Ainslie Bullion - Daily news, Weekly Radio and Discussions

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Ainslie Radio (weekly) now live - https://www.ainsliebullion.com.au/g...y-25th-sept-2015/tabid/88/a/1054/default.aspx

Another government shutdown looking likely
October 1st is the deadline for avoiding yet another federal government shutdown in the US. Senate leaders are pursuing a stop-gap funding bill to extend the present budget for about 2 months with funding for women's healthcare group Planned Parenthood a significant sticking point. Concurrently, the White House has begun cooperating with federal agencies on planning for a shutdown. In a research note published on Wednesday, TD Securities analysts predicted a 55% chance that the US government will be shut down as a consequence of the lack of agreement. Today the debt ceiling is set at$18.1 trillion and since 1940, we've seen 95 measures taken to adjust the debt limit. Many will recall the last shutdown in 2013 which was the 3rd longest in history lasting 16 days.

We've written about these shutdowns before and have commented that in some ways, the debt ceiling is an irrelevant limit given that the debt is now well beyond that which can be serviced. Shutdowns themselves however are relevant as they are economically wasteful at best and in reality quite harmful. Even the threat of a shutdown consumes resources in terms of the planning required to do so. Government shutdowns hurt those who have their personal financial situations linked to the federal government. This would come at a time when personal financials are not known for their robustness; exemplified no better than the recent news articles covering the record number of full-time employed New York City workers who are forced to live in homeless shelters or on the street.

Should it eventuate, a shutdown next week could see almost 1 million federal workers furloughed and facing a pay deficit that would only be remedied at the discretion of Congress retroactively upon reopening. Those escaping furlough will nevertheless be legally required to work without pay, again, until the shutdown is terminated. Either scenario will see those without savings to draw upon experience difficulty.

Here are some of the ways that the already struggling US economy could be impacted by a shutdown next week:

Any employment or grant applications with the federal government would not be processed.
Holiday makers would be unable to access any federally funded tourist attractions including museums, national parks and monuments.
The issuance of US passports may be interrupted impacting the ability to travel for business.
Small businesses reliant upon government workers or tourists could see a dramatic drop in takings. This wouldn't only include the absence of people spending money, but also accounts for businesses that may need to cease operation should they occupy part of a federal government building.
Federal contractors would likely experience delays with an inability to process paperwork.

In an increasingly fragile economic environment, the US Senate will be one to watch next week. In terms of the likely impact on gold, records are mixed. During the first day of the last government shutdown, gold prices dropped by about 3%. On August 2nd 2011 however, the day after the US government passed debt ceiling extension legislation, gold rallied by about 2.5% and continued to new highs. One could imply negligible effect, however considering the current backdrop of volatility it is arduous to anticipate. Regardless of the impact on precious metals, a shutdown does not convey the impression of a well-functioning system.

 

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As we mentioned in our last weekly wrap https://www.ainsliebullion.com.au/g...y-25th-sept-2015/tabid/88/a/1054/default.aspx, Friday's combination of stronger USD priced gold and a further weakening in the AUD saw a significant jump in the gold price which put it at an eight month high (see the chart below). Although we sometimes see spikes in the spot price of metal, there are now many indicators of something more fundamental being at play. We are currently about five weeks into what is a new era of stock market and currency volatility. That's long enough for investors to start to think longer term and consequently adjust their investment outlook. The fact is that it's becoming increasingly difficult to sell the idea that Australia is on a path of prosperity. Let's look at a few issues that are cause for concern with regards to Australia's economy and currency outlook exactly the type of issues that bullion provides insulation from.

Politically, our new leadership team has given us a confidence boost as exemplified by the latest ANZ Consumer Confidence print of 114.5; a near 26% jump in one week. At the same time however, the media is reporting further uncertainty on a plethora of issues including taxation, superannuation reform and issues surrounding Australian property prices. With Scott Morrison's emphasis on spending rather than revenue last week, speculation is focusing on what expenditures may be cut. Uncertainty and confidence do not coexist for long.

Last Thursday, the ABS released data on Australia's sliding population growth which represents a deterioration of one of our strongest growth areas at a time of increased recession risk. In the last year, 45% fewer people migrated to Australian than during the 2008 peak. With the mining boom over, consumer spending fuelled by strong population growth has been important. The following graph from the Wall Street Journal indicates this slide.

Just this morning, the ABC released research from recruitment firm Robert Walters which claims that today, almost 90% of Millennial and Gen-Y workers in Australia want to head overseas to work "to escape our country's slowing economy and rise in unemployment". As productive workers leave Australia, issues with consumer demand, economic capability and population ageing https://www.ainsliebullion.com.au/g...-drowning-in-debt/tabid/88/a/944/default.aspx are exacerbated.

As we have already discussed https://www.ainsliebullion.com.au/g...ces-no-rate-hike/tabid/88/a/1048/default.aspx, the Fed's weakening ambition and ability to raise interest rates above the zero bound has brought negative interest rate policies (NIRP) into mainstream Western media. Andrew Haldane, the chief economist at the Bank of England, released a highly discussed piece which was revealing in terms of the mindset of central bankers. Of interest was the notion of zero interest rate policies (ZIRP) having strategically failed. If the Bank of England and the Fed are looking to NIRP as a way to overcome the zero bound on a permanent basis, the stability of all fiat currencies could become dramatically weakened.

