Monthly Archives: September 2022
“This is a big break for the government and taxpayers. It makes the debt more manageable and easier to pay back. It’s lousy for bondholders. The money they’ll be repaid by the government will be worth a lot less than the money they put up.”
USAGOLD note: It’s not just bondholders who suffer – from Tokyo to Beijing to Berlin and beyond. Ordinary citizens with money in CDs, money market accounts, and the like, also suffer as their purchasing power slowly goes up in smoke…… As many thoughtful commentators have suggested, we are in a whole new financial era. We get the feeling that the real reaction to all of this hasn’t even begun.
“You wouldn’t know it from looking at the market today, but some of the largest miners and metals traders are warning that in just a couple of years’ time, a massive shortfall will emerge for the world’s most critical metal — one that could itself hold back global growth, stoke inflation by raising manufacturing costs and throw global climate goals off course.”
USAGOLD note: Over 25% of the silver supply comes as a byproduct of copper mining. A copper squeeze, as a result, would also greatly affect the supply of silver at a time when above-ground stockpiles have been depleted. As you can see from the chart below, copper and silver have been traveling companions over the past decade.
Chart courtesy of TradingEconomics.com
“‘By basically endorsing the idea of a recession, Powell set off the emotional phase of the bear market,’ said Julian Emanuel, head of equity, derivatives and quantitative strategy at Evercore ISI.”
USAGOLD note: In the financial world, October, not April, is the cruelest month. The month nature retreats – goes into hiding, and prepares for the winter. And at the end of September 2022, the prevailing mood in markets suggests the beginnings of just such a full retreat. “The bad news is you are seeing and you will continue to see it in the near term in indiscriminate selling of virtually every asset,” says Evercore’s Emanuel, “The good news is that tends to be that the end game of virtually every bear market we’ve ever witnessed, and it’s coming in September and October, where that has historically been the normal state of affairs.”
Short and Sweet
China’s monetary tradition and the origins of money
“The first step in theorizing correctly about money,” writes Mises Institute‘s Joseph T. Salerno, “is to understand that the value of money, like that of commodities, is never fixed and unchanging. Chinese philosophers who published the earlier Mohist Canons (468 B.C.~376 B.C.) grasped this crucial point. They recognized that metallic money, such as the ‘knife coins’ (pictured above) then in wide circulation, was valued and exchanged by weight and argued that the real value of money, despite its fixed face value, was not stable but fluctuated inversely with the prices of commodities. When commodity prices were high, money was ‘light’ or its purchasing power low; when prices were low, money was ‘heavy’ or its purchasing power high. Thus, if monetary conditions were such that the nominal prices of commodities were abnormally high, the real prices of commodities were not high, but rather money was ‘light’ or depreciated.”
According to Salerno, much of what we understand about sound money was first explored in ancient China, where metallic coinage was first introduced in the 12th century BC or earlier. Salerno’s article serves as an interesting introduction to Chinese monetary theory and philosophy. We recall that China was also the first country to experiment with paper money as an alternative to coins made from precious metals. As might be expected, those experiments led to several instances of runaway inflation.
“Does the deployment of helicopter money not entail some meaningful risk of the loss of confidence in a currency that is, after all, undefined, uncollateralized and infinitely replicable at exactly zero cost? Might trust be shattered by the visible act of infusing the government with invisible monetary pixels and by the subsequent exchange of those images for real goods and services? . . . To us, it is the great question. Pondering it, as we say, we are bearish on the money of overextended governments. We are bullish on the alternatives enumerated in the Periodic table. It would be nice to know when the rest of the world will come around to the gold-friendly view that central bankers have lost their marbles. We have no such timetable. The road to confetti is long and winding.” – James Grant, Grant’s Interest Rate Observer
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“History shows that inflation takes an average of 10 years to return to 2% once it breaks above 5%, according to Thanos Vamvakidis, a strategist for BofA Securities in the U.K.”
USAGOLD note: One would think too, that the greater the gap between the current headline inflation rate and the 2% target, the greater the difficulty returning to that target number. At the moment, that gap is 6.3% but the future number is dependent on the future price of raw materials and finished goods at a time when the supply chain is breaking down.
Gold up marginally in early trading as we close out a positive week
Britain’s quick turnaround likely to leave an indelible impression on investor psychology
(USAGOLD – 9/30/2022) – Gold is up marginally in early trading as investors continued to weigh the impact of the UK’s return to quantitative easing, inflation moved to double digits in Europe, and the British pound sunk closer to parity with the dollar. Gold is up $5.50 at $1669. Silver is up 16¢ at $19.05. As we close out a week of improvement in gold and silver pricing, the one event likely to leave an indelible impression is Britain’s surprise turnaround on monetary policy. It happened quickly and without hesitation. In the end, the risk of inflation was far preferable to a collapse of a large portion of the country’s pension system and the potential for a domino effect. Britain’s decision will not be lost on investors in other nation-states whose bond markets rest on similarly shaky ground. Historically, central banks have opted for monetary inflation as their baseline policy because the alternative – an economic depression – is something no policymaker wants to add to their resume.
