Ainslie Bullion - Daily news, Weekly Radio and Discussions

[AinslieBullion]

Yuan devaluation implications explained

We spoke yesterday of the results of China's sharemarket collapse but what about the cause? The core issue is they are devaluing their Yuan to try and spur on growth through a more export friendly currency. The Daily Reckoning's Greg Canavan explains the implications well as follows. Its longish but worth the read to understand what is happening at the moment :

"China is losing control of its currency devaluation. In the process, it has unleashed a deflationary storm.

The People's Bank of China (PBoC) lowered the reference rate for the yuan versus the US dollar to the lowest point since last August (a move of 0.5%). And after this the Chinese market tanked immediately at the open.

Within 29 minutes, stocks plunged 7% (again) and the market wide trading halt kicked in (again). The problem for China is that it has a lot of 'hot' money nervously pacing around its economy. And with each decline in the exchange rate, a chunk of this hot money can't take the strain anymore, so it flees.

Think of it as one giant margin call against China. As China tries to devalue in an orderly fashion, speculators make it hard by rushing in to take advantage of the trade. This causes an orderly devaluation to become disorderly.

For years, 'hot', or speculative money flowed into China. It came via cheap US dollar loans (or using commodities as collateral) and amounted to leveraged bets on a slowly appreciating yuan versus the US dollar. No one knows how much hot money flowed in, but it represented a decent amount of China's at one point US$4 trillion foreign exchange pile.

Now that pile is shrinking as the money escapes, and flows back to where it came from. This is an important point. Firstly, it represents a tightening of credit in China. That's not good for an economy struggling for growth right now.

And when I say money 'flows back to where it came from', I mean flows back to the bank or institution that made the loan. When you repay a loan, the money effectively disappears.

In the same way that new loans create demand in an economy, the repayment of outstanding loans extinguishes demand. As far as I can work out, this is what's causing big falls across stock and commodity markets.

That is, as leveraged bets on the yuan unwind (meaning debts are repaid) demand for 'risk assets' (stocks, commodities, high yield debt) falls, and so the price for these assets falls too.

As evidence of the hot money escaping China, yesterday the PBoC reported a larger than expected drop in foreign exchange reserves of US$108 billion during December. Keep in mind the carnage didn't kick off until the New Year so you can bet that this outflow will pick up pace in January.

The question is how long will this go on for? Certainly, markets can't sustain the pace of the past few days for much longer. Calm will be restored. But no one will be certain whether the selling is over for good.

More importantly, investors are quickly losing confidence that authorities have the situation under control. The post-2008 market recovery was in large part built on confidence in global policymakers. It was especially built on confidence in China's policymakers. That is now waning.

This is partly the reason why you're seeing gold come back into play as a safe haven currency."

As the Aussie dollar drops on the back of this it is yet again worth reminding newcomers that a falling AUD sees your gold and silver price increase. Don't just watch the USD spot price on the news, it's the combination of that and the AUD you need to watch. We are seeing the double whammy of a rising USD spot price as investors seek a safe haven as markets rupture and a falling AUD turbo boosting it up (for Aussies) as the yuan is devalued.

China has only devalued the Yuan by relatively small amounts so far and you've seen the carnage. The market is anxiously waiting to see if they up the ante and make a big cut. If so, brace yourself.

 

[AinslieBullion]

"Sell Everything" v Buying Gold & Silver

RBS (Royal Bank of Scotland) yesterday advised clients to brace for a "cataclysmic year" and to "Sell everything except high quality bonds. This is about return of capital, not return on capital. In a crowded hall, exit doors are small.". "China has set off a major correction and it is going to snowball. Equities and credit have become very dangerous, and we have hardly even begun to retrace the 'Goldilocks love-in' of the last two years,"

Let's be clear, we are not advisors, we just present facts and ask the salient questions. RBS and some others may think gold and silver will go down with the rest when this next crisis hits. But let's look at this a bit closer RBS suggest holding bonds (debt instruments) in what is largely speculated to be a debt/credit instigated crisis.go figure. They may, like some others, think the scale and scope of the ensuing liquidity squeeze will see "everything" sold in the mad panic. That well may be the case on some significant scale but we can't escape the fact that there are (in the order of) $295 trillion of financial 'paper' assets around the world (shares, ETFs, bonds, etc). When or just before that market collapses, a significant proportion of it will still be liquid and still be looking for a safe haven home. Throughout history physical gold and silver have been that tried and tested home. The total tradeable gold market is estimated at $1.5 trillion. RBS talk of the "small exit doors", but it is the small size of the gold 'room' on the other side that means even a modest amount of that massive $295t trying to get into that little $1.5t space should only have one impact on price. It's the law of supply and demand. Gold rising 3.1% (US spot, in AUD it was up 9.3%) whilst sharemarkets around the world saw double digit, record breaking losses is case in point, but only in part. The real action hasn't started yet. We include the following very telling table again as a reminder of the past.

