Oct 29

QE Finished, Gold Fans Clearly Crackpots

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The US Fed just ended quantitative easing. Anyone thinking history or gold worth a look must be a crackpot for worrying…
 

TIME WAS the Gold Standard simply existed…like rain or snooker tables, writes Adrian Ash at BullionVault
 
Zero rates and quantitative easing are the monetary equivalents today. Doing anything else puts a cental bank into the “hall of shame” according to Bloomberg. The Financial Times gasps that today the US Fed’s “grand experiment is drawing to a close…”
 
Oh yeah? The world hasn’t yet seen the last of US quantitative easing, we think. Not by a long chalk. QE is getting new life after 15 years in Japan, the world’s fourth largest economy, and it has barely begun in the single largest, the Eurozone. 
 
Only China to go, and the QE Standard will be truly global. But financial markets and pricing mechanisms the world over are already through the looking glass. After $3 trillion of US Fed asset purchases, climbing back to the other side will take more than a month’s rest from extra money printing. 
 
The Gold Standard, meantime, now exists only to fill space when financial hacks run out of other silly things to talk about. 
 
Take this classic Phil Space nonsense, for instance, from the Washington Post.
 
To recap… 
 
Over a week ago, billionaire tech-stock investor and former PayPal boss Peter Thiel appeared on right-wing shock jock Glenn Beck’s TV show. He mumbled something about the value of money…reality…and the virtual world of monetary politics we’ve all lived in since 1971. 
 
Nothing to see or hear in that. Even the laziest gold bug can see US president Nixon’s decision to end the Dollar’s gold link changed nothing and everything all at once. Metaphysical mumblings are the best anyone’s since managed in trying to understand how humanity got beyond itself in that moment.
 
Yet on Friday, Thiel’s comments were picked up by a right-leaning think tank blogger…and finally last night, this “unthink” piece appeared at the Washington Post online. 
 
So what? Well, George Selgin, new Cato Institute director, said earlier this month that anyone challenging the way money currently works must do better if they want to be taken seriously. Amateur bug-o-sphere stuff only makes things worse.
 
But Selgin underplayed the task ahead, I fear. QE, zero rates and unlimited money-supply growth are big, important issues. Today’s US Fed meeting proved that once again. 
 
On the other side of the debate however, even the most qualified and serious economist daring to doubt the sanity of printing money to buy up government debt, mortgages, stocks or other nation’s currencies now looks like a “crackpot” to most politicians, financiers and reporters today.
 
Because, hey! Nothing bad has happened. No inflation, currency destruction or financial apocalypse fuelled by money-from-nowhere. 
 
Not yet. And now the Fed is turning off the taps. For now.
 
What could possibly go wrong? We must be crazy to bother owning gold as financial insurance, never mind worrying about how money itself…as basic to civilization as the written word…is being bent and remade in the latest central-bank experiments.
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Oct 27

Gold as Investment Insurance

Gold Price Comments Off on Gold as Investment Insurance
Just how much is enough? It depends on how you judge the risk of a serious stockmarket crash…
 

YOU WAKE UP in the morning, turn on the news, and get a sick feeling in your stomach, writes Brian Hunt, editor-in-chief at Porter Stansberry’s research group, Stansberry & Associates.
 
The stock market is crashing again. Another big Wall Street bank has failed. Your 401(k) has lost another 25%. It’s bleeding value every week.
 
Your dream of early retirement is history. You’ve lost so much money in stocks that even a “regular” retirement is in jeopardy. If you live a long life, there’s no way you’ll have enough money.
 
This is the financial disaster scenario that terrifies a lot of investors. It’s what kept people up at night during the 2008 credit crisis.
 
Could it happen again? Could another crisis cause the value of the US Dollar to collapse? Could the stock market suffer another epic decline?
 
Many people say the answer to these questions is “yes”.
 
Fortunately, I don’t need to know the answer to these questions…and neither do you.
 
The good news is that it’s very easy to buy insurance against financial disasters like these. I personally own this insurance. Many of the smartest, wealthiest people I know own it, too. It could mean the difference between a comfortable, early retirement…and just barely getting by.
 
First, it’s important to agree on what “insurance” is. In my book, buying insurance comes down to spending a little bit of money to hedge yourself against a disaster.
 
Throughout our lives, we spend a little bit of money on insurance and hope we never have to use it. For example, home insurance costs a small fraction of your home’s value. Buy it and hope you never have to use it. Same goes for car insurance. It costs a fraction of your car’s value, so you buy it and hope you never have to use it.
 
It’s the same with investment insurance. You can buy “investment insurance” and hope to never have to use it.
 
There are hundreds of wealth and investment insurance policies out there. They involve intricate details, lots of forms to sign, and payment of big fees to advisors and salesmen (which are often the same thing).
 
I’d rather keep things simple and keep money in my pocket instead of a salesman’s pocket. Here’s how you can do it…
 
Put a small portion of your wealth in gold bullion.
 
That’s it.
 
That’s all it takes to insure yourself against a financial disaster.
 
No complicated insurance products. No big fees to pay. Just pay a small commission to a gold seller, store the gold in a safe place, and you’re done.
 
Here’s why this “insurance” is important…
 
Some popular market gurus are predicting a global depression, a collapse in the Dollar, and a huge increase in the price of gold. The chances of them being right are relatively slim. People have been predicting the “next depression” for 30 years. The world just has a way of not ending.
 
However, the “doom and gloom” gurus bring up some good points. They aren’t crazy. There are some big risks to our financial system. The US government is spending way too much money on wars, Obamacare, welfare, and other programs. Europe and China’s economies could decline and trigger a global recession. These are all real risks to your retirement account.
 
I’m no doom-and-gloomer. I think the economy will deal with these risks and keep growing. Again, the world just has a way of not ending like so many people believe it will. That’s why I want to own stocks, bonds, and real estate. These assets will do well if the crap doesn’t hit the fan.
 
However, I also want insurance in case I’m wrong and the potential disaster that some are predicting takes place. People would likely flock to gold in a global financial disaster…and cause its price to soar.
 
That’s why it makes sense to buy gold as a form of insurance.
 
The good news is that you don’t have to buy a huge amount of gold to have a good insurance policy. You can place just 5% of your portfolio into gold.
 
Let’s say you have a $100,000 portfolio with 95% of it in blue-chip stocks and income-paying bonds. You place the remaining 5% of your portfolio into gold. This gives you $95,000 in stocks and bonds and $5,000 in gold.
 
If the predicted financial disaster doesn’t strike, your stocks and bonds will increase in value. Your gold will probably hold steady in price or decline a little. Since the bulk of your portfolio is in stocks and bonds, you’ll do just fine.
 
But what if the financial disaster strikes? I’ve heard some top financial analysts say gold could climb to $7,000 an ounce in the financial-disaster scenario.
 
Let’s say a financial disaster sends the value of your stocks and bonds down 50%. That would be a massive decline. Throughout history, only the worst, most severe bear markets sent stocks down this much.
 
This epic financial disaster would cut your $95,000 stock and bond position by 50%, leaving you with $47,500. But let’s say this disaster also causes gold to rise to $7,000 an ounce. Right now, gold is $1,230 per ounce. A rise to $7,000 would produce a more-than-fivefold increase in the value of your gold. It would cause the value of your $5,000 gold stake to rise to about $28,455.
 