“We sometimes forget that central banking, as we know it today, is, in fact, largely an invention of the past hundred years or so, even though a few central banks can trace their ancestry back to the early nineteenth century or before. It is a sobering fact that the prominence of central banks in this century has coincided with a general tendency towards more inflation, not less. By and large, if the overriding objective is price stability, we did better with the nineteenth-century gold standard and passive central banks, with currency boards, or even with ‘free banking.’ The truly unique power of a central bank, after all, is the power to create money, and ultimately the power to create is the power to destroy.” – Paul Volcker, Deane and Pringle’s The Central Banks, 1995
“The ancient Egyptians believed their gods had shimmering skin made from gold. While the Aztec word for gold, teocuitlatl, literally translates as ‘excrement of the gods’. From ancient Rome to the California gold rush, this dense shimmering metal has been immutably connected with divine quality and the sense of opportunity. The reason for this is simple: gold is the most special element of them all.”
“You’re starting to see all the classic early signs. …I think it’s going to get worse into 2023 and 2024. Which has implications for elections.”
USAGOLD note: The tweet links to a Mark DeCambre (MarketWatch) video interview with Ray Dalio……
“Throughout the Covid crisis, the world heard very little from the economics profession. Economists love to find fault with governmental policies, but few of them questioned the extreme dirigisme of the way the U.S. and most other governments reacted to events. Few warned that we would suffer from high inflation as a result of spending binges and locking down of much economic activity.”
USAGOLD note: A scathing review of the economics profession – too little, too late, too often. In the end, it does matter if we fail to get good guidance from those who are supposedly in the know.
Related: The economists self-censored and inflation is the result, Bhattacharya and Packalen, Brownstone Institute, 9/21/2022
Cartoon courtesy of MichaelPRamirez.com
“[Bloomberg’s Vincent] Cignarella put the blame for inflation on fiscal policy, whereas I’m more inclined to cite what, try as I might, I can’t avoid describing as the self-evident notion that when, as Pozsar put it, “the price of everything is thrown around randomly,” inflation is just a kite without a string — condemned to whipping around wildly, and notwithstanding episodic downward spirals, always at risk of being carried away into the wild blue yonder.”
USAGOLD note: A detailed refutation of the notion that inflation can be readily controlled with rate policy, and rate policy alone. In short, The Heisenberg, like Zoltan Pozsar, believes the world doesn’t work like that.
“Not surprisingly, Icahn said inflation was playing a significant role in the market’s downturn. ‘Inflation is a terrible thing,’ he said, observing that it led to the downfall of the Roman Empire. ‘You can’t cure it.'”
USAGOLD note: Icahn says we’ve “printed-up too much money”… and now “the party’s over.”
Gold gives back some of yesterday’s solid gains
International Banker explains why central banks now have an ‘insatiable appetite’ for gold
(USAGOLD – 9/29/2020) – Gold gave back some of yesterday’s solid gains in early trading as the dust settled around the UK’s sudden relaunch of quantitative easing. It is down $9 this morning at $1653. Silver is down 19¢ at $18.76. One cannot help but recall, under these circumstances, Britain’s decision in the late 1990s to auction off a significant portion of its gold reserves in order, it said, to diversify into various currencies. What would it give today to have that asset still on the books – one it sold for under $300 per ounce? As it turns out, the BoE sale was among the last major liquidations before the group went from net sellers of the metal to net buyers in 2011. Since then, the official sector has added over 5000 metric tonnes to global reserves (See chart.). International Banker’s Nicholas Lawson says there is now an “insatiable appetite for the yellow metal” among central banks.
“Part of gold’s appeal,” he says, “is the diversification benefits it offers to central banks – and investors in general – especially given how vulnerable their respective currencies can be to bouts of pronounced volatility. And with quantitative easing proving an increasingly popular policy to combat economic crises in recent years, currencies have been even more under pressure in the face of massive injections into the money supply. In contrast to currency reserves, however, gold’s durability, scarcity and finite supply are just some features that provide central banks with surety and trust during times of uncertainty and market turmoil. As such, it provides them with crucially stable assets in their reserves.” He goes on to say that 57 central banks “expect to boost their gold reserves over the next 12 months” and that the most interesting finding in a recent World Gold Council survey is less optimism about the US dollar’s role as the global reserve currency.
Chart courtesy of GoldChartsRUs/Nick Laird
“If you want to protect your savings, gold, and silver are important assets to own, especially the physical asset, not just financial instruments. Equities only help while monetary policy continues to create asset inflation, but that can stop abruptly when money supply growth coincides with nominal GDP growth, as the multiple expansion effect dies. Sovereign bonds are not a solution as both the price and the yield make them the most expensive asset.”
Daniel Lacalle, PhD, economist
“Not even the most hawkish Federal Reserve in decades can beat down the exuberance of gold enthusiasts at the industry’s biggest annual gathering. Bullion prices will reach $1,806.10 an ounce by year-end, according to the average estimate in a survey of 10 participants at the Denver Gold Forum, the yearly meetup of mining executives, investors, bankers and analysts.”
USAGOLD note: That’s a pretty good move if it does in fact materialize before year-end …… The consensus has gold rising on “heightened geopolitical and economic risks.”
“Where is the physical silver going that is leaving the LBMA and COMEX? Metals Focus India reports that silver demand in that country, perhaps the world’s top silver consuming nation, is now so strong that the silver price in India is trading at a premium to the world silver spot price. In July 2022, almost 58 million ounces of physical silver was imported into India. This was at least 50 percent higher than in any month in the previous four years and may be an all-time high record amount of imports into India in any month.”
USAGOLD note: Silver, like gold, is traveling west to east. We cited this article in Tuesday’s DMR and repost it here for those who may have missed it.
“Through the month of September, we’ve been on ‘Crash Watch’ over concerns that a global equity market drop could lead to a liquidity-driven margin call across all asset classes. The watch continues through this week’s FOMC meeting and then into October. What is ‘Crash Watch’? It’s sort of like a Tornado Watch for those of us in the American Midwest.”
USAGOLD note: Not a totally unreasonable reaction to current Fed policies in the face of a developing recession…… “Beware and be wary,” Hemke warns.
Short & Sweet
The Exter Inverted Pyramid of Global Liquidity
“[Exter’s Inverted] Pyramid stands upon its apex of gold, which has no counter-party risk nor credit risk and is very liquid. As you work higher into the pyramid, the assets get progressively less creditworthy and less liquid. . .[In a financial crisis] this bloated structure pancakes back down upon itself in a flight to safety. The riskier, upper parts of the inverted pyramid become less liquid (harder to sell), and – if they can be sold at all – change hands at markedly lower prices as the once continuous flow of credit that had levitated those prices dries up.” – Lewis Johnson, Capital Wealth Advisor’s Lewis Johnson
“There’s an assumption that this transition will be disinflationary, but I really don’t think that’s right. Most big transitions are inflationary with a lot of volatility and relative instability. In general, predictability, stability, peace, cooperation, etc. are disinflationary for goods prices and inflationary for asset prices. Instability, less confidence about the future, more combative markets/governments all add extra costs that translate into higher goods prices and lower asset prices,” she said. “Not all transitions are inflationary but transitions that will require a significant rerating of existing capital because of its obsolescence, transitions that create scarcity, transitions that shift power dynamics; those tend to be inflationary.” – Lindsay Politi, One River Asset Management
USAGOLD note: Insights on where we are headed…… Politi does a good job of offering some perspective and food for thought on the profound changes underway in the global economy. “Expecting there to be limits on things like inflation or price movements because they existed in the past will also prove to be very wrong,” she says.
Gold level as markets process Bank of England’s bond market re-entry
Gold serves as a “good wealth protection choice” in the United Kingdom
(USAGOLD – 9/28/2022) – Gold is level in early US trading as markets processed the news out of the United Kingdom this morning that its central bank would re-enter the bond market as a buyer. It is unchanged at $1630. Silver is down 19¢ at $18.26. The BoE’s surprise decision is likely to have a mixed effect in global markets. The pound continued its sharp sell-off adding to the US dollar’s good fortune. In general, though, the market mood is likely to be tempered by the reality of a major central bank capitulating to a wobbly bond market and suddenly returning to quantitative easing. Gold, as might be expected, is up sharply in British pounds. UK stocks are level.
“In pound sterling terms, the gold price has actually appreciated by no less than 13% while the FTSE all share index for comparison has declined by around 10% [year to date],” writes Sharp Pixley’s Lawrie Williams in an analysis posted yesterday before the BoE’s decision. “With the Bank of England following the U.S. Federal Reserve with an aggressive interest rate raising policy to fight inflation, and commenting that the UK economy is probably already in at least a mild recession, one can anticipate further equity price slippage, while the gold price can probably still hold its own making it a continuingly good wealth protection choice for investors.… All currencies fluctuate – even the mighty U.S. dollar and there is a feeling that it may well be flying too high at present. There is the possibility it may start to come down from its peaks when there is a realization of quite how much the servicing of the huge U.S. debt position will cost at the higher interest rate levels currently in place, and likely to be further increased.”
Gold in British pounds and UK stocks
(%, year to date, FTSE)
Chart courtesy of TradingView.com • • • Click to enlarge
“One of the signs that you have entered into a mania phase is when people have trouble absorbing non-conforming information. ‘Confirmation bias’ is a psychological behavior where individuals disregard any information which conflicts with their current beliefs. While that bias has always been problematic for investors, in recent years, as individuals lock themselves inside their ‘social media echo chambers,’ it has worsened.”
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