Speaking of supply and demand RBS also predict $16 oil (which dropped below $30 last night for the first time since 2003) and UBS have it at $20. The economic bellwether Dr Copper slipped to GFC lows last night of just $1.99. Incredible stuff. China's woes indicate a similar continuing plight for iron ore. The outlook for Australia is getting dimmer. That means our dollar is likely to fall further (combined with likely continuing yuan devaluations) and that is music to precious metals holders' ears.

 

[AinslieBullion]

Stepping Back "Forest from the Trees"

Those analysts or investment houses not predicting a financial crash this year are at least fairly unanimous that it will be a volatile one. Yesterday we posted a nice succinct must read article* (https://www.ainsliebullion.com.au/g...s-to-raise-rates/tabid/88/a/1136/default.aspx) by Hebba Investments which steps back and concentrates on the core issue debt v growth. In a nutshell this latest credit cycle is showing clear signs of imploding. Growth has been fuelled by record debt, debt growth has significantly outpaced GDP growth, this simply is unsustainable. It's not just a US, China, Europe or Japan problem, it is a globally interlinked problem.

It's also a macro (forest) problem in a market fixated on micro (trees) data. Last week it was the strong US employment figures ('rally' short lived, macro wins), yesterday we saw stronger than expected Chinese trade data (rally short lived, last night US shares plunged 2.5%, macro wins watch Australia follow suit today).

"Macro", the core issue, must always win in the end. The market has rallied on a debt binge that just escalated to new highs after the GFC. It rallied on free money looking for a return, not on fundamentals. That is not in any way sustainable. As we repeatedly remind you (of that famous quote) the 4 most expensive words in investment are "its different this time".

Hebba talk about the forest from the trees, and we may well just see more volatility for a while as the various micro signs confuse the market. But it might also crash tomorrow.
As yesterday's article reminds us, the credit cycle has been repeated time and time again throughout history. Gold has always been the protector of wealth, the only real money when the rug is pulled from the fake/Fiat money bandwagon.

(* Please note when posted yesterday only part of that article was included. This has been fixed now and you can read the full article.)

 

[AinslieBullion]

Behind the 2015 Chinese Gold Record

China's financial market woes have hogged the headlines this year but you probably didn't see anything in the mainstream press about their final figure on gold consumption for 2015. As we mentioned in today's Weekly Wrap Podcast, that figure came in at an incredible 2,597 tonne.
A big number indeed, but let's give it some context

For a start, per the first chart below, it is 19% higher than the previous record set in 2013.

Secondly that figure accounts for around 80% of global production. When you add that India surpassed 1000t in 2015 you have 2 countries alone consuming more than is mined.

In a market where the spot price is largely dictated by futures trades on COMEX, where 100's millions of oz's are 'traded' through paper contracts short and long, you very quickly get further context when you compare what happens with physical gold actually changing hands. That Chinese consumption of real physical gold of 2,597 tonne annually equates to an average weekly number of 49.9 tonne. The TOTAL gold deliveries in COMEX for 2015 were 43.5 tonne. That's right, the Chinese consumed more physical gold in one week than the total for the whole year on COMEX, yet it is largely COMEX that sets the price.(for now).

Finally, China is the world's largest producer of gold at around 450 tonne per year. That leaves 2,150 tonne of gold consumed in China coming from imports. Simple logic dictates that a large portion of that is coming from 'western' vaults as prices declined last year because 'everything is awesome' and you don't need gold This year is already clearly demonstrating that everything is most certainly not awesome and the problem is that gold has gone to a couple of countries and cultures that historically hold gold for the long term. The speculative 'weak' hands of the west have delivered gold on the proverbial silver platter to the 'strong' hands of the east. Watch this space.

