Mainstream Economist Turned GoldBug? About Time

A plea for sanity

2012-APR-25

An article by Professor Lew Spellman has caught the attention of the sharp-eyed, and may indeed be important. Spellman, who in the past has been an economist at the Fed and served as an assistant to the Chairman of the President’s Council of Advisors, makes the point that gold is quietly becoming a core banking asset for collateral purposes, at a time when the alternative, sovereign obligations, is becoming dangerously unstable as a bedrock of value. This is an establishment economist suggesting that gold is being chosen by markets as an alternative to money issued by government diktat.

He even suggests that ownership of gold would allow banks to increase leverage of their balance sheets. The London Bullion Market has been lobbying for this for the last six months, and at government level the Chinese have long pressed for gold to have a monetary role on a supra-national basis. Powerful forces recognise the benefits, and if the Basel Committee which is considering the matter agrees to banks using gold as Tier 1 Capital, it would create substantial demand for physical bullion, for any such gold would have to be physically held on an allocated basis.

Anyone who understands gold’s historic role will grasp the importance of the argument behind extra bank leverage. Direct ownership of bullion by a bank is superior to holding the fiat money issued by a central bank. It should increase confidence in any bank and the system as a whole. Given relative values, bank purchases of bullion will drive the value of gold as Tier 1 Capital up relative to other qualifying assets, increasing its desirability for regulatory purposes further without a gold-owning bank doing anything.

The fly in the ointment is politics. Ever since the Nixon shock in 1971, the US Government has tried to convince the world that gold has no monetary role. It would require the US Treasury to accept that gold might be superior to the paper dollar after all. No doubt that U-turn can be performed, but the concern would be that gold being officially recognised as a form of money would disadvantage the dollar and hand substantial power to the Chinese, who have been accumulating gold from their own mines.

This raises the question about how much gold the Chinese actually own. They have been mining the stuff for over a thousand years, and if Marco Polo is to be believed, seven hundred years ago there were enormous quantities of gold throughout both the Chinese Empire and Japan. This is certainly under-recorded by the World Gold Council, and while it and subsequent production may be tucked away, it won’t have been destroyed. It is a fair bet that some of it is still in China, under the control of the government, the ultimate inheritors of the dynastic legacies.

Why does this matter? It matters because if gold is accepted as the ultimate collateral, the balance of monetary power shifts from the US to China. China is already angling to conduct Asian trade settlements without using the dollar, and is ready to start using gold for settling her trade balance with Iran. This is an important development, the predictable result of US attempts to dictate terms of trade.

China is ready to use gold for monetary purposes, as is much of Asia and the Middle East. Europe is falling apart and needs gold as collateral for its banking system. Central banks everywhere, from Mexico to the Ukraine, are adding to their gold reserves, and according to the IMF in March alone twelve of them added 58 tonnes to their reserves, presumably in anticipation of its monetary return. The official price of $42.22 is an old joke that no longer amuses. How about it, Mr President?

Author: Alasdair Macleod

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Is Developed Country Sovereign Debt Really "Riskless"?

The myth of riskless debt

2012-APR-22

Much has been learned from the ongoing financial debacle that has been painfully rattling the world’s financial structure in recent years. Foremost among these valuable lessons is the realization that all financial assets have risks.

Even the bonds of many sovereign nations are being called into question, and rightly so. Though often deemed to be “riskless” because of a country’s ability to extract tax from its citizens, logic tells us that nothing in life is risk-free. This conclusion can also be reached by even a cursory reading of monetary history, or in a more meaningful and instructive way, just by closely observing financial events in recent years. Unquestionably, sovereign bonds have risks.

In fact, there are three of them. Each of these risks needs to be seriously considered and analysed before purchasing the bond of any sovereign nation.

1) Currency risk – There are two types of currency risk. The first is inflation, which has been eroding the purchasing power of currencies ever since governments abandoned the classical gold standard decades ago. This risk is particularly acute in today’s environment in which continuous central bank intervention manipulates artificially low interest rates, with the consequence that the interest income earned on a bond is not likely to completely offset the loss of purchasing power of the currency in which the bond is denominated. The other currency risk comes from fluctuating exchange rates. A declining exchange rate will reduce the value of bonds denominated in a foreign currency. For example, any euro-based investor who owned bonds denominated in British pounds saw their wealth eroded when the pound’s exchange rate collapsed against the euro a few years ago.

