Author Archives: News

‘Liquidity is terrible’: poor trading conditions fuel Wall Street tumult

Financial Times/Eric Platt, Joe Rennison and Kate Duguid/6-6-2022

graphic image of money pallettes stacked“Liquidity across US markets is now at its worst level since the early days of the pandemic in 2020, according to investors and big US banks who say money managers are struggling to execute trades without affecting prices.”

USAGOLD note: For major players, it sounds like there’s nowhere to run, no place to hide. We recall similar circumstance in March 2020  – invoking a massive liquidity bailout from the Fed of $1.5 trillion in short-term credit.

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Fed will succeed in bringing inflation down over next couple of years, Bernanke says

MarketWatch/Greg Robb/5-28-2022

“I don’t want to give you really sharp forecasts, but I do think the Fed will bring inflation down over the next couple of years.” – Ben Bernanke, former Fed Chairman

USAGOLD note: This from the father of quantitative easing, Ben Bernanke (2009) ……… It brings to mind an Ed Stein cartoon first published at the USAGOLD website in 2010.

Cartoon of Ben Bernanke crashing economy into a tree – Ed Stein cartoonist

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China faces a nearly $1 trillion funding gap. It will need more debt to fill it.

CNBC/Evelyn Cheng/5-31-2022

graphic image of a red dominoe starting a chain reaction“The Chinese government faces a growing shortfall of cash, analysts say, as they predict an increase of debt to fill the gap. ‘The latest wave of Omicron and the widespread lockdowns in place since mid-March have resulted in a sharp contraction in government revenue, including land sales revenue,’ Ting Lu, chief China economist at Nomura, and a team said in a report last week.”

USAGOLD note: Looks like China will be resorting to the printing press. The strong appetite for gold in China is likely to become even stronger as a result. The question is to what degree China will be able to supply goods to the world economy while in a major lockdown. Economists (and central bankers) are likely to read more global price inflation in this development due to supply-side constraints.

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Zombie firms face slow death in US as era of easy credit ends

Bloomberg/Lisa Lee/5-31-2022

“They are creations of easy credit, beneficiaries of central bank largesse. And now that the era of unconventional monetary policy is over, they’re facing a challenge like never before. They are America’s corporate zombies, companies that aren’t earning enough to cover their interest expenses, let alone turn a profit.”

USAGOLD note 1: What is surprising in this report is the number of household names listed as zombie companies. This crisis in the making echoes eerily the credit crisis of 2008, only on a significantly larger scale. Moreover, it arrives at a time when the Fed and public opinion are anathema to bailouts, raising the specter of a zombie-driven credit contagion.

USAGOLD note 2: The potential damage resulting from steady rate increases, given the current political mood, is very real and not something to gloss over. If the average interest rate on a company’s outstanding debt is 2% and it increases to 4%, its interest expense doubles – not a small matter for already wobbly companies that do not have the means to retire their over-sized debts. The impact on stock and bond markets could be substantial.

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Here’s the asset investors want if inflation stays high, says Deutsche Bank.

MarketWatch/Barbara Kollmeyer/5-30-2022

“Some 43% of respondents said property was the top buy-and-hold choice, followed by 33% who opted for developed market equities and 15% for gold. Cryptocurrencies were ‘not on the radar,’ selected by 1% as a top asset, just behind cash at 4%.”

USAGOLD note: Deutsche Bank seemed a bit surprised that stocks placed higher than gold in the survey given its strong performance during the stagflationary 1970s – a period increasingly compared to our own. At the same time, one wonders how many are aware of gold’s performance during that period – or silver’s for that matter. During the 1970s, gold rose 1820%, silver 1699%, and stocks 11.5%. Here’s the chart – for the record:

Gold, silver and stocks performance
(1970-1979, %)
overlay line chart showing gold, silver and stocks 1970-1979
Chart courtesy of TradingView.com • • • Click to enlarge

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German inflation reaches highest in nearly 50 years

MarketWatch/Maria Martinez/5-30-2022

“Consumer prices rose 7.9% on year measured by national standards, against the 7.5% forecast by economists in a Wall Street Journal poll. They rose 8.7% on year by European Union harmonized standards, above economists’ forecast of 8.1%.”

