MarketWatch reported that anticipation of ongoing low interest rates prompted Goldman Sachs to raise its price forecasts for gold and silver.
Nov 08
QEII makes a casino of investing. Place your bets…!
SO WHAT IF the Fed pushes short-term yields so low on US notes and bonds that it forces everyone else to takes heaps of risks and buy stocks and commodities? asks Dan Denning in his Daily Reckoning Australia.
That is the question that kept us tossing and turning Sunday night. By monetizing so much of the debt at the shorter end of the US yield curve (note and bonds that mature in 10 years or less) the Fed makes those instruments extremely unattractive to anyone who wants a return that beats inflation.
And in point of fact, yields on two-, five- and 10-year notes are all at or near record lows. Prices go up a bit, but not really enough to make buying US debt a winning trade. That means investors have to go out and buy junk bonds, or corporate bonds, or emerging market bonds. Or equities. Ahh, yes. Equities.
Perhaps that is why the stock market went up on the QE announcement last week. The size of the Fed’s move wasn’t a big surprise. But perhaps the dynamics of its movement – crowding everyone else out of the short-end of the bond market – is setting off the hunt for other assets…and stocks are an easy option. This is why stocks could make new nominal highs without any real improvement in the earnings prospects for major companies (ex financial).
Meanwhile, in the derivatives market, Gold Futures were knocking on the door of US$1400 per ounce, about to kick down the door. We’re here in Sydney to talk about gold to the Gold Symposium on Tuesday. The easy thing to do now is make a price forecast. Goldman Sachs did that last week, setting a price target of $1,650 for gold in the medium term. But all the action in the precious metals is pretty bullish right now, including silver, platinum, and palladium. And we mentioned on Friday that some analysts are even saying the base metals will thrive in the QE II trade, with some copper forecasts hitting $12,000 per tonne.
Reuters reported on Friday that copper hit a 27-month high, just a couple of hundred Dollars off its all-time high on the London Metals Exchange. It was a kind of delayed reaction to Wednesday’s Fed news. First, a possible strike at a major mine in Chile clouded the supply picture. But really, it’s as if everyone started to think the same thing at exactly the same time: Inflation!
The fact is that each phase of global financial crisis has been met with a money flood from the authorities. That money usually (and first) finds its way into the share market, and it takes the small fry up fastest. To me, this is the definition of financial gambling. That is, the Fed is turning the entire global stock market into a casino. It’s also probably accelerating the flow of capital out of Dollar denominated assets and into other markets with less destructive central bankers and politicians. That said, it could be bullish for tangible assets and thus, junior resources.
Says Barron’s magazine:
"This year, for the first time ever, China has been investing more overseas in assets like iron, oil and copper than it puts into US government bonds. China in this year’s first half spent $31 billion on hard assets, compared with $23 billion on Treasuries and other US government bonds. Experts say China’s investments in each of these asset classes will total about $55 billion for the full year. But even a tie marks a major turnaround from China’s previous practices."
So yes. That seems all very bullish and favorable for Aussie stocks. Almost too good to be true, though. The devaluation of the Dollar isn’t likely to be so easy to profit from. And it’s probably going to get a lot more political.
Buying Gold or physical Silver Bullion today…?
Oct 30
Paul Volcker wrung inflation out of the system. Ben Bernanke is wringing cash-savers’ necks…
AS WE NEVER TIRE of boring anyone who’ll listen here at BullionVault, it’s not inflation alone that makes Gold Prices rise, writes head of research Adrian Ash.
If it were, the last decade’s four-fold rise would be missing, and gold wouldn’t have dropped by three-quarters during the 1980s and ’90s.
Sure, the cost of living has increased since 2001 – no doubt about that. And yes, the real value of money has contracted as global money supplies have surged. But the pace of change doesn’t compare with the 25% suffered by UK consumers in 1978, nor the 8% annual average hitting US consumers between 1971 and the end of 1980.
So the common link between the 1970s and the last decade of rising Gold Prices is a little more complex than inflation alone. But only a little.
Because it’s the failure of interest rates to keep pace with inflation that matters.
Check this…
- The 1970s saw 3-month Treasury bills pay an average of 0.1% per year less than domestic US inflation. That decade saw gold prices rise 24 times over vs. the Dollar;
- The 1980s and ’90s then saw 3-month bill rates average 3.1% more than inflation each year. Gold Prices fell by 81%;
- The last 11 years have since seen real T-bill rates sink alongside Federal Reserve rate and longer-term Treasury bond yields, averaging just 0.3% since Jan. 2000. Gold has risen 450% low-to-peak.
- Most recently – and thanks as much to the flight-to-safety after Lehmans collapsed as to Ben Bernanke’s response – real rates have now averaged fully 1.0% below US inflation since the global financial crisis began in summer ’07. Professional wholesale dealers meantime ask 1,350 US Dollars for an ounce of gold, up from $649 before the crisis broke.
A caveat: You shouldn’t try trading in and out of Gold Bullion using this indicator. That plunge in real rates on the chart above, for instance, of early 1980 proved a feint, as investors soon discovered after piling back into gold when it bounced from a 40% plunge. Similarly, the rise in real rates of 2006 didn’t make for a sell signal. The underlying trend, it turned out, was still down for rates…and up for gold. And short term, plenty of other factors can get in the way as well – be it mid-term US elections, the Indian festival season, or a global guessing-game of whether the Fed will print eleven or twelve zeroes after the figure $1 when it meets next week.
That policy, remember, is designed to mimic an interest-rate cut. Because interest rates already have already been slashed to zero, known as the "lower bound" amongst policy wonks, who now feel they need to somehow overcome the "zero bound" by printing money to help devalue it faster. Goldman Sachs reckons that, creating $4 trillion next Wednesday, would be "equivalent to a cut in interest rates of 3%". Even so, the investment bank’s analysts complain that we’ll probably get a measly $2 trillion instead.
So, let’s take the vampire squid at its word, and imagine that the Fed goes for a two and twelve zeroes – whether immediately, or dripped out of Washington over a period of months. On Goldman’s maths, that would eat a further 1.5% off the real rate of interest (not) being paid by 3-month T-bills…and so such a move (and notional outcome) would take real returns down to minus 3.9%.
For US savers, that would be the worst level of real returns to cash since the start of 1975, back when US inflation was running above 10%. That same month, almost 36 years ago, the Gold Price hit what proved an intermediate peak, slipping by almost one-half as real interest rates then climbed up towards zero. (Like we said, real rates aren’t a dead-set signal for short-term direction.)
Real returns paid to cash then failed at zero, however, and slipped back – while gold rose 8-fold again – before the Volcker Fed finally set about "wringing inflation out of the system" in mid-1980 with double-digit overnight rates.
If you expect Ben Bernanke to wring anything but cash-savers’ necks in the next year, then please – go ahead and sell Gold Bullion. And if you want to know what happens if inflation subsides, as he keeps claiming it will, watch out for Part II next week.
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Aug 19
Interesting article on Goldman and Gold.
Goldman Sachs is bullish on Gold Prices. Reason to worry…?
If GOLDMAN SACHS is publicly bullish on gold, is that a good thing or bad thing for gold bulls? asks Dan Denning in his Daily Reckoning Australia.
Wall Street’s notorious trading house published a report on gold last week setting a price target of US$1300 in the next six months. The report cited several factors. But before we get into them, we’ll confess it made us a bit nervous. Whenever a broker is saying one thing, you have to wonder if they’re actually doing the opposite.
That said, Goldman did make a point that is true of an asset in a bull market: it requires corrections to shake out the speculators and weak hands from time to time. Following the June high north of $1250 the net speculative long positions declined. Traders took profits. And so did momentum players in the exchange traded funds market.
But then something happened that naysayers such as Michael Pascoe and Rory Robertson did not expect. The gold bubble did not pop. Because it’s not a bubble. The momentum players departed and the price found plenty of support. It’s now around US$1220.
Goldman says the big catalyst for a further move higher (other than its announcement leading to a stampede of money into gold short-term) is a repricing of US growth expectations for the rest of this year and all of next. Maybe it’s a fear trade, or just bearishness on US corporate profits when unemployment keeps rising.
Either way, about the only dubious chart we saw in the whole report is the one showing lower US real interest rates and the Gold Price (exhibit five). As those cool cats in statistics say, correlation is not causation. Its possible low rates give speculators fuel to play in the gold market. But it’s more likely, we reckon, that US rates are low because the bond market is pricing in a deflationary scenario.
So why would gold rise in a deflationary scenario? Good question! It brings us full circle to the argument fund-manager David Einhorn made when we announced his gold position: you Buy Gold when you think monetary and fiscal policy are bad (we’re paraphrasing). Whether it’s inflation or deflation matters less than the fact that something unconventional and bad is going down. Gold does well in that environment, what with it being real money and all.
Take a look at the Aussie Gold Price chart below. It shows you that gold is much closer to making a new high in US Dollar terms than it is in Aussie Dollar terms. For Aussie gold to match the greenback gain, you’d need a much stronger greenback or a much weaker Aussie. It’s worth noting that following the Fed’s announcement that it would sort of begin quantitative easing part two, the Aussie made the second-largest declines against the greenback, trailing only the dreaded Esperanto currency, the Euro…
As we have banged on about gold for years now, we won’t test your patience much longer. But last week’s news that the Aussie unemployment went rate up in July wouldn’t be Aussie Dollar bullish, would it?
Maybe the Aussie will get a boost when this miserable Federal election nonsense is over. When thinking about the election we recall the phrase, “Don’t vote! It only encourages them.” Of course voting in Australia is compulsory. But it might be a fine worth copping if you can say you weren’t an accessory to “the advanced auction of stolen goods,” as Mark Twain once put it.
Seriously. If anything is clear so far about the difference between the two major parties, it’s that both treat Australians as chattel. We are but tax slaves who exist to fund the government’s spending pleasures. And the Greens? More like the Reds!
But that’s all politics. Financial independence is the only real defense against this kind of relentless State encroachment from all sides. Get it. Keep it. Defend it. And whether you like it or not, more and more governments across the world are spending out of an empty pocket. They’re spending to give people money that’ve lost jobs as a result of the structural shift in the labor markets. That shift came from globalization. The money might keep people above water for awhile, but it’s no replacement for a real job making real things.
More and more spending is going to simply pay the interest on previously borrowed money. This is probably the most dangerous aspect of a credit bubble. You borrow and spend all that money and, and the end of the day, you have nothing to show for it…no bridges…no roads…no factories…no real increase in the capital stock. Just a lot of over-priced residential housing that suddenly isn’t in such short supply as you thought. And now Australia finds itself at an interesting crossroads.
Just a little debt didn’t seem like such a bad idea at the height of the global financial crisis. Both Australia’s major political parties now promise to pay it off quickly, with all the bounty from mineral and energy royalties. Both will increase spending too, but in different places, cutting other spending priorities.
But should the housing bubble pop sooner rather than later, and should Aussie banks find themselves last in the queue for global capital in another phase of the Great Correction, the temptation for more government borrowing will be nigh irresistible.
Why? Well, our stance against government debt may seem dogmatic. But if it is, it’s because the modern State always abuses the power to borrow. Always. Whether it’s to fund politically popular but economically unproductive projects, or whether it’ just a way of putting off tough choices about actually reducing government spending and, thus, the reach of the State into private life, it’s always easier to borrow and kick the can down the road.
Debt is the health of the State in the same way that liquor is the health of the alcoholic. The relationship is inherently destructive. But we reckon that in the face of so much unproductive debt (household and sovereign) the only politically palatable policy response will be to monetise that debt: pay it off or buy it from bank with new money. The deflationists can enjoy their moment in the sun while it lasts. But it won’t last for long at this rate.
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Jan 16
Goldman Sachs are gold bulls. They predict the price of gold may go to $1,350 an ounce within the next year. They also believe that interest rates will not be raised until 2012. Given how easy it is for private investors to buy physical gold it seems wise to act on Goldman Sachs’ prediction.
It’s common sense to put a portion of your savings into gold at the moment. Especially if Goldman Sachs’ prediction of no interest rate increases until 2012 comes true. This is a fabulous opportunity for you to protect the purchasing power of your savings. The relationship between low interest rates and money supply have serious implications down the line. Even if you are not as bullish as some of the more optimistic gold bulls out there, you should take Goldman Sachs’ prediction seriously. Remember, you can easily buy gold online and save a lot of money on commissions.
