“The country has prospered from an influx of often short-term foreign funds, partly due to ultra-loose monetary policy in the US and Europe, which encouraged investors to seek higher returns in Turkey and other emerging markets.”
USAGOLD note: As Turkey unravels we need to take into consideration the long list of other emerging nation states in similar straits as outlined above. The contagion effect is not coming from one direction but from multiple sources from one end of the globe to the other. Turkey is simply the most visible at the moment. Unintended consequences abound. If you would like to gain a deeper understanding of the forces at work, the Financial Times article linked above is a good source of background information.
“The increase in the CPI over the past 12 months was 2.9%, unchanged from June. After stripping out volatile gas and food, the more closely followed core rate of inflation rose 0.2% last month. The 12-month rate of core inflation rose to 2.4%, the highest rate since September 2008.”
“Turkey’s lira plunged to a record low Friday amid escalating tension over the detention of an American pastor, with Trump ordering some tariffs on Turkish metals to be doubled. The carnage quickly spread from emerging to developed markets: The euro sank as much as 1 percent to the weakest in more than a year, extending a drop triggered earlier by a Financial Times report that the European Central Bank raised concern about European banks’ exposure to Turkey.”
“Desperate measures are in the air in Turkey: trading rooms are awash with talk of a bailout by the International Monetary Fund and potential capital controls. But there’s a vacuum at the core of economic policy making. The central bank and government have remained largely silent as the currency plummeted to record lows and the U.S. imposed sanctions and threatened more.”
USAGOLD note: One thing is clear about the meltdown in Turkey: Those who own gold have weathered the destruction of the lira thus far and are likely to survive future debasement. Meanwhile those who own Turkey’s sovereign debt are in the process of getting wiped out. Turkey’s sovereign debt is now the worst performer on the planet according to this Bloomberg article – down 38% thus far this year and worse than Argentina’s debt at a 36% loss. As might be expected, the calls for an IMF bailout have risen in concert with Turkey’s demise. We have to ask a couple questions: How does the IMF go about structuring a bailout for a country under sanctions imposed by the United States? And what is the contagion effect elsewhere if it isn’t?
“Any pressure building on the yuan will need to be released in a timely manner and China will not work against market forces, the official told the lenders, according to the people, who asked not to be named as they weren’t authorized to speak publicly. Cross-border capital flows are balanced overall, and China’s fundamentals will provide support for a stable yuan, even though the currency weakened since June, according to the official.”
USAGOLD note: All of that is carefully worded warning that China will act to defend the yuan and that Chinese banks would be ill-advised to act against the government’s stated objectives with respect to the currency.
“China, the world’s largest gold bar and coin market, saw demand rise 11% to 69.5 tons as gold benefited from a flight to safety amidst increasingly tense trade-war rhetoric, according to the World Gold Council. The yuan weakened drastically against the US dollar, falling 5% over the quarter. And the stock market slumped: the Shanghai Stock Composite index dropped 14% in the first six months of the year.”
“Iran’s demand for gold bars and coins may remain strong for the rest of the year and even increase as the U.S. reimposes sanctions, pummeling the value of the rial. The Islamic Republic’s bar and coin sales tripled to 15.2 tons in the second quarter, the highest in four years, the World Gold Council said Thursday. The country accounted for about three-quarters of Middle Eastern demand for bars and coins in the quarter. . .
USAGOLD note: Iran’s central bank is encouraging citizens to import gold coins and bullion.
“Speculators’ net bearish bets on U.S. five-year and 10-year Treasury note futures rose to a record high earlier this week, according to Commodity Futures Trading Commission data released on Friday.”
USAGOLD note: Gold is not the only asset being shorted at a record rate. The massive shorting of the bond market comes at a time when the U.S. government is issuing new debt like never before. The market might move rates higher before the Fed gets the opportunity. Jamie Dimon came out over the weekend predicting a 5% yield on the 10-year Treasury. The Treasury Department will place a heavy $78 billion of U.S. sovereign debt this week in three, 10– and 30–year Treasuries.
“A senior administration official told CNBC on Friday that there was ‘zero’ engagement between the Trump administration and China as the two countries ratchet up trade tensions. The official said that there had been ‘one call in the past few days,’ and that it resolved nothing. Earlier in the day, Larry Kudlow, director of the National Economic Council, told reporters that there had been communications between the two countries at the ‘highest levels,’ but that talks had ‘stalled’ in recent days.”
USAGOLD note: The Wall Street Journal reports this morning that both China and the United States have publicly threatened to lay heavy tariffs on nearly all the other’s exports.
