Ainslie Bullion - Daily news, Weekly Radio and Discussions

[AinslieBullion]

Listening to Your 'Gut' & Black Swans

"Gut feel" is not something you are necessarily taught nor will you find as a subject in finance or economics at uni. It is, however, a remarkably effective tool when making a decision when confronted with asymmetric inputs. The mainstream press may be relatively effective in reporting all the tensions in the world but it rarely links this with finance, instead reporting the usual 'everything is fine' 'shares and property always go up' doctrine. However unless you watch SBS World News or the like you are likely spending more time learning about a house fire or car crash in Melbourne than growing tensions in the South China Sea, or US/Russian tensions fully explained, etc. You are also less likely to hear why financial markets are so "fundamentaless" or of the current precariousness of the world's most systemically important bank (Deutsche Bank) at present. To be fair 2016 has seen more mainstream reporting of the current financial set up as it becomes too hard to ignore. It is no coincidence that the spot price of gold is currently up 26% and silver up 41%. More people are listening to their 'gut'.

Is it any wonder? Right now your 'gut' is digesting a quite extraordinary cocktail:

Central banks are very clearly flagging they have reached their limits, and conceding the ineffectiveness, of the unprecedented monetary stimulus they have unleashed since the GFC. If there is one overarching theme of 2016 and the resulting beginning of this gold and silver bull market, it is the loss of faith that central banks have 'got this'. They don't. Whether you understand the machinations of macro economics or not, your gut knows you can't keep doing this and that it's not working anyway.

You are looking perplexed at financial and property markets at, or near, all times high when the underlying economy is tepid at best. You are being advised to buy shares (at these highs) looking for yield because rates are near zero whilst your gut is telling you you're chasing 3% yield but risking a 50% fall on your capital(from which you need to make 100% gains to get back to even).
Having just digested Brexit, and probably now appreciating why it occurred, it is now swallowing the US Elections. It's the same theme anti-establishment, anti-globalisation. This mood is so strong that with a less 'out there' candidate than Trump it would be a whitewash against Clinton. The hatred of her is only matched by that of him polls are evenly split. This is easily the most divisive US election in history and either way you can expect social and market turmoil on the result.

Geo political tensions around the world have not been this heightened in a long time and too numerous and intertwined to do justice now. Last week the US and South Korea announced joint nuclear drills (ala North Korea), the US, Japan and China are not budging on the South China Sea conflict and playing dangerous games, and tensions between the US and Russia have hit multi decade lows and intertwined with the Syrian war, a war unleashing a refugee crisis like no other. That crisis is then fuelling another war of a different kind with the political backlash being felt through Brexit, Merkel's recent landslide defeats, the upcoming Italian referendum, today Hollande closing the Calais refugee camps, etc etc. And of course there is ISIS which needs no further explanation.

On the aforementioned US / Russian tensions we must always remember we may be getting a one sided view on what is happening. For a little balance (though of course, inevitably the other way) this is what Vladimir Putin had to say to western journalists recently:

"We know year by year what's going to happen, and they know that we know. It's only you that they tell tall tales to, and you buy it, and spread it to the citizens of your countries. You people in turn do not feel a sense of the impending danger this is what worries me. How do you not understand that the world is being pulled in an irreversible direction? While they pretend that nothing is going on. I don't know how to get through to you anymore."

Any one of these many 'black swans' circling at present could spark the next financial crisis. Sometimes you need to listen to your gut and protect yourself from that happening

 

[AinslieBullion]

"If It Walks Like Lehman and Talks Like Lehman"

it is Lehman". This remark by a Wall Street trader yesterday reflects the fear overcoming global markets last night as Deutsche Bank's share price plunged to new lows. We've written extensively on DB, most recently here. Yesterday the troubled bank, named by the IMF as presenting the greatest systemic risk to the global financial system, hit a low not seen since the mid 80's and perilously close (22c!) to single digits, which psychologically analysts are calling the line in the sand.

Source:

As we reported in Friday's Weekly Wrap, the bank faces fines of $14b from the US Dept of Justice, possibly the proverbial straw on this crippled camel's back. The further falls this week came after Merkel stated there would be no bail out of the bank from the state. Yesterday Bundesbank (Germany's central bank) reiterated that view even more forcefully saying "state support of banking sector must end," and bluntly stating it just "props up zombie banks." . Casting a broader net than just DB they called for structural reform of all banks stating that a "systematic clean-up, inevitable after the bursting of the financial bubble, isn't finished yet,". Not exactly confidence inspiring stuff Not surprising then, Bunds (German sovereign bonds) have spiked on the news to a level equating to negative yields all the way out to 15 years.