Post-financial disaster, you’re left with $75,955 ($47,500 from stocks and bonds + $28,455 from gold). The disaster still hits you, but not nearly as hard. Your insurance played a big role in limiting the damage.
 
But what if you think the chances of financial disaster are higher than “unlikely”? What if you’re more worried than the average Joe?
 
If you are, simply increase the “insurance” portion of your portfolio. Instead of a 5% position in gold, you could increase it to 20%.
 
If the previously mentioned financial disaster were to strike your $100,000 portfolio weighted 80% in stocks/bonds and 20% in gold, the math works out like this:
 
The 50% decline in your $80,000 stocks/bond position leaves you with $40,000. Gold’s increase to $7,000 an ounce makes your $20,000 gold position increase to $113,821.
 
Your large gold insurance position actually produces a net gain in this scenario. You’re left with $153,821…an increase of more than 50%.
 
As you can see, the larger your gold-insurance policy, the better you do in the financial-disaster scenario. But if the financial disaster doesn’t strike, you won’t benefit as much because you hold less money in stocks and bonds, which do well if the economy carries on. And keep in mind…it would take a serious financial disaster to send stocks down by 50% and gold to $7,000.
 
Depending on what you think the chances of financial disaster are, you can adjust your gold-insurance policy. It all depends on your goals and beliefs.
 
Think the chances of disaster are slim? Consider a gold-insurance policy equivalent to 1%-5% of your portfolio. Think the chances of disaster are high? Consider a gold-insurance policy equivalent to 20% of your portfolio.
 
Are the “gloom and doom” gurus right? Is financial disaster around the corner? I don’t know the answer. Nobody does. But if you buy some “investment insurance” in the form of gold, you don’t need to know the answer. It’s simple. It’s easy. It’s low-cost.
 
You buy gold and hope to never have to use it. You’ll do fine if things carry on. You’ll do fine if the crap hits the fan.
 
And the peace of mind you get from owning gold “insurance” is worth even more than the money it could save you.
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Oct 23

An End to QE? A Good Man in Congress?

Gold Price Comments Off on An End to QE? A Good Man in Congress?
God knows what Ron Paul was ever doing in US politics…
 

OVER the weekend, we were down in Nashville at the Stansberry Conference Series event, along with Ron Paul, Porter Stansberry, Jim Rickards and others, writes Bill Bonner in his Diary of a Rogue Economist.
 
The question on the table: What’s ahead for the US?
 
Ron Paul took up the question from a geopolitical angle. He told the crowd that the military-security industry had Congress in its pocket.
 
As a result, we can expect more borrowing, more spending and more pointless and futile wars. They may be bad for the country and its citizens, says Paul, but they are good for the people who make fighter jets and combat fatigues.
 
“We’ve been at war in the Middle East for decades,” he said…
“We supported Osama bin Laden against the Soviets in Afghanistan…and the result of that was the creation of al-Qaeda.
 
“Then we supported Saddam Hussein against Iran. Saddam and bin Laden hated each other. But after 9/11 we attacked Saddam, using a bunch of lies to justify it. We sent over military equipment worth hundreds of billions of Dollars. This equipment is now in the hands of ISIS – another enemy we created…and a far more dangerous one.”
Ron Paul is such a pure-hearted soul. What was a man like him doing in Congress?
 
It must have been some sort of electoral accident. Good men rarely run for public office. And when they do, it is even rarer for them to win.
 
Poor Ron is retired from Congress now. And he spends his time trying to “get the word out.” He thinks that if people only realized what was happening they would vote for more responsible leaders and more sensible policies.
 
Alas, that’s not the way it works. The further the country goes in the wrong direction, the more people there are who have a financial interest in staying on the same road.
 
We visited Ron in his office on Capitol Hill. He held a breakfast meeting with a small group of congressmen, trying to convince them to vote his way; we don’t remember what was at issue.
 
It was an uphill battle. Only a few members of Congress attended. And those few worried that their districts would lose money…or that the labor unions wouldn’t like it if they voted no…or that they might not get a plum committee assignment if they bucked their own party leadership. Ron was alone.
 
Politics favors blowhards, hustlers and shallow opportunists, we concluded. Which makes us wonder how Ron Paul ever got elected to Congress in the first place.
 
But not only did he get elected…once in Washington, he never sold out. Neither to the right nor the left. He opposed zombies, malingerers and bullies wherever he found them.
 
Which brings us to the subject of our own presentation to the Nashville crowd. We were following the (QE) money. “St. Louis Fed president James Bullard let the cat out of the bag last week,” we explained.
 
As Bullard told Bloomberg TV last week:
“I also think that inflation expectations are dropping in the US. And that is something that a central bank cannot abide. We have to make sure that inflation and inflation expectations remain near our target.
 
“And for that reason I think a reasonable response of the Fed in this situation would be to invoke the clause on the taper that said that the taper was data dependent. And we could go on pause on the taper at this juncture and wait until we see how the data shakes out into December.
 
“So…continue with QE at a very low level as we have it right now. And then assess our options going forward.”
We didn’t think it would happen so fast. We thought the central bank would wait. We expected a little more hypocrisy…a bit more posturing…a little more phony resistance…a few denials…
 
…the Fed should have played it cool…coy…elusive…hard to pin down, making investors really sweat before coming to the rescue.
 
We knew where the Fed would end up…but we didn’t know it would go there so quickly and easily!
 
Bullard is admitting to a staggering act of vanity and hypocrisy. In the land of free minds and free markets, apparently only the Fed knows what prices equities should fetch.
 
Henceforth, it will approve all price movements on Wall Street.
 
To bring you fully into the picture, dear reader, the US central bank has the economy, and the markets, hooked on cheap credit and printing-press money. It has been supplying both on a grand scale for the last five years.
 
But it had promised to stay away from the playground, beginning this month. Now that the economy is recovering, goes the storyline, the Fed will back away from its emergency measures and allow things to return to normal.
 
QE ends this month. Higher interest rates are expected next year.
 
No bubble has ever been created that didn’t have a pin looking for it. And nobody likes it when the two meet up. Last week, it looked as though the Fed’s bubble and Mr. Market’s pin were coming closer. Then quick action by Bullard helped push them apart on Friday.
 
QE began in November 2008. And zero interest rates began a month later. This has perverted prices for stocks, bonds, houses…and just about every other asset price on the planet. Stocks are worth more than twice what they were at the bottom of the crisis. The average house is worth $60,000 more.
 
Now QE is ending. And that means a lot less money gushing into financial markets.
Instead of increasing at a 40% rate as it did in 2012, what Richard Duncan calls “excess liquidity” – the difference between what the Fed pumps out via QE and what the government absorbs via borrowing – will go up only 6% this year.
 
Next year, there will be even less.
 
With less new money coming from the Fed…and still no real recovery…something’s gotta give. No matter what Fed officials say. And since stocks periodically go down anyway, this seems like as good a time as any.
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Oct 22

Some Scattered Semblance of Sanity

Gold Price Comments Off on Some Scattered Semblance of Sanity
And other irritating spates of MPA from the MKIAM…
 

At the BITTER END of a long, long argument about it, writes Richard Daughty via his alter-ego, the Mogambo Guru, I stubbornly maintain that being paranoid and hostile is not, in any real way, related to my being such a sub-par husband and father, which, now that we are talking about it, is actually the result of a lot of other people (not naming any names) having wildly unrealistic expectations that were WAY too high.
 
Like, by a mile, in most cases. 
 
