Monthly Archives: June 2020
Part 5 of 5 . . . . .
What makes this gold market rally
different from all others
Yields in economically important parts of the world
are negative, not positive
Negative interest rates are a reality in both the European Union and Japan, and Alan Greenspan said recently that it is “only a matter of time” before they spread to the United States. One of the arguments against gold over the years has been that it costs money to own it. Now it costs money to own euros and yen, and before too long it might cost money to own the dollar as well. The advent of negative rates is perhaps one of the more profound differences between this gold rally and rallies of the past. It might also prove to be the most enduring. “One of the reasons,” Greenspan added in that same CNBC interview, “the gold price is rising as fast as it is – you know, at $1500 a troy ounce . . . What that is telling us is that people are looking for resources they know are going to have a value 20 years from now, or 30 years from now, as they age and they want to make sure they have the resources to keep themselves in place.”
Chart courtesy of the World Gold Council
“Since the COVID-19 crisis hit, the Federal Reserve has returned to bond-buying with a vengeance. After cutting interest rates to (effectively) zero and initially saying it would buy US$700bn in bonds, on 23 March it removed the brakes stating it will ‘purchase Treasury securities and agency mortgage-backed securities in the amounts needed to support smooth market functioning and effective transmission of monetary policy to broader financial conditions and the economy’. With the total US monetary base now at US$5.1tn (and given the close historical correlation between the two), the gold price could very reasonably be expected to rise to US$1,892/oz and potentially as high as US$3,000/oz.”
USAGOLD note: At $1892 to $3000 per ounce a “golden” future indeed …… The chart below shows the correlation between gold and the monetary base Gibson mentions in the snip above.
Sources: ICE Benchmark Administration, St. Louis Federal Reserve [FRED]
Repost from 6-25-2020
“Excitement about reopening aside, that third and most miserable course is the one we appear to be on. The country will rebound, as things reopen. The bounce will seem remarkable, given how big the drop was: Retail sales rose 18 percent in May, and the economy added 2.5 million jobs. But absent dramatic policy action, a pandemic depression is possible: the Congressional Budget Office anticipates that the American economy will generate $8 trillion less in economic activity over the next decade than it projected just a few months ago, and that a full recovery might not take hold until the 2030s.”
USAGOLD note: 2030s? Apparently the CBO is not in the V-shaped recovery camp.
Repost from 6-24-2020
“Printing money was always going to be easier than withdrawing it later. In effect, central banks are boxed into a situation where they can’t normalize policy and must maintain low rates and abundant liquidity, lest they destabilize fragile asset markets and spur low growth and disinflation. This state of “infinite QE” risks miscalculations and major policy errors. If central banks are, as is now fashionable to state, the only game in town, then the game is lost.”
USAGOLD note: Well said. . .and a Bloomberg Opinion piece worth visiting. Historically, replacing real productivity and natural market cycles with the monetary printing press ultimately reduces, as Das puts it so well, to “a recipe for disaster.”
Repost from 2-27-2019
“The cities were still there, the houses not yet bombed and in ruins, but the victims were millions of people. They had lost their fortunes, their savings; they were dazed and inflation-shocked and did not understand how it had happened to them and who the foe was who had defeated them. Yet they had lost their self-assurance, their feeling that they themselves could be the masters of their own lives if only they worked hard enough; and lost, too, were the old values of morals, of ethics, of decency.” – Pearl Buck, who was in Germany in 1923
USAGOLD note: We came across this article last week while researching another topic and thought it worth passing along as a matter of interest. By posting it, we do not mean to suggest that we expect hyperinflation to burst on the scene anytime soon. At the same time, one of the points made is that once a central bank sets foot on the road to inflation is difficult to step back. “So the printing presses ran,” writes Smith, “and once they began to run, they were hard to stop. The price increases began to be dizzying. Menus in cafes could not be revised quickly enough. A student at Freiburg University ordered a cup of coffee at a cafe. The price on the menu was 5,000 Marks. He had two cups. When the bill came, it was for 14,000 Marks. ‘If you want to save money,’ he was told, ‘and you want two cups of coffee, you should order them both at the same time.'”
Repost from 3-9-2020
“Whether it’s a bearish portent of a sell-off to come or prudent hedging after a fierce stock rebound, traders are bolstering their defenses against an end to this vertiginous rally. Gold and longer-maturity bonds are getting outsized inflows. Protective equity options are outdrawing speculative contracts, while volatility markets are positioning for fresh disruptions.”