It wasn't just Euro markets either. The news brought down global markets and saw bonds up strongly until the relief rally last night after the perceived Clinton victory in the US debate. The VIX dropped back to 12 as well and both gold and silver saw large drops as clearly everything is awesome... If you didn't read yesterday's news, that is your cue.

Whilst they try and tell us this isn't like Lehmans, the fact remains that when a bank is so publicly in trouble, a bank run is on the cards. Whilst most people think of a bank run as retail depositors getting their money out while they can all at once, as we saw in the GFC the bigger and faster danger is a wholesale liquidity run. Whilst DB is in the spot lights there are others struggling in this negative interest rate environment as well.

We spoke of Black Swans yesterday and DB is most definitely a big one.

 

[AinslieBullion]

WTO "Wake Up Call"

A couple of weeks ago we talked about the limitations of GDP growth as a measure of the health of the economy. Quite simply GDP can be bought with debt, created by government, and manipulated through spurious adjustments. What is a far more pure and direct measure is global trade.

The World Trade Authority (WTO) just released their latest update and, in the context of a decline for the last 5 years, they have downgraded 2016 further to just 1.7% from 2.8% just 5 months ago. That is quite simply an alarming slow down, 40%, in less than a half a year.

Unfortunately it gets worse with the 2017 forecast slashed by up to 50% from previous projections to between 1.8% and 3.1%. This is the first time they have given a range, though their track record would indicate it will be at or below the lower bound of that range as well.

When you combine that with a GDP forecast of just 2.2% (again a figure that seems to be continually revised down) we are now faced with 2016 presenting the almost certain outcome of a global trade to GDP ratio below 1:1, the first in 15 years.

Of course that hot topic of globalisation is again in the headlines with the director general of WTO having this to say in regards to the shock announcement and taking clear aim at Trump and the Brexit movement:

"The dramatic slowing of trade growth is serious and should serve as a wake-up call. It is particularly concerning in the context of growing anti-globalization sentiment. We need to make sure that this does not translate into misguided policies that could make the situation much worse, not only from the perspective of trade but also for job creation and economic growth and development which are so closely linked to an open trading system."

 

[AinslieBullion]

The "Everything Bubble"


The Felder Report produced some very insightful graphs and observations over the weekend that capture the essence of the problem before markets. Taking issue with Janet Yellen's (US Fed Chair) recent statement when defending leaving rates on hold

"I would not say that asset valuations are out of line with historical norms."

he went on to highlight that this is exactly what is happening.

But rather than the more simplistic measure, Felder produces the following graph which looks at household financial assets versus disposable personal income (DPI).

https://www.ainsliebullion.com.au/Portals/0/everything bubble.jpg

But if you think that looks scary, in reality it is far far worse. The denominator in that equation, DPI, since the GFC has seen a massive increase in what is called "transfer payments". Transfer Payments are payments made or income received in which no goods or services are being paid for, such as a benefit payment or subsidy. In other words it's the likes of social welfare where that is funded by taxing others or deficit debt robbing future generations, and thus is not newly produced income, services or goods. For those mathematically challenged, if you removed the transfer payments from DPI that graph above shoots up.

Felder spells this out in real terms pointing out that since 2007 household financial assets have increase from $53trillion to $72 trillion, a 36% rise or around 4% annually. DPI without transfer payments ('real personal income') rose just 1.2%.

That this is occurring in unison with weak real economic growth (recall the Fed just downgraded US GDP again to 1.9% and global trade plunging) and a protracted period of declining earnings makes for a very scary cocktail.

Again don't get caught up thinking this is just a US problem. This is a global phenomenon and Aussies have arguably gone harder than most racking up 'world's worst' personal debt amid stagnant wage growth and our largest property market just being named the 4th riskiest in the world.

So the assets on top of that equation are increasing largely on multiples expansions (over valuation) whilst the income below it is overstated in real terms. That looks very much like a bubble sorry Janet

 

[AinslieBullion]

Gold Supply 8% of What's Needed

The CEO of Rangold, Dr Mark Bristow, told Mining Weekly recently that in the last 16 years a lack of new discoveries and reducing yields meant miners have failed to replace more than half the amount of gold mined.

The graph below tells the very clear story. He said mine lives have fallen as lower grades (meaning lower yield, or the amount of gold per tonne that can be extracted) have now been calculated and when combined with plummeting new exploration yields he is predicting supply is heading for a 'sharp fall'.

It appears the exploration equation is seeing a double whammy where it peaked in 2011 on the high gold price but was yielding very little in the way of actual new discoveries, and then the price fell sharply and so did exploration budgets with it. So less money was being spent on a declining discovery yield.

