“The rift between Washington and Beijing has moved beyond issues related to the pandemic to include angst over China’s national security actions against Hong Kong. This backrop has crimped investors’ risk appetite and bolstered demand for Treasuries as a haven. Still, bond bears aren’t giving up, emboldened by the easing of social-distancing measures across many U.S. states and by the pipeline of Treasury supply that is growing larger.”
USAGOLD note: As Mish Shedlock suggests in a post below, value relativity plays an important role in the demand for U.S. Treasuries. Still, demand for U.S. paper is dropping in some very important markets – like China and Japan – while the need for Treasury financing is soaring to record levels. As for ranking the two most demanded safe havens, this is where gold has the advantage. The supply of gold is substantially less elastic while demand from all quarters is rising.
“Rich countries are set to take on at least $17tn of extra public debt as they battle the economic consequences of the pandemic, according to the OECD, as sharp drops in tax revenues are expected to dwarf the stimulus measures put in place to battle the disease.”
USAGOLD note: No problem. If push comes to shove, there’s always the printing press. As we have pointed out often here, though few on Wall Street (or Main Street for that matter) would quarrel with the decisions the central banks have made in recent months, a good many are preparing for the potential consequences – whether those policies succeed or fail. That is where gold might come in handy.
“Ask anyone in Germany what they associate with gold and, more often than not, they will say that it is synonymous with enduring value and economic prosperity. Ask us at the Bundesbank what our gold holdings mean for us and we will tell you that, first and foremost, they make up a very large share of Germany’s reserve assets … [and they] are a major anchor underpinning confidence in the intrinsic value of the Bundesbank’s balance sheet. The Bundesbank produced this publication to give a detailed account, the first of its kind, of how gold has grown in importance over the course of history, first as medium of payment, later as the bedrock of stability for the international monetary system.”
Part 4 of 5 . . . . .
What makes this gold market rally
different from all others
Bullion banks are covering their shorts on price retreats, not piling-on
Declining global interest rates have put a damper on another traditional source of physical gold supply – bullion bank leasing programs. “We can conclude,” writes gold market analyst, Alasdair Macleod, in an insightful paper published at the GoldMoney website, “that the basis for highly geared interest rate arbitrage by borrowing gold is running into a brick wall. Not only is there no incentive for lessors but also there is also a diminishing appetite for lessees because the opportunities are vanishing. Synthetic gold liabilities are being gradually reduced, not only by ceasing the creation of new obligations, but by buying bullion to cover existing ones. This will have been particularly the case when the USD yield curve began to invert in recent months (itself a backwardation of time preference), and was the surface reason, therefore, that the gold price moved rapidly from under $1200 to over $1500.” This change in direction for bullion banks represents another fundamental difference between this rally in the gold price and rallies of the past. What’s more, given the entrenched low-rate environment, it looks like it might remain a factor for some time to come.
“The queue stretched from behind the former convent for European aristocratic women an entire city block to the affluent shopping street of Bahnhofstrasse. Lines like this are common in the coronavirus era. Consumers across the world have had to wait to enter stores and limit purchases of staples like toilet paper or pasta. Saturday’s human traffic jam in downtown Zurich was different.”
USAGOLD note: What just happened? Was that some good news that just flashed across the screen? Let’s hope it’s a signal of something bigger, brighter – beyond just Switzerland.
Repost from 5-19-2020
“Gold prices in India rose over one percent on Monday to hit an all-time high of Rs 47,929 per 10 grams on the MCX amid a sell-off in risky assets and weak Indian currency. The domestic bullion prices surged tracking gains in the international yellow metal prices that were trading at levels highest in more than seven years. Silver futures in India also rallied 4 percent or more than Rs 1,900 to over 48,600 per kg.”
USAGOLD note: It was not that long ago that some were predicting a collapse of demand and prices for gold based on a perception that India’s citizenry would not buy gold at record-high prices. We differed with that analysis some time ago arguing that demand would remain strong as long as investors in India believed it was a better option than the rupee. The chart below of gold priced in rupee explains much about India’s current attachment to gold …
Chart courtesy of TradingView.com
Repost from 5-20-2020
“Let’s be honest.. if we get a successful vaccine it will help speed global recovery, but it won’t undo the brutal economic damage that’s already been done. A vaccine will simply flatten the depth of the recession – not reverse it, and certainly not magically convert Q2 Earnings into positive numbers… Markets are not thriving because they expect a vaccine miracle. They are simply arbing governments and central banks.”
USAGOLD note: Blain is highly critical of the latest EU rescue package which emphasizes grants over loans as a means to helping its distressed southern members – particularly Italy and Spain (who have already voiced their approval of the €500 billion planned package).
Repost from 5-20-2020
“So when Ken Rogoff talks (or writes), I listen. In his latest article, Rogoff offers a dire forecast for the recovery from the New Depression resulting from the COVID-19 pandemic. He writes, ‘The short-term collapse… now underway already seems likely to rival or exceed that of any recession in the last 150 years.’ That obviously includes the Great Depression and many other economic crises. This is something you should really consider before you decide the coast is clear and it’s time to jump back into stocks.”
USAGOLD note: We cited this same Rogoff Project Syndicate article in the April issue of News & Views, our monthly newsletter. Ricards calls the coronavirus crisis the “blackest swan most people alive today have ever seen … a full-fledged global contagion.”
Repost from 4-16-2020
Investing is dead: World’s largest asset manager says ‘We’ll just buy whatever central banks are buying’
“Now that the Fed has, as Rabobank put it, ‘carved central planning into the bedrock of the US financial system, and moral hazard is not just universally accepted but a widely expected component of the investing process (or what’s left of it), it probably also means that conflicts of interest are also a thing of the past. Because when the asset manager tasked with executing the Fed’s takeover of the bond market says that it plans on co-investing with the Fed – its client whose trades it is executing and thus potentially frontrunning – what is that if not one giant conflict of interest? Worse, what does it say about the future of the entire financial industry and investing itself?”