Evidence that Australian investors are already seeing potential in bullion acquisition is not only illustrated by the stock shortages experienced by bullion dealers of late and by the increase in AUD priced gold, but also by Australian listed gold miners which have been under heavy selling pressure in recent times. Such stocks have seen signs of recovery of late. With a portfolio of gold exploration tenements within Australia and Brazil (and with multiple recent comparisons between Brazil's economy and our own) Beadell Resources is a small yet appropriate example. Beadell's stock is up approximately 38% in 8 trading days as gold's supply and demand situation becomes apparent to investors. See the chart below. Our article last week on Nordgold's expansion https://www.ainsliebullion.com.au/g...ns-for-expansion/tabid/88/a/1051/default.aspx is also evidence in support of the gold mining industry.

Although these are only a few observations, Australian investors with a portfolio allocation in precious metals have a number of reasons to smile. Such investors are insulated from the declining AUD and the subsequent erosion of wealth without exposing themselves to other fiat currencies in a world of competitive devaluation. Similarly, bullion investors position themselves outside of traditional stock investments that are a function of economic health and are highly volatile. Such investors isolate themselves from capital controls such as those seen recently in Greece and do not need to worry about reliance upon government deposit guarantees. Additionally, bullion investors are poised to benefit from an area where demand far outstrips supply https://www.ainsliebullion.com.au/g...-gold-and-silver/tabid/88/a/1044/default.aspx and where we're already seeing evidence of the upside potential that many indicators have been projecting https://www.ainsliebullion.com.au/gold-silver-bullion-news/gold-debt/tabid/88/a/1052/default.aspx for some time.

 

[AinslieBullion]

Swiss Watchdog Opens Bank Probe

We don't generally focus in detail on topics related to price manipulation but occasionally news is released that is thought provoking regardless of an individual's particular views on the topic. Just such news was released overnight. As a consequence of a preliminary probe that has uncovered indications of illegality, the Swiss competition regulator WEKO has announced an investigation into whether some of the big banks including Barclays, Deutsche Bank, HSBC and UBS have been conspiring to influence precious metals bid / ask spreads.

Such manipulation would not be new with the LIBOR scandal being one example. Four large banks pleaded guilty to manipulation of FOREX rates in May and were cumulatively fined nearly $6 billion. It was only one month ago that the EU's competition regulator was reported as investigating similar behaviour with precious metals and comes after news of a US probe by the DoJ and the CFTC that we reported on earlier this year https://www.ainsliebullion.com.au/g...tigation-launched/tabid/88/a/861/default.aspx.

What's interesting in this case is the fact that UBS has been granted conditional leniency with regards to the possible manipulation of precious metal pricing and if the LIBOR scandal is any indicator, this leniency could be a precursor to UBS releasing evidence to the investigation in an admission of guilt. Bloomberg commentary offers suggestions as to why UBS would do this, saying that "the bank may face a lower fine than the other banks and financial firms suspected in the probe or may avoid penalty altogether". ZeroHedge also hypothesises that UBS's conditional leniency could indicate that "the regulators have definitive proof it is involved, and gave it the option to turn in evidence or face even more massive financial penalties."
In terms of consequences, we have seen similar revelations in the past such as LIBOR, FX and the tax evasion issue result in fines. Although Bloomberg has suggested that UBS may be able to escape penalty entirely in the event of criminal findings, other suggestions lay at the opposite end of the spectrum. In the case of UBS, one of the conditions for such an agreeable LIBOR outcome was that the bank "commit no United States crime whatsoever" for a fixed period that was then extended subsequent to the deal. If this condition turns out to have been violated, the consequences could be more impactful than the simple issuance of fines, with ZeroHedge commentary overnight suggesting that "the bank could well lose its license to operate in NYC".

Now regardless of individual views on the validity or possibility of such manipulation, it is interesting to ponder the potential impact that the outcome of this investigation could have on the pricing of precious metals and how the current supply and demand equation may change.

 

[AinslieBullion]

India Rate Cut Surprise & Gold

Yesterday, The Reserve Bank of India (RBI) cut its repo rate (the level at which the central bank lends to commercial banks) by 50 basis points from 7.25% to 6.75% with the market having priced in only a 25 basis point drop. Only 2% of forecasters predicted a cut of this size which represents the biggest drop since 2009 and as such lends support to our recent observations https://www.ainsliebullion.com.au/g...y-25th-sept-2015/tabid/88/a/1054/default.aspx of repeated GFC record reads occurring for numerous metrics in recent weeks. Yesterday's cut follows cuts in January, February and June that had already amounted to a 75 basis point drop.
In what could have been mistaken for the content of an RBA announcement, Governor Raghuram Rajan said "The weakening of global activity since our last review suggests that commodity prices will remain contained for a while" and indicated that "Monetary policy has to be accommodative to the extent possible". These statements represent somewhat of a policy divergence from those represented by the hawkish faction within the Federal Reserve.

One can understand the importance of currency competitiveness given the fact that India's exports have seen 8 consecutive months of decline with the July merchandise export figure falling by 10.3%yoy. The April-June quarter of this year saw Indian exports fall by 17%yoy which represents one of the steepest declines on record. The depressed oil price will have had an influence here with oil contributing 18% of India's total exports. See the extent of India's export problems in the chart below from Deutsche Bank. The RBI's oil price projections have been subdued from the April range of $60-$63 down to $50/barrel currently.

In an all too familiar story, growth concerns seem to have heavily influenced the rate cut with India's print falling from 7.5% to 7% in the AprilJune quarter. With a central bank target of 6% for 2016, India's consumer inflation is also well below expectations.

At the announcement of the rate cut, Indian shares arrested their 1% falls for the day and closed flat. In last Friday's weekly wrap https://www.ainsliebullion.com.au/g...y-25th-sept-2015/tabid/88/a/1054/default.aspx we referenced ANZ research predicting that the RBA will need to cut our official cash rate to a record-low 1.5% next year and the RBI cut yesterday is likely to reinforce that analysis.

Whilst on the topic of India, let's look at their August gold imports which jumped to 138 tonnes. At 5% of total annual gold production, this represents the highest monthly figure for this year and has been topped only once since 2013 as pictured below.

What's interesting about this spike in Indian gold demand is that it is occurring within the context of a particularly week monsoon season which has the effect of reducing rural incomes. Note that the monsoon deficiency was reference in the RBI's statement of yesterday in the context of food inflation pressures.

A good analysis of this activity in gold was made recently by Hebba Investments who stated that "investors need to remember that much of Indian physical gold demand is coming from the rural economy which holds gold in lieu of rupees and bank accounts. So the fact that gold demand is surging in this sector despite lower incomes suggests that for the average Indian gold buyer, the price of gold is simply too low to resist."

 

[AinslieBullion]

20% of Aussie debt held by China

In today's weekly wrap, we make reference to freshly released research from Canada's RBC suggesting that China looks to hold an approximate 20% share of all Australian government and semi-government bonds. There has been much media discussion about the liquidation of China's US denominated debt and the implications thereof in recent times and many of those arguments are now largely applicable to Australia. China's willingness to utilise foreign reserves in support of their currency and in support of their continued gold acquisitions has been amply demonstrated of late. We reported on the latter just yesterday. In an even larger indication of China's financial importance to Australia, if considering only the bonds that are held offshore, China represents a 1/3 holding. What's of additional interest is the fact that at around 3.5% of total reserves, China's AUD holdings are disproportionately high when compared with those being held by other central banks which generally target the 2% mark. This could indicated a greater risk of AUD denominated liquidation if China attempts to shift its portfolio allocation towards global norms; a point illustrated by noting the current liquidation of their reserves plotted against the value of the Aussie below.

In early September we reported https://www.ainsliebullion.com.au/g...a-e2-80-99s-woes/tabid/88/a/1036/default.aspx on analysis that predicts a steeply lower Aussie dollar in the future and this revelation adds support to such suggestions as a lowering in the value of the Aussie is a potential consequence of any further liquidation of China's $US3.7 trillion foreign reserve pool. At the time, we surmised that such currency movements could see significant gains for Australian bullion holders as they benefit from the weakening currency demand. See Monday's news article https://www.ainsliebullion.com.au/g...-well-positioned/tabid/88/a/1055/default.aspx for a better understanding of the benefits of holding bullion in this environment.

Higher yields on Australian bonds should also be expected as a key source of demand begins to falter. This is based on the premise that large institutional investors will be unwilling or unable to compensate for any large scale repositioning in China's foreign reserve allocation. The low yield debt environment has been of key assistance in maintaining Australia's moderate deficit and has eased budget pressures federally. According to the ABC, "the Australian Office of Financial Management (AOFM) needs to borrow around $70 billion a year to cover maturing government debt as well as a federal budget deficit which is forecast to be around $25 billion next year." Such figures highlight the importance of the availability of Australian debt demand to our political and economic landscape; both of which are not known for their stability at the present time.

 

[AinslieBullion]

Gold Soars on Bad US Jobs Data

Friday's US NFP print has been broadly viewed in the main stream media as anything from "disappointing" to an "unmitigated disaster". This is exemplified no better than by the commentary from economist Thomas Simons at New York's Jefferies LLC who said "it's been years since we've seen such an unambiguously bad report". The following is a brief summary of the main points from last week.

- September saw only 142,000 jobs created, significantly below the expectation of 200,000 and falling below the lowest estimate.

- The August print was revised significantly lower, down to 136,000 jobs from 173,000.

- The average workweek declined by 0.1 to 34.5 hours

- Hourly wages fell slightly which missed expectations of a 0.2% increase.

- Weekly earnings fell from $868.46 to $865.61.

This latest NFP print is put into perspective in the chart below. It's interesting to note that 2015 monthly job growth has averaged 198,000 compared with 260,000 last year.