He stresses it's not just new discoveries but the realisation of lower grades of already discovered reserves that needs to be factored. He estimates it will require the discovery of 90million new ounces per year to catch up, and to reverse this grade deterioration, 180 million ounces per year will need to be discovered. As you can see from the graph below, current discovery yields are in the order of 10 to 15 million ounces per year, around 6-8% of what is needed!

At the moment the gold price is being dictated more by speculative futures trading (COMEX) than fundamentals, but at some stage the rule of supply and demand must prevail.

 

[AinslieBullion]

Blood In The Streets

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

Waking up this morning to gold and silver both being smashed last night it is worth remembering these sage words There was even a tagline online this morning "Bullion Bloodbath". So what happened last night? In Aussie dollars gold was down $46 or 2.7% and silver (brace yourself) was down $1.27 or 5.1%. In USD gold is sitting at $1269, still above the key support line of $1255.

The rout that took out everything bar the USD last night started with reports via Bloomberg that the ECB were considering tapering their QE program and fresh off Deutsche Bank settling with the US Dept of Justice and not copping that $14b fine that threatened to bring them down. We also had some hawkish statements from the Fed boosted by one OK manufacturing print on Monday and all of a sudden the algos went nuts. That's what you will read in the finance sections today. By the way, the ECB released various denials of these rumours later last night and regular listeners to our Weekly Wrap will know that good US data print is the exception not the rule

It's worth just looking at some other occurrences. Topically after yesterday's news where we pointed out that "At the moment the gold price is being dictated more by speculative futures trading (COMEX) than fundamentals, but at some stage the rule of supply and demand must prevail.". we see the following price action on the open of COMEX last night

To help you visualise in metric, that is a tad under 100 tonne of gold 'sold' in 30 minutes, but most likely nearly all traded purely in paper swaps and reportedly only 2.5m oz (78t) available for delivery should someone actually want it. It will be incredibly interesting to see this weekend's COT report to see if those big commercial shorts were at play here. The other thing you won't read is that this happened when China is on a week long 'National Day' holiday. That means no big buyers of physical on value and no reality check by the SGE (Shanghai Gold Exchange) via arbitrage. If you think that is coincidence go back and look at previous Chinese holidays

Speaking of coincidence you may recall in the lead up to the GFC the banks were manipulating the CDS's on mortgage backed securities trying to scare the holders out of their positions (again, if you haven't watched The Big Short yet, it's an absolute must (and is now on Netflix). This somehow makes more sense to everyday people when Margot Robbie, Brad Pitt and Ryan Gosling explain it). Gold and silver are the proverbial canaries in the coal mine when it comes to the financial system and are both at near record high short positions on COMEX by you guessed it. the big banks. But it's probably nothing

Nothing really changed last night, however there is maybe just a bit of blood in the streets to take advantage of

 

[AinslieBullion]

Bank Cartel Silver Manipulators to Court

Topically after the "coincidental" COMEX lead price plunge yesterday, regular readers may recall our article back in April of this year where Deutsche Bank not only admitted to practices around price fixing precious metals markets brought by a class action, but in the settlement reached, agreed to name and shame other complicit banks. Nearly 6 months later, yesterday the U.S. District Court governing this action dismissed UBS as a defendant but ruled Bank of Nova Scotia (often called ScotiaBank) and HSBC were answerable, and hence now open to silver manipulation price-fixing litigation where investors in the class action can prosecute antitrust and manipulation claims against the banks. Specifically the claims they can now bring to the Federal Court are:

employment of a manipulative device claims
bid-rigging, and unjust enrichment.
price fixing and unlawful restraint
price manipulation claims
aiding and abetting and principal-agent claims.
At the moment this is all about silver as the parallel gold action is still being considered.

Whilst it may not see the end of the sort of blatant market fixing we've come to expect from these guys (because banks seem to be able to buy, oops, sorry, 'settle' their way out of everything) it gives credibility to the so called conspiracy theorists and is another very important step toward a natural market lead by supply and demand. Importantly too, the discovery process (where documents and communications need to be made available to the plaintiffs' lawyers) will maybe show the world what these guys get up to and help it being stamped out.

Cynics think that, just like the CFTC ruling a few years back, that whilst ever a low gold and silver price is convenient for the government (reinforcing the 'everything's awesome' narrative) these actions will never have their in-principle support and ultimately fail. The CFTC is not a court, and courts, particularly at a Federal level, have a record of ignoring government edict, proudly declaring rule of law is outside of politics. So cynicism may well be proved wrong this time.