 

[AinslieBullion]

The "Core" of the Bubble Bursting

Doug Noland is the 'bubble expert'. The following are excerpts from his latest missive and are worth everyone reading as strikes to the core of the cracks that are currently appearing in the credit fuelled financial asset bubble.. Even this excerpt piece is longer than we strive to contain are articles to, but if you want to read the full article, click here http://creditbubblebulletin.blogspot.ca/2016/01/weekly-commentary-cracks-at-core-of-core.html

"The world has changed significantly perhaps profoundly over recent weeks. The Shanghai Composite has dropped 17.4% over the past month (Shenzhen down 21%). Hong Kong's Hang Seng Index was down 8.2% over the past month, with Hang Seng Financials sinking 11.9%. WTI crude is down 26% since December 15th. Over this period, the GSCI Commodities Index sank 12.2%. The Mexican peso has declined almost 7% in a month, the Russian ruble 10% and the South African rand 12%. A Friday headline from the Financial Times: "Emerging market stocks retreat to lowest since 09."

Trouble at the "Periphery" has definitely taken a troubling turn for the worse. Hope that things were on an uptrend has confronted the reality that things are rapidly getting much worse.
Importantly, the past month has seen contagion effects from the collapsing Bubble at the Periphery penetrate the Fragile Core.

Recent weeks point to decisive cracks at the "Core" of the U.S. financial Bubble. The S&P500 has been hit with an 8.0% two-week decline. Notably, favored stocks and sectors have performed poorly.

Bubbles tend to be varied and complex. In their most basic form, I define a Bubble as a self-reinforcing but inevitably unsustainable inflation [.] Such inflations are always fuelled by some type of underlying monetary expansion typically monetary disorder. Bubbles are always and everywhere a Credit phenomenon, although the underlying source of monetary fuel often goes largely unrecognized.

I'll posit another key Bubble Dynamic: De-risking/de-leveraging at the Periphery is problematic, with a propensity for risk aversion and associated liquidity constraints to spur contagion effects. At the Core, de-risking/de-leveraging becomes highly destabilizing. Indeed, I would strongly argue that de-leveraging at the "Core of the Core" is tantamount to financial crisis.
It is the "Core of the Core" that now concerns me the most. That is where Federal Reserve (and global central bank) policies have left their greatest mark. It is at the "Core of the Core" where momentous misperceptions and market mispricing have become deeply entrenched. It's the "Core of the Core" that has attracted enormous amounts of "money" over recent years. It's also here where I believe leverage has quietly been used most aggressively. Over recent years it became one massive Crowded Trade. Now the sophisticated players must contemplate beating the unsuspecting public to the exits.

A similar dynamic is now unfolding in U.S. and other "Core" equities markets: Sustainability in the (U.S. and global) Credit Bubble - the monetary fuel underpinning the boom - is suddenly in doubt. The bulls, Fed officials and most others see the economy as basically sound, similar to how most conventional analysts argued about the Chinese economy over the past year. Inherent fragility and unsustainability are the key issues now driving securities markets in China, in the U.S, and globally. And, importantly, sentiment has shifted to the view that policy tools have been largely depleted.

It is worth recalling that my tally of Total U.S. Securities (Treasuries, Agencies, Corp Bonds, Munis and Equities) ended Q2 2015 at a record $76.924 trillion, or 429% of GDP. This was up $30.90 trillion (77%) from 2008's $46.034 trillion (313% of GDP) and greatly exceeded 2007's $53.279 trillion (368% of GDP).

Back in 2000, Dallas Fed president Robert McTeer suggested that our economy's ills would be rectified "if everyone would hold hands and buy an SUV." And for the next 15 years Fed policies did the unimaginable in the name of (indiscriminately) stimulating growth of any kind possible. And if epic mortgage finance Bubble financial and economic maladjustment was not enough, the past seven years have seen the type of financial folly and egregious wealth redistribution that tear societies apart.

The bottom line is that Bubbles destroy and redistribute wealth, though the true effects are masked for a while by inflated securities and asset markets along with resulting unsustainable spending patterns and economic activity. Regrettably, years of policy mismanagement, gross financial excess, deep structural maladjustment and the most imbalanced economy in our nation's history will now come home to roost. At this point, I cannot confidently forecast how quickly the bust will unfold. I do, however, believe this process has begun as Bubbles falter at the "Core of the Core.""

 

[AinslieBullion]

What's Next - NIRP & "Helicopter Money"?

