Monthly Archives: November 2020
“This year, the Covid-19 pandemic and the reaction from central banks had a significant impact on the price of gold. Over the past few decades, central banks have viewed gold as a ‘safe-haven asset’ – an investment that can be used to dodge the impact of negative sovereign bond yields and act as a safeguard against inflation. Against the backdrop of the pandemic, gold has rarely appeared more attractive. However, in August, central banks became net gold sellers for the first time in approximately 18 months, highlighting the competing demands on investment strategies.”
USAGOLD note: This pdf document from Central Banking magazine is a compilation of studies linked individually here over the past couple of weeks – a nice package that can be stored for future reference. If I might make a brief comment, central banks store gold for the same reasons as most individual investors – to have as a long-term store of value. That positioning implies using the metal when needed. For some central banks, the pandemic has presented the need for liquidity. This study concludes that nothing has changed among central banks with respect to their long term views of gold. Should stability return, so will the steady additions to aggregate central bank reserves – with a few new parties likely to join the quest given the lessons learned.
“The Chinese currency is set to play a bigger role in global trade and investment in the wake of the pandemic, with the dominance of the US dollar in the international monetary system expected to decline, two Chinese central bank officials said on the weekend. “Whether you look at interest rates or exchange rates, yuan assets have clear advantages now [against assets denominated in other currencies],” Ding [Zhijie, head of research center at State Administration of Foreign Exchange] said …”
USAGOLD note: This prediction sounds very similar to the one Goldman Sachs made a few months back – only in this instance it is coming from the Peoples Bank of China. A bigger role for the yuan and a reduced role for the dollar, if it were to actually materialize, could diminish overall demand for the greenback and accrue as a positive for gold demand globally. The just-concluded Regional Comprehensive Economic Partnership – a trade deal signed by 15 Asian countries including China but excluding the United States – could provide a boost to China’s ambitions as stated in this article. Some might think the Biden administration will move to remedy the U.S. exclusion from that partnership, but we should keep in mind that the anti-China sentiment runs deep in Washington and is not strictly a Republican phenomenon.
“’When viable, widely distributed vaccines hit the market, we believe that this will catalyze the next leg lower in the structural USD downtrend we expect,’ the U.S. bank said in a research note.”
USAGOLD note: Accelerating a major drop in the value of the dollar is not one of the side-effects we would have guessed the result of a vaccine. Citibank is one among a growing pool of analysts who think things could get dicey for the dollar in 2021.
Repost from 11-18-2020
2021 marks a dubious milestone:
The fiat money system’s golden anniversary
“If you look out the window, you’ll see printing presses everywhere. You know what happened to all the other countries in history that have gotten themselves deep into debt… it hasn’t been pretty.” – Jim Rogers, recent Peak Prosperity Interview
The Everyman edition of Edward Gibbon’s History of the Decline and Fall of the Roman Empire comprises some six volumes and nearly 4000 pages. Rome was not built in a day and, as Gibbon’s work reveals, it was not lost in a day. What we are challenged to recognize with respect to U.S. monetary policy today is not an event, but a process. The decline of the dollar since the United States went off the gold standard in 1971 has not come in a handful of sudden, cataclysmic events like formal devaluations, but gradually and consistently, over a period of five decades. That process is likely to continue.
Gold has had long periods where it gained in value during those five decades, periods when it lost value, and periods when the price was stagnant. The over-riding trend, though, has been to the upside. In fact, the long-term linkage between the rising U.S. national debt and a rising gold price is one of the most enduring features of the contemporary fiat money economy president Richard Nixon launched in 1971, as shown in the chart in the first section. A system he launched by the way with the famous statement: “We are all Keynesians now.”
In 2021, we will come to a dubious milestone – the fiat money system’s golden anniversary. Pandemic aside, the continuing inability of the U.S. federal government to come to grips with its fiscal problems during those fifty years largely explains the enduring, some would say stubborn, presence of gold in millions of investment portfolios around the world – including now those of central banks, financial institutions and hedge, pension and sovereign wealth funds. Until such time as fiscal rectitude takes hold in the halls of Congress – an unlikely proposition any time soon – present gold owners are likely to hold tight and new owners are likely to continue joining their ranks. In the end, contemporary gold owners, by and large, do not own gold to become wealthy, but to protect the wealth they already have.
Image courtesy of Wikimedia Commons. The decline in the Roman Antoninianus’ pure silver content from 240-280 AD paralleled the beginning stages of the empire’s decline. The coin was introduced in 215 AD with a 50% silver content and was gradually debased in steps to a copper coin plated with silver by 270 AD.
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“Although foreign investors — primarily central banks — were among the biggest sellers, ditching almost $300bn of Treasury bonds and bills in March, the market’s ‘dysfunction’ was ‘exacerbated’ by the unwinding of a popular hedge fund trade that takes advantage of the difference between the prices of Treasury bonds and futures, which led to another $90bn of US government debt being dumped, according to the FSB.”
“At least 20 Chinese companies have suspended planned bond sales worth Rmb15.5bn ($2.4bn) over the past week, as the high-profile defaults of three state-owned enterprises and questions about the solvency of a fourth unnerved investors in the world’s second-largest bond market.”
USAGOLD note 1: Considering Jerome Powell took the vow of transparency when he became the chief operating officer at America’s central bank, it is a bit disconcerting to find out eight months later that what was put off as an overnight repo market liquidity problem was more akin, according to this report, to another near financial meltdown.
USAGOLD note 2: As for the report on China, we have posted a number of articles on the risks posed globally by zombie companies over the past several months. In China, it seems, the problem is rapidly coming to a head. Companies are withdrawing bond offers and investors are dumping their holdings of some troubled companies.
USAGOLD note 3: As we might have anticipated, those at the center of this minor earthquake (at present) are calling for government bailouts. ……… All of this serves as a reminder that we live in financially perilous times and that “anything can happen,” as Softbank’s Masayoshi Son recently reminded us. Preparation is both prudent and essential.
Repost from 11-18-2020
“[Stanford University professor David] Dodson, who once ran for the U.S. Senate in Wyoming and has served as CEO and chairman at multiple companies including an auto parts retailer and trucking company, told CNBC that the fourth quarter is make-or-break for many Main Street owners and retailers and the lack of progress on stimulus could lead to another wave of bankruptcies that end up doing significant damage to the national economy.”
USAGOLD note: As we have noted before, this is the silent crisis evolving on Main Street America. Many of our clientele are owners of small businesses or professional practitioners, and our thoughts and concern go out to them. Trouble for some, as Dodson points out, can become troublesome for many.
Repost from 10-9-2020
“’It’s worse because the revenue shortfall is uncertain and horrific,’ says [Volcker Alliance’s Richard] Ravitch, now a director of the Volcker Alliance, a nonprofit group that advises on effective government. ‘There’s an enormous loss of revenue going on, and we don’t know how long it will last.’ … The question now: How many municipal bond issuers—cities, states, and others—won’t be able to repay investors?”
USAGOLD note: Another silent crisis brewing at the corner of Wall Street and Main ……
Repost from 8-29-2020
“A major component in the most sophisticated of these technologies producing renewable energy is silver. Silver is the best conductor of electricity. The beauty of silver is that technology has so far failed to replace it with an alternative. No known material matches silver for its energy output and conductivity per dollar. It is still relatively cheap too.”
USAGOLD note: Plume will catch your attention with his assertion that “silver is the new oil.” Silver demand would get an assist from a Biden administration pushing oil alternative technologies.
Repost from 11-17-2020
Yap stone money inflation
Monetarily speaking, everything progressed smoothly on the island of Yap where large stones weighing hundreds of pounds were transported around to serve as money. That is until something unforeseen happened to the value of the money. For centuries, the stones served in exchange because there wasn’t much of this type of rock on Yap itself.
The depreciation of the stone money began when an enterprising Western businessman realized he could produce stone money cheaply and in copious quantities on a neighboring island and transport it to Yap, where it could be used to procure goods in demand elsewhere. In other words, this oceanic cousin of John Law printed Yap stone money to buy his wares at what might be called a “favorable” discount. By this process, the yap stone money was debased until it became worthless. Little did the citizens of Yap know that they were deprived of their wealth, and their money destroyed, by the process of monetary inflation.
Coins & bullion since 1973
“Foreign investors held $7.071 trillion in U.S. Treasuries in September, down from $7.083 trillion the previous month, the Treasury Department report said. Japan and China’s Treasury holdings fell in September to $1.276 trillion and $1.061 trillion, respectively. Japan remains the largest holder of U.S. Treasuries.”
USAGOLD note: That which cannot be sold abroad must be sold at home. That which cannot be sold at home must be monetized. Just because the level of debt being issued by the federal government has gone vertical, it does not mean that the rules of the game have changed.
Source: U.S. Department of the Treasury • • • Click to enlarge
Repost from 11-18-2020
Gold edges higher in pre-Thanksgiving trading, a quick thought on Janet Yellen as Treasury Secretary
(USAGOLD – 11/25/2020) – Gold edged higher in quiet pre-Thanksgiving trading following the sharp sell-off of the past two days. It is up $4 at $1814. Silver is up 13¢ at $23.48. The velocity of rebounds following options expiration rarely matches the downdraft. Gold, it seems, almost always takes the elevator down and the stairs back up. As we move into the long Thanksgiving weekend – a time when investors are likely to take stock of where we’ve been and where we are going – there is considerably more to weigh in the balance than in previous years. We will offer a quick thought from Canacord Genuity’s Tony Dwyer as a capstone to the events of the past few weeks and perhaps an opening salvo for what’s to come: “Janet Yellen has exceptional experience, knows how to print money, and should be instrumental in being able to negotiate a near-term fiscal package.” Though that comment is recorded in a Barron’s article on why the stock market broke 30,000, such thinking could echo loudly at some point in the precious metals markets as well.
Wishing you and yours a safe and happy Thanksgiving ………
Chart of the Day
Sources: St. Louis Federal Reserve [FRED], ICE Benchmark Administration, Daniel J. Lewis
Click to enlarge
Chart note: As you can see, the drop in the Weekly Economic Index from early March through mid-April was the worse since the 2008 financial crisis. Since then we have had something of a recovery but the index remains deeply below the zero line. As a matter of interest, we added the price of gold. At the moment, the index is in recovery mode though it still appears a bit weak at this juncture, as it did the first time we ran this chart a month ago. Stay tuned. We will repost this chart at from time to time to see if we get a “V”, “W”, “Nike swish” or “lightning bolt” – and gold’s response. (The Weekly Economic Index incorporates a long list of economic indicators including retail activity, unemployment claims, even railroad traffic and wholesale fuel sales (to name a few) using “timely high-frequency data.”)
“‘I’m a fan of good process,’ Schwarzman said. “In my comments three days after the election, I was trying to be a voice of reason and express why it’s in the national interest to have all Americans believe the election is being resolved correctly. But the outcome is very certain today, and the country should move on.'”
USAGOLD note: We do not believe Schwarzman will get a lot of argument on this …… It is time to move on. Plan for the future. Has been for some time now. New administration, we might add, but same economic mess.
“Investors have embraced alternatives to traditional stocks and bonds in pursuit of diversification and higher risk-adjusted returns. The share of non-traditional assets among global pension funds increased from 7% in 1999 to 23% in 2019 (Chart 1). Gold allocations have been recipients of this shift. Gold is increasingly recognized as a mainstream investment, evidenced by the fact that global investment demand has grown by an average of 14% per year since 2001 and the gold price has increased by almost four-fold in euro terms over the same period.”
USAGOLD note: As this study points out the biggest markets for gold in Europe are Germany and Switzerland where the attachment to gold is generational and firmly implanted as part of the cultural heritage. Familiar concerns drive Europe’s interest in gold – inflation, runaway inflation and deflation. The average annual return for gold in Europe since 1971, according to WGC, is an impressive 12%.
Chart courtesy of the World Gold Council • • • Click to enlarge
“I grew up in a purely urban family. We had no relatives in the country. I’m born in 1944. When I was a baby, my mother could only buy food because she still had some gold coins. Without gold, I would have starved. She always told me that. Therefore, this generation already has a certain gold affinity. In extreme times of crisis, this is one of the few things left to be accepted. Gold was the only thing left to the people of the city at that time. Before the silver cutlery was also traded at the farmer.”
Former European Central Bank governor
Table courtesy of VisualCapitalist.com • • • Click to enlarge
USAGOLD note: This table was compiled before gold’s sell-off the past few days, but the yellow was ahead by such a wide margin that the point made does not lose its impact.
“Yet the precious metal is poised to break out in 2021 as inflation concerns take center stage, they added. Goldman holds a $2,300-per-ounce price target for gold, implying a 22% rally from current levels over the next 12 months. Such a bounce would also place bullion at an all-time high.”
USAGOLD note: We referenced this article – the latest from Goldman Sachs commodities analysts Jeffrey Currie and Mikhail Sprogis – in yesterday’s DMR and post the link here for those who may have missed it. Goldman Sachs has been bullish on gold for the past couple of years and remain so going into 2021.
“Driving profit has been the clamor for gold and silver from investors, mainly in Europe and North America, worried the coronavirus pandemic and money-printing by central banks could devalue other assets. These investors pushed gold prices to record highs above $2,000 an ounce earlier this year.”
USAGOLD note: All those banks that decided to close down their precious metals trading desks a few years ago have got to be looking at JP Morgan’s successes with at least a small amount of envy. And according to this article, a good chunk of the profit came from trading in the physical metal itself – a business in which JPM says it is well-connected and securely supplied. It could get the metal when others could not. There is no explanation in the article why that would be.