Topically Ed Steer, refers to this bullion banking cartel as 'Da Boyz' and yesterday outlined (with our square bracket explanations) how they go about allegedly orchestrating the sort of price falls we saw Tuesday night:

"The procedure, which Ted Butler has pointed out ad nauseam over the years, is always the same. JPMorgan et al [commercial banks] spin their algos [algorithms that control the High Frequency Trading], throw in some spoofing and sell just enough contracts as it takes to trigger Managed Money [speculative hedge funds etc] sell stops, then pull their bids and you get the standard waterfall declines that you saw today. The Managed Money traders are Pavlovian pooches, selling longs en masse on one hand and going short on the other. 'Da boyz' are standing right there to pick up the other side of these tradespurchasing all the longs the Managed Money traders are selling and covering their short positions with them."

In our humble opinion, if this is correct, it is clearly criminal as it robs investors and miners alike.

As we said yesterday it will be very interesting see the next COT report to get some visibility in the shift from commercial to managed money.

 

[AinslieBullion]

IMF Debt Binge Warning

Before we get into today's article, it was another hard night for silver last night. Listen to this week's Weekly Wrap podcast for our thoughts.

If you missed it yesterday the IMF, after already earlier in the week revising down growth forecasts across the globe, issued their latest Fiscal Monitor report with yet another record tumbling in this unprecedented global financial experiment we find ourselves in. Total non financial sector debt, or total public and private debt, hit a new all-time record high of $152 trillion (that's $200 trillion in Aussie dollars). Now that is of course a huge number but it needs context for full effect. Try 225% of global GDP That (per the chart below) is about 5% higher than just before the GFC. And remember that excludes all financial sector debt! Of more concern than the headline:

"two-thirds, amounting to about $100 trillion, consists of liabilities of the private sector which, as documented in extensive literature, can carry great risks when they reach excessive levels."

They point out that Australia is one of the worst, referring to our 'fast paced binge' on new debt. As we've reported before, we have the highest personal debt to GDP ratio in the world, with Canada snapping at our heals. Both us and Canada have gone on a cheap money property splurge and the IMF is warning of the consequences ("great risks") of that both in terms of creating bubbles (Canada's property appears to be popping now) but also the ability to service this debt when rates inevitably rise. In their words:

"there are concerns that the sheer size of debt could set the stage for an unprecedented private deleveraging process that could thwart the fragile economic recovery."

In what could be the first signs, in the first nine months of 2016, commercial bankruptcy filings in the US jumped 28% compared to the same period in 2015, September saw a 38% (!) jump on the same month last year.

But it's not just private debt that has them worried. Topically just one week after the US posting it's 3rd biggest deficit in history ($1.4 trillion) taking their national public debt to $19.57 trillion, the IMF warned:

"New empirical evidence confirms that financial crises tend to be associated with excessive private debt levels in both advanced and emerging market economies, but high public debt is not without its risks. In particular, entering a financial crisis with a weak fiscal position exacerbates the depth and duration of the ensuing recession. The reason is that the absence of fiscal buffers prior to the crisis significantly curtails the ability to conduct countercyclical fiscal policy, especially in emerging market economies."

So as you may be feeling a little uneasy with what happened to gold and silver this last week keep in mind why you likely bought it and ask yourself how the world extracts itself from this 'binge' without all financial assets inflated by it not unwinding in a way that will make the falls this week look minor.

 

[AinslieBullion]

Italy On The Cusp

So it looks like Trump has finally done his dash. It will be interesting to see if this affects gold today just as the non-release of Clinton docs by WikiLeaks was said to play on the Tuesday night smack down last week.

So, and discounting the unknown of the escalating Syrian conflict, the next date of importance for gold could well be 4 December. This is the day the Italians go to the polls for a referendum on a structural overhaul to their constitution and governmental process. Anyone who knows Italy would say that is fundamentally a good thing as they have an incredibly cumbersome and archaic system that has frustrated successive governments. So what's the big deal? In essence the current and unelected Prime Minister Matteo Renzi has bet his premiership on it, and so it has taken on a popular vote component that could de-rail not just the necessary referendum but the Eurozone itself.

The anti-euro, anti globalisation, anti establishment party Five Star Movement (M5S) is set to capitalise on this as their popularity is surging and they have a fundamental platform policy of taking Italy to a referendum on leaving the EU. This is no Britain or Greece. Italy leaving the EU would be disastrous. Keeping in mind too we are not talking about a particularly stable economy on its own as we wrote about most recently here. Of the big 3, Italy has not gone well under the EU, as you can see from the following graph, and their people know and fell this through sky high unemployment, banks on the cusp of failure and a general and protracted economic slump.

The Financial Times recently put it bluntly:
"An Italian exit from the single currency would trigger the total collapse of the eurozone within a very short period. It would probably lead to the most violent economic shock in history, dwarfing the Lehman Brothers bankruptcy in 2008 and the 1929 Wall Street crash."