It would be way too simplistic to say 'I told you so' to the US Fed that the current market drop is because of them raising their rates just 0.25% in December. But what a coincidence huh The reality is the world is so strung out on debt amid slowing growth that US rates are but one trigger amid many. The problem the US Fed has now is 'where to from here'? Late last week saw a number of key economic data prints reinforce that the US economy is anything but strong together with 4 of the US Fed governors reiterating policy is still 'data dependent' and giving the market strong hints that there won't be more rate rises for some time (again). You saw the reaction after Bullard in particular up she went, but only for one session, it dropped again 2.5% Friday night. That for now is more 'Fed talk' you'd think the market would know better by now but it is desperate for the free money game to continue and will jump on any hope.

The data is also still being skewed by debt. New car sales for instance are at record highs. Hooray! But look behind that and you see car debt finance is through the roof and reminiscent of the sub prime debt on houses before the GFC. Wage growth is stagnant and debt into depreciating assets is skyrocketing you do the math.

What is starting to get more traction in the market now, and the next thing to look out for as a gold and silver investors in particular, is how they recommence monetary easing should this rout continue. US Fed governor Dudley has already explicitly said negative interest rate policy (NIRP given ZIRP didn't work) would be considered if things worsen. Bernanke, Krugman, and even last year banking giants Citi and Macquarie have called for 'helicopter money'. As opposed to QE which printed money and deposited it with banks to loan out (which in hindsight only bolstered share margin loans and artificially inflated financial assets plus a whole bunch of new auto sales of course..), 'helicopter money' would see freshly printed USD essentially going straight to the public in the final throw of the dice to get some kind of inflation going. Watch out for this term, you're going to see more of it. Make no mistake, deflation is poison for a world at all time record debt levels. As we've said many times, there are 3 ways to get rid of debt. Pay it off (GDP is abysmal and less than debt growth), default (see how that works out for you), or inflate it away. They clearly have but one tool available and they will do all they can.

 

[AinslieBullion]

Oil Sub-Prime Watch This Space.

Oil fell again last night to just $28.28 at the time of writing that's its lowest price in 14 years and well below the GFC low of $43.78. Iran announced it will greatly increase production post sanctions and the world is literally swimming in the stuff. Demand looks set to continue to languish and the IMF yet again downgraded global growth projections last night. So what?
You will recall that the GFC came about through debt instruments on sub prime mortgages unwound by falling house prices. (BTW if you haven't seen the movie The Big Short yet, you must. If your friends don't 'get' what you might be trying to warn them of take them. People need to understand what happened in the GFC to know what is going to happen soon, but most likely on a much larger scale). Concerns have been growing about whether the oil price will see a similar outcome on all the debt instruments on oil producers, particularly in the US.

Estimates of energy debt in the US range from $500b to $1 trillion. A lot of that is in so called 'high yield bonds', you might know them as junk bonds. The index of US high yield energy bond yields has just spiked to an all time high; higher than the GFC (check out the chart below and look where the 2 previous spikes happened). The market has also been abuzz the last couple of days on reports that the Dallas Fed quietly met with affected banks last week and told them not to 'mark to market' their energy debts. i.e. don't book the impairments resulting from these lower prices. The Fed have denied this and it will unlikely be proven but the market seems to be taking it seriously notwithstanding a huge coincidence. The liquidity squeeze of the GFC occurred because banks feared each other's capacity, so interbank lending stopped. The barometer of this is called the TED Spread (the interbank lending rate against US bonds). That TED Spread is surging.

Just last week Wells Fargo, one of the largest banks in the US and the largest mortgage holder, reported it has $17b of energy debt on its books. It said that was "mostly" junk bond grade and had only $1.2b in provisions assigned to it. This is just one bank. Giant Citibank reported similar issues earlier.

Keep an eye on this. The coming crash is borne of too much debt. All the focus this year has been on China's, but the US energy debt situation is just as scary. The scarier thing is, it is all interlinked.

Source:

 

[AinslieBullion]

Global Debt Default Warning from Davos

The drums are beating louder and louder. Last night at one point the S&P500 was off 3.2% before a late rally to finish 1.2% down.

So far this year the S&P500 is down 9.1%, the All Ords (before an almost certain plunge today) is down 8% whereas gold is up 9.6% and silver up 7.9%.