USAGOLD note: There are as many strategies on hedging a market mania as there are creative money men looking for an edge, but there is only one sure way and that is to put money outside of it – in gold and silver, two assets that do not simultaneously represent someone else’s liability.
Repost from 6-23-2020
The decline of the U.S. dollar could happen at ‘warp speed’ in the era of coronavirus, warns prominent economist Stephen Roach
“Stephen Roach, a Yale University senior fellow and former Morgan Stanley Asia chairman, tells MarketWatch that his forecast for a sharp deterioration of the U.S. dollar could be a very near-term phenomenon, not an event that looms off in the distance. ‘I do think it’s something that happens sooner rather than later,’ the economist told MarketWatch during a Monday-afternoon interview.”
USAGOLD note: Sentiment on the dollar’s future is weakening, led by analysts like Stephen Roach, and probably one of the quiet motivations for gold going past the $1750 mark.
Repost from 6-23-2020
(USAGOLD – 6/30/2020) – Gold tracked lower in quiet seasonal trading this morning despite a warning from Fed chairman Powell that “the path forward for the economy is extraordinarily uncertain” and a Bureau of Labor Statistics report showing that nearly half of the U.S. population is out of a job. The yellow metal is down $3 on the day at $1771. Silver is up 1¢ at $17.93.
Former hedge fund manager Hugh Hendry (who says he is “long gold”) is out with an elaborate and somewhat unconventional analysis of the present economic situation. “… [W]ith overseas nations printing central-bank reserves to buy dollar assets,” he warns in The Dawn of Chaos, “and with banks and credit markets now uncomfortable with owning Treasuries, and what with a podcast star running the Fed, I can see US stock and gold prices rising considerably higher and volatility exploding to the upside … I can see the dawn of CHAOS, people, and it’s going to change the course of history once and for all!” [Emphasis added.] Hendry believes a massive devaluation of the dollar is required saying “[i]f The Fed doesn’t change then the world’s going to snap.”
Chart of the Day
Chart note: As you can see, gold and the dollar index moved higher in tandem from late 2019. Since the dollar’s mid-March peak, they have moved in opposite directions with the dollar going lower and gold higher indicating that the long-established inverse correlation might be coming back into play.
“If you are looking to predict the shape of the US economic recovery — be it V, W, L or even K — don’t look at the markets. Look instead at the small- and medium-sized businesses that represent 50 percent of employment in the country. They are the best economic indicator in America right now. They are also in trouble.”
USAGOLD note: A large segment of our clientele are medical practitioners and small business owners. We thought this article taking note of the situation might be of interest ………
“Since the last survey in March, the managers have shifted their view of who will win the White House. Former Vice President Joe Biden is now expected to win with 62% expecting it, a sharp reversal from December when 70% expected President Donald Trump to win. Views on who would win were split evenly in March.”
USAGOLD note: Some would say that a 20% correction is on the light side given the kind of economic numbers being generated these days.
“For we have reached a critical point. In a sense, it is true that the mists are lifting. We can, at least, see clearly the gulf to which our present path is leading. Few of us doubt that we must, without much more delay, find an effective means to raise world prices; or we must expect the progressive breakdown of the existing structure of contract and instruments of indebtedness, accompanied by the utter discredit of orthodox leadership in finance and government, with what outcome we cannot predict.”
John Maynard Keynes
The Means to Prosperity (1933)
“‘One thing we’ve done is to start looking at gold,’ says Geraldine Sundstrom, portfolio manager, asset allocation at Pacific Investment Management Company, as she explains how the firm is preparing its portfolio in the current market. She speaks with Bloomberg’s Francine Lacqua on ‘Bloomberg Surveillance.’”
USAGOLD note: Pimco joins the list of major financial firms incorporating gold in their portfolio mix.
“A mix of slow growth, easy money and black swans can propel gold to record highs in the second half of 2020. Lingering fears about lockdowns and scarring to the real economy should keep haven demand strong, but the metal could also rally in a risk-on environment, as the 2008 play book showed. Comfortably the best-performing major asset in the past year, gold soared by a quarter. That put it within levels that Markets Live foresaw at the end of 2019. With a global recession arriving sooner and cutting deeper than expected, $2,000/oz is the next target.”
USAGOLD note: Van der Walt is a macro commentator at Bloomberg and one of a good many Wall Street analysts who see gold at the $2000 mark by the end of the year.