On the contrary, being paranoid and hostile is a natural, organic reaction, namely, where sections of one’s DNA turn on or off as a self-preservation response to the huge exogenous shock to the nervous system of the evil Federal Reserve creating so impossibly much excess money and credit that asset prices (stocks, bonds, real estate) have been inflated to unbelievable, unsustainable heights, and half the country is now receiving a government check each month.
 
These are, unfortunately, big, big, BIG, economy-exploding things that are now long, long overdue for a huge, painful correction back to, in yet another irritating spate of Mogambo Pointless Alliteration (MPA), some scattered semblance of sanity.
 
Unfortunately, big deflations in asset prices would, at a leverage of 90% borrowed and 10% capital – or more! – cause instant, massive bankruptcy at the slightest downturn, since virtually all money is in the leveraged stock, bond and derivatives markets, whether you like it or not, which is kind of stupid of me to say since nobody would like it, which just proves how weird things are these days.
 
But who wouldn’t be an angry paranoiac after a lifetime of suffering treachery after treachery? Like, for example, how teachers, police, and court-appointed morons always immediately fixate on blaming me, as some mythical “bad parent”, for the misbehavior of my stupid children when they are accidentally left unsupervised for a few hours, or a couple of days, max.
 
Like all I have to do in life is watch a bunch of stupid kids, instead of out frantically scratching and scraping for more Dollars with which to buy gold and silver to save the butts of the aforementioned stupid kids, and the sweet butts of their wonderful, delightful parents, when this whole bizarre, Keynesian-inspired deficit-spending stupidity finally destroys the world.
 
Or how about how I am always losing my stupid job? Why? Because the other employees secretly plot against me just because (they claim) I am lazy and incompetent so that they end up doing my work, too, even though we all know they hate me because I know that they are idiots who are not buying gold and silver in perilous economic times like these, even though I tell them over and over and over to do so. I mean, who’s the victim here?
 
Or how about all my neighbors being rude to me because they are hateful little rodent-people, bristling with resentment about being informed that they are stupid, as in one recent episode where I was charmingly friendly and convivial, casually asking a neighbor out mowing his stupid lawn…
“Hey, moron! Are you buying gold and silver bullion because the evil Federal Reserve and all the other central banks of the world are creating so insanely much cash and credit, under the laughable delusion of Keynesian economic idiocies, that we are doomed to an inflationary collapse, or are you still a moron?”
And then they get all huffy because they refuse to understand. “Don’t be obtuse, you morons!” I haughtily say, knowing that they don’t know the definition of obtuse is to refuse to understand something, because then I would have something ELSE to throw in their stupid faces the next time they say to me…
“Well, Mister Know-It-All Mogambo (MKIAM), you have been wrong about silver and gold for more than a year, so that anybody who listened to your stupid advice lost money, and they also lost all credibility by actually believing anything you said, you horrible man, whose own children think you are horrible, too, as revealed in the first paragraph!”
Like most Earthlings, they are morons about gold and silver, even though I have told them countless times How Things Always Are (HTAA), which is that you have to own silver and gold at the end of long monetary booms, and if you don’t, then you are a moron, regardless of any temporary aberrations caused by deliberate manipulation of the gold markets by the Federal Reserve.
 
Nice and simple. So where’s the justice for ME?
 
But, mostly, my paranoia and hostility stems from contemplating the world’s One Big Problem (OBP). Namely, backbreaking debts created by central banks that are now so incomprehensibly huge, incalculably huge, so impossibly huge that it is an overwhelming sum, involving, as it does, virtually all the money, assets and debt in the Whole Freaking World (WFW), which is a pile so gigantically big that not even Superman, strange visitor from another planet with powers and abilities far beyond those of mortal men, could lift it.
 
And it’s all leveraged to the maximum, all-or-nothing hilt to magnify looming losses, with so much debt known and unknown, so many parts and players known and unknown, pandemic political corruptions and frauds known and unknown, with so many divided loyalties back-stabbing each other, with so many treacherous cross-currents, cross-ownerships, grudges and revenge blood-lust that it cannot possibly be understood except as the supreme, swirling, stinking cesspool of everything turning to valueless crap, stinking and swirling and spiraling down the old crapper, which, fortunately, is merely a problem of hydrologic engineering, which is VERY well-understood.
 
So, what’s new? Internal metrics of the stock, bond and housing markets deteriorating? Sub-zero bond yields? The Swiss voting on owning more gold? The evil International Monetary Fund (IMF) suggesting that we dump the fiat Dollar and fiat Euro in favor of a fiat Special Drawing Right (SDR) drawn on the selfsame IMF? Foreign countries forming trading blocs to the exclusion of the US Dollar? The Ebola virus being a Black Swan Event, or even a Butterfly Effect event? Asteroids plunging into the Earth? Volcanos erupting? Earthquakes? Drought? Invasions of ravenous vampire zombie space creatures from Mars?
 
It gets – yikes! – worse every day, in every way, and the only thing of which one can be absolutely sure, beyond a doubt, take it to the bank, is that the foul Federal Reserve, along with the other intellectually-corrupt central banks of the world, will create all the gigantic, exponential amounts cash and credit necessary to, if they have to, literally, buy up the entire stock market to keep prices high, just as they are doing for bonds.
 
How can you NOT have stock market and bond market booms around the world when the central banks are busily creating the money and debt with which to buy stocks and bonds?
 
So you mock my paranoia and hostility, and my manic hysteria about buying gold and silver bullion? You ain’t seen nothin’ yet.
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Oct 21

Swiss Gold Vote: Should You Be Worried?

Gold Price Comments Off on Swiss Gold Vote: Should You Be Worried?
Switzerland’s gold referendum will force the SNB central bank to buy more than it sold in 2000-2008…
 

The SWISS GOLD VOTE in November – “Should I be worried?” asks a BullionVault user owning metal in Zurich, writes Adrian Ash at the world-leading physical gold and silver exchange online.
 
It’s no idle question. Governments do nasty things when they need to buy or keep hold of an asset.
 
Witness the United States’ compulsory gold purchase of April 1933 for instance…and its ban on hoarding, exporting or trading gold. 
 
Big difference here is that the Swiss public gets to vote on what drives such measures. Thanks to their petition system, the country’s junkies get junk on prescription…while minarets are banned. The changes proposed for 30 November would compel the Swiss National Bank to:
  • hold all its gold reserves in Switzerland; 
  • raise gold holdings to 20% of the SNB’s total assets; 
  • never sell gold ever again. 
This is a Swiss decision, and with the Franc effectively “backed” by gold again if this passes, it’s really not for us British turkeys…earning and holding British Pounds Sterling…to say whether or not a foreign nation should vote for Christmas.
 
But personally speaking, I’m no fan of central-bank gold hoarding. It tends to mark dark times, and still darker plans on the part of government.
 
The Swiss government is in fact pitted against this new gold plan. But still, it’s better by far to let gold circulate freely, I believe…outside state vaults and in private hands…just like the truly classical Gold Standard worked.
 
But let’s put my hopeless idealism, and the economic wisdom (or otherwise) of this 1930s-style Gold Standard proposal aside (for that is what it is). Just how desperate might the Swiss authorities become if the vote passes? Put another way, what impact might it have on the supply/demand balance worldwide, and hence prices?
 