Whilst this is all happening global financial leaders are meeting for their annual love-in at the World Economic Forum in Davos. Yesterday the chairman of the OECD's review committee and former chief economist of the Bank for International Settlements (BIS), William White, had this to say:

"The situation is worse than it was in 2007. Our macroeconomic ammunition to fight downturns is essentially all used up,"

"Debts have continued to build up over the last eight years and they have reached such levels in every part of the world that they have become a potent cause for mischief,"

"It will become obvious in the next recession that many of these debts will never be serviced or repaid, and this will be uncomfortable for a lot of people who think they own assets that are worth something,"

White has credibility as he was one of the few bankers who warned about the GFC before it happened.

From the AFR:

"Mr White said stimulus from quantitative easing and zero rates by the big central banks after the Lehman crisis leaked out across east Asia and emerging markets, stoking credit bubbles and a surge in dollar-borrowing that was hard to control in a world of free capital flows.

The result is that these countries have now been drawn into the morass as well. Combined public and private debt has surged to all-time highs of 185 per centof GDP in emerging markets and to 265 per centof GDP in the OECD club, both up by 35 percentage points since the top of the last credit cycle in 2007. [PS Australia is one of the very worst]

"Emerging markets were part of the solution after the Lehman crisis. Now they are part of the problem, too," he said."

Quite tellingly he had this to say too:

"Debt jubilees have been going on for 5,000 years, as far back as the Sumerians."

There is one asset that over that whole 5000 years has always been there as real money, a real protection of wealth as each credit cycle ends and that is gold and silver. Do you think this time is different?

 

[AinslieBullion]

Your Wealth Paper or Hard Assets?

Oxfam released their annual report this week showing that the richest 62 billionaires own as much wealth as the poorer half of the world's population. The latter is about 3 billion people. Staggering stuff huh? We wrote about this last year too and it's just getting worse. Indeed in their 2010 report it took 388 of the wealthiest compared to just 62 now. All the money printing (QE), particularly since the GFC, that was supposed to enrich the masses and get them stimulating the economy, has just gone to the rich. It hasn't improved real growth it has just inflated financial assets like shares.

But it is this latter point that could see you move up that 'ladder' so to speak, and its all about 'paper wealth' v hard asset wealth. You see it would be a fair bet that the vast majority of this so-called wealth is tied up in those very same inflated financial assets. When you consider that in the 2001 crash the NASDAQ fell 80% and in the GFC shares more broadly halved you can see how very quickly that 'wealth' can disappear. French banking giant Societe Generale last week predicted a 75% drop in the Dow Jones this year.

All the warning signs are out there now. You can't pick up a paper and certainly can't read one of our news articles without seeing the writing on the wall. You can even watch a Hollywood movie right now in the cinemas http://www.thebigshortmovie.com/. Yesterday the chief executive of the Australian Stock Exchange, Elmer Funke, warned that the world is burdened by $200 trillion in debt that won't get paid back and will ultimately destroy emerging market economies and global growth. That $200 trillion is old news, we told you about it nearly a year ago https://www.ainsliebullion.com.au/g...king-the-gfc-cake/tabid/88/a/845/default.aspx, but it is certainly starting to bite now.

The point is, as RBS warned last week https://www.ainsliebullion.com.au/g...ying-gold-silver/tabid/88/a/1135/default.aspx, sometimes capital preservation is more important than capital appreciation. History tells us that in financial market crashes gold and silver can give you both. Let us leave you again with yesterday's quote from OECD review committee Chair White [emphasis ours]:

"It will become obvious in the next recession that many of these debts will never be serviced or repaid, and this will be uncomfortable for a lot of people who think they own assets that are worth something,"

 

[AinslieBullion]

"No limits"

Markets rebounded late last week as European Central Bank (ECB) chief Mario Draghi delivered a forceful message after their monthly meeting that they had "no limits" to using tools and instruments to get their target of around 2% inflation. That, in simple terms, is free money. As we've seen since the GFC, financial markets love free money and so all rejoiced and went on a buying spree of assets still over valued even after the big drops in shares this year.

In a perverse bit of irony, he talked up economic 'growth' being helped by the refugee crisis as it leads to a surge in fiscal spending, all of course debt funded off budget deficits. It's another demonstration of the terminal nature of this. Central banks and governments need inflation to inflate away their debts. To get that inflation in a world with declining growth they are resorting to monetary stimulus which, by definition, adds debt. The ECB already has rates at just 0.05% and after Thursday night the writing is clearly on the wall that the ECB itself (as a number of Euro nations individually have done already) could introduce negative interest rates.