 

[AinslieBullion]

COMEX Buy Signal?

Last week we mentioned the role COMEX played in the take down of gold and silver last week and that we were waiting to see what the Commitment of Traders (COT) report would reveal Friday night. Here are some comments from COT analysts together with a little education for those new to it:

From John Rubino:

"The quick and dirty COT story is that it's a snapshot of what the big players in gold/silver futures contracts are up to. There are two main groups in this market: the commercials (mostly big banks and companies that buy metal to turn it into coins, jewellery and industrial products) and speculators who bet on price moves. The former consistently fool the latter into guessing wrong at turning points. That is, the speculators are usually way long at the top and very short at the bottom. So you can tell where prices are headed over next the six or so months by looking at what the speculators are betting on and assuming that if they're excited, they're wrong.

This year they've gone record long, which explains the fast recovery in metals prices and mining stocks: The speculators were piling in. This, of course, sets the stage for an eventual correction. So what happened last week was to be expected (though it was several months overdue, illustrating the point that the COT report is great for direction but dangerously unreliable for timing).

So now that we know why the beat-down is happening, let's see what this indicator says about when (in very general terms) it might end.

Note that the speculators are cutting their long positions while the commercials are scaling back their shorts.

The key conclusions:

-Both groups are moving in the right direction to establish a precious metals bottom. That is, if they keep this up, eventually the commercials will be long and the speculators short, setting up a situation where the speculators will be forced to close their shorts by buying gold/silver, thus sending their prices up.

-The commercials are moving a little more aggressively than the speculators to close out their positions. Not sure what that means.

-Neither group had done all that much as of Tuesday the 4th, which implies that the bottom is not yet in sight.

-Based on the brutality of the final three trading days of last week, next week's COT report will probably show a much bigger move in the right direction - that is, the speculators will be a lot less long. So on Friday the 14th (when Tuesday the 11th's results are reported) we'll have a better sense of how close that bottom is.

-The carnage in bullion and mining shares represents a great buying opportunity because eventually these paper games will stop working. The fundamental environment - negative interest rates, massive government deficits, steady increases in private sector debt, incipient banking/credit crises everywhere you look - is phenomenally good for real assets like gold and silver. So who knows? This might be the last chance to get in before the phase change."

And from Hebba Investments:

"Summary

The latest COT data show a massive drop in gold speculative bulls and increase in gold speculative shorts.
The net position is back at levels that we deem much healthier for a gold bull market.
Gold should see additional physical demand as buying increases from China and India.
We believe gold investors should be taking this opportunity to buy back into gold."
And finally from us As stated above the timing is hard to predict. What is not is that metal will get very hard to get when it really takes off. Remember two wise messages:

"Better a year too early than a day to late"

"Trying to pick a bottom usually just results in a smelly finger"

Don't leave it too late.

 

[AinslieBullion]

Secular Bull Market Gold & Silver

We attended the Precious Metals Investment Symposium in Sydney yesterday. There were a range of speakers but a common conclusion. Gold is in a secular bull market. Before you think it's an obvious conclusion for a gold and silver 'love in', that has certainly not been the conclusion of the last couple of years. These conclusions were based on well reasoned analysis on a market that has turned in a consolidated manner.

For us last week was quite instructive too. Gold and silver saw their biggest weekly drop in around 3 years. That sort of 'shaking of the tree' would normally see a number of speculative investors fall out and sell in panic. It was the opposite with an extraordinary amount of people 'buying the dip' and hardly any sellers.

Last week was also notable for the amount of gold and silver that piled INTO the physical backed paper investment vehicles such as ETF's. From Bloomberg:

"Holdings of ETFs backed by gold rose by 9.1 metric tons to 2,046.4 tons on Friday. Assets in SPDR Gold Shares, the world's biggest gold ETF backed, surged to the highest since mid-August."

In total the ETF's holdings rose to their highest level since 2013. The story was the same for silver and the following charts show total weekly transparent holdings for both metals:

The key takeaway is that holdings ROSE on a price decline and it speaks volumes for the secular bull market thesis and that the sell-off was largely paper futures trades on COMEX that can have little to do with physical fundamentals.

By its nature a secular bull market has its big corrections on the way up, nothing goes up smoothly. The smart ones buy the dips on the way up.

