Dear Reader,
We hope you all had a safe and happy break from work. One story made me chuckle in regards to Gold during a lazy morning off:
“You could buy an ounce of Gold for that!” Apparently a couple paid an eye-watering £800 on two cocktails over Christmas and then posted their achievement on Facebook. I don’t have any social media personally but they were somewhat understandably roasted! I was heartened to read that one comment stated that it would have been much more savy to invest in Gold!
That’s not the most expensive cocktail ever created by a long way: “A flute was filled with a vintage Champagne and an ultra-rare Armagnac that pre-dates the Boer War with the result described as ‘liquid gold’. The price was £8,888, which is equivalent to a brand new Mitsubishi Mirage, a Rolex Submariner, or renting a private jet to fly a family of five to the Mediterranean and back.” (Daily Mail)
Again, great to see the mind of the author overtly comparing worth to “gold.”
So, while we’ve been relaxing and sleeping in, what has Gold and Silver been up to over this holiday? As mentioned in the last blog, we were expecting the U.S. Federal Reserve to raise interest rates and as expected when they did, the price of Gold and Silver dropped:
“It certainly won’t have been lost on the followers of gold and silver and of associated stocks that the U.S. Fed’s announcement last week that it would raise interest rates by all of 25 basis points, and that it was predicting at least three more such rate rises in 2017, had a devastating effect on gold and silver prices and stocks. Gold, for example, was trading at around $1,165 immediately ahead of the announcement and it plunged by around US$40 (some 3.4%) in its immediate aftermath. As if that was not bad enough, gold stocks as represented by the HUI Index, fell by around 12% at one time. The metals and stocks made a small recovery but that too was short lived and gold has fallen back further since although seems to be recovering a little so far today (14.30 GMT).
The big question now thus facing gold investors is will prices recover all the lost ground and more perhaps, and if so, when? I only wish I could answer that question with any degree of confidence.
What may have passed many observers by is not that the headline price of gold in U.S. dollars fell sharply, but that the U.S. dollar index itself rose strongly following the Fed rate decision by around 3% plus – a huge rise in currency parity terms. Dollar strength is seen as inversely affecting the gold price, so most of the fall in the gold price has actually been directly proportional to the rise in the dollar. That’s bad for U.S. investors in precious metals, but not necessarily for those in the rest of the world (Yes, there is a world which invests outside of the USA!) where the gold price in the domestic currency may have risen, or fallen only marginally, due to strength in the U.S. dollar.” (Seeking Alpha, 21 December 2016)
The same publication goes on to express in a further commentary on 27th December that Silver is looking good to rise further and summarises: “Silver is calm now but only awaits incentive for further price fluctuations. The US Dollar is silver’s most important driver right now. Investing in silver is a long-term job.”
And what can we gleen looking ahead into 2017 of our own interest rate rises? I found the most measured approach coming from The Telegraph last week:
“Poor economic forecasting, especially about interest rates, has been a feature of the post-financial crisis years. There have been frequent predictions of imminent rate rises that have simply not occurred as economists failed to grasp the extent of the headwinds that Western economies faced.”
Having said that, the broadsheet did some in depth research into who got it right pre-2008 and stated that: “
Roger Bootle, the Telegraph columnist who founded the Capital Economics consultancy, was one of the few economists to correctly predict that interest rates would remain at rock-bottom levels for many years after the financial crisis.
For example, in this article from June 2009 he said Bank Rate could be kept at record lows for as long as five years. While even he underestimated the extreme longevity of low rates, markets were at the time predicting rates of 2.5pc by the end of 2010. In other words, he was broadly right while the markets were hopelessly wrong.
So what does Mr Bootle expect now?”
A quick aside: We’ve long been advocating a financial investment plan that follows the historical repetitive pattern of inflation, deflation, then hyper inflation. Mike Maloney is the U.S. commentator that researches and explains this historical cycle of fiat currencies in great depth in both his books and video seminars at GoldSilver.com
Interestingly, his latest piece is also on Silver! He gives two options for Silver in looking ahead to 2017 and beyond:
“Option One: Silver prices are near the end of their correction and will rally substantially higher. Why? Exponential increases in debt and total currency in circulation lift the prices for nearly everything, including college tuition, cigarettes, the S&P, housing, health care, silver and gold. We have heard this before and we see the consequences of using our “fake money” every day.
Option Two: Silver prices reached a generational high in 2011 and will collapse even further in coming years. Why? Supposedly the crushing deflation will rule the world for several years and prices for stocks, bonds, real estate, gold and silver will crash to unbelievable lows. We have heard this before. Some prices will probably crash, but silver and gold should rise because they are real money and independent of(surging) counter-party risk.”
He looks squarely at Silver’s ratio to the S&P 500 or in layman’s terms, the American Stock Market. The graph is staggeringly clear; Silver has reached its lowest channel of support in that ratio relationship and he predicts that it is due to go up as stocks go down.
So, back to U.K. interest rates. The Telegraph writes that Mr Bootle’s “forecast for 2017 is that there will be no change to Bank Rate, but that it could reach 3pc by the end of 2019.
He said: “It’s quite possible that in three years’ time Bank Rate might be 3pc, and one has to imagine that it is going back up to something like 5pc, but that might take a long time to get to.”
The most important factor in determining the timing of interest rate rises was “the overall strength of the economy”, he added.
“Mr Bootle also addressed the likely influence of Mr Trump’s election on interest rates in Britain. “If Trump’s policies are to lead to stronger growth in the US in the short term – and I think they will – the connection [with the British economy] won’t be powerful but it will tend to stoke growth in the UK, and British exports to America will be stronger.
“All of that points in the direction of higher interest rates here.”
The Bank of England’s American counterpart, the Federal Reserve, recently raised US rates and Mr Bootle said that, while higher rates in the US didn’t automatically mean higher rates here too, “in the past they have tended” to follow suit.
The article goes on to explore what this will mean for mortgages and savings; I haven’t got time today to go into too much detail on these two but suffice to say the detriment to the mortgage rates will be higher than the advantages of savings rates – it always is. For example, mortgage interest rates are higher currently than the interest rates on our savings. I don’t agree with that but that’s how the banks work.
What I would like to highlight this week is a short three second graphic that blew my mind and not much does in the economic news forums anymore.
The economic crisis of 2008, which hasn’t gone away but it’s just gone underground, came because the big U.S. banks assumed they were too big to fail. That economic sickness spread like a plague across the globe and is still going. India and Venezuela are currently enduring monetary and social crisis so vast and shocking we probably can’t comprehend what it’s like to live under those circumstances. So, surely more monetary safe guards have improved since 2008 and U.S. banks avoid putting all one’s financial eggs in one basket?
Wrong.
Please click on this link to watch a 15 seconds graphic of how the banks in America have morphed into a horrible nightmare scenerio of just four large banks that have swallowed up many independent banks, ballooning into obese entities. The graphic resembles something one might see in a dominant virus under a microscope.
If we thought 2008 was ugly, when these four giants crash it’s going to be awful.
This is why so many Gold and Silver commentators see no real long-term problem with Gold and Silver prices dipping recently. If this banking fragility is all the global economy is standing on, then investment in real physical “money” – Gold and Silver – becomes an obvious strategy to explore.
The Market Oracle also thinks so in an overview published this morning: “Quietly, while all attention was riveted on the U.S. election, gold made a notable comeback in 2016. The gain was not spectacular at 8.7%, but it was respectable, and it came after three straight down years. (Silver had an even better year with a 15.2% gain.) In addition and perhaps even more importantly, global investment demand registered its fourth largest increase since the 2011 post-crisis peak. That resurgence suggests that down years for gold did not temper the global inclination to own it. To be sure, these numbers in tandem represent an important turnaround for gold and a break from the near-term past. It is also perhaps the first hint that we may have turned the page from the corrective phase of the cycle to resumption of the long-term secular bull market for both gold and silver.” (4th January 2017)
They continue with some excellent level-headed figures, which blend in both the ups and downs of the Gold price:
“Gold has posted gains twelve of the last fifteen years under decidedly disinflationary circumstances. Since the turn of the century, gold has averaged a 12% gain annually, even after the negative returns in 2013 through 2015 are blended into the calculation. That, by any measure, is an impressive track record and one that should be taken into account by anyone interested in prudent wealth management and effective portfolio design with the longer-term in mind.
Silver investors, we know from direct experience working with our clientele, view silver as a safe-haven alternative to gold with the added bonus of stronger upside potential (Experience also tells us it also has stronger downside potential. Please see chart below.) Silver sales at USAGOLD have steadily and markedly climbed year over year the past few years and we suspect that sales will be strong at the start of 2017 due to the currently low price level at around $16 per ounce.
One of the more interesting developments to surface over the course of 2016 was the strong growth in silver demand from India. Indian investors are concerned that their government will impose import and capital controls on gold, perhaps even ban it. As a result, some investors are switching to silver as a hedge against currency debasement. Silver, as a result, has become to a certain extent, as India’s Economic Times suggested recently, the new gold in that country.
“Commodity experts and bullion traders,” says Economic Times, “feel that silver can trump gold in coming months as demand for the metal is increasing for solar panels and electronics sector. Demand for silver is increasing in the home décor and fashionable jewelry categories in the country which may push the price of the metal by almost 15-20% in 2017, feel the traders and analysts.”
If even a small amount of India’s massive gold interest were to migrate to silver, it could cause supply disruptions and premium increases here in the United States. We have seen before the hair trigger relationship between ramped up physical demand and premium increases. The physical silver market globally in terms of availability is not nearly as deep and liquid as gold, and a heavy source of new demand could become problematic.” (The Market Oracle, 4th January 2017) (Data sources for 2016 gains: Bloomberg Commodities Index, Zillow Home Value Index, U.S. Dollar Index, Brent Crude Oil, Dow Jones Industrial Average, Gold Spot Forex, Silver Spot Forex)
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