2) Interest rate risk – Although central banks have been actively intervening in the credit markets to keep interest rates low, it is inevitable that interest rates will again rise. Rising interest rates mean that bond prices will fall. Bond prices will fall so that the yields of the bonds’ coupons will always equal the prevailing interest rate.

3) Counterparty risk – Most devastating of all is the risk of default. A country will repay its bonds only if it has both the financial capacity and the willingness to repay. In this regard, investors are learning from recent events that many countries have exceeded the ability to repay its debts, even if they want to do so.

Despite these recent events, many bondholders still believe that they can achieve a favourable risk/return ratio by owning a government bond. While that assertion may have been true in the past, most governments today are over-leveraged and stretched to the limit. It is no longer reasonable to expect that a government bond can be bought and held to maturity. They have become a trading vehicle, to be bought and sold like commodities in an attempt to profit from price fluctuations. This task requires unique skills, so it is best to leave the ownership of sovereign bonds to professional traders and speculators.

As a consequence of countries living far beyond their financial capacity, many promises made by politicians are going to be broken. This will include the insincere promise to always honour a country’s debts. The plain truth is that many governments around the world are running out of money, and in that environment, sovereign bonds are not risk-free.

Author: James Turk

http://www.goldmoney.com/

The Central Bank Put Option

Jim Grant: ‘gold price is the reciprocal of faith in central banks’

2012-APR-02

Up, down, and back up again: that about sums up the action in the gold and silver markets last week, though neither bulls nor bears were strong enough to move the gold price out of its trading range between $1,650-$1,680. Likewise, the silver price continues to trade in a range from $31-$33.
The indecisiveness in the metals is mirroring broader market ambiguities. German unemployment is now at a record post-reunification low, yet it’s been reported this morning that total eurozone unemployment stands at a 25-year high of 10.8%. In Italy, unemployment rose from 9.1% to 9.3% January to February – its highest level since 2004. The division between the German “core” and the Med countries (plus Ireland) grows ever wider.
New Chinese manufacturing data had cheered investors earlier today (production up for the fourth straight month) but that was before the eurozone unemployment data was released. European exchanges are down slightly and crude oil prices have taken a hit – though both WTI and Brent remain above the lows they reached last Thursday.
As for America, Barry Ritholtz posts good comment on Wall Street’s love of easy money, noting the combination of “extraordinary skills and stupendous luck” that it will take to return monetary policy “to some semblance of normalcy”. The humorous and informative James Grant remains just as sceptical, noting in the CNBC video below that “gold has more upside” because of these difficulties. Click on this link to watch James Grant discuss gold, the Fed and the US economy with James Turk.

Tags: central banks, China, euro crisis, gold price

Author: The GoldMoney News Desk

Hurting metals still have a bright future.

Gold and silver prices holding above important support

2012-MAR-30

Gold and silver are holding above important support levels, despite selling pressure yesterday. The gold pricemoved back above $1,660 this morning, after flirting with $1,650. The silver price sunk below $32 briefly yesterday afternoon – hurt indirectly by talk from the US, Britain and France about releasing petroleum reserves, thus temporarily lowering oil prices – but has moved back above support at $32.James Turk discusses the significance of this price action in his latest King World News Interview.

Though the gold market has been struggling for direction in recent weeks, this price action in combination with increased chatter about “QE3” in America and Spain’s debt problems may help the bulls. Though there have been times in recent years – notably during the spring of 2010 – when gold performed well during periods of EURUSD weakness, a lot will depend on how the dollar performs. The Dollar Index has again fallen below 79.00 in trading this morning, and is struggling to maintain the kind of upward momentum seen at the end of last year, when euro fears were dominant. Further dollar weakness will encourage gold buying.

During your lunch break today you might want to read “Four Numbers Add Up to an American Debt Disaster” by Bloomberg’s Caroline Baum. A key point she raises: “The U.S. is more dependent on short-term funding than many of Europe’s highly indebted countries, including Greece, Spain and Portugal”. Not enough attention is paid to the US Treasury’s reliance on short-term financing – something that could easily backfire in the years ahead.

This dynamic is not limited to the government either, given the precarious state of so many overly indebted companies and households. In the words of Peter Schiff: “America is on the mother of all adjustable rate mortgages”.