First, the security of gold property held in Zurich or Bern, under the tarmac at Kloten or beneath the Gotthard mountains. Switzerland is a highly open economy, with financial services earning a huge portion of its tax revenues and employing nearly 6% of the working age population. Its banking reputation may have been dented in recent years (and its hard-won bank secrecy laws look set to be crushed by the European Union kowtowing to the US juggernaut). But physical gold storage, alongside refining imported gold bullion for export, continues to be a crucial industry.
 
By our reckoning, the world’s investors added 1,400 tonnes of gold to private and bank vaults in Switzerland between 2009 and 2013. For non-bank storage of physical property, it remains by far the most popular choice amongst BullionVault users, holding nearly 75% of the current record-high levels of client gold. To the best of our knowledge, no country enjoying such revenue – nor any state enjoying such confidence from foreign wealth – has ever turned it away. 
 
Even during the UK’s balance of payments’ crisis of the 1970s, foreign-owned bullion was allowed to enter and leave freely, sidestepping both VAT sales tax and the exchange controls blocking private British ownership of gold. London of course remains the centre of bullion dealing worldwide, just as Switzerland remains the No.1 choice for investment storage. It’s very hard indeed to see Switzerland attempting any kind of expropriation, compulsory purchase, exchange controls or punitive taxation – most especially of foreign-owned gold. 
 
So, with theft highly unlikely (especially against the popular pro-gold backdrop of a successful referendum), might the SNB rush to buy gold in December after the 30th November vote? Complicating factors start with the referendum process itself. Next month’s question gives no time limit for completing the extra gold buying, nor for repatriation of existing stock from foreign central-bank care. But if voters look harder (and they’ll be urged to think hard by the pro-gold billboard campaign set to start mid-November), then supporting documents set a deadline of 2 years for bringing the current gold home, and 5 years for reaching that 20% target. However, the clock will start running from the date of “acceptance”. But is that acceptance by voters (ie, November 30th) or by parliament and thus the regional cantons (ie, into Swiss law)?
 
This matters, because Swiss referenda, when approved by the public, can take up to 3 years to become law. So the whole process…if the SNB accepts its fate and doesn’t work with the government to refuse, reject or somehow revoke the Swiss public’s decision…could last up to 8 years.
 
Expect delays. SNB president Jordan has long spoken against the vote, and vice-chair Danthine did so this month (invoking the threat of deflation and Euro-led recession). Those policymakers are unelected, so Switzerland’s referendum pits popular, if not populist will against the technocrats. But elected politicians also oppose the move (and by a wide margin). Even if passed, in short, the spirit of the new rules will likely be hampered by those people charged with enshrining and then enacting them. 
 
The SNB is also a signatory to the fourth Central Bank Gold Agreement. Running for 5 years from 27 Sept. this year, it obliges the 22 central banks involved to “continue to coordinate their gold transactions so as to avoid market disturbances.” The expected transactions were of course sales (the first CBGA was signed after the UK’s sudden and clumsy gold sales announcement of mid-1999), but this treaty only offers further cover for delaying, going slow, or otherwise tempering the impact of buying.
 
An object lesson in central-bank recaltricance is the repatriation of Germany’s gold. Wanting some 300 tonnes from New York and 374 from Paris, the Bundesbank’s plan announced in January 2013 is scheduled for completion in 2020. Yet last year, only 5% of that total was shipped, barely one-third the average run rate required. Whatever the reasons, there really isn’t any hurry, not for the central bankers involved at either end of the transfer.
 
As for retrieving Switzerland’s current overseas gold holdings, we’re given to believe the Bank of England can “dig out” a 20-tonne shipment every two days. So if 20% of the SNB’s metal is still there in London, it could expect to get back the UK holdings inside 1 month. But only if the Bank of England devotes its entire vault staff to that task alone (it holds another 5,000 or so tonnes belonging to other customers besides the UK Treasury), and only if central-banking’s “old world” handshakes and winks are thrown over to appease public opinion.
 
Again, don’t bet on it. Central bankers have fat brass necks when it comes to defending themselves under cover of mutual independence from national governments and their voting publics. So might history offer some clues to the timing of Swiss buying?
 
Sucking in foreign money around WWII, and with exchange controls blocking many citizens abroad from buying investment bullion, Switzerland’s own gold reserves grew from 450 tonnes to 1,940 between 1940 and 1960. The sales starting 2000 took eight years to dispose of that much again, this time into a bullish free market (and again, after a public vote). Now something around 220 tonnes per year might be wanted – sizeable quantities to be sure, but in line with recent sources of demand like gold miners buying back the huge forward sales they’d made to insure against lower prices at the turn of the century (dehedging averaged 260 tonnes per year between 2000 and 2012) or the growth rate of new Chinese consumer demand (100 tonnes per year 2004 to 2013).
 
That extra demand, however, came during a strong bull market in prices. Miner dehedging in particular put a strong bid in the market, helping drive prices higher both mechanically (see the spike of early 2006 for instance) and psychologically (if gold-miner hedging had been bad for investor sentiment, then de-hedging could only be good). Many people now believe that forcing the SNB to hold 20% of its assets as gold will clearly drive market prices higher. Added to the repatriation of all Switzerland’s existing gold reserves…which could catch the cosy world of central banking asleep as Swiss law demands the gold is returned…it is expected to spark a huge squeeze on physical supplies worldwide.
 
We’re not so sure. Heavy central-bank gold sales during the 1990s are widely held to have pushed gold prices down. But those sales continued until the financial crisis began. By then, gold prices were 3 times higher from their lows of 2001, replaying what happened in the late 1970s, when the US Treasury was a big seller. Relatively heavy purchases – this time by emerging-market states – then coincided with the 2011 peak. But again, those purchases have continued as prices fell steeply.
 
Yes, back in 1998-2000, the Swiss gold sales discussed and then begun at the turn of this century helped drive the final nails into gold’s coffin-lid. But sandbagging the price, and dismaying dealers (as well as “bitter end” investors enduring the two-decade bear market starting with 1980’s peak at $850 per ounce), those huge sales in fact laid the floor for the 12-year bull market which followed.
 
Free from central-bank vaults like no time since before the First World War, gold rose and kept rising as private Western households, then Asian consumers, money managers and emerging-market central banks joined the gold miners themselves in buying bullion.
 
Gold is nearly as rich in irony as it is in politics. If the Swiss pro-gold campaign is trying to gerrymander a price-rise by forcing the SNB to turn buyer, history may yet – we fear – have the last laugh.
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Oct 21

Russia’s "Too Many Rubles" Problem

Gold Price Comments Off on Russia’s "Too Many Rubles" Problem
After finally getting it right in 2009, Moscow is replaying a currency crisis terribly…
 

ARE YOU getting that “It’s kinda like 2008 again” feeling? I am! says Nathan Lewis at New World Economics.
 
In November of 2008, the Russian Ruble was collapsing vs. the Dollar, the Russian central bank was intervening in the foreign exchange market, Russian interest rates had risen to high levels, and I was writing an op-ed about it.
 
“On the surface, it appears that Russia’s central bank is doing what it should to support the value of the Ruble. Rubles are being purchased on the foreign exchange market, using foreign reserves. The central bank’s interest rate targets have been raised, with the main overnight credit rate now at 12%.
 
“However, a closer inspection reveals that the central bank – like most central banks in these sorts of situations – is neglecting to address the most important factor, the number of Rubles in circulation. The supply of Rubles is largely unchanged. If the demand for Rubles declines, and supply is unchanged, then a lower Ruble value is the inevitable result. Indeed, once market participants notice that the central bank is not properly managing the supply of Rubles, it is common for demand to fall even more.
 