 

[Gullintanni]

"futures trades on COMEX that can have little to do with physical fundamentals. "
So if these guys drop the "paper price" of silver to $5 oz does that mean i can still sell to dealers and they will pay $25ozt?
If the answer is yes then you have a point, if the answer is NO like i know it is then it is clear that the "paper price" and physical price are EXACTLY THE SAME THING>

 

[wrcmad]

For us last week was quite instructive too. Gold and silver saw their biggest weekly drop in around 3 years. That sort of 'shaking of the tree' would normally see a number of speculative investors fall out and sell in panic. It was the opposite with an extraordinary amount of people 'buying the dip' and hardly any sellers.

Obviously AinslieBullion were sellers... into a market you are pumping as a secular bull market, where the smart ones buy the dips?

The key takeaway is that holdings ROSE on a price decline and it speaks volumes for the secular bull market thesis and that the sell-off was largely paper futures trades on COMEX that can have little to do with physical fundamentals.

Pumpershittle statement of the week.... impressive.
Mere ad hoc pumper rhetoric at best.
I'd love for you to explain your last sentence above? :lol:
I bet you don't can't.

 

[AinslieBullion]

Gold Doing The Math

An interesting thing happened last night The US Fed minutes from the last meeting were fairly hawkish (pro raising rates / tightening monetary accommodation). That would normally weigh down on gold. Last night however the gold price increased on the news.

Maybe, just maybe, markets are starting to do the math. All this hullabaloo, this market fixation, is about whether or not the Fed will raise rates by just 0.25%, up to just 0.75%. Also the Fed minute language was clearly of needing to raise rates for credibility and 'enough is enough' rather than 'everything is so awesome we can do it'.

A common gold thesis is that gold performs better when rates are low as people are less concerned by the lack of yield or return. If rates go up, in theory, cash and bonds look better. However this ignores the real rate equation arising from subtracting inflation. That still puts us firmly into negative real interest rates even if they hiked a full 1%. Amid all the talk of deflation, inflation is on the rise. The game is changing.

But it is the other reason people buy gold, and we'd argue right now the MAIN reason are buying gold, that needs greater consideration and the aforementioned application of maths. People are buying gold because they see we are getting perilously close to a financial crash. Gold has proven time and again it is uncorrelated to financial assets. It tends to go up when they go down.

So if the Fed puts rates up by 0.25% in December you may miss out on 0.25% better returns if you had your money parked in a financial asset. That's probably not a big deal on the value of your total worth. 0.25%, however, IS a big deal when there is over $200 trillion in global debt, or say the US government with $19.6 trillion. 0.25% is also a big deal to the nearly $300 trillion financial assets market inflated on cheap money and accommodative monetary policy. What happens when that turns to tightening?

And that last question is the key. If we have a financial crash after all this unprecedented stimulus, how big could that fall be? Even if it were "just" 50% like the GFC that 0.25% you missed out on looks completely irrelevant. Remember if you lose 50%, you need to make 100% on that resulting wealth just to get back to even. Meanwhile gold would likely have gained, or at least held in value. It's pretty simple math.

Keep in mind too it is only the US talking of tightening. Every other country has the monetary easing foot firmly to the floor.

So what does the world's top precious metals forecaster have to say? From Bloomberg:

"Rising inflation and sagging confidence in the ability of central banks to revive global growth will drive up gold, according to Incrementum AG, which says bullion could climb to a record in the next two years.

'Consumer prices are set to rise as oil rebounds, while low or negative interest rates and bond buying by central banks have failed to boost economies, said Ronald Stoeferle, managing partner at the Liechtenstein-based company, which oversees 100 million Swiss francs ($101 million). Incrementum was the top precious metals forecaster last quarter, Bloomberg-compiled data show."

 

[AinslieBullion]

Australia Gets 'Extreme' Warning

If you missed it earlier this week, fresh off the IMF's warnings, ratings agency Standard & Poors (S&P) has joined them issuing us with a dire warning on our debt exposure. S&P's warned our debt, both public and private, has hit "extreme" levels and puts us in the unenviable position as one of the worst in the world. In their words:

"Australia would have one of the weakest external positions of the 130 sovereigns that we rate."

As we have reported previously, Australia's net foreign debt has surpassed the trillion dollar mark at $1.045 trillion, up from $976b in just the 12 months to June.

The implications are numerous. S&P's warning joins both Fitch and Moody's ratings agencies that we are on our final warning on our AAA ratings. You need to understand that losing that rating is not a slap on the wrist but has the dual effect of automatically increasing the cost of servicing that mammoth debt bill but also a larger potential issue of capital withdrawal on a loss of faith in our economy as a safe haven.

S&P also draw a clear comparison between us and Spain. Like us Spain borrowed heavily in the domestic housing market which, like us, saw soaring property prices and a general misconception that debt doesn't matter when it's in housing, as many 'learned' commentators will offer when dismissing our title of worlds highest personal debt to GDP. We don't need to tell you how that worked out for Spain (really really badly if you don't. They are the S in the notorious Euro basket case 'PIGS').

