Stable Economies Are Crumbling

Stable Economies Are Crumbling

Dear Reader,

We hope you've had a good week and are utilising the flurry of late summer warmth afforded us in Britain. It's lovely to continue to see the sun, although we've certainly noticed the evenings drawing in.

Last week we outlined many of Bleyer's Gold and Silver coins and bars.  This week, we'll take a look at how these most well known of the precious metals are sitting in the global economy, through updates on the latest developments.  

One article caught my eye two days ago. And to my surprise, it is still sitting at the top of the Business Sections Most Viewed list even this morning and really, due to the centrality of its message to our own economy, it is no wonder:  "The Deutsche Bank crisis could take Angela Merkel down – and the Euro", The Telegraph (26th Sept 2016). A delight of description, Matthew Lynn writes;

"There are some words that make such an unlikely pairing that we find it hard to put them together.  Italy and efficiency, for example. Or Bake Off and Channel 4. And ‘Germany’ and ‘banking crisis’ is another one. Our image of German banks, and the German economy, as completely rock solid is so strong that it takes a lot to persuade us they might be in trouble. And yet it has become increasingly hard to ignore the slow-motion car crash that is Deutsche Bank, or to avoid the conclusion that something very nasty is developing at what was once seen as Europe’s strongest financial institution."

Firstly, although I completely agree that the concept of Germany business efficiency is buried within our English psyche, I wonder - in actuality - how many followers of the financial news are really surprised by Germany's unravelling house of cards? I'm pretty sure not many. Let's take a look back at words I wrote in July 2015, a year and three months ago:

"As I sat down to write this morning, I realised that this Euro crisis is like watching someone skim a smooth pebble over the sea. The pebble, we all know, will eventually sink. The length of its skimming "illusion" is in part dependent on the smoothness of the water, and so when the surface gets choppy its chances of descent are sudden. The surface of the Euro zone is now extremely choppy. In the financial scheme of currencies, I believe it really doesn't matter if a new deal between Greece, the ECB and IMF is agreed by this Sunday or not. Either way Greece is bankrupt. Any new deal will only slightly delay the sinking of the stone. But the stone will sink. The question is can that process be slowed down enough to give Britain, and the British people, time to act? Or is this our last wake-up call? As I listen to the special session on Greece in the European Parliament, I can hear the spreading fear of contagion as the delegates from the Euro zone stand up to speak. Each country is now scrambling to take care of its own financial well-being, with relations between Germany and Greece at an all time low." (Greek Contagion: We are watching the death of the Euro before our eyes, 2015)

And, here is a graph to clearly show both why those relations are so fraught and why it is absolutely no surprise whatsoever that the German economy is seriously under threat. The truth is it always has been, ever since the creation of a federal and economic union between the very different northern European economies with their southern European cousins. The north is colder, more financial service based, works longer hours inside; while the south is warmer, enjoys a more passionate laissez-faire attitude and is historically broadly speaking more geared to agriculture. So, joining two very different materials was always going to be like mixing water with olive oil. Here's the graph:
What concerns me greatly, is the presence of Italy, the U.S. and Spain in that list. Each of these countries have been in a deepening debt crisis of their own for several years. The debt to GDP ratio currently stands at 133% for Italy, 107% for the U.S., Portugal 128%, 98% for France, Belgium 106% and 99% for Spain, up from 86.32% in 2015. (The Statistics Portal, 2016) All their economies are much larger and more internationally connected than the Greek economy. If they collapse the dominoes will fall hard and fast. 

So, are Germany's current financial difficulties really news? Not really; "Deutsche Bank has been wobbly for a year now. Back in July, it announced a slump in profits and revenues. Back in February, the Bank’s co-CEO John Cryan put out a statement re-assuring staff and investors that the institution was ‘rock solid’ amid an earlier slide in the share price. Anyone whose memory stretches back a whole eight years will know that is the kind of thing bank CEOs say about three minutes before the whole thing goes pop. 