“The ‘supply of Rubles’ is known as base money. As of November 10, the central bank reported that Ruble base money was 4,416 billion Rubles. At 27 Rubles/Dollar, that is worth about $163 billion. On September 1, the monetary base was 4,508 billion Rubles. We see that, despite the apparent frantic efforts of the central bank, Ruble base money has barely changed.”
Well, here we are six years later. The value of the Ruble has fallen from 32 per Dollar at the start of 2014 to about 41 per Dollar today. The central bank’s policy rate is at 8.00%, and the central bank has intervened in October by buying a total of $9.262 billion of Rubles (about 370 billion Rubles at 40 to the Dollar). It hasn’t accomplished much.
 
This follows a total of $39 billion of Dollar-selling and €3.8 billion of Euro-selling earlier this year.
 
And the monetary base? Unfortunately, we don’t have data yet for what has happened in October, but it was 9.351 trillion Rubles on 1 February 2014 and 9.947 trillion on 1 October 2014.
 
There is a certain amount of seasonal variation in the monetary base, but particularly in a crisis situation, what should have happened is that the monetary base should have contracted by about the same amount as the amount of forex intervention. The forex interventions before October should have resulted in a shrinkage of the Ruble monetary base by about 1.54 trillion Rubles, a contraction of about 15%. But, that didn’t happen. Instead, the monetary base actually expanded by 6% over that time.
 
This “too many Rubles” problem got worse, with the usual consequences. I’ll guess that the same thing has happened during October as well, as we should see in the statistics soon.
 
Here’s what I wrote in 2008:
“When the central bank sells Dollars, it receives Rubles in return. To support the value of the Ruble, these Rubles should disappear from circulation. In other words, base money should decline by an equivalent amount. If this had been done, base money would have declined by about 60%, or 2,646 billion Rubles. Only 1,770 billion Rubles would remain. If necessary, the central bank could buy every last remaining Ruble in existence with an additional $66 billion.
 
“A 60% decline in base money is very large. In practice, it would hardly take such a dramatic effort to support the currency’s value, if the central bank is properly addressing the problem. A 20% reduction should be more than enough. That would require the use of about $33 billion of foreign reserves, a relatively small sum.
 
“At least until the crisis passes, base money should not be allowed to expand via some other open-market operation, such as an interest-rate target. In technical terms, the Ruble-buying operation should be ‘unsterilized’.”
I don’t know if anyone in the Russian government read this, but I do know that, in early 2009, they took exactly the measures described.
 
In February 2009, the monetary base shrank by 22%, with an exactly corresponding quantity of sales of foreign currency. And it worked: the Ruble rose in value, and the crisis passed. I documented it in my 2013 book Gold: the Monetary Polaris, which is available in free eBook (.pdf) version here. The part about Russia begins on page 133.
 
So, we know it works.
 
The appalling thing is that Russia’s central bank should know this, because they are the ones that did it, and it worked for them. But, they seem to have forgotten. (Presumably there are new people there now.) Monetary affairs, today, is in the hands of doofuses, in Russia and everywhere else. People don’t believe this when I say it. But, what else would you call it?
 
Looking at the Russian central bank’s balancesheet, it has a number of options here. It could sell foreign reserves, and reduce the monetary base by the equivalent amount – as it did in early 2009. But, it could also sell domestic assets (government bonds), and reduce the monetary base by the same amount. This way, they wouldn’t have to give up any foreign reserve assets at all. I suggest starting with a 10% contraction in base money, and going to 20% or even 30% if necessary. It doesn’t really matter what kind of asset you sell. The important thing is that there are less Rubles in existence than when you started.
 
Eventually, I hope that Russia will show some leadership in the creation of a new monetary order based on gold. However, before then, they are going to have to learn a few things about how to manage a currency correctly.
 
You can’t manage a currency based on gold, or anything else for that matter, if you act like a doofus.
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Oct 15

What the Bond Crash Will Look Like

Gold Price Comments Off on What the Bond Crash Will Look Like
A lot of very discontinuous action to the downside ahead…
 

“WHEN sorrows come,” wrote Shakespeare, “they come not single spies, but in battalions,” says Tim Price on his ThePriceOfEverything blog.
 
Jeremy Warner for The Daily Telegraph identifies ten of them. His “biggest threats to the global economy” comprise…
  1. Geopolitical risk;
  2. The threat of oil and gas price spikes;
  3. A hard landing in China;
  4. Normalisation of monetary policy in the Anglo-Saxon economies;
  5. Eurozone deflation;
  6. ‘Secular stagnation’;
  7. The size of the debt overhang;
  8. Complacent markets;
  9. House price bubbles;
  10. Ageing populations.
Other than making the fair observation that stock markets (for example) are not entirely correlated to economic performance – an observation for which Eurozone equity investors must surely be hugely grateful – we offer the following response.
 
Geopolitical risk, like the poor, will always be with us.
 
Yes, the prices for oil and natural gas could spike, but as things stand WTI crude futures have fallen by over 15% from their June highs, in spite of the clear geopolitical problems. And the US fracking revolution, in combination with fast-improving fundamentals for solar power, may turn out to be a secular (and disinflationary) game-changer for energy prices.
 
China, however, is tougher to dismiss. If we had any meaningful exposure to Chinese equity or debt we would be more concerned. But we don’t, so we aren’t.
 
Five of Jeremy Warner’s ‘threats’ are inextricably linked. The pending normalisation of monetary policy in the UK and US clearly threatens the integrity of the credit markets. It’s worth asking whether either central bank could possibly afford to let interest rates rise.
 
This begets a follow-on question: could the markets afford to let the central banks off the hook? Could we, in other words, finally see the return of the long absent and much desired bond market vigilantes?
 
That monetary policy rates are so low is a function of the growing prospect of Eurozone deflation (less of a threat to solvent consumers, but deadly for heavily indebted governments). Absent a capitulation by the Bundesbank to Draghi’s hopes or intentions for full-blown QE, it’s difficult to see how the policy log-jam gets resolved. But since all German government paper out to three years now offers a negative yield, it’s difficult to see why any Eurozone debt is worth buying today for risk-conscious investors. Cash is probably preferable and gives optionality into the bargain. ‘Secular stagnation’ is now a fair definition of the Eurozone’s economic prospects.
 
But all things lead back to Warner’s point 7: the size of the debt overhang. Since this was never addressed in the immediate aftermath of the Global Financial Crisis, it’s hardly a surprise to see its poison continue to drip onto all things financial. And since the policy response has been to slash rates and keep them at multi-century lows, it’s hardly a surprise to see property prices in the ascendant.
 
Complacent markets? Check. But stocks have lost a lot of their nerve over the last week. Not before time.
 
Ageing populations? Yes, but this problem has been widely discussed in the investment community over the past two decades – it simply isn’t new news.
 
We saw one particularly eye-catching chart last week, via Grant Williams, comparing the leverage ratios of major US financial institutions over recent years (shown below).
 
  
The Fed’s leverage ratio (total assets to capital) now stands at just under 80x. That compares with Lehman Brothers’ leverage ratio, just before it went bankrupt, of just under 30x. Sometimes a picture really does paint a thousand words. And this, again, brings us back to the defining problem of our time, as we see it: too much debt in the system, and simply not enough ideas about how to bring it down – other than through inflationism, and even that doesn’t seem to be working quite yet.
 