S&P call such investment 'unproductive'. Whilst they didn't discuss it we remind you that our total national debt is now just over $6 trillion. In the last 5 years that has risen $2 trillion, a 50% increase. Over that same period our actual GDP growth was around $350 billion. In other words it's taken nearly $6 of debt to generate $1 of economic activity.

Can you see now why they are worried? It doesn't make us particularly different to other countries but that ratio is about double that of the US which attracts most of the tutt tutting.

What frustrates all of this is our treasurer in the very same week S&P's issue this warning was telling an audience at the IMF & World Bank that:

"There is not an economy in the G20 or other wise that would not want to be Australia at the moment and would not want to have the strong financial and banking system that ensures that we can have the resilience to ensure we underpin jobs and growth in this country,"

S&P bluntly rebutted this:

"The government will point out that its fiscal position is strong but it's not quite as strong as it used to be.And you don't want to have your fiscal situation adding fuel to the fire on the external side."

i.e. get your act together Australian government or you will lose that coveted AAA.

 

[AinslieBullion]

Crash Warnings Escalate Except Gold

The warnings of a crash on Wall Street have been coming thick and fast of late.

Recently Bank of America Merrill Lynch (BofAML) warned of an "imminent recession" and said:

"We are seven years into a full-fledged, all out, central bankers doing everything they can to stimulate demand.. We looked at all of these indicators that have been pretty good at forecasting recessions and we extrapolated that if they follow the current trends they're on, we're going to hit a recession sometime in the second half of next year.What scares me is the market been so fragile. So, remember what happened in January? We got a whiff of bad news and all of the sudden the market is at 1800.I think that speaks to the reaction function of the market. There are a lot of itchy trigger fingers. There's lot of violent trades that can really roil a fairly complacent environment."

Then last week HSBC's technical analysis team issued a "Red Alert" signalling an imminent sell off in equities. This has escalated quickly from the "Orange Alert" issued at the end of September signally the market topping and noted that the market looked eerily similar to that just before the 1987 crash. They warned that the key lines in the sand are 17,992 for the Dow Jones or 2,116 for the S&P 500 and said:

"With the US stock market selling off aggressively on 11 October, we now issue a RED ALERTThe fall was broad-based and the Traders Index (TRIN) showed intense selling pressure as the market moved to the lows of the day. The VIX index, a barometer of nervousness, has been making a series of higher lows since August..As long as those levels [17,992/2,116] remain intact, the bulls still have a slight hope.But should those levels break and the markets close below (which now seems more likely), it would be a clear sign that the bears have taken over and are starting to feast. The possibility of a severe fall in the stock market is now very high."

No surprise then that Goldman Sachs issued a buy signal on gold:

"We would view a gold sell-off substantially below $1,250 as a strategic buying opportunity, given substantial downside risks to global growth remain, and given that the market is likely to remain concerned about the ability of monetary policy to respond to any potential shocks to growth. The move lower [referring to those big drops a fortnight ago] does not appear to be driven by physical gold ETF liquidation.The drivers of strong physical ETF and bar demand for gold during 2016 are likely to remain intact, including continued strong physical demand for gold as a strategic hedge." It looks pretty clear on the graph below

 

[AinslieBullion]

Gold, Silver, Property, Shares or Cash?

There are a lot of people looking to 'down weight' equities on growing calls of a crash nearing (as we reported yesterday). For many this leaves the choice of property, cash or precious metals as most people don't understand how to access bonds, and many believe these will be an integral part of any crash.

The chart below shows the relative performance of each asset class over the last 15 years (to March of each year). We've used it for Brisbane seminars so please excuse the Brisbane-centric House Price (and yes Sydney would be much higher). To remove the 'gold doesn't yield' argument we include rental income for houses, dividend reinvestment plans for shares, and compounding interest on term deposits for cash.

 

[AinslieBullion]

Inflation at All Costs

Our new governor of the Reserve Bank of Australia gave his maiden speech yesterday and it was all about the battle against low inflation. Australia like most of the rest of the world (except the US) is stuck in a low inflation slump. Why is that bad you ask? Well if you (Australia) have $6 trillion of debt, $1 trillion of that to overseas lenders (as we discussed recently here) and your economic growth and fiscal policy mean you are unable to pay that back, other than defaulting the only option is to inflate it away. Inflation is their only hope after this unprecedented credit cycle.