USAGOLD note: Already a source of steady gold demand over the past several years, German investors are likely to take an even greater interest in the metal as inflation looks deep and persistent. Allianz Trade, the German insurance firm, says “the worst is yet to come for European households.”

Germany inflation rate
(%, year over year, through May 2022)

line chart showing the inflation rate in Germany through May 2022
Chart courtesy of TradingEconomics.com

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Goldman’s Waldron warns of unprecedented economic shocks, echoing Dimon

Bloomberg/Sridhar Natarajan/6-2-2022

“A top Goldman Sachs Group Inc. executive echoed Jamie Dimon’s pessimistic tone, warning of tougher times ahead amid a string of shocks rattling the global economy. ‘This is among — if not the most — complex, dynamic environments I’ve ever seen in my career,’ Goldman President John Waldron said at an investor conference Thursday. ‘The confluence of the number of shocks to the system to me is unprecedented.'”

USAGOLD note: The warnings from both Waldron and Dimon are an extension of the deep changes in market psychology among heavyweight investors we chronicled in the headline article for the May issue of News & Views.

cartoon image of an investor experiencing headline shock

The Great Financial Shock of 2022
Today’s headlines serve as a constant reminder of why we own gold.

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Economic pessimism growing in US

Gallup Polls/Jeffrey M. Jones/5-321-2022

“Gallup’s Economic Confidence Index measured -45 in May, down from -39 in each of the previous two months. It is the lowest reading in Gallup’s trend during the coronavirus pandemic, and likely the lowest confidence has been since the tail end of the Great Recession in early 2009.”

USAGOLD note: Such pessimism often leads to a gold purchase as a matter of self/family preservation.

ed stein cartoon stress test on investors 401k

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NY Fed sees three year balance sheet rundown to $5.9 trillion

NewsMaxFinance-Reuters/Staff/5-24-2022

“The Fed’s stock of Treasury bonds and mortgage backed securities is projected to decline by roughly $2.5 trillion by mid-2025, to about $5.9 trillion, when the central bank’s run-off of assets is likely to be halted to maintain an adequate level of bank reserves, the New York Fed said on Tuesday.”

USAGOLD note: These numbers appear to be a projection rather than an actual schedule of reductions. The great debate at the moment is whether or not the Fed can stay the course on quantitative tightening or if it will be forced to throw in the towel if and when the economy tightens and financial markets register a negative response. The most interesting revelation comes at the end of the article when Reuters reports that the Fed intends to hold its Treasuries portfolio until maturity. In other words, the Fed will reduce its balance sheet through natural attrition. If that turns out to be the case, it will temper the impact on rates from the sell-side of the equation. The most consequential impact, though, will come from the buy-side of the equation as the Fed withdraws its bond market support as the buyer of last resort.

(Chart note: Some years ago we constructed the interactive chart above at the St. Louis Fed’s FRED portal. You can track it at our Monetary Trends and Indicators page, along with several other charts of interest to precious metals owners.)

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Fed carrying $330B in unrealized losses on its assets according to Q1 financial statement

Reuters/Howard Schneider/5-27-2022

photo of the Federal Reserve Bank headquarters in Washington D.C., facadeUSAGOLD note: We are not certain what impact, if any, the situation summarized in the headline will have on Fed operations or the solvency of the Fed itself. The article does advise that if it chooses to actually liquidate Treasuries or mortgage-backed securities, the “unrealized losses would have to be booked as a tangible hit.” We have not seen a great deal of discussion on this arcane aspect of Fed operations, and one wonders if it even matters if the Fed runs at a profit. This article does not follow up on or reach any conclusions on the “tangible hit” observation, but perhaps it should have. I would think that a good many would like to know to what extent Fed monetary policy operations could be hemmed in due to a shrinking bottom line.