In a recent interview with Jim Grant of Grant’s Interest Rate Observer, Sprott Global questioned about the likely outlook for bonds:
“What would a bear market in bonds look like? Would it be accompanied by a bear market in the stocks?
 
“Well, we have a pretty good historical record of what a bear market in bonds would look like. We had one in modern history, from 1946 to 1981. We had 25 years’ worth of persistently – if not steadily – rising interest rates, and falling bond prices. It began with only around a quarter of a percent on long-dates US Treasuries, and ended with about 15% on long-dated US Treasuries.
 
“That’s one historical beacon. I think that the difference today might be that the movement up in yield, and down in price, might be more violent than it was during the first ten years of the bear market beginning in about 1946. Then, it took about ten years for yields to advance even 100 basis points, if I remember correctly.
 
“One difference today is the nature of the bond market. It is increasingly illiquid and it is a market in which investors – many investors – have the right to enter a sales ticket, and to expect their money within a day. So I’m not sure what a bear market would look like, but I think that it would be characterized at first by a lot of people rushing through a very narrow gate. I think problems with illiquidity would surface in the corporate debt markets.
 
“One of the unintended consequences of the financial reforms that followed the sorrows of 2007 to 2009 is that dealers who used to hold a lot of corporate debt in inventories no longer do so. If interest rates began to rise and people wanted out, I think that the corporate debt market would encounter a lot of ‘air pockets’ and a lot of very discontinuous action to the downside.”
We like that phrase “a lot of very discontinuous action to the downside”.
 
Grant was also asked if it was possible for the Fed to lose control of the bond market:
“Absolutely, it could. The Fed does not control events for the most part. Events certainly will end up controlling the Fed. To answer your question – yeah. I think the Fed can and will lose control of the bond market.”
As we have written on innumerable prior occasions, we wholeheartedly agree. Geopolitics, energy prices, demographics – all interesting ‘what if’ parlour games. But what will drive pretty much all asset markets over the near, medium and longer term is almost entirely down to how credit markets behave. The fundamentals, clearly, are utterly shocking. The implications for investors are, in our view, clear. And as a wise investor once observed, if you’re going to panic, panic early.
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Oct 14

Goldbug Apocalypse

Gold Price Comments Off on Goldbug Apocalypse
US growth doesn’t play well for the “apocalyptic goldbug” narrative. But for Asian demand…?
 

JOHN KAISER joined Continental Carlisle Douglas as a research assistant in 1982. Six years later, he moved to Pacific International Securities as research director, and also became a registered investment adviser.
 
Kaiser moved to the US with his family in 1994, and now produces The Kaiser Report of mining-stock analysis. Here he tells The Gold Report‘s sister title The Mining Report why “goldbugs” still expecting a US economic apocalypse might get their own disaster…
 
The Mining Report: At the Cambridge House Canadian Investment Conference in Toronto, you talked about escaping the resource sector swamp. Why do you call the current market a swamp?
 
John Kaiser: There are four key narratives that dominate the resource sector, in particular the junior resource sector.
 
One is the supercycle narrative where a growing global economy catches the mining industry off guard with the result that higher-than-expected demand results in higher real metal prices. That then unleashes a scramble to find deposits that work at these higher, new prices and put them into production. The juniors played an extraordinary role during that cycle in the last decade; however, global economic growth has slowed. Therefore, we are looking at a period of sideways, possibly weaker, metal prices for a number of years, which puts the supercycle narrative on hold. That is one factor keeping the sector in a swamp.
 
Another important narrative is the goldbug narrative, where a soaring gold price is going to make deposits much more valuable. We did see that play out. Gold reached $1950 per ounce briefly, but has since retreated 40%. Even though that’s still 400% off the low from just over a decade ago, it has turned out to be a wash in real prices. Now, growth projections in the US are having negative implications for the prevailing apocalyptic goldbug narrative. That does not bode well for an escape from the quagmire.
 
A third key narrative is security of supply, which we saw manifested in the rare earth [RE] boom in the past five years. However, the RE prices have come back to earth as substitution and thrifting has kicked in. The anxiety that China is going to eclipse the US anytime soon has diminished, and the concern that there will be supply squeezes around the world has diminished.
 
The fourth narrative, which has dominated the junior sector for two of the past three decades, is that of discovery exploration. Unfortunately, there have not been many very good discoveries in the past decade that have inspired confidence in the retail sector. Add to that the structural changes in the financial services sector that make it increasingly difficult for junior public companies to source retail investor capital.
 
These are the forces that are keeping gold – and junior mining equity – prices bogged down.
 
TMR: Let’s look at each of those narratives a little bit closer to determine what they mean for junior mining companies. If China’s growth is slowing and the US recovery remains hesitant, what does that mean for base metals – copper, nickel, iron and zinc?
 
John Kaiser: In the last decade, juniors have made a career of picking up deposits found in past exploration cycles and discarded as marginal because the grade wasn’t high enough. The juniors did a tremendous job of reevaluating their potential based on new prices and technology. That led to $140 billion worth of takeover bids, compared to the $5bn per decade in the 1980s and 1990s. These deposits now sit as inventory in the big mining companies.
 
That means when we get another price boom, the big mining companies will develop these projects to supply the demand surge, not acquire juniors that claw a new batch of discarded deposits out of the closet. Investors interested in juniors with advanced deposits will have to focus their attention on an existing pool of juniors that will shrink as they disappear through buyouts or mergers with very modest premiums off cyclical market lows.
 
TMR: Would you apply that scenario to all of the base metals?
 
John Kaiser: Copper and iron are the ones that are faced with oversupply in the next couple of years. Nickel is a special situation because it was being oversupplied until Indonesia imposed an export ban on raw laterite ore. The Philippines is contemplating doing something similar. Should this come to pass, then we will have temporary shortages of nickel, and we could see nickel prices going higher. But if Chinese capital builds the capacity to smelt the nickel laterite ore in Indonesia and the Philippines, then we will see weak nickel prices.
 
The one metal I think will realize higher prices in the next few years is zinc. That is because major mines have started to shut down, and what is coming onstream is considerably less capacity than what is shutting down. Normally, that doesn’t really matter because China has been the elephant in the room, the largest zinc producer. China has nearly doubled its production in the past decade. The prevailing view is that if we get a higher zinc price, China will move quickly to put more mines into production. However, I believe, due to a new environmental focus, the country could actually shut down some of its capacity, worsening the supply situation.
 
TMR: Let’s go back to your themes. The second one was the goldbug theme. The Federal Reserve is betting that the US economy is good enough to handle rising interest rates as part of a push to jumpstart the global economy. What could this mean for the supercycle we talked about and the apocalyptic goldbug narrative and the companies in the metals space?
 
John Kaiser: If the Fed successfully finesses the transition from quantitative easing and low interest rates to an economy based on positive real short-term interest rates, then we will see the consumer start to feel more comfortable with the future and spend money. Businesses would then start spending the trillions of Dollars they are now hoarding or spending on share buybacks to prop up stock prices.
 
If they shift to building stuff again for the long run, which employs people with quality jobs and signals optimism about America’s economic future, then the banks become happy and will start lending money to consumers. It creates a virtuous circle where the economy grows organically rather than artificially. This is also good for the rest of the global economy because it will enable emerging markets to hitch their wagon back to the US as a primary export destination and, ultimately, as a flow of capital back to their own economies to fund self-sustaining economic growth.
 