The other reason for the need for inflation is to give the appearance of economic growth. Real growth is below expectations despite all the monetary stimulus. Nominal growth includes inflation, and so looks better. Problem solved. Lowe barely touched on the resulting property bubble yesterday (nothing to see here, you're "all" getting "richer"). But that comes at a time when wage growth is stuck at a 25 year low. So there is a very real erosion in disposable income. Its arguably worse in the US where the monetary stimulus through both QE (money printing) and ZIRP (zero interest rates) has stimulated inflation, but to date largely just in shares and property which enriches the top 1-10% at the expense of the rest who struggle with stagnant income and inflation on real things not always included in the CPI basket. Topically, US Core CPI (released yesterday) is on the rise, hitting 2.2% in September, and has now been above the Fed's 2% target for 11 straight months. Rather than raising rates in September they deferred to 'maybe' December. Surprise surprise

The risk is, that with all this new and easy money in the system, that inflation can 'get away from you' and you lose control. Gold historically thrives most in a high inflation environment, and in particular a negative real rates environment. The US interest rate is 0.5%, less CPI and you are firmly in negative real rates territory. Likewise here we are at 1.5%, less our CPI and again you are in the red.

This all comes at a time when the calls for an imminent US recession are growing louder. Should that happen you could almost bet the US Fed will throw the monetary stimulus kitchen sink at it. Under that scenario, ex hedge fund head at Goldman Sachs Raoul Pal recently said gold would double. On the chances of that happening, and remember a US recession when they are supposedly the only thing saving the global economy at present will see a global sell off, he said:

"The business cycle points to that [its now been over 7 years], and 100% of all two-term elections have had a recession within 12 months since 1910."

It seems gold wins in either scenario. Business as usual and "this time is different" with no recession (after already one of the longest non-recession streaks in history), and gold will enjoy central banks attempts to get high inflation at all costs. A US recession happens and you see a global sell off of all those inflated financial assets, a run to the safe haven of gold, followed by central banks throwing more stimulus at the fire and boosting gold further.

 

[AinslieBullion]

The Future Proof Portfolio

You could be excused for concluding, when reading our daily news, that we think you should sell everything and buy gold and silver. We try regularly to say we are more about balance than "all in" precious metals but irregular readers could miss that. That said our tag line is "Balance your wealth in an unbalanced world"!

Why, with everything we report each day about a looming financial crisis, would we say that? To be frank, because we don't know when this will happen. And in fairness to whomever you seek financial advice, nor do they. Markets act erratically, central bankers seem to be able to string it all out longer than you think possible, and count how many times we use the word 'unprecedented' when reporting what's going on in the world today. The reality is that this global economic experiment is exactly that, unprecedented. That means no one really knows how it will end or when. That means you need a balanced portfolio; one that will have one of its components 'up' whilst others may be 'down' or neutral. Remember you don't always get to choose when you divest. This is particularly important in Self Managed Super Funds. You don't get to choose where the market is at when you retire.

This is why we've teamed up with some guys we really respect in the areas of shares, bonds, and property to bring you a seminar titled "The Future Proof Portfolio" on 22 November at the State Library Queensland.

Matthew Gross is the Director of The National Property Research Co. They are an independent property research consultancy. I used Matt almost exclusively over my 20 year property development career because he researches innovatively and thoroughly and tells you as it is, not what you might want it to be when investing potentially 10's of millions of dollars of shareholders money. Matt will give you insight into what's happening in property and strips down the generalist property bubble headlines. In fact you may have seen him in Channel 7 News last night talking about Brisbane's apartment market.

Simon Gabbie is a Director at Godfrey Pembroke Financial Advice Specialists and licenced Financial Advisor for over 16 years. Simon is a wise head in financial planning and takes what we consider a well balanced and importantly, honest view on investment. Simon's services are 'fee for service' meaning there is no distraction of commissions in deciding what is best for his clients. Diversification is his mantra.

And then of course is your humble scribe on gold and silver!

So why not join us and get your friends along as well (particularly those thinking you are 'nuts' buying gold) to hear all about investing in this new paradigm of finance and investment fundamentals. Seats are limited and the response on release yesterday was very strong, so don't delay. Click on the link below for details.

 

[AinslieBullion]

Beware The Chinese Debt Dragon

People often talk about eating Chinese and being hungry half an hour later. China just miraculously met market expectations for GDP growth in the last quarter at 6.7% annualised. The markets gave a collective sigh of relief on Wednesday as the much feared 'hard landing' appears to be avoided. But in a common theme in global economics at the moment, that annualised 6.7% GDP growth came courtesy of 20% debt growth over the same period. So it took $3 of debt to get $1 of GDP growth. Did you hear that on the news Wednesday?? Didn't think so In September alone China added, wait for it$330 billion (a third of a Trillion) in debt. Check out this graph: