Dear Reader,
I’ve been writing about interest rates for some time. I stated in one of our previous blogs that before we see hyper-inflation that the interest rate could even drop further in the U.K. So, last week’s news was probably not a big surprise to many of our readers. History follows the inflation-deflation-hyperinflation cycle quite predictably. I’d like to start this week’s piece by quoting from an article I wrote back in March of this year called “A Storm is Coming.” Nothing has changed since then:
“Just as many analysts are seeing 2016 as a repeat of the environment that led to the 2008 Credit Crisis and stock market crash, so too is the environment for gold, finding its footing, after years of being in a bear market. And with short interest right now incredibly high in the paper gold markets, chances of seeing even more ETFs like Black Rock halt or suspend trading in one capacity or another is very likely as the price continues to soar upward towards its previous all-time high.” (The Examiner, March 2016)
Now, in light of this, will the factors causing the rush into Gold get better or worse? It really doesn’t take much research to see we’re heading for an economic storm, maybe unlike one we’ve experienced before. In Britain, we are facing a bumpy ride, as the Euro Zone sinks around us:
“The ECB is facing renewed euro zone deflation, low inflation expectations and stuttering economic activity,” says Howard Archer, chief European economist at IHS Global Insight. Like some other central banks, the ECB is discovering that its attempts to slash interest rates and pour money into the financial system by buying bonds is having a limited impact. After a brief upturn late last year, the euro zone economy has slid right back to where it was with new data showing that deflation returned with a vengeance in February. The problem is that with interest rates already down the central bank has no new tricks up its sleeve.” (News Markets)
Personally, I think the factors that set up the coming global economic storm have been in place since the crash of 2008. Quantitative easing, zero or historical low interest rates, increased global debt to international GDP’s and our current deflationary period began in response to 2008 and have only been building in intensity over the years since. These are, in fact, the ‘biggest financial risks facing the U.K.”
And the deputy managing director of the International Monetary Fund agrees. He states that, “the world is heading towards “economic derailment” unless policymakers make tough choices to get the recovery back on track, a top International Monetary Fund official has warned. David Lipton, deputy managing director of the Fund, said urgent action was needed to boost growth and dispel the “dangerous” view that policymakers had run out of ammunition. He warned that the downside risks to the recovery were “clearly much more pronounced” than at the start of the year [NB: pre-Brexit], suggesting the IMF was poised to slash its global growth forecasts for the fourth time in a year. In a separate speech, Martin Weale, one of the Bank of England’s nine rate-setters, said policymakers had the tools to fight another UK downturn if the outlook worsened. Well, this last week we saw, unsurprisingly, what that was; a copycat move following Japan and many eurozone central banks. Here’s another quote from March from the Telegraph which I wrote about back in the same month:
“The Bank could cut rates closer to zero, restart its quantitative easing programme and even hoover up corporate debt. However, he warned that introducing negative rates in the UK could be counterproductive and even “wrong” if it hurt the real economy. “Negative interest rates may provide some support, but the extent of this depends on how banks behave, and whether they are able to pass on the full amount of the rate reduction to borrowers,” he said. (The Telegraph Business, 8th March 2016)
Sounds very prescient now doesn’t it? But, all these counter-productive monetary policy moves are positive signs for Gold and Silver, as history, and actual demand, has borne out. In fact, yesterday Money Morning predicted that double-digit gains for Gold will continue throughout 2016:
“With the metal up 27% this year, our new gold price prediction shows another double-digit return by the end of 2016. In fact, our Money Morning experts think gold will continue to be one of the best-performing assets of the year.”
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.
Again, stage three of this prediction is happening right now and has come to light spectacularly (albeit quietly) within the last 24 hours. The trouble is the BoE wants to buy long term bonds and there aren’t enough people willing to sell them. This is because most investors recognise that in the short term, the financial markets are heading for a rough correction, many believe far worse than 2008. So, short term bonds aren’t a favourite. This is a massive sign of what many investors and markets truly believe will happen in the next few years. Only the 10+ year bonds are seen as the slightly safer investor option at the moment:
“As Bloomberg notes, the BOE’s failure to reach its target on Tuesday is an early warning of the challenges it may face in expanding its QE plan. A big part of the problem for the central bank is that it already scooped up about a third of the U.K. government bond market as part of a program that started in March 2009. And, with yields already at all time lows, it has just run into the same problem that we warned back in 2014 will haunt the BOJ: a lack of willing sellers. Ironically, even as the BOJ has stumbled from one monetary policy embarrassment to another, it never had a failed POMO. It was up to the Bank of England to demonstrate what a bond shortage really means. But why the lack of sellers? Well, since the BOE paused purchases in 2012, global bond yields have tumbled, meaning investors may be less willing to part with longer-term bonds that tend to offer higher yields than their shorter-dated equivalents. Long-dated U.K. bonds are in particular demand from pension companies that hold the securities to match their liabilities.”
So, what happened in the markets yesterday and into this morning in the markets, in response to this Quantitative easing failure? “The breadth of the programme surprised financial markets and led to a sharp drop in government bond yields as investors bet on years of economic stimulus.”
Well, not to sound ironic, and certainly not rude, but…. there’s a surprise! The trouble is this financial paper-money game playing will – and already is – affecting real people’s lives, especially regarding pensions over the coming near-term years.
