Monthly Archives: January 2020
“’Even if the coronavirus situation improves, there are good reasons to expect continued inflows into gold,’ said Nicholas Frappell, global general manager at Sydney-based ABC Bullion. Other factors remain, including the Fed’s growing balance sheet, low real rates, and a reluctance to ‘normalize’ policy at the Fed, the Bank of Japan and European Central Bank, he said.”
USAGOLD note: In other words “business as usual” for the central banks is good for gold . . .
Chart courtesy of Gold Charts R Us
The next great monetary experiment
Daily Reckoning’s Brian Maher warns of the potential consequences of modern monetary theory. “This MMT sounds like a recipe for immense inflation, even hyperinflation,” he says. “You are spending all this money directly into the economy. It will drive consumer prices through the attic roof, you say. This is crackpot. A witch’s sabbath of inflation would surely result. Yes, but here the MMT crowd meets you head on… They agree with you. They agree MMT could cause a general inflation, possibly even a hyperinflation.” [Link to full article]
Modern Monetary Theory (MMT), we would add to Maher’s observation, is neither modern nor a theory. John Law, the Scottish financier, tried a version of it almost exactly 300 years ago (1717-18) in France.* He did so with the blessing of the French monarchy and with a rationale very similar to MMT’s proponents today. MMT entails, simply put, a federal government fiscal policy without spending limits coupled with the power to print whatever money is required to finance any deficits. In the end, Law’s theories (to his surprise if we are to believe the historical account) bankrupted the French people and the government, reduced the economy to ashes, and created such a distaste for paper scrip among the citizenry that it took 80 years for France to reintroduce paper money as a circulating medium.
In The Story of the Greatest Nations (1900), Edward S Ellis and Charles F. Home tell of the public mania that engulfed the French people and led to ultimate financial ruin for thousands:
“The shrewder speculators* became alarmed. They began to sell their shares of stock, and hoard in gold the enormous wealth they had acquired. This resulted in a demand on the government for metal in exchange for its paper, and soon the government had no metal to give. Then the crash came. Those who had the government paper could buy nothing with it. Those who held the Mississippi stock could scarce give it away. It was worthless. The government itself refused to accept its own paper for taxes. A few lucky speculators had made vast fortunes; but thousands of families, especially among the wealthier classes, were ruined.”
That snippet provides a hint as to the steps taken by those who survived Law’s version of modern monetary theory. For those to whom all of this has a distinct ring of familiarity, perhaps a judicious hedge makes some sense. A number of analysts have made the argument that we do not have to wait for the formal launch of modern monetary theory. It is already here.
* Please see this link for a summary of Law’s Mississippi Company land scheme.
“’You have to have balance … and I think you have to have a certain amount of gold in your portfolio,’ Dalio said, reiterating his call last year that the precious metal will be a top investment in the years to come.”
USAGOLD note: Dalio says ‘cash is trash’ in this era of negative real rates of return and says gold is the way to go instead. He also rejects bitcoin as an alternative to gold: “There’s two purposes of money, a medium of exchange and a store hold of wealth, and bitcoin is not effective in either of those cases now.”
Repost from 1-21-2020
“Europe might be called the ‘old continent’ and be struggling in various fields such as economic growth, innovation, and demography. Nevertheless, or rather because of this, interest in gold, a crisis proven asset, has increased in recent years, not only among private and institutional investors, but also among central banks. Far from being a ‘barbarous relic’, gold is making a strong comeback on the old continent, which seems to be only in its early stages.”
USAGOLD note: I found Stoferle’s concluding remarks, as posted above, intriguing and in a way comforting. For those of us with our roots in Europe, it may be a reminder of our own heritage. I can remember as a child my grandfather and father referring to Europe, not as the ‘old continent’, but as the ‘old country’ – to distinguish it, one would think, from the ‘new world.’
Repost from 1-16-2020
Bloomberg/Liz McCormick and Alex Harris/5-21-2019
“As soon as next year, analysts say the Fed will resume large-scale buying of debt securities — this time just U.S. Treasuries — in amounts that may ultimately exceed its crisis-era purchases. According to an estimate by Wells Fargo & Co., the central bank’s balance sheet will rise past its historic peak as it adds over $2 trillion to its Treasury debt holdings in the next decade.”
USAGOLD note: We used to call this kind of government debt buying by the Federal Reserve monetization, which was a fancy name for printing money. Now, it is repackaged with a nice big bow and passed off to the public as a means to “keeping ample reserves in the banking system.” Nowhere in this article is it even mentioned that the buying might have to do with the large needs of the federal government at a time when foreign lenders are in retreat.
Repost from 5-21-2019
“‘Russia may become the world’s second-biggest gold miner globally, beating Australia in three to five years, assuming that there is no force majeure,’ [Sergey Kashuba, head of the Union of Gold Producers of Russia] added. Russian growth will partly come as Polyus PJSC, its biggest miner, develops Siberia’s Sukhoi Log, one of the world’s largest untapped gold fields, with a potential annual output of as much as 1.7 million ounces.”
USAGOLD note: Russian gold production is channeled into national reserves and not sold in international markets as part of Putin’s program to break away from the U.S. dollar. The Sukhoi Log’s 1.7 million ounces of annual production translates to about 50 tonnes. Russian mines produced about 300 tonnes of gold last year. China and Australia were the number one and two producers. We recently updated our World Gold Production by Country page to include the 2018 statistics released by the U.S. Geological Survey.
Chart courtesy of TradingEconomics.com
Repost from 10-28-2019
“There is tremendous hidden value in every silver coin not understood by most precious metals investors and the overall market. The video explains why each silver coin is superior in value compared to the U.S. Money supply. The crazy price move in Palladium is only a precursor to what will take place in gold and silver, especially silver . . .”
USAGOLD note: We have experienced considerable volume in silver coin purchases at USAGOLD over the past several weeks. . . .If one has tremendous value, think what a large pile might do for you.
Repost from 1-23-2020
“It seems the Japanese yen has lost its position of the safe-haven asset. It is more likely the only recovery of the carry trade factor will be able to support the Japanese yen. However, the easing monetary policy of the central banks is among the major negative factors that may affect the carry trade.”
USAGOLD note: We often referenced the Japanese yen and gold as traveling partners at this site. According to this article, that association is now a thing of the past.
Repost from 1-23-2020
(USAGOLD –1/29/2020) – Gold inched higher in early U.S. trading as markets awaited the outcome of this week’s Federal Open Market Committee meeting and continued to sort out the effects of the coronavirus outbreak in China. It is up $1 on the day at $1570 after dipping to $1564 in overseas trading. Silver is down 1¢ at $17.49. In Monday’s DMR we referenced a Reuters report that the coronavirus had “subdued” demand for gold inside China itself, then added: “one wonders how long that will last.”
This morning we got an inkling on that score from a report in the South China Morning Post. “The Hong Kong gold market,” it reads, “rose on the first trading day of the Year of the Rat on Wednesday, rising to its best lunar year debut since 2016, as investors flocked to the safe haven asset amid concerns over the Wuhan coronavirus outbreak.” It goes on, at the same time, to identify volatile stock markets as another prime incentive for gold demand and, as the Chinese Gold and Silver Exchange Society’s Haywood Cheung put it, “a lot of political uncertainties worldwide.”
John Authers, the long-time market analyst at Financial Times who now plies his trade at Bloomberg, says this morning “that perhaps it is best to say that the virus provided an excuse to sell stocks, rather than a reason.” The same, we would add, might be said about buying gold. Authers’ column goes on to explore the overvaluation of stocks as the more compelling reason for paring holdings.
Chart of the Day
Chart note: We have been monitoring this chart over the past several weeks because the message it conveys is so compelling at this point in time. It shows the developing correlation between gold and money supply growth as represented by MZM. We have not focused on this relationship in years. The upward trajectory in MZM, a broad money supply measure, began in May and has been relentless ever since. To what we owe this unexpected phenomenon remains to be determined, but our guess is that it has to do with both declining rates and commercial banks’ deployment of excess reserves. Whether or not it will result in price inflation down the road (the Fed’s fervent wish) remains an open question, but, at the very least, we can say that money supply growth is showing some signs of life.
“Friedman’s pronouncement that inflation is caused by excessive money printing is still true. The problem in today’s economics profession is that ‘inflation’ is too narrowly defined; limited to the prices of goods and services, while asset price inflation is excluded. If inflation is defined to include asset prices, then it would be well recognized that, today, we have plenty of it.”
USAGOLD note: The problem with all of this is that no one knows where it ends. Some see the process as the Weimarization of the global economy. Others see it as the necessary remedy to demographically determined Japanese-style stagnation. Some, including a good many hedge fund managers, say common sense dictates hedging one’s bets, i.e., that it cannot possibly end well. This article defines the problem in a straightforward manner and ends with the observation that the notion of ‘trickle down’ is a “harebrained idea.”
“Investors are seeking more clarity from the US Federal Reserve this week on how much it may expand its balance sheet following the central bank’s efforts to restore order to short-term funding markets.”
USAGOLD note: Looks like the Fed chairman could face some tough questions at his news conference on Wednesday.
“Gold sellers in Hong Kong and Mainland China are expecting a surge in demand for the precious metal this year. The boost reportedly happens quite regularly during the Year of the Rat as it is often considered by traditional Chinese people as the best time to get married and have babies.”
USAGOLD note: As we posted last week via Bullion Vault, China’s gold consumption was down in 2019 on the basis of weight but near an all-time high the basis of yuan expended. The top year was 2013 and 2019 second.
“A customer of mine who is 55 years old recently asked if it was not too late for him to get into precious metals. The answer is no – it is not too late to invest in gold and make a profit at any age. Quite the contrary, with the market showing the early signs of a correction, it is, in my humble opinion, a perfect time to invest in precious metals.” – Oliver Garret, Forbes
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“In essence, the Fed has become the lender of first resort when it should be the lender of last resort and offer repo at a penalty rate. The Fed should be willing to help a dealer in need, but it should come at a price.”
USAGOLD note: Bianco offers a solid critique of the Fed’s new repo and reserves program and ends with a caution. “The repo market’s problem,” he says, “is far from over.” Bianco was early in calling Fed policy a version of quantitative easing.
Repost from 1-23-2020
“I ran into Jim Mellon at a party at the weekend, and we soon got talking about markets. One of his comments – stated with surety and simplicity – has stuck in my mind. ‘Investing in 2020 is going to be easy,’ he said. ‘All you need to do is own gold and silver.’ He said it like it was a no-brainer.”
USAGOLD note: Dominic Frisby makes an interesting revelation in this piece having to do with gold’s 144-day moving average. He also passes along Ross Norman’s gold and silver predictions for 2020. That carries some relevance because Norman is “the LBMA’s number one forecaster over the last 22 years.”
Repost from 1-28-2020
“There are certainly forms of instability that have been introduced by algorithmic trading that will increase as we put more and more faith in these algorithms. The February 2018 flash crash was instructive. The culprit was a slightly esoteric exchange-traded product that has a rebalancing mechanism inside of it. And that rebalancing mechanism ended up destroying the product on one specific day when the market moved a little bit more than the product was designed to handle. The product was required to trade a lot of instruments in response to that move. But then those trades exaggerated a small move and it became a big move, which required more rebalancing—and everything spiraled out of control.”
USAGOLD note: We have consistently written over the years about the “madness of machines” – the potential for a financial panic spun by algorithmic trading that would be no different in its consequences than one spun by its human creators. This interview of an individual at the heart of the algo-based trading system is a must read for those who want to understand what has become, for good or ill, a dominant force in investment markets.
Image by Creepeurman [CC BY-SA 4.0 (https://creativecommons.org/licenses/by-sa/4.0)]
Repost from 3-4-2019
“If the economy was booming with stock prices at reasonable levels, we could take comfort that good times really had returned. But I don’t feel able to trust a recovery that is financed by an overpriced stock market. Overpriced stocks makes us feel that it is safe to spend again. But the financial security pushing spending forward is illusory.”
USAGOLD note: A short, sensible assessment of the relationship between today’s stock market values and the economy at large – potentially an elaborate house of cards.
Repost from 10-29-2019
Head of U.S.’ largest bank says central banks are fueling a sovereign debt bubble, negative-rates won’t ‘end well’
USAGOLD note: Candid, unexpected remarks from JP Morgan’s Jamie Dimon at the link . . . .
Repost from 1-23-2020
Nine lessons from prosperous investors
We first introduced our readers to these nine lessons all the way back in 1999. They were passed along to us by the legendary commodity market analyst R.E. McMaster, formerly editor of The Reaper newsletter. The original source for the nine lessons was a highly regarded money manager who handled accounts for wealthy Greek and Mexican merchant families.
1. It is easier to make a fortune than keep it.
2. Intelligence is an inadequate substitute for wisdom. Wisdom fears, respects the unknown and fosters humility. Intelligence can lead to self-destructive arrogance and ultimate failure.
3. Risk must have premium, and we must understand it well.
4. There is no order. There is no formula. There is no equation that works all of the time. It works just long enough to fool just a few more of us just a little longer.
5. What we fail to remember is that a paper gain is just that. Paper. Worth nothing. Not until we say sell, and not until we get cash. Anything less is just that.
6. When the Bass Brothers in Texas write a check for real money, their money, to buy 25% of the Freeport McMoran Gold Series II, we take notice. When the Fidelity Magellan Fund buys a fifty-million in Dell computer, we yawn. So, should you. It is other people’s money.
7. Slick advertising budgets, powerful computers and few slabs of marble do not, by themselves, make a great financial institution.
8. Never invest in anything you do not feel comfortable with or understand well.
9. When a thousand people say a foolish thing, it is still a foolish thing.
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“Gold investors should feel very comfortable with their holdings. In fact, I will emphatically make the case that gold bullion investors have less to worry about now than at any point in the past 100 years.”
USAGOLD note: Stewart Thomson’s latest . . . worth a visit at the link.
Graphic image courtesy of the World Gold Council
Repost from 1-22-2020