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Stagflation danger stalks global economy beset by war fallout

Bloomberg/Enda Curran and Yuko Takeo/5-19-2022

graphic image of 1970s reducs coming soon to an economy near you“The world economy is increasingly succumbing to the threat of stagflation reminiscent of its 1970s ordeal, a mounting headache for global finance chiefs already navigating the fallout from the war in Ukraine. “

USAGOLD note: We remember distinctly when Alan Greenspan warned of stagflation’s return about two and half years ago to a gigantic yawn on Wall Street. He revisited those concerns October last year writing presciently, “If growth expectations continue to decline and price expectations continue to rise, we may be heading into a stagflationary environment as increased supply-side costs erode consumer purchasing power and, ultimately, final demand.” That’s about as succinct a portrayal of where we now stand as you are going to find. The real question is “how bad is it going to get?” Hopefully, we’ll hear more from Mr. Greenspan on the subject now that the rest of the financial world is catching up with him.

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Fed officials raised possibility of ‘restrictive’ policy to fight inflation

Financial Times/James Politi/5-25-2022

graphic illustration of a a hawk and dove in flight“Federal Reserve officials discussed the possibility of moving the US central bank to a ‘restrictive’ policy stance that would better fight inflation through more aggressive interest rate increases, but worried that this could undermine the strong recovery in the jobs market.”

USAGOLD note: This FT report complements the Morici opinion piece below. Despite the constant press references to a hawkish Fed, its inner workings, as reflected in the minutes from the May FOMC meeting, increasingly tilt dovish. Example: “Several participants commented on the challenges that monetary policy faced in restoring price stability while also maintaining strong labour market conditions.”

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The Fed’s 15 minutes: Plan to offload mortgage-backed securities could push interest rates even higher

The New York Sun/Scott Norvell/5-20-2022

“The plan is to simply let the securities — bundles of home mortgages purchased from the banks that initially lent the money to homeowners — roll off its balance sheet as they mature. If the bank can’t meet its reduction targets through attrition, however, it may have to resort to selling those securities on the open market, which could nudge mortgage rates up even higher than they already are and put home buying out of reach for more Americans.”

USAGOLD note: Mortgage rates have already gone from 3% to 5.25% since the beginning of the year pushing a good many out of the housing market.

line chart showing the increase in mortgage rates over the past year
Sources: St. Louis Federal Reserve [FRED], Freddie Mac

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Surging dollar stirs markets buzz of 1980s-style Plaza Accord

Bloomberg/Ruth Carson and Amelia Pollard/5-18-2022

graphic image of a digitalized crypto dollar zeroes and ones“Through that agreement which France, Japan, the UK, US and West Germany agreed to weaken the dollar — a stance taken out of a belief that the dollar’s huge move higher was damaging the global economy.”

USAGOLD note: In 1985 there was general agreement among industrialized nations that the dollar needed to be throttled. If that were not the case, the Plaza Accord never would have gotten off the launch pad. Which nation-states today would be interested in elevating their currencies, as was the case in 1985? Not many, we will venture. That said, a new accord to weaken the dollar, should it happen, would likely stimulate demand for precious metals.

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Portugal’s central bank opens its vaults for rare glimpse of gold bars

US Niews and World Report/Reuters-Sergio Gonclaves and Pedro Nunes/5-18-2022

Photo of pallettes of gold bars purchased by Hungary's central bank“‘Gold is an important asset for central banks as it is a refuge asset and has no credit risks,’ said Bank of Portugal board member Helder Rosalino on Tuesday during the rare media visit to the facility, guarded by armed police officers.”

USAGOLD note: Portugal’s central bank reserves include 383 tonnes of gold, the fourteenth largest stockpile in the world.