The reaction to this data could be seen in the gold pricing. During the Hong Kong session, the gold price was actually trading with a downward trend until the release of the NFP print at which point prices went vertical as indicated by the Kitco plot below. Gold finished the Friday trading session at US$1,138, up nearly US$25 from the previous day. Of additional interest is the fact that gold's 50-day moving average has been convincingly breached to the upside. Silver pricing followed the behaviour of gold.

Conversely, the dollar index closed late on Thursday afternoon in New York at 96.10 and was trading with an upward bias during the Hong Kong session until the NFP print was released at the 96.32 mark. From that point the index plummeted around 110 basis points. End of trade saw the index close at 95.91 representing a fall of just under 20 basis points with suggestions that the Plunge Protection Team had played a hand. The intraday plot below shows the dollar index drop at the time of the NFP print.

Readers will note that just the previous Friday (September 25th) saw a 1.7% surge in gold pricing which was headlined in our news email of that day. This also comes at a time when gold metrics are starting to show regularly healthy signs as we reported in Monday's news article of last week https://www.ainsliebullion.com.au/g...-well-positioned/tabid/88/a/1055/default.aspx. At the time we observed that ASX listed gold stocks were one such indicator and yesterday being the first trading day since the NFP print and subsequent gold price surge, similar behaviour could be seen. Newcrest closed up by 9% yesterday and Beadell resources which we've specifically mentioned previously closed up by over 10% as a result. It seems reasonable to conclude that gold is increasingly demonstrating its appeal as a safe haven store of value in the context of equally increasing poor economic data.

 

[AinslieBullion]

Precious Metals Continue to Rise as the IMF Downgrades

Yesterday we brought you news of the technical strength we've been seeing recently in the precious metals market and noted in particular gold's 50-day moving average breach to the upside. Last night we continued to see growing momentum in gold and silver pricing with silver hitting an approximate 3 month high and gold closing near the highs of the US session. Trade overnight produced improvements of US$9.93 for gold at US$1,146.60 and $0.162 for silver at US$15.87.

There are many issues that are likely contributing to this recent price support with some reports focusing on the impacts of Russia's involvement in Syria for example. Let's look however at another piece of news from overnight which is the continuation of a longer trend; that being another IMF growth forecast downgrade.

According to the IMF release "global growth for 2015 is projected at 3.1 percent, 0.3 percentage points lower than in 2014, and 0.2 percentage points below the forecasts in the July 2015 World Economic Outlook (WEO) Update". Importantly, emerging market performance and activity in developing economies is now forecast to slow for the 5th consecutive year. Unsurprisingly, the bulk of the projection cuts were seen in the EM and oil exporting nations yet the real point to be observed here is the trend that we've spoken about in recent articles. Specifically, at 3.1% we are now at the lowest rate since the GFC as illustrated below.

According to the IMF release, the primary motivation for the forecast cut is the performance of China with additional issues including political uncertainty, lower commodity prices, market volatility and inconsistent FOMC guidance. The IMF additionally suggested that advanced economies ramp up infrastructure investment to bolster growth.
A declining outlook for global growth makes the individual investment landscape difficult as the companies that are to produce investment returns struggle in such an infertile environment. The recent supply shortages in precious metals and the technical price analysis of late indicates that gold and silver are increasing in popularity as focus continues to shift from the return on capital to the return of capital.

 

[AinslieBullion]

Germany Releases Detailed Gold Stocktake

Scepticism aimed towards official claims of national gold holdings is now a common theme so in an attempt to bolster an image of stability, Bundesbank has released a complete list of Germany's near 3,400t gold reserves. The report, which is to be updated on an annual basis, specifies the location, status and identity of the entirety of the holdings which are worth a little over 166.8 billion Australian dollars. Germany's reserves amount to the second highest in the world next to the US which has incidentally also suffered scepticism regarding the legitimacy and accuracy of reserve accounting.

Historically, Germany has held a large percentage (nearly 70%) of its holdings abroad. Half of the reserves are vaulted in the US with the remainder of the overseas allocation stored in London and Paris. This is a policy born of the fear of invasion during the cold war period and has in recent years been changing. By 2020, more than 50% of German reserves are to be stored in Frankfurt. All French stores are to be repatriated entirely and the US vaulted metal will be reduced. We've reported a number of times on the difficulties involved with the latter, but ultimately Germany's current policy means that over the next few years, 700 metric tons will be in transit under highly secretive arrangements. Interestingly, the 1966 French repatriation of US vaulted gold involved taking physical possession in Manhattan by submarine.

Difficulties with the US extraction remain. Germany first asked the US for about 350 tonnes of its gold held in New York back in early 2013 at which point they were apparently told that it would take 7 years to achieve that. That year saw just 10% of the requested amount returned and 2014 saw an additional 20%.

The Bundesbank release represents rare transparency in an area that is typically shrouded in a veil of assumption and speculation. A good example of this is China where evidence of underreporting is substantial. Some argue that such clarity places increasing pressure on the US to act similarly with respect to the auditing of gold holdings and it will be interesting to observe the financial power dynamic if public auditing becomes more widely adopted.

 

[AinslieBullion]

We have covered on a number of occasions the issue of China's sale of US Treasuries with particular reference to SDR consideration https://www.ainsliebullion.com.au/g...ina-sdr-decision/tabid/88/a/1011/default.aspx. We've also discussed in recent times how the sale of US debt features in the context of funding China's ongoing gold acquisition project https://www.ainsliebullion.com.au/g...st-gold-reserves/tabid/88/a/1058/default.aspx. One may be forgiven for thinking then that the liquidation of USTs is superficially a phenomenon uniquely relevant to China. In reality however, the US$12.8 trillion Treasury market is seeing its biggest selloff in history.

In what seems to be at least partially a consequence of the slowdown in emerging markets, nations that previously were significant acquirers of US debt such as China (as we've already mentioned), Taiwan, Brazil and Russia are now selling as the chart below illustrates.

What's alarming is how quickly this trend has arisen. To provide some context, last year central banks purchased US$27B of US debt yet according to Deutsche Bank, data ending at July this year shows a 12 month liquidation totalling US$123B. The circumstances that supported the former purchases included healthy emerging market trade surpluses that allowed the bolstering of foreign exchange reserves and many opted for the seemingly liquid and safe USD. There are many conclusions one can draw from this year's trend including a reduction in the faith of the reserve currency, reaction to declining commodity prices and a necessity to support local currencies.

According to the Wall Street Journal, "sales by foreign central banks could accompany a further decline in bond yields, by underscoring the depth of economic problems hitting emerging regions" and there is certainly evidence to support such problems. In addition to China, Russia has reduced its UST holdings by almost US$33B for the 12 months ending in July; as did Taiwan with a near US$7B reduction. With particular reference to the degradation in oil prices, Norway has reacted with a reduction of just over US$18B over the same time period.

We have been commonly remarking about the surprising number of metrics that have degraded to GFC record levels but this activity in the UST market represents the most significant since data started in 1978. For all but the most risk tolerant investors, it represents yet another warning bell in the existing chorus and supports strongly the idea of balancing wealth with hard assets.

 

[AinslieBullion]

Gold's reaction to Fed's confusion

The last FOMC decision on rates 3 weeks ago was somewhat unique in that it was one of the most anticipated of all time. We commented on this during the lead up and highlighted former Chairman Greenspan's comments of bewilderment at the time relating to how baffling it is that "a few basis points in an overnight rate by one central bank is going to be all determinate". Subsequent to the release of the decision, we reported on how the response was comprised of an ongoing bolstering of gold acquisitions at a national level and an apparent decline in faith considering that the once somewhat consistent forward guidance has been replaced with mixed messages.

Last week has provided indications of this trend continuing on the back of the release of the FOMC minutes which we touched on in our weekly wrap of last Friday https://www.ainsliebullion.com.au/g...day-9th-oct-2015/tabid/88/a/1066/default.aspx. The gold price rallied from the open in New York on Thursday evening to a close of US$1,156 having hit a high tick of US$1,159 in the December contract with reasonable volume. Today we bring you commentary from the trading community which has drawn a correlation between the confusing message presented by the minutes and the appreciation in gold last week.

The idea revolves around a discrepancy between the inflation projections perceived by the fed and the reality of inflation conditions. The XAU chart below is annotated with suggestions as to the cause of the gold price movement in relation to the timing of the release of the minutes. The initial period post-release shows a drop in prices which commentary suggests is a reaction to the conflicting hawkish and dovish content within the minutes. Lack of direction and consistent forward guidance tends to foster a "selling" mentality as an immediate reaction.

An example of the hawkish tone in the release was the observation that "growth in real GDP over the first half of the year was stronger than participants expected when they prepared their June forecasts, and the unemployment rate declined somewhat more than anticipated". On the other hand, there was concern evident regarding the unexpected lack of inflation and furthermore, the previously prominent concept of this inflation-poor environment being transitory has been seemingly abandoned. The release stated that "participants anticipated that recent global developments would likely put further downward pressure on inflation in the near term; compared with their previous forecasts, more now saw the risks to inflation as tilted to the downside."

To summarise, the FOMC sees a failure in attaining their inflation target mandate of 2% despite extending projections out to 2018 and despite apparently improving economic data upon which they claim to operate. As such, the bias of the FOMC minutes would appear more dovish than initially interpreted in terms of inflation concerns and online commentary suggests that "once that confusion cleared 3 hours later, gold soared". Although market behaviour is seldom the consequence of a single factor, this suggestion does act to highlight one of gold's many endearing qualities; namely that of an inflation hedge and certainly there is merit to this idea considering that mainstream commentary is now squarely focused on further easing initiatives.

 

[AinslieBullion]

Silver Squeeze & GSR Show Price Rise Promise

There has been endless press of late around the global shortage in investment silver against rampant demand. Mints and refineries around the world have extended wait times and increased premiums as they struggle with supply and demand. And whilst, per the first chart below, the silver price is responding by breaching its 200 day moving average for the first time in nearly 6 months it is still relatively low (refer to the bottom chart) particularly in the context of the supply demand dynamic at present. Current news items such as Glencore dramatically cutting production just adds to the supply squeeze.

Whilst some may argue breaching the 200 day MA indicates 'over bought', another always instructive metric is the gold silver ratio which indicates otherwise. Whilst we have previously reported on its high level in terms of its average (c45) over the last century, we don't normally 'zoom in' as the next chart shows where we see its performance against, in this case, the 20 month moving average (MMA) over the last 20 years.

Previous instances of such protracted breaches of the moving average preceded strong uptrends in the silver price as can be seen below. So whilst the silver price has responded to the current supply / demand squeeze, it still has plenty of scope for higher moves particularly in the context of current continual poor global economic projections.

 

[AinslieBullion]

Chorus of Economic Warnings Escalates

The chorus of warnings across the globe of a pending economic recession continue to grow. The IMF, fresh after their recent (yet again) global growth downgrade https://www.ainsliebullion.com.au/g...e-imf-downgrades/tabid/88/a/1063/default.aspx, have stated in their financial stability report that "Shocks may originate in advanced or emerging markets and, combined with unaddressed system vulnerabilities, could lead to a global asset market disruption and a sudden drying up of market liquidity in many asset classes." Importantly too they stated this doesn't rely on 'extreme assumptions' i.e. something(s) small could be enough to tip us in to the next financial meltdown. Just remember it was the sudden liquidity squeeze that saw the GFC unfold and only desperate Government liquidity injection that stopped it from completely unravelling. They had many more 'bullets in the gun' then

BIS (the central banks' central bank) continue their warnings https://www.ainsliebullion.com.au/g...f-cb-consequences/tabid/88/a/971/default.aspx again now warning of "major fault lines" in the global financial system due to the debt glut off low interest rates. (Coincidentally, the US Treasury just quietly updated their consolidated debt position, up another $2.7t to $62.7t, or 350% of US GDP!).

Bank of America have now also warned us to prepare for a "massive policy shift in 2016" with the failure of artificial stimulus in the 'west' playing out and China going 'all in' on stimulus to get out of their slump combing in a dangerous cocktail that sees them expressly recommending investing in gold along with commodities, TIPs (Treasury Inflation Protected Securities) and property. The latter may resonate overseas but coincides with concerns about an already overheated Australian property market and some predictions of price falls not rises in the Aussie context.

 

[AinslieBullion]

Why Yesterday Was a Big Deal

We mentioned in the news yesterday where Australia may differ in Bank of America's global predictions of property (together with gold) being the best investments going forward. This was reinforced yesterday in the shock move by Westpac to raise interest rates on owner occupier home loans, with them and others having already done so for investment properties. This prompted Fairfax business columnist Elizabeth Knight to state:

"History will show that if there was a day that marked the start of the end of Australia's residential property boom, it was today."
She certainly wasn't alone with such sentiment and it also prompted Goldman Sachs to say it now sees a rate cut by the RBA in November as "highly likely" and most likely more again in 2016. The other big banks are widely tipped to follow Westpac's lead as well.

Whilst principally blamed on bolstering capital reserves ahead of any market shock, many believe we are also seeing a realisation by the banks that they have over exposed themselves to a property bubble born of ultra low interest rates which would only be worsened with another rate cut. When interest rates eventually climb there could be carnage in the property market as loans become unserviceable, particularly in light of low expectations of wage growth and job security going forward in Australia's fragile post mining boom economy. This fragility was further reinforced yesterday with more terrible economic data out of China. This move could well be the banks getting ready and trying to limit the extent of that carnage now.

Of course another rate cut in November should also see a drop in the Aussie dollar which is always good news for Aussie precious metals holders. The AUD is caught in an interesting dynamic right now where it dipped on the China news yesterday but rose last night on further weakening of the USD. The latter however is due to the now very apparent weakness in the supposed economic saviour of the world.

 

[AinslieBullion]

More Signs of Debt Distress

Financial analyst and commentator Mike Savage recently highlighted a little talked about occurrence in global debt markets. But first he reminds us of the context

"It appears to me that day-by-day more people are recognizing that the past 7 years has been an experiment where we had a debt problem, it imploded in 2008, and we attempted to fix it with more debt. Now, after it has been proven not to work- not just here [US] but also in Europe and in particular Japan the same actors that started all of this are calling for- MORE!"
And then

"A chart put out recently shows that at the height of the crisis in 2008 the Fed had around a $100 billion in reverse repos. These are used to replace defaulting debt with supposedly good debt. In the last 2 months the Fed is now holding over $640 billion in reverse repos. By the way, that is up from about $225 billion just 2 months ago. $400 billion in a couple of months? What is REALLY happening under the hood?"

The RRP spike may be explained by the Fed experimenting with how to raise rates when they have flooded banks with so much free money. But on any level it is another clear sign of a system swamped in debt figuring out how to deal with the consequences. Too many people seem to somehow dismiss "Government" debt as not being real in the sense that your mortgage, personal loans or credit card debt is real. Debt is debt. The GFC gave us a little glimpse before it was temporarily fixed with more debt and likewise Greece. It must come home to roost.