“The Chinese currency rebounded from a 15-month low hit earlier in the session, after China’s central bank said it would set a forward reserve requirement ratio of 20 percent – up from an earlier zero – from Monday for financial institutions settling foreign exchange forward yuan positions.”
USAGOLD note: Details on PBoC’s move to curb speculation in yuan. . . . . .
“Some 157,000 new jobs were created last month despite widespread complaints among businesses about a shortage of skilled labor, the Labor Department said Friday. Although the increase fell below the 195,000 MarketWatch forecast, hiring in May and June was stronger than previously reported. The smaller gain in employment was also partly a result of governments cutting jobs in education during the summer break.”
USAGOLD note: The cheerleaders in the mainstream media had a bit of a letdown when the Labor Department released its employment numbers for June. In its e-mailed Bloomberg Open report, the news service reported a consensus figure of 193,000 new jobs with a “Bloomberg whisper number” of 208,000. All said, not just a “miss” but a big miss. . . .
“As more product [US Treasuries] comes to market, investors could be expected to demand higher yields to snap up all the supply. And those higher yields mean higher costs at a time when taxpayers already have shelled out nearly half a trillion dollars this year in debt service. Put it all together and it raises questions about how long the spurt in economic growth will continue, what will happen the next time the economy falls into recession and what impact it all will have on financial markets.”
USAGOLD note: $500 billion in debt service (and rising) compared to $600 billion spent on the national defense. . . .
“China said it was ready to retaliate against the latest threat by the U.S. to raise tariffs on its goods. ‘China has made full preparation for the U.S. threats to escalate the trade war, and will have to retaliate to defend national pride and the people’s interests,’ China’s Ministry of Commerce said in a statement Thursday on its website.”
USAGOLD note: All the hope raised yesterday dashed today. . . . .
USAGOLD note: Gold American Eagle sales are in recovery mode after a February through April slowdown. Momentum has been building since May. July sales were up 43% over June and nearly eight times April sales. Silver, too, had a better month in July after a two month slowdown. Sales were more than double June’s numbers. The table below is provided by the U.S. Mint.
“The Asian nation has spent long periods before without revealing increases in gold holdings. When the central bank announced a 57 percent jump in reserves to 53.3 million ounces in July 2015, it was the first update in six years. In 2009, the country said it bought 14.6 million ounces since 2003.”
“The department expects to issue $329 billion in net marketable debt from July through September, the fourth-largest total for that quarter on record and higher than the $273 billion estimated in April, Treasury said in a report Monday. The department’s forecast for the October-December quarter is $440 billion, bringing the second-half borrowing estimate to $769 billion, the highest since $1.1 trillion in July-December 2008.”
USAGOLD note: Since the federal government added $703 billion to the national debt in the first half the year, second-half borrowing, if it goes as forecasted in this article, will take the 2018 total to $1.472 trillion. Though formidable, that number would fall short of the 2010 record of $1.713 trillion and 2009’s $1.612 trillion. It will match the 2008 debt addition of $1.471 trillion.
Chart courtesy of the St. Louis Federal Reserve (FRED) and the Fiscal Service. This chart (along with several other gold investor favorites) is posted and auto-updated at USAGOLD’s Monetary trends and indicators in chart form page.
P&G raises prices on popular brands as costs rise/Financial Times/7-31-2018 –– “Procter & Gamble is pushing up prices for nappies, toilet paper and kitchen towels as the rising cost of commodities, exacerbated by trade tariffs, ripple through the supply chain to the supermarket aisle.“
Why Americans are about to experience sharply higher prices/Zero Hedge/7-30-2018 –– “You’re going to see higher prices passed on to consumers…almost immediately” Matt Gold, a former deputy assistant U.S. Trade Representative for North America under former President Barack Obama, told CNBC. “A lot of goods are already warehoused that were imported months ago, so it takes a bit of time to catch up, but prices catch up pretty fast,” he added.
Inflation is coming thanks to Trump’s tariffs/Bloomberg/7-26-2018 –– “What led me to rethink my views? Steel prices are up more than 40 percent since Trump said on March 1 that he planned to impose a 25 percent tariff on steel imports and a 10 percent levy on aluminum. That is a significant increase that has yet to be passed through to consumers. But it will, and when that happens, potential risks to both the stock market and the economy increase dramatically.”
USAGOLD note: China and Russia continue to add to their gold reserves. Russia has gone from about 350 tonnes at the turn of the century to almost 1900 tonnes at present – quite a turnaround and commitment to the yellow metal. We would not be surprised at an announcement from China at some point in the future of major additions to its gold reserves. China tends to keep things quiet until a surprise announcement is made.
“The U.S. stock market has been partying all throughout July, and a hangover is coming. That’s according to analysts at Morgan Stanley, who said that Wall Street’s rally is showing signs of ‘exhaustion,’ and that with major positive catalysts for trading now in the rearview mirror, there’s little that could continue to propel equities higher.”
“President Donald Trump called on Congress to enact sweeping immigration reform, including a border wall, and threatened a federal government shutdown if Democrats refused to back his proposals.”
USAGOLD note: I would remind that the last time the politicians closed down the government, rating services took the U.S. credit rating down a notch. One wonders what another downgrade would do to the government’s ability to fund its deficit at a time when it is scheduled to reach record levels.
“The rial has plummeted more than 50 per cent this year. A severe shortage of hard currencies has pushed up prices of goods, while panicked Iranians have rushed to buy gold coins, cars and small apartments to preserve their savings. Mr Seif was criticised for poor management of the crisis. In recent months, the central bank has sold 60 tonnes of gold coins in local markets to stem the rise in the price of the precious metal, but the contentious decision has had little impact.”
USAGOLD note: As the saying goes, there’s no rush like a gold rush and once it begins prices and premiums can go through the roof overnight. Historically, attempts by central banks to quell a rush by becoming the gold seller of last resort end in failure – and a greatly reduced gold reserve – at which time they must let the price find its own level, no matter what degree of financial chaos ensues. People – no matter the country in which they gold citizenship – go to gold when they are concerned about their currency going to the nether depths.
“Recent pressure from the president is having no impact on” how they [the Fed] respond to data, said Priya Misra, head of global rates strategy at TD Securities USA in New York. “Ultimately, they will do what is right for the economy.”
USAGOLD note: That, I imagine, is cipher for saying that the Fed will continue on the path of raising interest rates despite the European Union and the ECB acting in concert to keep the euro down, Japan and the BoJ acting in concert to keep the yen down and China and the PBoC acting in concert to keep the yuan down. The Fed for its part continues on an interest rate path designed, it asserts, to provide space for lowering rates the next time a crisis occurs – a crisis, by the way, that could very well be instigated by the Fed raising rates.
“Hike in minimum support (MSP) for kharif (summer) crops and good rains across the country have raised hopes for a better second half for the gold trade. Though demand in the first half of 2018 has been unenthusiastic, the trade is expecting a 25% growth in the second half compared to H2 of 2017.”
USAGOLD note: China has already logged strong gold demand growth in the first half of the year. India and China, as things look now, will account for nearly 100% of the year’s global mine production.
“If the $200 billion of tariffs against China are implemented as planned, consumers could see price increases of 20 percent, according to an analysis by Societe Generale. The Trump administration’s latest plan targets a list heavily weighted toward consumer goods. The earlier tariffs targeted mostly industrial and intermediate goods.”
USAGOLD note: Keep in mind too the inflationary impact of oil prices. There is an oil price component to just about everything we consume.
“General Motors Co. cut its forecast for profit this year as surging prices for steel and aluminum combine with swings in South American currencies to burden the largest U.S. automaker.”
USAGOLD note: The first report we have seen linking tariffs to higher production costs – a whiff of inflation. The headline suggests that GM absorbed part, if not all, those cost increases by reducing its margin. Ultimately, if the trend continues, manufacturers will be forced to pass along that cost in the form of higher prices on finished products.
“Last week, surveys showed that the majority of economists expected the central bank’s next move to be in the direction of a tapering of its quantitative easing policy, but fewer than a quarter reckoned anything was likely to happen this year, let alone this month. Some speculative investors, reflecting that mood, had been building long positions in JGB futures.”
USAGOLD note: With all eyes on China, Japan’s central bank moves unexpectedly to rein-in its quantitative easing program, according to this FT report, and pushes the yen higher in overnight markets. The move is an attempt to slow the flow of capital from Japan into U.S. sovereign debt.
“Gold ticked higher on Tuesday as the dollar slipped, but struggled to stabilise after weeks of losses. . . Gold has shed more than 10 percent since touching a peak of $1,365.23 in mid-April, largely hit by a stronger dollar amid U.S. interest rate hikes. Last week it hit a one-year low.”
USAGOLD note: Silver managed to eke out a gain of 10¢. Gold got as high as $1229 in the trading session but turned south as the dollar regained its footing. As we roll through the remaining weeks of the annual summer doldrums, some are beginning to talk about a bullish reversal in the works for gold. I foundthis analysis particularly interesting from a short-term point of view. (Offered with the usual caveats in place. . . .)
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