 

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We are helpless in face of inflation, claims Bank of England Governor

The Daily Telegraph/James Warrington and Giulia Bottaro/5-16-2022

“Appearing in front of MPs this afternoon, Andrew Bailey admitted he’d felt helpless to control soaring prices amid an energy market shock and the war in Ukraine, adding: ‘It’s a very, very difficult place for us to be in.'”

USAGOLD note: Has Andrew Baily just framed the new central bank conundrum? Unlike the Fed, the Bank of England, he says, will not sell government bonds from its asset portfolio in times of turmoil. One might ascertain from that, it would likely even buy more if circumstances necessitated it. The Telegraph article goes on to describe British inflation as “runaway.” We would venture a guess that such thinking stands a very good chance of making its way across the Big Pond before too long.

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Investors withdraw over $7 billion from tether, raising fresh fears about stablecoin’s backing

CNBC/Ryan Browne/5-17/2022

“Investors have withdrawn more than $7 billion from tether since it briefly dropped from its dollar peg, raising fresh questions about the reserves underpinning the world’s largest stablecoin. Tether’s circulating supply has slipped from about $83 billion a week ago to less than $76 billion on Tuesday, according to data from CoinGecko.”

USAGOLD note: It has been said that if tether goes, so will the whole of the crypto superstructure. Will the buck be broken? Judging from the withdrawals, it looks like it is going to be tested. Per this report tether tokens are backed one to one by a pool of cash ($4.2 billion), Treasuries ($12.3 billion), and commercial paper ($24.2 billion). Last July, the company told CNBC it would produce an audit in a matter of months. It has yet to do so.

line chart showing tether token in dollars
Chart courtesy of TradingEconomics.com

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Carnage in Cryptolandia

The New York Sun/Scott Norvell/5-13-2022

“Fingers are being pointed. Conspiracy theories are being floated. Some victims are said to be suicidal, and a chief executive is reportedly under police protection in Korea. There are also lessons that, if history is any indication, would be largely forgotten by the time the next mania comes along.”

USAGOLD note: What’s frightening is how quickly it happened. Luna-Terra investors lost millions in a matter of days and the whole crypto sector continues to wobble dangerously.

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Dollar’s strength pushes world economy deeper into slowdown

Bloomberg/Enda Curran and Amelia Pollard/5-14-2022

graphic image of street sign showing the corner of Wall Street and Main Street USAG“The soaring dollar is propelling the global economy deeper into a synchronized slowdown by driving up borrowing costs and stoking financial-market volatility — and there’s little respite on the horizon.”

USAGOLD note: Our currency your problem…….. Until the stagflationary quagmire bubbles to the surface at the corner of Wall Street and Main, USA.

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Crazy markets are shredding Wall Street stock and bond forecasts

Bloomberg/Lu Wang and Liz McCormick/5-13-2022

antique print showing Greek soothsayer Cassandre“Another stormy week has left investors groping when it comes to the direction of stocks and bonds. Expecting to be led out of the darkness by Wall Street’s best and brightest may be asking too much, given their performance so far this year. As usually happens in twisting markets, it is proving a brutal year to forecast for the securities industry.”

USAGOLD note: Why are people surprised by this? In Saturday’s Financial Times, Gillian Tett quotes a parody on economists by Swedish economist Axel Leijonhufvud written in 1973. “The status of the adult male [of the Econ tribe],” wrote Leijonhufvud, “is determined by his skill at making the ‘modl’ of his ‘field,’ The fact… that most of these ‘modls’ seem to be of little or no practical use, probably accounts for the backwardness and abject cultural poverty of the tribe.” Gold ownership makes sense for the more humble among us precisely because the Cassandras of the economic tribe can’t seem to get it right so much of the time. “These failings,” writes Tett, “were one reason why so few foresaw that 2008 crisis.” It is also why, according to Tett, the Fed stuck to its transitory inflation mantra when a quick foray into “the weeds of the financial system” might have told them otherwise.

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