A smooth transition to real growth is bad news for the goldbug narrative because if we have higher interest rates and, thus, better yields, that makes gold – which yields nothing – not very competitive. A strong Dollar also clashes with the idea that everything is falling apart and, therefore, gold is going to go up due to resulting hyperinflation and fiat currency debasement.
 
But if the Fed is wrong and it merely succeeds in popping a stock bubble and the Dow Jones drops more than the 10-15% that would qualify as a healthy correction, unleashing another asset deflation spiral similar to 2008, then we end up in a very negative scenario for the global supercycle narrative and for the goldbug narrative because gold goes down in a liquidity crunch. Either outcome creates an argument for gold dropping through that $1180 per ounce resistance level and touching $1000 per ounce on the downside.
 
TMR: Are you predicting $1000 per ounce gold?
 
John Kaiser: I see $1000 per ounce as a temporary aberration except in the worst case scenario of a global depression. Today 1980’s $400 per ounce gold adjusted for inflation is $1120 per ounce, so $1200 per ounce is just a 9% real gain. That is sobering when you consider the mining industry extracted 2.3 billion ounces over the last 30 years on the back of gold’s big move during the 1970s. As this low hanging fruit got harvested, mining costs rose, even more so than general inflation during the past five years.
 
All-in cost estimates average $1350 per ounce for new gold, partly due to higher mining costs, but also due to lower grades, more difficult metallurgy and social license costs. A gold price in the $1000-1200 per ounce range implies that the world going forward will be content with the existing 5.4 billion ounce aboveground gold stock plus the billion extra ounces existing mines will produce as they deplete over the next decade.
 
As an optimist about global economic growth, I find that hard to believe. If the end of quantitative easing and the arrival of higher real interest rates gives the American economy organic growth legs, rather than sending it into a tailspin that requires the Fed to put it back on life support, it will pull the global economy back into an uptrend with resource-hungry emerging economies with large population bases as the long-term growth engines.
 
While your typical North American goldbug owns gold to hedge against catastrophe and a possible capital gain trade, new wealth in emerging nations seeks gold ownership as a form of saving and wealth insurance. This gold is not generally for sale. In my view, global economic growth is a plausible driver for higher real gold prices. The question is how long can gold hang around at price levels where it does not make economic sense to mobilize new gold mine supply?
 
What would jumpstart an uptrend in gold is China announcing its actual reserve holdings, which were last reported in 2009 as 1,054 tonnes. Since then China has produced about 2,000 tonnes and because the central bank is the official buyer of domestic gold production, China’s official gold holdings are likely over 3,000 tonnes, just behind Germany at 3,384 tonnes. China has also been a heavy importer of gold since its breakdown in 2013, possibly over 1,000 tonnes. That would put China in second place, halfway to America’s official holdings of 8,134 tonnes. China sees as the long game the eventual end of the US Dollar as the world’s single reserve currency.
 
For now China is more than happy to see weak gold prices and is unlikely to harm its gold accumulation agenda by updating its official reserve holdings. But if it did, that would make investors think twice about selling the gold they already own and increase demand for more, which would lead to a higher gold price. A shortage could push gold to $1500 per ounce without excessive inflation or fiat currency debasement. It would also underpin a new bull market in the juniors, especially if the American economy is back on track and the dominant gold narrative is no longer one that just promises higher gold prices without enhanced mining profitably.
 
TMR: We’ve talked before about the fact that during this downturn, a lot of companies were going to either disappear or be reduced to walking dead on the Toronto Stock Exchange and the TSX Venture Exchange. Is one of the bright spots of the market today that it’s easier to tell the good companies from the bad?
 
John Kaiser: Yes and no. Just under 600 companies out of 1,700 have more than $500,000 working capital and aren’t in the big mining company league. Some 300 have between $0 and $500,000 working capital, and about 700 have negative working capital of about $2B. The negative working capital ones are pretty much dead in the water because no one wants to give them real money to replace money that’s already been spent. You may find a few companies among them with interesting stories that are worth salvaging. But most of the indebted companies are going to wither away and disappear.
 
That leaves about 900 companies with potential to survive. Among those, I gravitate toward the ones that have real management teams – technical personnel who know something about exploration – and projects with a story indicating that the brains of management are actually at work and that they are not just going through the motions of pretending to explore. Some companies are sitting on piles of money where management is collecting big salaries but because they have large shareholders who are treating the company simply as a keg of dry power for extremely bad times, they do not have the go-ahead to do anything along the lines of serious exploration that would risk the capital but also put the company in a position to deliver a substantial reward. One also has to be careful about those companies because they represent opportunity cost.
 
But, in general, it is now easier to see companies that are doing something and distinguish those from the rest because the inability to finance and the poor financial condition of most of the resource juniors make it very clear that they have nothing and are doing nothing. There is no reason to invest even a penny in such zombie companies.
 
TMR: Thank you for your time.
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Oct 10

Central Bank Gold Agreement No.4

Gold Price Comments Off on Central Bank Gold Agreement No.4
“We, the undersigned, aren’t selling gold anyway. But just so you know…”
 

In MAY 2014, the European Central Bank and 20 other European gold holders announced the signing of their fourth Central Bank Gold Agreement, writes Julian D.W.Phillips at GoldForecaster.
 
This agreement, which applies as of 27 September 2014, will last for five years and the signatories have stated that they currently do not have any plans to sell significant amounts of gold.
 
Collectively, at the end of 2013, central banks held around 30,500 tonnes of gold, which is approximately one-fifth of all the gold ever mined. Moreover, these holdings are highly concentrated in the advanced economies of Western Europe and North America, a statement that their gold reserves remained an important reserve asset, a statement made in each of the four agreements since then.
 
After 29 years of implied threats that gold was moving away from being an important reserve asset and the potential sales of central bank gold the gold price had fallen to $275 down from $850 in 1985. But the sales that were seen were so small that with hindsight they were seen as only token gestures. Today the developed world’s central banks continue to hold around 80% or more of the gold they held in 1970.
 
It only became clear subsequently that the real purpose behind these sales (from 1975) were to reinforce the establishment of the US Dollar as ‘real money’ and the removal of gold as such. The US government would brook no competition from gold, but continued to hold gold (as money ‘in extremis’) in ‘back-up’.
 
Then in 1999 the Euro was to be launched. It too needed to ensure that Europeans, who had a long tradition of trusting gold over currencies, would not reject the Euro in favor of gold and turn to gold and its potentially rising price. So it was decided that while gold was to be retained as an important reserve asset, its price had to be restrained for some time, while Europeans were made to accept the Euro as a reliable, functioning money in their daily lives.
 
To that end, major European central banks signed the Central Bank Gold Agreement (CBGA) in 1999, limiting the amount of gold that signatories can collectively sell in any one year. There have since been two further agreements, in 2004 and 2009. Now the fourth Central Bank Gold Agreement is in operation.
 
Together, the European Central Bank, the Nationale Bank van België/Banque Nationale de Belgique, the Deutsche Bundesbank, Eesti Pank, the Central Bank of Ireland, the Bank of Greece, the Banco de España, the Banque de France, the Banca d’Italia, the Central Bank of Cyprus, Latvijas Banka, the Banque centrale du Luxembourg, the Central Bank of Malta, De Nederlandsche Bank, the Oesterreichische Nationalbank, the Banco de Portugal, Banka Slovenije, Národná banka Slovenska, Suomen Pankki – Finlands Bank, Sveriges Riksbank and the Swiss National Bank say that…
“In the interest of clarifying their intentions with respect to their gold holdings, the signatories of the fourth CBGA issue the following statement:
  • Gold remains an important element of global monetary reserves;
  • The signatories will continue to coordinate their gold transactions so as to avoid market disturbances;
  • The signatories note that, currently, they do not have any plans to sell significant amounts of gold.
“This agreement, which applies as of 27 September 2014, following the expiry of the current agreement, will be reviewed after five years.”
The first clause confirms the ongoing role of gold as an important reserve asset. The most important part of the statement is the third part, where the signatories confirm “they do not have any plans to sell significant amounts of gold.”
 
In other words they have completed their sales. We do not expect them to resurrect their sales as they have fulfilled their purpose. Their sales stopped in 2010 in effect, bar some small sales by Germany of gold to be minted into coins. We did not consider these a part of these agreements.
 
The statement clarifies that none of the signatories will act independently of the rest and sell gold. They will coordinate any future transactions with the other signatories should a situation arise where a signatory wishes to sell again. We believe that this will not happen because of the financially strategic and confidence building nature of their gold reserves.
 
This agreement in lasting for five more years reassures the gold market that none of the signatories will sell gold for five years and even then they will likely make a further agreement for five more years.
To us this statement and agreement removes the specter of central bank gold sales in the future. As we have seen since these sales were halted in 2010, emerging market central banks have been buyers of gold steadily and carefully, without chasing prices.
 
We have the impression that the bullion banks go to prospective central bank buyers and ‘make the offer’ of gold available on the market, which the central bank then buys. They do not announce their intentions and act so as not to affect the price barring taking stock from the market.
 
This not only reassures gold-producing countries and companies, who can be reassured that there will be no policy of undermining the price of gold with uncoordinated sales of gold, but tells the rest of the world including emerging central bank buyers that there will be no supplies from them put on sale. Such buyers will have to find what gold they can on the open market or from their own production.
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Oct 10

Soft Money Paradigm Breaking

Gold Price Comments Off on Soft Money Paradigm Breaking
Disaster. Catastrophe. Go on – admit it holds a certain appeal…
 

IT MIGHT seem that today we are deeply devoted to the Mercantilist paradigm in monetary affairs, writes Nathan Lewis at New World Economics.
 
That is the notion of a floating fiat currency managed by a panel of bureaucrats, to address an ever-changing menu of issues including unemployment, exchange rates, financial markets, government funding, and the interests of one group or another.
 
Some people call this the Soft Money paradigm, characterized by the “Rule of Man”.
 
But, I think it is important that quite a few governments have actually abandoned this paradigm. They do not attempt to manage their economies by jiggering their currencies.
 
Rather, they adopt a simple fixed-value system: the value of the currency shall be X. There is no domestic discretionary element. This is the Classical paradigm, the Hard Money paradigm, in which the “Rule of Law” is primary.
 
But what is “X”? In the past, it was gold. A “gold standard system” is a system in which gold is the “standard of value,” ie, “X”.
 
A “Dollar” was once worth 23.2 troy grains of gold. Today, lots of countries have the same sort of arrangement, but they use the Euro as “X” instead of gold. This includes the eighteen members of the Eurozone, all of which have given up any avenue of domestic money-jiggering.
 
It is true that the Euro itself is a floating fiat currency, and that the ECB does take into consideration the concerns of Eurozone member states during its funny-money decision-making process. However, we also know that the ECB doesn’t really take orders from any one state, not even Germany, which is a little miffed at the central bank’s latest money-printing scheme.
 
We also know that there are many Mercantilist economists who declare loudly that any state that gets itself into trouble should have its own independent currency, which can supposedly be jiggered by its own independent board of incompetents to make all the boo-boos better, really we promise.
 
Thus, I would argue that the Euro is basically serving as an external monetary benchmark for these states, much as gold did in the past.
 
In addition, there are another ten small states and territories that use the Euro but are not officially part of the Eurozone. Also, there are twenty-eight countries, mostly in Africa, that have some sort of Euro link, mostly via a currency board system.
 
In total, there are fifty-five states and territories that have a Classical fixed-value system based on the Euro. The only difference between these “Euro standard systems” and a “gold standard system” is the choice of the “standard of value.”
 
The Classical ideal in money is very common today. But why use the Euro as a “standard of value” instead of gold?
 
The most basic reason is stability of exchange rates, or what I call the “terms of trade.” The smaller countries of Europe have always had a high degree of trade with each other. This does not only include imports and exports, but also financing and investment. Whatever the potential benefits of using gold as the “standard of value,” the fact is that to do so would introduce a lot of chaos into exchange rates with other Euro-using states, and other countries as well, which would be completely intolerable to businesspeople.
 
One of the primary attractions of a Classical fixed-value arrangement, rather than an independent floating fiat currency, is to gain all the advantages of stable trade relationships. That’s why Europe gave up their independent currencies and created the Euro in the first place.
 
This problem did not exist in the past. Before 1971, the major international currencies, and most minor currencies, were fixed to gold. Thus, a country that adopted gold as a “standard of value,” or “X” in a fixed-value system – the role the Euro plays today – would also have stable exchange rates with most major trading partners. There was no conflict.
 
At some point, the Euro may be so debauched as to render it completely unacceptable as a benchmark of value in a Classical fixed-value system. At that point, a government might either adopt another major international currency as its monetary “standard of value,” or it might use gold.
 
If the Euro reaches such a state – ECB chief Mario Draghi recently said he intends to make another trillion Euros appear out of thin air, I kid you not – then other major currencies would also likely be close behind, except for the Japanese Yen, which would be far ahead.
 
Thus, other major currencies would not likely satisfy those fifty-five former Euro enthusiasts either.
 
Then they might turn to gold – which actually has a rather lovely track record, and which actually was the monetary benchmark for most of those countries for a very long time already.
 
But when might that happen? History suggests that such a changeover does not happen until the former benchmark currency has been abused beyond all hope of renewal.
 
Disaster. Catastrophe. I admit it holds a certain appeal.
 
However, there is an alternative: to introduce gold-based currencies today, but to make them optional instead of mandatory. Thus, the present Euro-based and other fiat currencies would continue, but there would also be a gold-based alternative.
 
At first, this gold-based alternative might not be very popular. It would have a lot of exchange-rate volatility with the fiat Euro, Dollar, Yen and pound. Let’s be a bit Germanic and call it the goldmark, and give it the traditional value of 2790 goldmarks per kilogram of gold.
 
As today’s fiat currencies gradually lost their viability, people might decide, incrementally, that they want to keep at least part of their savings in terms of goldmarks, not Euros or Dollars. Borrowers find that they cannot issue debt or borrow money unless denominated in goldmarks; suppliers want to be paid in goldmarks; workers demand wages in goldmarks; and producers demand goldmarks in payment for their goods and services.
 
As more and more people use goldmarks (and other similar currencies that emerge), for their own personal interests, they find that they can also engage in trade with all the other people that use goldmarks, without the issue of unstable exchange rates. Thus, the issue of chaotic trade relationships gradually melts away.
 
But what if everything is fine? What if there is no disaster? People can still use goldmarks as they see fit – perhaps as an investment product much like the gold ETFs popular worldwide – but perhaps they would continue to use fiat Euros for most commercial situations. It works both ways. There is no downside.
 
The only problem, it seems, is that people are not aware that such a thing is possible, and in fact rather easy to do. Also, they don’t know how to do it. But, these are minor issues, really.
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