Tags: buy gold, debt crisis, dollar, gold price, silver price

Author: The GoldMoney News Desk

Bernanke speaks, gold price rises.

Bernanke lifts gold price again

2012-MAR-27

Precious metal bulls have got used to being “saved” by Federal Reserve Chairman Ben Bernanke in recent years. Frequent spurts higher in the gold price often coincide with Bernanke press conferences, in which the chairman vows to maintain easy money policy at the Federal Reserve. Yesterday was a classic case of this, with gold gaining around $20 in a matter of minutes just after 12GMT following Bernanke’s comments that more progress on unemployment will require "more-rapid expansion of production and demand from consumers and businesses, a process that can be supported by continued accommodative policies."

As Trader Dan Norcini comments, pity the poor Fed Funds Futures traders. No sooner do we have glimmers that rates are going to rise as the US economy picks up pace and inflation rises, than do we have the Fed Chairman himself come out and quash these rumours. Dan correctly notes that Bernanke is terrified of rising rates. The US is in a debt trap from which there is no escape without considerable economic pain.

Little wonder then, that some analysts view our current epoch as “the most favourable era for gold prices in our lifetime”; BMO Financial Group’s Don Coxe adding that “governments are running deficits "beyond the forecasts of all but the hardiest goldbugs five years ago; central banks are printing money and creating liquidity beyond the forecasts of all but the most paranoid goldbugs a year ago."

Unsurprisingly, the dollar sold off yesterday, with the USDX now below 79.00. 80.00 is looking more and more like a “hard top” as far as this index is concerned, Gregor Macdonald and others noting that capping any rise in the dollar is an important aspect of current US government policy – though one that is seldom discussed in much detail by mainstream media.

A result of this official determination to weaken the dollar is of course, more people looking to buy precious metals.

Tags: Ben Bernanke, buy gold, dollar, Fed, gold price

Author: The GoldMoney News Desk

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Global Gold Demand Trends

A fine article from our friends at GoldMoney.

Chinese gold imports will keep increasing

2012-MAR-18

Since China began to embrace economic progress in the 1990s and let the compelling forces of capitalism take hold to raise living standards in that country, its impact on world markets has been profound. Chinese capital has become a major influence in the global economy, and demand from China has had a huge impact on commodity prices. But an exception to the Chinese influence has been gold.

China has had little impact on world gold markets. The reason being that Chinese domestic gold production, which over the past several years has grown to make China the largest gold miner in the world, was sufficient to satisfy domestic demand. Consequently, in contrast to other markets in which China has become an important source of demand, it has had little impact on the demand for gold.

Just over a year ago, however, the balance between Chinese gold production and demand began to change. Chinese mining companies were unable to produce enough metal to satisfy the growing domestic demand, with the result that China began importing gold.

The trend for importing gold began modestly, and received little attention. But last year this growing trend started to get noticed. The Financial Times in September 2011, for example, reported: “Data from the Hong Kong government showed that China imported a record 56.9 tonnes [of gold] in September, a six-fold increase from 2010. Monthly gold imports for most of 2010 and this year run at about 10 tonnes, but buying jumped in July, August and September. In the three-month period, China imported from Hong Kong about 140 tonnes, more than the roughly 120 tonnes for the whole 2010.”

More recently, Reuters reported: “China imported nearly a fifth more gold from Hong Kong in November [2011] than the previous month, continuing a trend of sharply rising purchases that has seen bullion flows to the mainland more than treble in the first 11 months of the year. A record 102.525 tonnes of gold entered the mainland from Hong Kong in November, the Hong Kong Census and Statistics Department said.”

These are huge numbers. Last year India imported approximately 900 tonnes of the roughly 2,800 tonnes of gold mined last year. But China is rapidly closing the gap, and is likely to overtake India in the next few years. The impact on the global gold market from such an event, if it were to occur, would be profound and obviously very bullish. But even if China does not become the world’s largest gold importer, the inability of Chinese producers to mine enough metal to meet domestic demand will alone be very bullish for the gold price.

Given the above it is clear to see that China has become an important influence in the gold market and consequently, on the gold price. It is therefore another reason to remain bullish on the prospects for the metal of kings.

Tags: China, commodities, gold price, Hong Kong, mining

Author: James Turk