Many are calling this as the terminal phase of this credit cycle with late last week's moves simply a 'dead cat bounce'. The universe has a way of putting limits on most everything. History tells us there has always been and always will be a limit to credit based cycles. It's simple math.

 

[AinslieBullion]

Silver Demand Surge

Chinese stocks plunged another 6.4% yesterday, their lowest level in 13 months. It will be interesting to see what happens here today after US shares surged on the back of more desperate liquidity injections by China (biggest one day ever!). At the same time gold and silver continue to rise albeit less so silver and remain one of the very few assets appreciating this year. What is very interesting is that despite the silver price being up, 7.28 million oz have been withdrawn from the biggest ETF SLV by rights a rising price should see rising (not falling) stocks supporting the paper promises. Where is it going? Also US Silver Eagles sales, which already saw a record 47m sold last year continue to sell heavily with 5m in just the first couple of weeks this year. Indeed there are more Silver Eagles sold than the US mines. What makes this more amazing is that retail sales in the US are apparently only modest. COMEX analyst Ted Butler says he has proven that JP Morgan, the US's biggest bank, has amassed 400m oz of physical silver. He believes they are the big buyer that keeps cleaning out the US Mint of Silver Eagles. He goes on to point out that they are also one of the biggest short sellers of silver futures on COMEX. i.e. short paper trades to lower the price and scoop up 400m oz of physical silver at a bargain. The big question is when will they 'let her go' and how much longer will this epic buying opportunity last?

SRSRocco released these 3 interesting graphs that put the current buying in context when compared with 20 years ago.

 

[AinslieBullion]

COMEX smashes record
Just when you thought the COMEX gold (futures market) situation couldn't get more absurd we learned yesterday that the registered gold stocks dropped over 200,000 oz in one day taking the total registered gold (that available for delivery) to just 74,000 oz. If you are new to this space and that still sounds a lot, well consider that open interest (contractual claims) stands at around 40 MILLION oz. The graph below tells the story as the ratio of Open interest to registered gold just shot up to 542 ounce claims to ounces of gold registered for delivery!

We reported back in December last year when the record was 294. Registered gold is only part of the picture, there is also Eligible gold which is lodged but not available. The question many are asking is why are the big bullion banks removing gold from Registered in such epic amounts? Many speculate they can see the possibility (inevitability?) of the big squeeze coming and want to keep what physical gold they do have closer to hand.
Whilst financial analysts don't get too concerned by this situation (because contracts could always be settled with cash) the reality of the setup remains, that if just one big player demands gold not cash or another contract, the whole thing snaps. Any graph like the one above in the financial world simply must be taken notice of.
Tomorrow we will bring you an intriguing set up in silver on Comex too

 

[AinslieBullion]

COMEX Silver 2011 Again?

Yesterday we reported the 73% overnight drop in registered gold on COMEX and promised something on silver today. We came across the chart below recently which shows it is not only registered gold that is being sucked out of COMEX, but silver too. The chart below however zooms back a bit and you can see clearly the situation (price grey line) that occurred when the silver price last peaked in mid 2011 at $49. One can't help but wonder if, with silver registered stocks heading back to the levels that coincided with that peak, whether we may be seeing similar price action to what occurred then. History has a way of repeating

Also whilst the massive gold accumulation of China hogs the headlines, the world's largest physical silver exchange in Shangai has also seen a spike up in silver inventories with 615 tonne held in January this year compared to just 176 tonne last January. The theme of gold moving from west to east appears as relevant for silver at the moment

 

[AinslieBullion]

Negative Nonsense

Japan's central bank (BoJ) announced on Friday they would be implementing negative interest rates as their desperation to stimulate growth went up another gear. For newcomers, BoJ already have the world's most aggressive quantitative easing program, buying not just essentially ALL bond issuance in the country but equities as well. They are almost at QE saturation. So what's left? Reduce your official interest rates below zero Yep you PAY for the privilege of holding government bonds which acts as the final disincentive to holding cash as opposed to risk investing or buying stuff to stimulate 'growth'.

So Japan now joins a host of countries in Europe (ECB) on negative rates including the likes of Germany and Switzerland out to 10 year maturity. Indeed there is now a record $5.5 trillion in government bonds trading at negative yields, around a quarter of the index for government bonds. For more context of the scale, 23% of global GDP will come from countries with negative rates. US 10 yr Treasuries are not immune and plunged to 1.91% after the announcement.

