Dear Reader,
Since writing a piece on the Investment Potential of Silver last week, the price of Gold increased by 1.1% while Silver increased by 6%, six times as much. Funny that! Most of the time, it’s simply a case of looking at the geo-political pressures and watching the charts. As our C.E.O. Caroline Peers said last week, sometimes the price of Silver is ahead of Gold’s moves but sometimes it lags behind.
Today, I’d like to enable our readers to get in economic position for an interesting month. On April 27th both the U.S. Central Bank (The Federal Reserve) and the Bank of Japan (BOJ) will give two major economic announcements.
Chatter in the financial markets tends to stay close to home, until the week or day before any announcement. But quietly, a few economists are beginning to look ahead and discuss what might happen on that day:
“HSBC economists are forecasting that Japan could announce a “QE For The Citizens” program. The BOJ may actually print money and give it to the citizens to spend. That’s very inflationary. Institutional buying of gold stocks in anticipation of such a program may be adding fuel to the current “rocket rally”. Also, savers are one of the main backbones of capitalism.”
“Janet Yellen [chair of board of governors of the Federal Reserve system) probably wants to raise rates in America on the same day that the BOJ’s Kuroda announces what is essentially a helicopter money drop. A rate hike in America on April 27 could cause a horrific US stock market sell-off. Yellen’s first rate hike caused a major equities market meltdown, and a surge into the yen and Gold. A second hike, against the background of helicopter action in Japan, could see the yen ignored as a safe haven. Gold and Silver may stand alone, as the safe havens for institutional liquidity flows.” (The Inflation Adjusted Price of Gold, 12 April 2016)
If this is the case, it would be prudent to alert our readers a good two weeks ahead of the financial curve here. I believe it is extremely useful to watch what happens in and to Japan, with regard to both its economy and the geo-political pressures which mount against it as a result of that extremely unhealthy economy. But, why is watching Japan akin to watching a canary in a coal mine? Simply put, their economic model is ahead of ours by a few years:
“The situation [in Japan] is more significant than many realize. Japan first launched ZIRP (Zero Interest Rate Policy) in 1999. QE (Quantitative Easing) was launched there in 2000. So the Bank of Japan has years of experience with the monetary policies that all Central Banks have begun to adopt post 2008. So, if the Bank of Japan loses control of its financial system, it’s only a matter of time before other Central Banks do the same. At that point it’s systemic collapse. Japan is at the forefront for Keynesian driven Central Bank monetary policy. Japan was not only the first Central Bank to start ZIRP and QE, it has also launched the single largest QE program in history (a single QE program equal to over 25% of Japan’s GDP).”
“Olivier Blanchard, former chief economist at the International Monetary Fund, said zero interest rates have disguised the underlying danger posed by Japan’s public debt, likely to reach 250pc of GDP this year and spiralling upwards on an unsustainable trajectory. Japan is heading for a full-blown solvency crisis as the country runs out of local investors and may ultimately be forced to inflate away its debt in a desperate end-game, one of the world’s most influential economists has warned.” (Zerohedge, Japan Leads Global Central Banks in the End Game, 12 April 2016)
At this point, I’d like to make some comparisons.
1) How high is Britain’s debt as a percentage of our GDP? This varies slightly depending on the source I use but in general, most agree it currently sits at around 90%. Amazingly, this has been a very recent increase: “Government Debt to GDP in the United Kingdom averaged 49.48 percent from 1980 until 2014, reaching an all time high of 89.40 percent in 2014 and a record low of 31.30 percent in 1991.”
2) When did the European Central Bank and Japan both adopt QE? The ECB began it’s QE programme in March 2015. I find it so interesting to read economic policy motivation in retrospect i.e.: “This is what we think our policy will achieve!” when a year later it’s clear it hasn’t. “In the second week of April (2015) we approach the one month anniversary since the ECB crossed their own Rubicon to start broad-based buying of EU sovereign debt. The €60bn per month open-ended QE progam (or so called PSPP – Public Sector Purchase Programme) is to last until at least September 2016 – until the ECB is convinced that Eurozone deflation risks have been averted (with the objective being to drive inflation closer to 2%.” (Brave New World, Atlantic Asset Management.) But, again in retrospect, it’s clear this QE policy in Europe hasn’t worked. The inflation rate across the EU area is currently sitting at 0.3%! Clearly, nowhere near the goal of 2% and clearly in deflationary, not inflationary, territory. So, QE didn’t work in both Europe and Japan, with the Eurozone being approximately 15 years behind Japan. However, that is to assume the slide downwards will be at the same pace as Japan. But as we can see, the Eurozone, particularly over this last year, clearly has other extreme demographic pressures within and upon it.
3) When did the European Central Bank adopt negative interest rates? Here’s where it gets deeply concerning for Europe, because on Negative Interest rates, as opposed to just Zero Interest Rates, the eurozone is actually ahead of Japan! “The Bank of Japan surprised markets by adopting negative interest rates in January, more than a year and a half after the European Central Bank became the first major institution of its kind to venture below zero. With other options to stimulate the economy limited, more policy makers are willing to test the technique. They acknowledge that sub-zero rates can crimp the ability of banks to make money or lead them to take additional risks in search of profit. The ECB cut rates again March 10, charging banks 0.4 percent to hold their cash overnight. At the same time, it offered a premium to banks that borrow in order to extend more loans. Sweden also has negative rates,Denmark is using them to protect its currency’s peg to the euro and last year Switzerland moved its deposit rate below zero for the first time since the 1970s. Janet Yellen, the U.S. Federal Reserve chair, said in November that a change in economic circumstances could put negative rates “on the table” in the U.S. Since central banks provide a benchmark for all borrowing costs, negative rates spread to a range of fixed-income securities. By February, more than $7 trillion of government bonds worldwide offered yields below zero. That means investors buying bonds and holding to maturity won’t get all their money back. While most banks have been reluctant to pass on negative rates for fear of losing customers, a few began to charge large depositors.” (Bloomberg, March 2016)
So, if Japan is the canary, it is well beyond clear that a lack of oxygen has spread deep within the lungs of a spluttering European economy.
“The global economy, with the EU and China/Japan in particular, is slowing significantly – and this after years of ZIRP, NIRP, QE and other highly creative bailout measures. Next up, pure helicopter cash and further ineffective acts of desperation to be ignored by the media and investing populace. The “2015 EU-wide transparency exercise”- a report on 105 banks across 21 countries in the European Union published by The European Banking Authority (EBA) raises concern on the bad debt held by banks. The report mentioned European banks have a mountain of bad debts totaling around €1tn. The bad debt amount to 5.6% of total loans and advances of Europe’s Banks and 10% when lending to other financial institutions are excluded. This stands on a higher side compared to the US banks which have a bad debt ratio of only 1.67% against total loans. What many may miss in these numbers is unlike corporate and retail loans, most lending to other financial institutions is indirectly and in some ways directly backstopped by the ECB through programs such as the LTRO and TLTRO. Any banker who can read this report should not, and likely does not, trust his/her fellow European banker. Banking is a business that relies heavily on trust, and EU banks don’t trust each other.” (Banking Crisis in Europe, Middleton, 11 April 2016)
The general economic signs of Europe following economic disaster like Japan are everywhere in the mainstream media already, it’s just that the focus in those same mainstream outlets hasn’t yet turned the public’s attention to Gold and Silver as the safe haven. It’s like talking about the problem without yet mentioning a solution. But I’ve rarely heard so many central voices saying the same thing more and more clearly. I have been writing for quite some time now that all the fundamental economic factors which caused the 2008 crash have not changed but simply been white-washed. That sounded an odd thing to write three years ago, but now it is commonly agreed that the world economy is in just as bad, if not worse, shape than just before the 2008 crash:
“The cherry blossom may be out in Washington DC. But the economists at the International Monetary Fund, which is based in the US capital, haven’t allowed that to lighten their mood or stop them delivering one of its most pessimistic assessments of the global economy since 2009. The IMF is worried that the global economy’s pulse is weak and thready. It has increased its expectations of a recession in almost every region in the world, with a 20pc chance of a contraction in the US this year and a roughly 35pc chance of one in the eurozone.” (Ben Wright, Washington Correspondent, Business section The Telegraph, 12 April 2016)
Wright puts forward a compellingly clear piece on what economic maths we are all facing. And his wording gets stronger towards the conclusion of the piece: “The equities market sell-off in the last month of 2015 and the first two months of this year [2016] was an unalloyed concern. Any repeat risks starving companies of capital and resulting in cessation of much-needed investment. This is happening against a backdrop of increased geopolitical tension. The IMF highlights events in Africa, the Middle East and Ukraine, along with the refugee crisis in Europe, which are all hampering trade and investment flows, fuelling skepticism about economic integration and tying policymakers’ hands. The final rotten cherry on this gloomy gateau is, in the IMF’s opinion, the risk of a Brexit, which, it says, could “pose major challenges for the [UK] and the rest of Europe”. The fund worries that the negotiations that followed a Brexit vote would be protracted and “would also likely disrupt and reduce mutual trade and financial flows, curtailing key benefits from economic cooperation and integration”. The UK suffered one of the biggest IMF downgrades of any advanced economy.” (Wright)
With this last IMF quote I must take umbrage. I am tired of scaremongery and am fully able to make my own decision on June 23rd, as are we all. Of course a Brexit will cause financial uncertainty! All change does! But what about the mainstream media discussing the disrpution to our trade of a euro collapse? One of the IMF’s own ex-economists put that event at a chance of 35pc! On a personal note, I’m not scared of uncertainty because I’ve lived long enough to know that uncertainty usually comes before the greatest breakthroughs. In fact, you can’t get a breakthrough without it, because before we make a move we have to let go of something. And to let go means – by definition – there is a short period of uncertainty. Getting onto a small life-raft will always feel a risk when the sinking ship still looks above the water line. But leave it too late and either there will be no life-rafts left or if one’s raft is too near when the ship sinks, it’s bulk will drag you down. Economic disasters are much the same.
A key point here is to recognise that in any financial uncertainty, Gold and Silver act as the safe haven, the harbour, as it were, until the storms have passed and the ships have sunk out at sea. So, whichever way the British people vote in the EU Referendum, the uncertainty of new negotiated free trade agreements, or the rocks of the eurozone, will be avoided by moving some of our money into the safe haven’s of Gold and Silver, because precious metals historically perform well in times of change.
In conclusion, I quote from a financial think-tank called Gains, Pains and Capital:”Another Crash is coming, driven by the economic collapse. Smart investors are preparing now. Stocks trade based on the profits they earn. With few exceptions, investors do not pay for a company that is not making any money. Profits are derived from sales. Sales is the money coming “in the door.” Profit is what’s left after costs. Sales growth for the S&P 500 has collapsed since 2012. Today it is barely positive, registering a level not seen since the 2008 collapse.”
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