion of foreign reserves.
Some points to take away from this include:
Current gold pricing is very attractive.
There is increasing risk involved with holding foreign denominated bonds and currencies.
Last week's FOMC report further supports these risks.
It is advantageous to draw down on foreign bond and currency reserves in order to bolster gold holdings.
Such acquisitions are bullish for the gold price.
We mentioned in April that it is important to keep an eye on the big picture when attempting to evaluate real investment demand and value. The continued positioning into bullion displayed by Russia and China amidst foreign currency drawdowns and more broadly a lack of global structural reform is just such an example to heed.
AinslieBullion
Member
Gold & debt
Yesterday saw another 2% fall on our stock market and futures this morning show no sign of a recovery today. With current global stock volatility increasing, it is looking very much like we are ending an era of stock and bond prosperity fuelled by central bank stimulus; itself backed by only credit and faith. It's timely then that another indicator is also pointing towards a cyclic shift at this time. The following graphs plot the gold price in US dollars along with the US national debt and it is evident that the former tends to track the latter within the range of a price channel. At some points in history, the gold price tends to overshoot the debt level and at other times it undershoots but there is a definitive correlation.
If we look at gold pricing from January 1996 to July 1999 we see a drop from about $405 to $253 representing a 38% downward movement in a time span of 42 months. This period of time was an example of a "debt undershoot" and is interesting as it preceded the decade long rally to $1900 achieved in August 2011, a point where the gold price had overshot the debt level at the time. From that point, we again see a retracement in the gold price to $1070 in July 2015 representing a 44% drop in 47 months; a move very reminiscent of the 1996-1999 collapse.
As the green circles in the graphs above and below indicate, currently we are at a historically low gold to debt level (another "debt undershoot") and this would indicate significant upside potential at this time. The second chart below illustrates how the gold to debt ratio on a population adjusted basis has behaved within a price channel over the 20 year time period described above. Again, it is clear that gold prices rise with debt and that current pricing is at the lower bound of a multi-decade range. Another way to think about this is to consider that the last 4 years of price declines have built up an imbalance which needs to be corrected as it was in 1999.
Lastly, the following plot of the gold price highlights the significance of today's price level as labelled by point number 4. It matches the lower bounds of the price channel trajectory which extends from the end of the previous gold bear market labelled by point number 2. With the historical evidence of this gold price channel established, it is completely reasonable to assume that as national debt increases, gold prices consequently have considerable upside and that is without considering the potential risks of hyperinflation or a currency panic.
Source:
Yesterday saw another 2% fall on our stock market and futures this morning show no sign of a recovery today. With current global stock volatility increasing, it is looking very much like we are ending an era of stock and bond prosperity fuelled by central bank stimulus; itself backed by only credit and faith. It's timely then that another indicator is also pointing towards a cyclic shift at this time. The following graphs plot the gold price in US dollars along with the US national debt and it is evident that the former tends to track the latter within the range of a price channel. At some points in history, the gold price tends to overshoot the debt level and at other times it undershoots but there is a definitive correlation.
If we look at gold pricing from January 1996 to July 1999 we see a drop from about $405 to $253 representing a 38% downward movement in a time span of 42 months. This period of time was an example of a "debt undershoot" and is interesting as it preceded the decade long rally to $1900 achieved in August 2011, a point where the gold price had overshot the debt level at the time. From that point, we again see a retracement in the gold price to $1070 in July 2015 representing a 44% drop in 47 months; a move very reminiscent of the 1996-1999 collapse.
As the green circles in the graphs above and below indicate, currently we are at a historically low gold to debt level (another "debt undershoot") and this would indicate significant upside potential at this time. The second chart below illustrates how the gold to debt ratio on a population adjusted basis has behaved within a price channel over the 20 year time period described above. Again, it is clear that gold prices rise with debt and that current pricing is at the lower bound of a multi-decade range. Another way to think about this is to consider that the last 4 years of price declines have built up an imbalance which needs to be corrected as it was in 1999.
Lastly, the following plot of the gold price highlights the significance of today's price level as labelled by point number 4. It matches the lower bounds of the price channel trajectory which extends from the end of the previous gold bear market labelled by point number 2. With the historical evidence of this gold price channel established, it is completely reasonable to assume that as national debt increases, gold prices consequently have considerable upside and that is without considering the potential risks of hyperinflation or a currency panic.
Source: