Private: OPEC, Russia oil output freeze deal may be ‘meaningless’: IEA
A deal among some OPEC producers and Russia to freeze production is perhaps “meaningless” as Saudi Arabia is the only country with the ability to increase output, a senior executive from the International Energy Agency (IEA) said on Wednesday.
Brent crude futures are up more than 50 percent from a 12-year low near $27 a barrel hit early this year, bouncing back after Russia and OPEC’s Saudi Arabia, Venezuela and Qatar struck an agreement last month to keep output at January levels.
Qatar has invited all 13 members of the Organization of the Petroleum Exporting Countries (OPEC) and major non-OPEC producers to Doha on April 17 for another round of talks to widen the production freeze deal.
“Amongst the group of countries (participating in the meeting) that we’re aware of, only Saudi Arabia has any ability to increase its production,” said Neil Atkinson, head of the IEA’s oil industry and markets division, at an industry event.
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PG View: So every country besides Saudi Arabia is prepared to freeze production at their maximum capacity . . . yeah, pretty meaningless . . .
As we said repeatedly in recent weeks, a freeze does nothing to mitigate the supply glut, the glut just grows more slowly.
Private: Gold prices retreat as dollar strengthens
23-Mar (FT) — The price of gold dropped more than 1 per cent to a low of $1,231.6 a troy ounce in morning London trading. The metal has risen almost 20 per cent this year, as investors have poured money into gold-backed exchange traded funds.
The precious metal is widely seen as a haven asset, however the US dollar is also a contender. The US dollar strengthened on Wednesday to a one-week high against a basket of major currencies.
Gold rose 1 per cent after news of the attacks in Belgium on Tuesday, touching $1,260 a troy ounce.
“While gold usually rallies in these situations, it generally does not hold on to initial gains,” said Jim Steel, an analyst at HSBC. “For gold, much may now depend on the level of perceived risks going forward and the US dollar’s performance.”
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PG View: Dollar strength doesn’t quite explain the magnitude of this morning’s setback in gold: The dollar index is up 0.40%, while gold is off 1.8%. Something else is up, but the underlying fundamentals remain supportive to gold.
Private: Gold lower at 1225.78 (-22.69). Silver 15.40 (-0.42). Dollar higher. Euro lower. Stocks called mixed. U.S. 10yr 1.93% (-1 bp).
Private: Krugman Urges Abe to Scrap Sales-Tax Increase, Boost Stimulus
22-Mar (Bloomberg) — Nobel prize winner Paul Krugman urged Japanese Prime Minister Shinzo Abe to abandon plans to raise the nation’s consumption tax next year and instead expand fiscal stimulus to revive the economy.
“Japan still has not achieved escape velocity in breaking out of the deflationary cycle,” Krugman told reporters late Tuesday in Tokyo after attending a panel discussion on the global economy with Abe and senior Japanese policy makers. “I would call for another round of fiscal stimulus.”
Krugman joins fellow economic laureate Joseph Stiglitz, who last week also recommended against the government going ahead with a plan to increase the nation’s sale tax in April next year. The current proposal is to boost the levy to 10 percent from 8 percent now, although food would be left at the existing level, in an effort to tackle the nation’s public debt.
Koichi Hamada, an economic policy adviser who attended the meeting, also said the prime minister should forgo the sales tax increase.
Krugman has already been influential in Japan’s tax debates after helping to convince Abe to delay increasing the levy, which was originally slated to be raised in October last year. Japan’s fiscal and monetary policies must push in the same direction, the economics professor said Tuesday.
“Japan needs fiscal policy to be reinforcing monetary policy, not fighting it,” Krugman said. He said that negative interest rates, which the Bank of Japan began implementing last month, are a “good idea” but of “limited effectiveness.”
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Private: The Time and Place for ‘Helicopter Money’
by Greg Ip
22-Mar (WSJ) — With fiscal and monetary policy reaching their limits, the search for new solutions to the world’s low-growth, low inflation rut has turned to “helicopter money.”
The policy gets its name from an essay by Milton Friedman in 1969 that imagined newly printed money dropped from helicopters. While it evokes images of Weimar Germany and hyperinflation, it’s actually not that exotic or, for the U.S., unprecedented. It’s a logical option for any country struggling with deflation and slow growth, as Japan has and perhaps other countries some day may.
Peter Praet, the European Central Bank’s chief economist, recently noted, “All central banks can do it. The question is, if and when is it opportune.” Richard Clarida, a Columbia University economist, predicts: “We will see a variant of helicopter money (perhaps thinly disguised) in the next 10 years if not the next five.”
…Helicopter money merges QE and fiscal policy while, in theory, getting around limitations on both. The government issues bonds to the central bank, which pays for them with newly created money. The government uses that money to invest, hire, send people checks or cut taxes, virtually guaranteeing that total spending will go up. Because the Fed, not the public, is buying the bonds, private investment isn’t crowded out.
…If this sounds too good to be true, it’s because usually it is. Throughout history, governments that couldn’t or wouldn’t collect enough taxes to finance their spending resorted to the printing press, from the U.S. Confederacy in the 1860s to Zimbabwe in the 1990s. It’s why so many central banks, including the ECB, are prohibited from financing government deficits.
…The main concern with monetary finance is that inflation is an arbitrary tax on holders of cash and bonds. If politicians get used to the printing press, they could let inflation rip, destroying the wealth of many households.
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Private: Why Goldman is wrong about gold
“Those who are still making short calls on gold — expecting that it will fall further — fail to understand that negative nominal rates coupled with rising inflation expectations are the rocket fuel for gold — especially since central banks are trapped in this vortex of persistently reducing the value of their currencies vis a vis their trading partners. Even our Federal Reserve found it necessary to renege on its plan to raise rates four times this year after the markets fell apart in January. But from this folly, there is no end.”
MK note: Pento’s argument with some strong elaborations is very similar to the one I made in the last issue of News & Views – “Gold in the zero-bound”:
“Something happened on the way to negative interest rates. Something unexpected. Gold and silver demand went through the roof. The first two months of business at USAGOLD were reminiscent of the 2009 run to gold. In London, where people have the additional concern of a potential exit from the European Union, investors were lining up around the block to purchase precious metals, and reports were circulating that “Some London banks are placing unusually large orders for physical gold.” For the first two months of the year, the U.S. Mint reported gold coin sales running double what they were for the same period in 2015.”
Private: The Daily Market Report: Gold Gains on Latest Terror Attack
22-Mar (USAGOLD) — Gold firmed in overseas trading on Tuesday, buoyed by safe-haven buying in the wake of the latest terrorist attacks in Europe. The Islamic State has reportedly claimed responsibility for the bombings at the Zaventem Airport and the Maelbeek metro station, both in Brussels Belgium.
While gold remains within the recent range, the underlying trend since late December remains decisively to the upside. The primary driver for the rally in gold that has dominated this year has been the movement toward ever-easier monetary policy, even though it came right on the heels of the Fed’s first rate hike in nearly a decade.
Yesterday, ECB Executive Board member Benoît Cœuré Coeure said that the easing measures unleashed earlier in the month “show that we have no shortage of tools.” ECB Governing Council member Liikanen said that rates won’t rise until “well past the horizon of the asset purchases.”
The implication here is that rates are going to remain negative for a long time and the ECB has more ammo for their bazooka if it is needed. What’s interesting is the escalation of dovish ECBSpeak less than two-weeks after that bazooka was fired. The euro hit a 5-week high against the dollar last week, so if they really want to knock the single currency down they may indeed have to do more.
The German central bank seems to be worried that as the ECB becomes increasingly desperate, further accommodations may take the form of helicopter money:
Weidmann opposed the ECB’s initial foray into QE, likely because he knew it was a slippery slope. Nonetheless, he ultimately caved under intense pressure. He’s probably wishing he had stood his ground.
Private: JPMorgan Chase’s forecaster says buy gold, not stocks
CNBC/Stephanie Landsman/3-20-2016
“One of Wall Street’s most respected forecasters says the [stock] market’s rally is in trouble, and that investors are likely to do better by betting on gold.”
MK note: JPM’s Marko Kalonovik is widely followed and respected in the hedge fund industry and on Wall Street. He says the Fed’s dovish policy will put pressure on the dollar and push gold higher. If you haven’t read the post on the rumored Shanghai Accord I put up over the weekend, you might want to give it a quick read. If such an accord was reached, it will likely be viewed in the years to come as a watershed event for stocks, the dollar and gold. I will state again, though, that for the most part our clientele does not “bet” on gold as such. Instead, it views the metal as a safe-haven and private portfolio insurance.
Private: Germany to bring half its gold back by 2020
21-Mar (MINING.com) — After decades of storing the majority of its gold reserves overseas, Germany has decided to speed up efforts to bring its bullion back home, announcing Monday it plans to repatriate at least half of the country’s gold by 2020.
According to the Bundesbank, the country’s central bank, there currently are about 1,400 tons or 41.5% of Germany’s gold reserves sitting at its vaults in Frankfurt, RT.com reports.
Germany began building most of its gold holdings in the 1950s, when trade surpluses were exchanged for gold under the Bretton Woods system that linked the US dollar to the precious metal. That led to a build-up of gold in vaults overseas, especially in New York, under the Federal Reserve.
“Germany’s central bank wants to store more than half of the country’s gold within the country by 2020.”
During the Cold War the Bundesbank wanted to keep its gold in the west in case of an invasion from the Soviet Union.
But since 2013, it has been repatriating its gold bars. So far it has brought around 366 tonnes of gold back to Frankfurt, roughly half of the total to be transferred, the Bundesbank said.
In October, the bank released a detailed 2,300-page inventory of every single bar it held stored in vaults in Frankfurt, London, Paris and New York.
Bundesbank plans to bring another 307 tons of the precious metal home in the next five years. That means slightly more than half of Germany’s gold will be stored within the country by 2020, about a third at the Federal Reserve and the remaining 13% at the Bank of England. None will be located at the Central Bank of France, even though the country is Germany’s closest political ally in the euro zone.
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PG View: Germany understandably remains leery of others holding their gold.
Private: U.S. Richmond Fed composite index surged to +22 in Mar, well above expectations of 0, vs -4 in Feb.
The divergences between some of these Fed indexes are becoming dramatic. I’m not sure what should be believed anymore . . .
Private: U.S. Markit manufacturing PMI (flash) ticks higher to 51.4 in Mar, below expectations of 51.9, vs 51.3 in Feb.
Private: Gold Prices Rise After Brussels Attack
22-Mar (WSJ) — Gold prices moved higher in London on Tuesday, spurred by safe haven demand following a series of explosions in Brussels.
Spot gold was trading up 0.76% up at $1,252.90 a troy ounce in European morning trade.
“It does prove that gold is acting as a safe haven,” said David Govett, head of precious metals at Marex Spectron in London.
On Tuesday morning Brussels’ airport and a central metro station were rocked by explosions. Belgian authorities raised the terror alert across the country, as security was tightened across Europe.
The metal initially rallied as much as $10 when news of the attacks broke, Mr. Govett said, but the price of the metal has since come down slightly. Stock markets pared down their initial losses.
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Private: U.S. FHFA home prices +0.5% in Jan, in line with expectations, positive revised +0.5% in Dec; +6.0% y/y.
Private: Brussels explosions: Many dead in airport and metro terror attacks
22-Mar (BBC) — At least 26 people have been killed or seriously injured in terrorist attacks at Brussels international airport and a city metro station.
Twin blasts hit Zaventem airport at about 07:00 GMT, killing 11 and injuring 81, the health minister said.
Another explosion struck Maelbeek metro station an hour later. Brussels transport officials say 15 people were killed and 55 injured, 10 seriously.
Belgium has now raised its terrorism threat to its highest level.
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Private: Gold higher at 1254.36 (+10.73). Silver 15.91 (+0.109). Dollar higher. Euro lower. Stocks called lower. U.S. 10yr 1.89% (-2 bps).
Private: Banks warn of risks of ultra-loose policy
21-Mar (FT) — European bank chiefs have warned that a new wave of ultra-loose monetary policy could push some institutions into taking greater risks, as they seek to protect profit margins.
Speaking in the wake of the European Central Bank’s decision this month to push interest rates further into negative territory and to begin buying corporate bonds, the executives said that such moves might, as intended, push banks to lend more — but carried dangers of their own.
Gonzalo Gortázar, chief executive at Spain’s Caixabank, expressed concerns about a build-up of risk in the banking system as a whole.
“In a world of low or negative interest rates, that is a possible consequence; you could see banks taking more risk,” he said.
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PG View: These policies have been pushing individual investors to take greater risks for years. The banks maintained a decent spread, up to the point were central banks started going negative . . .
Private: The Daily Market Report: Gold Retreats as Fed Attempts To Revive Belief in More Rate Hikes
21-Mar (USAGOLD) — Gold slipped back into the range on Monday as several Fed members were out fostering confusion about policy moving forward. The dollar firmed modestly as today’s FedSpeak seemed geared toward convincing the market that the central bank may still raise rates further this year.
San Francisco Fed dove John Williams echoed Janet Yellen in saying that April and June are “live” meetings, meaning the Fed could indeed hike again at either.
Richmond Fed hawk hawk Jeffrey Lacker said he expects inflation to rise “significantly” once oil bottoms. He went on to warn that the central bank should not get caught behind the curve. Lacker is not a voter presently, but he dissented both in September and October last year, in favor of a rate hike.
Atlanta Fed centrist Dennis Lockhart gave a speech today, where he too suggested that a rate hike in April was possible.
This is all quite interesting given the overall context of last week’s FOMC statement, where they lowered both their growth and inflation forecasts, and then halved the number of expected rate hikes from four to two. The FedSpeak today seems geared toward keeping markets on their heels; from skewing too heavily toward Fed dovishness.
Nonetheless, the CME’s FedWatch tool shows the probability of an April hike at 7% and June has eroded further to 38%. Unless the Fed can inspire the market to believe a hike next month is a credible threat, I think we can safely assume April is off the table.
Today’s data undermines talk of an April hike as well: The Chicago Fed’s National Activity Index tumbled to -0.29 in February, below expectations of +0.25, versus a positive revised 0.41 in January. February existing home sales plunged 7.1% to 5.08 million, well below expectations of 5.355 million, versus 5.47 million in January.
If the Fed keeps trying to maintain the credibility of an impending rate hike, the dips caused in gold will provide buying opportunities. This mentality may in fact prevent them from moving toward easier policy even if such a move becomes warranted.
Private: U.S. existing home sales -7.1% in Feb to 5.08M, well below expectations of 5.355M, vs 5.47M in Jan.
Private: Chicago Fed national activity index fell to -0.29 in Feb, below expectations of +0.25, vs positive revised 0.41 in Jan.
Private: Gold Weaker On More Profit Taking, Chart Consolidation
21-Mar (Kitco News, via Forbes) – Gold on Monday is seeing more profit-taking pressure and backing and filling on the daily chart, following recent gains that pushed prices to an eight-month high less than two weeks ago. Improved investor risk appetite in the world marketplace recently is also a negative for safe-haven gold. April Comex gold was last down $7.90 at $1,246.50 an ounce. May Comex silver was last up $0.049 at $15.86 an ounce.
World stock markets were steady to mixed to start an Easter-holiday-shortened trading week. Many world markets are closed on Friday. U.S. stock indexes are pointing toward slightly higher openings and are at 2.5-month highs.
Crude oil prices are weaker on a corrective pullback after hitting a three-month high Friday. Major world oil producers from OPEC and Russia will meet on April 17 to discuss production limits. However, Iran has said it will not participate in the talks. Nymex April futures are trading just above $39.00 a barrel.
The other key “outside market” finds the U.S. dollar index trading near steady Monday. The dollar index on Friday hit a five-month low and the bears are in near-term technical control.
U.S. economic data due for release Monday includes the Chicago Fed national activity index and existing home sales.
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