“Our research and trading team has been advising friends and followers to stay very cautious of the current markets (excluding Gold, Miners, and certain other protective sectors). We don’t believe this rally warrants any exposure greater than 15 to 20% given the current global economic environment and the hyper-parabolic nature of the current price move. We believe the opportunity presented by the upside advances does not negate the potential risks of a massive collapse event taking place in the near future. In other words, we’re more cautious of how ugly and aggressive the end of this parabolic move will be than willing to try to find some opportunities in an already hyper-extended parabolic upside price trend.”
USAGOLD note: Vermeulen issues a clear warning of the “no fear rally” currently in progress in the stock market. “Why,” he asks, “do you think Gold has rallied to levels near $1800 over the past 4+ years?
“In 2020, the virus has led to unprecedented fiscal and monetary stimulus. It remains unclear how much more stimulus will be deployed by DM governments, how the resulting deficits will translate into higher taxes down the road, and how long monetary policy will remain ultra-loose. Finally, it is unclear whether the crisis leads to second round shocks, such as social unrest, political volatility, or rising international tensions. In such an environment, demand for defensive assets (gold in particular) will continue to expand, in our view.”
USAGOLD note: We referenced this Goldman study on Monday. Zero Hedge quotes from the report in detail at the link above. In short Goldman upgraded its twelve month forecast on gold to $2000 and $22 on silver.
Repost from 6-23-2020
“So what should we make of this rapid growth? Do the Fed’s asset purchases represent monetization of the federal debt? Will runaway inflation be the inevitable consequence?”
USAGOLD note: Of course, the answer to the inflation question, according to Dudley, is “No.” The Fed, he says, can raise rates and encourage banks to keep money in excess reserves at the central bank – policy options which would put a cap on inflation. If it were all that simple, we counter, no country would ever experience runaway inflation. In every modern example, runaway inflation – including the most destructive hyperinflations – occurred under the watchful eye of a central bank that believed it would get lucky. Bill Dudley is the former president of the New York Federal Reserve and what he is forecasting is what happened post-2008. A good many believe that the Fed might not be so lucky the next time around.
Repost from 6-22-2020
- Gold prices posted their biggest weekly gain since 2008 amid the coronavirus market crash.
- Bitcoin, believed by some to be a substitute for gold, has not risen in price among the market panic.
- Supply chain disruptions have led to unprecedented disruptions in the gold market.
- Industry experts believe that gold reserves are now being mined faster than they are replaced.
The Largest Sources of Annual Global Gold Demand
1. Jewelry: 2,107t (48.37% of demand)
2. Investment (total bar & coin): 870.6t (19.99% of demand)
3. Central banks & other institutions: 650.3t (14.93% of demand)
4. Investment (ETFs & similar): 401.1t (9.21% of demand)
5. Technology: 326.6t (7.5% of demand)
Visualization courtesy of HowMuch.net
Repost from 4-17-2020
“In bear or bull markets, billionaires are constantly worried about one thing: protecting their wealth. This video shows how some billionaires protect themselves from downturns – including turning to uncorrelated assets such as gold.”
USAGOLD note: Most billionaires do not take delivery of their gold because of the storage problem. That is not the case for the small private investor. A quarter of a million dollars or less in gold coins stores neatly in a modest-sized safe deposit box. Of course, if you would rather store your gold and/or silver at a depository, we can help with the arrangements. Safe storage includes insurance and the costs are not prohibitive. In fact the annual fees on storing are roughly comparable to what most ETFs charge with the added benefit of a delivery option on the coins or bullion stored. To learn more, we invite you to contact our Order Desk directly.
“Within the QE, US Treasuries make up the lion’s share: $1.64tn of purchases in just three months which, added to the $2.47bn already in the portfolio, mean the Fed holds over a fifth of the overall federal debt. Formally it isn’t a monetisation, but it’s clear that by now an important part of the US public debt has been nationalised on the central bank balance sheet.”
USAGOLD note: Minenna is the general director of the Italian Customs and Monopolies Agency, so these are not off the cuff remarks but instead ruminations of someone with a hands-on understanding of the situation. As he points out, Fed policy is not directed simply at domestic banks, but those in other currency areas as well. The dollar, he points out, is holding up well “for now” because of its exorbitant privilege status, but “some are beginning to wonder how long it will last.” Call Fed policy what you will, it all comes back to Bank of America’s recent observation that it can print fiat money, but it can’t print gold.
Repost from 6-23-2020