USAGOLD note: Food for thought …… Will fund managers go the way of the dinosaur? Seems a bit far-fetched, but if all we are going to do is “buy whatever the central banks are buying” then Durden is right. Financial expertise has essentially gone out the window.
Repost from 4-16-2020
Charles DeGaulle’s ‘Criterion’ speech
Given the increasing frequency and severity of international currency imbroglios and one emerging nation-state after another falling into monetary disrepair, it is not difficult to visualize more and more of these states looking to gold as a matter of national defense. One recalls Charles DeGaulle’s famous criterion speech on gold in this context. Though such a holding would not cure internal problems derived from excessive debt and the debasement of their own currencies, it would offer something of a shield for all nation-states against the devaluation/revaluation policies of other nation-states, just as it does for private investors who take the same course of action.
“The world’s biggest economies have rolled out a plethora of monetary support measures over the past two months. If there’s one central bank that knows how hard bottling them back up will be, it’s Japan, where special operations have become a permanent fixture.”
USAGOLD note: The Fed has already learned a lesson or two on that score and since it is willing to do whatever it can to keep the stock market and economy afloat, Bloomberg’s Moss is probably correct: “Policy makers will have an expansive role for years to come.” Shall we name that genie Moral Hazard?
Repost from 5-21-2020
Gold drifts marginally higher on US-China tensions, ongoing concern over central bank policy measures
(USAGOLD – 5/26/2020) – Gold drifted marginally higher to start the week with silver showing a bit more spunk this morning than its more widely-owned traveling partner. The yellow metal is up $2 on the day at $1733.50. The white metal is up 27¢ at $17.47. Both metals are responding to tensions building at the moment between the United States and China over Hong Kong, but more acutely to the aggressive policy measures instituted by central banks over the past few months to combat the economic consequences of the coronavirus.
ZeroHedge relays a report on gold from JP Morgan this morning saying that “while JPM takes a measured approach in qualifying what this move in gold means for the dollar, … ‘this isn’t anything close to the dollar crisis that is foretold every few years in response to extreme loose Fed policy or rising twin deficits (fiscal and current account) … instead, take this Gold move as a sign of eroding confidence in central bank-generated money generally, a trend that will probably continue until enough growth returns to put fiscal policy on a more efficient path.'”
Chart of the Day
Chart note: ZeroHedge finishes the post referenced above by posing a couple of questions: What if enough growth”doesn’t return? What happens to gold then? As our Chart of the Day illustrates, gold has been a productive hedge during the disinflationary period from 2001 to present – rising 16 of the 19 years charted. Its average annual return compounded since 2001 is 9.38%. In 2019, it rose 18.3% – its best annual gain since 2010. So far in 2020, it has risen 13.43%. A $100,000 investment in gold in January 2001 would have been worth about $565,000 at the end of 2019, and over $635,000 at the end of trading Friday (5-27-2020). Whether or not this trend will continue remains to be seen, but gold’s solid history under generally sluggish and sometimes crisis economic circumstances is a matter of record.
“Following the month when the largest monetary and fiscal packages in history were unveiled, the U.S. banking giant JPMorgan Chase & Co believes there’s only one winner going forward, and that’s gold prices.”
USAGOLD note: The only winner? Though we do believe that gold should be purchased as a hedge under the current onslaught of financial market uncertainty, we do not think it will be the only asset that rises to the occasion. We do, however, think it might be the most reliable option on the table – along with silver.
“Plans for full and partial in Australia, Singapore and Thailand sound reasonable in theory, but they won’t deliver the hoped-for economic bounce. These countries, deeply reliant on trade and tourism, remain largely closed to the outside world. Domestic consumers, buffeted by layoffs and wage cuts, are in poor shape to pick up the slack. Bankruptcies in Singapore were climbing even before the most stringent virus-suppression efforts.”
USAGOLD note: The recovery in Asia where it all started, according to Moss, is spotty at best and far from the hoped-for V-shaped trajectory some economists predicted. If Asia’s weak pulse proves to be representative, the road through recession might be longer and more arduous than we all hoped …
“I’ve been saying for years that central banks can never step away from this. They can threaten to. And they can bluff, and they can do some probing bets like they did last year, and the market may fall for that, or call that bluff in the short term. But yes I think we’re in a position now where central banks can never back away, which sort of begs the question how can this ever end. Can asset markets get inflated forever?”
“Few mainstream commentators understand the seriousness of the economic and monetary situation from a V-shaped rapid return to normality towards a more prolonged recovery phase. The fact that a liquidity crisis developed in US money markets five months before the virus hit America has been forgotten. Only a rising gold price stands testament to a deeper crisis, comprised of contracting bank credit while central banks are trying to rescue the economy, fund government deficits and keep the market bubble inflated. The next problem is a crisis in the banks, wholly unexpected by investors and depositors. At a time when lending risk is soaring off the charts, their financial condition is more fragile than before the Lehman crisis.”
USAGOLD note: It is that unexpected crisis – a black swan event suddenly cropping up somewhere in the financial sector – that has already pushed many money managers into the gold camp. Should it occur, the resulting demand for gold could make the flight to safety since the beginning of the year look tame by comparison.
“‘I think we’re in the third and final phase of the gold market that’s started in 2001, and this will be the most explosive phase for gold,’ Giustra told Kitco News.”
USAGOLD note: This is one of the better interviews we have seen in awhile on the long-term merits of gold ownership. Giustra explains how he has structured his own gold portfolio.
Repost from 9-16-2019
Graphic courtesy of TradingEconomics.com
“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.”