Such is the level of fear in global markets and desperation by central banks to stave off the inevitable, that we get investors willing to pay for the privilege of parking their money somewhere 'safe' on such an epic scale.

Bonds are often considered the alternative 'safe haven' investment to gold and silver. In the past the attraction has been that they yield where gold and silver don't. So let's revisit that equation Bonds are at historic low yields (and per above, many negative) which translates directly to historically high prices. Bonds are debt instruments being issued at a time when it is starting to look like we are nearing the end of a 40 year credit cycle. On the other hand gold and silver are at historically low prices and thrive in times of economic turmoil.

Below is yet another chart showing parabolic tendencies to add to the others you're seeing more of lately

 

[AinslieBullion]

Shooting Out of Control

Yesterday we included a chart of the growth in negative yielding bonds in the world and mentioned it as yet another 'parabolic' economic chart.

So what of these other parabolic / exponential / skyrocketing charts? The collection below has been doing the rounds and if you've missed them they paint a pretty clear picture your 'gut feel' barometer should be warning of storms ahead. It's US centric and politically motivated but a) the US is supposedly the new global economic saviour, and b) it's typical of the world as a whole. It's a bit hard to read but just know that the vertical grey shaded bars mark recessions. That last big one of course was the GFC. In short it paints a clear picture of rampant money printing and debt accumulation in a reflation effort post GFC. But it's not working. US Durable Goods Orders were abysmal on Friday a clear sign of a weak economy. Wall Steet boomed Friday night our time as that combined with Japan's easing had the traders convinced more easing from the Fed is coming (Australia rallied yesterday on the same). The charts below show that stimulus might be great for Wall Street (for now) but it's not working for Main Street and that will eventually see the whole thing come crashing down.

 

[AinslieBullion]

Money v "Money"

Whilst we are on a roll this week of parabolic/exponential charts the following are most compelling when remembering that sage investment quote of the 4 most expensive words in investment being "this time is different"

First, we often talk about the sheer scale of money printing since the GFC as central banks have tried to stimulate and reflate the system that almost broke then. You can't simply do this when you have a gold backed currency. When you have a Fiat currency, as the world has had since 1973, it is backed by nothing more than the promise of the Government, so (for a while) you can print all you like, especially if you have the reserve currency as the US do. Look below at how it kicked up after the 1982, 1990 and 2001 crash/recessions and then really went exponential after the GFC. You will note after the previous three they normalised after everything was 'fixed'. We haven't seen that this time because, well, it's not fixed?

What's that got to do with gold you ask? The chart below illustrates the ratio of the price of gold (real money) compared to the US Monetary Base (total amount of currency circulated fiat "money"). As you can see that ratio, at just 0.3, recently hit its lowest EVER i.e. Gold is as cheap as it has ever been compared to the monetary base. As important, you can see that ratio is now kicking up, just as it did at each recession. The last two times it got nearly as low coincided with the start of the big bull markets of 1970's (up 2270%) and 2000's (up 636%). Is it different this time?

 

[AinslieBullion]

2016 Silver Market Trends

The Silver Institute has just released their Market Trends report for 2016 and we summarise as follows:

Demand:

Industrial accounted for 54% of demand in 2015 and is set to increase again in 2016.

Photovoltaics (PV) set to surpass the 2011 record of 75.8m oz in 2016 and account for 13% of silver demand.

Ethylene Oxide (EO) this is the big growth area. Set to increase 25% (10m oz) this year over 2015 which itself saw 40% growth.

Jewellery set to increase 5% in 2016 after a slight decline in 2015.

Coins already off at a cracking pace it is expected to remain similar to the record year last year of 130m oz, which accounted for 12% of physical demand.

ETFs holdings for physical metal backing paper fell 2.8% in 2015. They don't really make a call as it will be market dependent

India gets a special mention as they imported a whopping 228m oz of silver last year and are expected to continue this pace in 2016.

Supply:

Mine supply expected to drop 5% in 2016 and continue to drop to 2019. 2016 will be the first year of reduced supply since 2002. [this is in line with various articles we've written about 2015 being the year of peak gold and silver].

Scrap further weakening as has been the case for several years.

Deficit:

"The silver market deficit (total supply less total demand) is expected to widen in 2016, drawing down on above-ground stocks. The larger deficit is expected to be driven by a contraction in supply."