The politics of a Deutsche rescue are terrible. Germany, with is Chancellor taking the lead, has set itself up as the guardian of financial responsibility within the euro-zone. Two years ago, it casually let the Greek bank system go to the wall, allowing the cash machines to be closed down as a way of whipping the rebellious Syriza [Greek]  government back into line. This year, there has been an unfolding Italian crisis, as bad debts mount, and yet Germany has insisted on enforcing euro-zone rules that say depositors – that is, ordinary people – have to shoulder some of the losses when a bank is in trouble." (Matthew Lynn, 26th Sept 2016)

And this is at the core of why I write - to inform and warn the great British public, our customers, in some small way to position ourselves to gently and wisely prepare, not in a rush but while there is still room to exit and move to a safer economic position.  I believe one of the methods in which to do this is to own some Physical Gold and Silver coins and bars and I'm heavily supported in this regard, by far more experienced people:

""Gold will likely soar to a record within five years as asset bubbles burst in everything from bonds to credit and equities, forcing investors to find a haven", reported Bloomberg last week, quoting Old Mutual Global Investors’ Diego Parrilla.

The metal is at the start of a multi year bull run with a few thousand dollars of upside in a world of “monetary policy without limits” where central banks print lots of money and low or negative interest rates prevail, said Parrilla, who joined the firm as managing director of commodities last month. He’s worked at Goldman Sachs Group Inc. and Bank of America Merrill Lynch.  As some of the excesses in other asset classes get unwound, gold will perform very strongly,” said 43-year-old Parrilla, who has almost 20 years experience in precious-metals markets. The “perfect storm scenario will mean that gold will perform best when other classes are doing worst." (Gold Seen Entering a Long Term Bull Cycle, Bloomberg, 20th September 2016)

Today, the Gold and Silver price are being pulled back a little but still sitting at a year-on-year price rise of 37% and 56% respectively. Now, I'm no trading expert but certain commentators believe this is because the paper owners who got in in the last few months are profit-taking, as they saw the price rise sharply last week. Remember paper holders of Gold and Silver will get in and out within days, never actually owning the real Physical metal. 

There is, however, strong hope for the British economy this week - "The UK's solid economy and efforts to cut red tape have propelled the country up three places in the global competitiveness rankings, according to the World Economic Forum. The WEF's influential report said the UK's status as a digital pioneer and support for entrepreneurs had cemented its position as "one of the most competitive economies in the world". This helped the UK to leapfrog Japan, Hong Kong and Finland into seventh place out of 138 countries this year, representing its highest ranking since comparable records began a decade ago. It came as European powerhouse Germany slipped one place into fifth as the eurozone continues to grapple with low growth and inflation. The WEF said there were reasons to be optimistic about the UK's competitiveness. It said the decision to leave the EU meant the Government could set policies and regulations that were "optimal" for the UK instead of having to "compromise" with 27 other EU member states. It also said UK policymaking was likely to become more transparent following its exit from the bloc."

So, positive news. At the same time, it would be wise to see that we do not live, nor would want to, in isolation. As the U.S. mainstream media election "commentary" descends into deeper confabulation, in Britain, we must be mindful that our economy would be affected by both disastrous events in the U.S. and in the eurozone. So, while enjoying our own hope, sunny days are always the best ones on which to prepare for the winter. Then it doesn't feel like a chore or a panic.

So, let's turn our attention to the physical demand and ownership of the real money; holding and owning one's own Gold and/ or Silver bar, or coins or growing collection of both. We  know - for now - the paper trading certificate price of Gold and Silver funds go up and down throughout the day. But what is happening behind the scenes with real people buying up real Gold and Silver bars and coins? I always find the actual figures difficult to come by from the U.K. but slightly more talked about in the U.S. I came across an interesting quirky little interview on a Commodity Trade site that was worth browsing. The interviewee is American and has a few colloquialisms thrown in but he talks clearly of the difference between the paper price of Gold and the physical real bullion in a piece entitled, "Gold and Silver Demand Beginning to Undo Government Intervention" (13th September 2016)

"Why is it then that the physical gold and silver demand is so strong? Gosh, I write a couple times a week to remind my subscribers that negative interest rates is the most positive fundamental for physical precious metal ownership that we’ve ever seen. We’ve never seen anything like it before. Again, why is that? Well because the argument against physical gold and silver ownership is it just collects dust. It sits there and doesn’t do anything. Well, that beats the pants off paying your bank one percent. And we’ve seen, now, these stories just in the last couple weeks about safe ownerships and safe sales in Europe just going through the roof. That’s what all this lore on cash is about. Even Ken Rogoff, the renowned economist, Harvard trained, is out there saying, “We got to eliminate cash.” Because if they can eliminate cash, then the average guy is not going to have any choice but to keep his cash in the bank. And the bank, they can charge you one or two percent for that privilege. All of that augers then for physical ownership of gold and silver instead. That fundamental is what is seeping through, even at the wholesale level.  

We’ve been conditioned to believe that [the daily spot price] is actually the price of gold. But it's a fallacy that that’s somehow a fair price. What that futures price is is the price of the derivative itself. But it’s not an actual exchange of gold at that price. So the price moves basically on the supply and demand of the derivative. Not of the supply and demand of gold. How do you know when it begins to fall apart? They’ve kept this plate spinning for years. Maybe they can keep them going for more. In the meantime, I’m just perfectly content stacking my physical gold and silver because I know in the end, these uneconomic systems that are just a sham and illusion like this, they just can’t go on forever." 

And do you remember last month I wrote a piece re-encouraging us to keep our eyes on the bond market? In that article I wrote, "A few months ago I wrote to watch bonds. This is because - put very simply - when the fiat economy is in trouble, the markets move from stocks to bonds. When the economy is in even deeper trouble, the trust in the government debt begins to evaporate and the markets then move from short term bonds into longer term bonds and then finally a rush into the safe havens of Gold and Silver." (10th August 2016) This weeks' headlines regarding Germany's economic ill-health prove those predictions more timely than ever! Look at this tiny little detail I found this morning in an article not by the English press but by the Irish press:

"Deutsche Bank's €1.75bn of so-called additional Tier 1 bonds, which pay interest of 6pc, are first in line to take losses in a crisis. They fell about 2 cents on the euro to a more than seven-month low of 71 cents."

Right on cue, the German bond market is suffering. Where will those investors go to get returns on their investment if bond interest rates continue to fall, which I believe is inevitable?  As predicted, into Gold and Silver. Now, whether they move into paper Gold or Silver or the more enduring Physical doesn't really concern the British public, as both will drive up the demand and price.

I'm not sure why this information was easier to find in the Irish Independent. Perhaps, tellingly and ironically, Ireland is not financially "independent" - as their newspaper title would suggest - but part of the eurozone. So, German's health affects her, our close and verdant neighbour, far more perhaps than Britain; "Ireland has the fourth highest government debt to GDP ratio in the European Union. New figures published by the EU statistics office Eurostat show Irish debt now stands at 114.8 per cent, having fallen by 9.4 per cent from 124.2 per cent over the period under review."(The Irish Times) Ireland is therefore only beaten on its "eurozonic" economic woes by Greece, Italy and Portugal. 

It is worth noting that many believe our U.K. interest rates will be cut further soon.  Now the commentary on this varies depending on what you read.  On one side, one can read of anger that interest rates might be cut further to 0.01%. If you saved £1000 that's just 10p interest!  The Daily Mail's Money section today states that; "A string of cuts in the pipeline will see rates on accounts offered by the big banks cut to as little as 0.01 per cent. At best, you will earn only 0.25 per cent."  Now that really puts the gains possible in owning Physical Gold and Silver into even sharper perspective. On the other hand, the same paper wrote last week that, "A key Bank of England policymaker has said that further economic stimulus is unnecessary, given that the effects of Brexit have been "less stormy" than expected." (22nd Sept 2016) Admittedly, these two scenarios can exist in tandem, in that the banks may cut their interest rates without the Bank of England cutting the base rate. Even so, the last interest rate cut has brought news that is sadness to me, because it's like watching people falling into a well-set trap. The Financial Reporter published a report this morning that states; "Interest rate cut sparks 45% remortgage rise. Andy Knee, Chief Executive of LMS, said: “The Bank of England’s decision to cut the base interest rate to 0.25% continues to have a positive impact on the remortgage market. Mortgage interest rates had already fallen to record lows*, which along with rising house prices has encouraged a greater number of homeowners to remortgage their homes. Indeed, last month saw the highest number of remortgages for seven years. "  Like I've written before, when the tide goes so far out unnaturally, history tells you to run away from the approaching tsunami, not towards it.  It's a little bit heartbreaking that there isn't more financial education out there. Average U.K. mortgage rates are around 5%.

Do enjoy a browse through Bleyer's Gold and Silver products; from coins to bars, special offers and safes and storage options. If you're interested in considering a pension investment into Gold then do call Bleyer's C.E.O. Caroline Peers for an informal chat. Caroline has many years in Wealth and Asset Management and takes great care to give bespoke service to each of Bleyer's clients.

We hope you enjoy the last of the summer and look forward to hearing from you soon.

01769 618618

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Comments
9/30/2016 11:41 AM
Well done for writing these blogs.
Perception of events is very difficult for the public in these complicated times.
Mine is simple, negative rates = default.
Insure accordingly.