 

[AinslieBullion]

Chinese Gold Consumption Hits New Record

China's insatiable appetite for gold has reached a new record high according to new official figures out of the Shanghai Gold Exchange. As at 25 September the year to date withdrawals hit an incredible 1,958 tonnes. As in the recent past this figure will vary significantly to the World Gold Council's (much lower) estimate of gold demand and does indeed contain a very small amount of 'internally traded' gold which doesn't represent true consumption. However the very thorough analysis and evidence put forward by respected analyst Koos Jansen, in our opinion, is clearly more transparent and believable. We won't enter the busy realm of speculation on why the WGC likes a lower number (especially whilst the gold price is so low) and whether the Peoples Bank of China is indeed fully reporting their official reserves. We recently reported the now monthly update for August and they have just released an update of official reserves for September, up another 14.9 tonnes to 1,708.5 tonnes. This is still a very modest number as a percentage of reserves and continues to attract disbelief by financial commentators. It also noticeably coincides with China offloading large amounts of US Treasuries from their reserves.

Koos Jansen (per the graph below) estimates there is 14,593 tonne of gold in total in mainland China. Whether 'official reserves' are indeed only 1709t seems a somewhat mute point in a communist regime. On any level there is an incredible amount of gold held in China and as we keep saying, these are traditional strong hands (long term holders), holding physical gold, not western speculators holding paper (ETF or Comex futures) claims to an ever decreasing pool of available metal. When you combine Indian consumption you are seeing consumption of physical gold greater than mine production. Where do you think it's coming from?

 

[AinslieBullion]

Debt, Inflation and Gold

Historically gold and silver have been seen as an inflation hedge. Their meteoric rise in the 70's was during a period of strong inflation and arguably a lot of what drove the 2000's bull run was the expectation of inflation, likewise the jump through the GFC was on the expectation of inflation due to the extraordinary money printing and zero interest rates undertaken to bail out the banks to prevent a total collapse. Last week we discussed Jim Rickards points on the effect of real interest rates on gold. Essentially the higher the inflation against rates, the lower the REAL interest rate and that historically drives up gold. We've seen gold and silver come off since 2011. This has been largely driven by the Fed TALKING up tightening. They did eventually stop QE3 but they still haven't done anything more than talk (as inevitably the situation got worse when they stopped printing money) and the recent rally in gold and silver is largely off the back of the growing belief this will not happen any time soon. Indeed, as we mentioned in Friday's Weekly Wrap, one Fed official even opened the Negative Rates prospect

Jim Rickards (through his various best selling books and articles) is arguably one of the most connected, strategic, and logical thinkers out there. He has just published another article via Strategic Intelligence that we have posted today and believe everyone needs to read. From a macro economic point of view he puts the global debt glut and easy money we often write of clearly into perspective against gold's current and possible role. Jim is not what you would call a 'gold bug', he is more an analyst and commentator on currencies, his latest best seller being Currency Wars. This makes his predictions on gold all the more robust.

For those who somehow still think Australia is immune to all this because we relatively cruised through the GFC, the stats below should be sobering. In fact, likely because of the 'lucky country' cruise, we have embraced relatively more total debt since the GFC then nearly any other developed country. We reported last week that the US had hit an eye watering 350% total debt to GDP. Well, thanks largely to our debt fuelled splurge into property, Australia is at 350%. The info below has the US at 370% (variance might be on the period of GDP used)
US GDP is US$17 trillion x 370% = US$63 trillion total debt

Australia's GDP is $1.5 trillion x 350% = $5.25 trillion total debt

Europe's GDP is US$18 trillion x 450% = US$81 trillion total debt.

This sort of debt can only be addressed by extraordinary economic growth to pay it off (of which NOBODY is predicting), inflating it away (i.e. needs inflation), or default. There is simply no other way.

 

[AinslieBullion]

What's Left for Central Banks?

Yesterday we posted an article https://www.ainsliebullion.com.au/g...ed-in-15-minutes/tabid/88/a/1077/default.aspx by Jim Rickards on how central banks could possibly use gold to overcome their 'little' debt issue. If the numbers we've been throwing at you about this debt issue aren't sinking in then check out these charts for a 'picture paints a thousand words' example (oh, and note the US take-off coincides leaving the gold standard).

Ask yourself if that in any way looks sustainable? Bill Holter happened to write a very similar article last night on the role gold may play in this situation. Bill puts it in terms of us reaching 'debt saturation'. We've explained before the Ponzi Scheme nature of fiat currencies and the underlying issuance of debt. Bill goes on to remind us:

"The problem with "debt saturation" is this, all fiat systems (Ponzi schemes) must have new investors in order to "grow". This is what is meant when you hear the word "reflate". The reflation process is always funded by new waves of borrowing. For years we would see various economic sectors passing the baton of reflation until there were few left with the ability to borrow more. Then we saw the real estate markets get to a point where more debt could not be added [GFC]. Finally, various sovereign governments and their central banks picked up the baton in a final reflation. We have particularly seen this since 2008 with the various fiscal spending plans and quantitative easings."

We've also recently discussed the fact that many nations have stopped buying US debt and indeed the likes of China are selling it in great amounts. So what happens when no one wants to take on more of the debt you need to issue to print your currency? Saturation. Bill explains, like Jim Rickards yesterday, that about the only bullet left in the central bankers' guns is gold. It may be the only thing left on their balance sheets that they can reflate to save themselves.

In store customers will have seen snippets of the excellent DVD we play in our showroom "End of the Road" and many have bought it off us. One quote the above reminds us of is Peter Schiff quoting a scene from Superman when Louise Lane falls from the building and he swoops her up mid air. He says 'Don't worry, I've got you'; she says 'Yeah, but who's got you?'. The Fed and other central banks have come to think of themselves as Superman. You may very well be asking Ms Lane's question.

 

[AinslieBullion]

Record Silver Demand From Just 1%

It should come as little surprise to anyone who was trying to buy silver last month that 2015 is set to break records for physical investment silver demand. The graph below shows physical investment demand compared to total fabrication demand. The main drivers look to be another astonishing year of physical demand from India for bars and North America for the widely reported demand for US Eagles and Canadian Maples, just the two of which accounted for 68% of global coin sales last year. A report just released says India is on course to import around 350m oz in 2015.

But analysis by SRSrocco points out the real implication of this by pointing out that less than 1% of investors are buying silver (and most of those in India). What that means is that in 2015 less than 1% of investment capital represented silver demand equating to nearly one third of total silver fabrication. A relatively minor shift of investment focus to (clearly undervalued) silver of say 1 or 2% would completely overwhelm the physical market.

Why do we keep writing physical in front of investment demand? Well that in itself is the explanation for the price not corresponding with demand. The sad fact remains, for now, that the paper silver market (Comex futures and ETF's) still dominates pricing. Futures contracts rarely see physical metal change hands and are leveraged at over 100:1 contract claims to physical metal. The paper shorts are winning for now but when just a 1% change can change the physical dynamic like it would, mother nature must win at some stage soon.

 

[AinslieBullion]

Gold & Silver Stoking The Fire

Fresh off the ECB making it clear Thursday night that they would be introducing even further monetary easing (increasing the already Eur1trillion QE program and reducing zero rates further), China's central bank cut interest rates on Friday for the sixth time in less than a year and yet again lowered the amount of cash that banks must hold as reserves in an effort to stimulate weakening growth. This double whammy saw both shares surge and the USD rise again, and more pressure on gold which it withstood until we were sleeping here Friday night. All rejoice free money.. for now.

Speaking of an un-real situation, this coincides with a Commitment of Traders report showing near record short COMEX contract increases by the big Commercial's (mainly the top 4 banks) last week. COMEX silver specialist Ted Butler had this to say on such short selling and it's worth repeating:

"Most people can't quite understand how anyone can sell something not owned, as it is not something that occurs in daily life. This is a prime reason, I would contend, that the silver manipulation has persisted as long as it has. And for the sake of this discussion, I'll try to be as clear and simple as possible and not get into my specific debate on short selling in SLV (or GLD), which can be quite complex.

There are two distinct price impacts from excessive short selling first, the price is artificially depressed as the selling occurs. It matters not whether someone owns the asset or not, or has borrowed the asset first before selling or not excessive selling will drive a price lower. The emphasis here is on excessive short selling. After the price of an asset or security is driven lower by excessive short selling, any rush to buyback excessive short sales can drive prices sharply higher. However, it doesn't always follow that excessive short selling in asecuritymust be bought back, as sometimes a company can go bankrupt and, effectively, eliminate the requirement to buyback short sales.That's not a concern in silver or any other real asset, as such assets can't declare bankruptcy. Furthermore, all short sales on futures contracts that allow and require physical delivery, such as COMEX silver futures contracts, must be closed out at some point, either by actual delivery or by repurchasing an offsetting futures contract to close out the previously shorted contract.I know that the vast majority (97% or more) of all short sales in commodity futures contracts, as well as corresponding long positions, are closed out by offsetting positions, or can be "rolled over" or extended far into the future. But that has nothing to do with the right and obligation of a contract holder to make or take physical delivery should he or she so decide. To my mind, that's why they are called contracts. Anyone suggesting that there is some way the COMEX silver shorts can insist on some type of "cash settlement" if an existing long contract holder demands physical delivery and can afford to pay for the delivery, is flat out wrong. Such a refusal or inability to deliver would result in a contract default and the likely closing of the COMEX".
So compare our must read story of Friday regarding physical silver demand against this set up in the paper silver market and ask yourself if this seems sustainable.

 

[AinslieBullion]

US Debt Limit 1 Week Left

In one week today the world's biggest economy cannot pay its bills if Congress does not approve yet another higher debt limit. We reported in the Weekly Wrap back in March 2015 when the US hit their current debt limit of $18.1 trillion, and since then they have survived on 'emergency cash funding' / accounting games leaving no more avenues come Tuesday next week but to simply borrow more for their continual budget deficits (spending more than income).

GOP's John Boehner expects a new limit of $19.6 trillion with a review in March 2017 to be tabled. The graph below puts this latest figure into perspective. That perspective of course is an exponential rise in debt as the Ponzi scheme accelerates in its final throes.

US Treasurer Jack Lew warned yesterday of the consequences should we see the games of 2013 replayed, and that doing so could result in an accident "that would be terrible." In 2013 the US Government shut down for 16 days resulting in a 0.3 impact on GDP and accompanying employment. The problem, as Lew alludes, is this times it's potentially much worse. The cartoon below sums up this farcical situation