 

[AinslieBullion]

Safe in the Green Zone

What a start to the year! The chart below shows clearly the carnage across nearly all markets over January. See how the AUD was part of that? Well that of course just made gold and silver even better in our currency with gold up 8.8% and silver up 6.1%. Our own All Ords (missing from below) was down around 4.5% too.

https://www.ainsliebullion.com.au/Portals/0/jan 16.png

A month does not a year make, but it could well be instructive for what's to come. There are no end of forecasts predicting, at the very least, huge volatility this year, or at worst 2016 being the end of this epic 40 year credit cycle. The article penned by The Daily Reckoning's Verne Gowdie that we posted yesterday puts it very nicely (if you haven't, it's a must read).

This week we saw the All Ords have its biggest fall this year on Wednesday and then nearly recover all of that on Thursday (listen to today's Podcast for why https://www.ainsliebullion.com.au/g...ie-radio-podcast/tabid/88/a/1158/default.aspx). Welcome to 2016! Whether we see the crash this year or next, it promises to be a volatile one and those with 'investment insurance' will come out better off. 7 of the 12 green bars (positive returns) above are traditional safe havens (aka 'investment insurance') gold & silver, US Treasuries and USD. Gold and silver are currently/still at historically low prices, UST's are near all time highs and USD near 10 year high. Just depends if you like buying low and selling high

 

[AinslieBullion]

The Other Side of 'Peak Gold'

As previously reported, China continues to be the world's biggest consumer of gold and is also the world's biggest producer as well.
For the first time in many years, China's gold production fell in 2015, according to the China Gold Association. Whilst only down 0.4% to 450.05 tonnes, it aligns with our previous reports on 2015 being the year of 'peak gold' and must be looked at in the context of the 10 year average growth in production in China being around 11%. That is a big drop.

China is still well ahead of any other gold producing nation. They produce 1.6 times more than second placed Australia. Russia is just behind Australia and the US is 4th and over half that produced by China.

As weekly podcast listeners know, Shanghai Gold Exchange has for some time been reporting weekly withdrawals (which align most closely with total Chinese consumption). After a world record setting 2597 t last year, they stopped reporting this year. They have just surprised everyone by releasing the monthly consumption figure for January. That number was 225 tonne. If that were annualised it would be 2700 tonne.

So it appears the world's biggest consumer is not letting up on demand but its domestic production is starting to fall. That means more imports and even more demand on the rest of the world when just last year they already consumed 80% of total gold produced.

 

[AinslieBullion]

Golden "Pet Rock"

Remember all the pain gold and silver endured in the lead up to the much hyped US Fed interest rate hike in December. Down it kept going as a rate hike meant 'everything is awesome' and no one needs the safe haven anymore. As we (and many) reported, the quote of that time was from a Wall Street type stating owning gold was like owning a "pet rock". But as we kept reinforcing, everything was and is far from awesome, and indeed any semblance of awesome was purely courtesy of the central bank stimulus around the world. The US's central bank (Fed) raising rates in December was a move in the other direction (because they had to or risk any remaining credibility), so how's that worked out for them (the vertical line is the day of said rate hike)?

But it is too simplistic to simply blame the rate hike for the market turmoil this year. We've had the much publicised woes in China as their market comes to terms with the always inevitable situation of slowing growth and too much debt, and massive plunge in currency reserves. Last night's action that saw (USD) gold soar to a 6 month high and shares plunge again was due to the growing concerns around Euro banks and financial institution failure contagion. Risk indices are spiking on not just Euro banks but Chinese and US as well. Europe's biggest, Deutsche Bank (who in January announced a Eur7 billion loss) crashed 11% last night to its lowest since January 2009 (GFC). We've reported a number of times on the simply gigantic derivative and particularly CDS (credit default swap) exposure they hold ($64 trillion, or nearly 5 times total Euro GDP!!) putting them firmly at the top of the "Next Lehman's" list but on a much bigger and globally interconnected way.

Finally, above we mentioned gold hitting a USD 6 month high. As at the time of writing this, Aussie dollar gold just hit an over 3 year high, up 15.5% this year alone. Silver on the other hand is still at historic lows, despite being up nearly 14% this year, and at a gold:silver ratio of around 78 is looking to be the bargain of the two.

To take that 'pet rock' metaphor where he never intended consider that rock to be the nucleus of what is certainly looking like an ever growing snowball hurtling down the hill, building and building on the many and various financial issues around the world. When that snowball hits the cliff at the bottom we all know that only thing that will be left. Your beloved, very valuable, golden 'pet rock'.