“On Tuesday, gilt yields collapsed further as it became clear demand from the BoE was outstripping supply of bonds to buy, pushing the yield on benchmark 10-year gilts to an all-time low of 0.56 per cent. Pension funds, which are some of the largest holders of government debt, have proven unwilling to part with them because they need the income from long-dated bonds to pay commitments to pensioners. Lower yields also create a problem for many pension funds with funding deficits, increasing estimates of shortfall.
“Benchmark 10-year gilt yields have fallen from 2 per cent to a new low of 0.56 per cent this year, opening up record shortfalls in UK pension schemes which use bond yields to calculate liabilities.” (The Financial Times, evening edition, 9th August 2016)
But sadly only the interest rate section of the BoE financial “measures” got most of the mainstream headlines last week, which again is not surprising. It’s not surprising either that the entire irony of giving the “public” a 0.25% interest rate cut on their debts, while at the same time entering into even more quantitative easing is akin to giving someone a tiny amount of money from one hand, while simultaneously taking a larger amount of money from their other hand. I didn’t see one article making this point. Quantitative easing raises the price of goods and services by lowering the amount one pound can buy. So, the tiny amount of “cash” gained by a 0.25% is more than lost to the mid to long term affects of increased quantitative easing.
No wonder the price of Gold and Silver are up once again. Over the last year Silver has risen 54.4% and Gold 44.9%. Remarkable but not surprising, based on the monetary moves of central banks.
I often find that the pattern of economics ebbs and flows at a faster or slower rate elsewhere in the globe. We are a global economy and much like all driving on the same motorway, the traffic up ahead can give a really good indication of what traffic will be like in our stretch on the road if we don’t get off and take a more scenic route. I have elderly family members living near the A20/M20 in Kent. And the traffic there over these summer weeks has been terrible due to the channel tunnel. Again, this sum of holiday traffic plus increased security was predictable.
If we look Eastwards on the financial road network, so to speak, we see China. It’s hard to know for sure but the bond market in China looks in as much, if not more, trouble than the Wests. But again, it’s hard to tell because public figures on either side may not be accurate or up to date.
“The biggest (unspoken of) bubble in the world just got bubblier. Following the lowest 10Y China government bond auction yield since records began in 2004, a surge in foreign inflows (seeking yield) combined with domestic flight-to-safety from the increasingly default-ridden corporate bond sector has sent China’s government bond yields to 2009 lows. Investors are more interested in government bonds as the slowing economy has reduced risk appetite and as default risks were exposed in the corporate debt market. And what has all this “flight-to-safety and reach-for-yield created? The biggest – least spoken of – bubble in the world.” (Zerohedge, 9th August 2016)
So, why is knowing what is going to happen in the bond market so important? I found a simply and clearly written expo of this here. It’s worth a quick read, as bonds I believe are going to play a big role in the financial troubles of entire nations in the near term future:
“If you don’t understand what’s in store for bonds, you won’t know what’s going to happen to stocks. With this prediction of what’s ahead, you’ll avoid the fate of everyone else as they lose what they have to the coming carnage. So let’s get started – with a very quick bond-market lesson. The bond market – meaning the market for all bonds all around the world – dwarfs the size of all the stock markets in the world combined. If you look at the averages over the past quarter century, the bond market has been 79% larger than the stock market (and in 2012, it was 104% larger). For the most part – and most people who aren’t economists or capital-markets specialists don’t know this – stocks trade off bonds. According to the BlackRock Investment Institute, there are $5.3 trillion worth of bonds today with a negative yield; 60% of those bonds, or $3.18 trillion worth, are European bonds.
Negative interest rates are insane. That means the investors who hold these bonds don’t get paid interest; they have to pay interest – for instance, paying the government for the right to loan it money.
And where do you think the bond bubble is at its very worst? You may have guessed already:
“Europe is Ground Zero for the bond bubble because most of those negative-yielding bonds are bonds issued by European Economic and Monetary Union (EMU) nations. So as the ECB drops $60 billion a month on bonds whose prices are grossly inflated, all the holders of all the rest of the trillions of dollars’ worth of bonds have to sit on their inventories of bonds, hoping and praying nothing goes wrong.
And there’s a lot that can go wrong.
First, almost all of these bonds were bought with borrowed money, meaning all the holders are leveraged to a huge degree. Then there are the central banks. The ECB, like all monetary authorities – the U.S. Federal Reserve included – is a paper tiger. It’s not a “real” bank with real capital, buying bonds with its money. The ECB has no significant capital; in fact, it really doesn’t have any capital. The capital that central banks supposedly have is the capital they need – if they need it – to be supplied by the taxing power of the governments that authorize central banks to play their games. Or they simply print money and say, “Look, we have capital.” (The Market Oracle, The Coming Bond Market Collapse)
I find it is like watching a team of people busily building the most stunning house of cards you’ve ever seen and becoming quite mesmerised with the illusion of it all.
A few months back I recommended a film called “The Big Short” and it is still a great way to watch the gist of how financial markets build on each other’s weaknesses to then collapse catastrophically at some later date.
I’ll end on some sobering figures and the reality of the price of Gold and Silver in comparison to all this funny money.
Gold is currently trading in excess of $1300 an ounce. This is well above the 1980 all-time high. However, this is an incomplete representation of what gold is trading at relative to US dollars. When you look at the gold price relative to US currency in existence (US Monetary Base), then it is close to the lowest value it has ever been.
This in itself is a major warning regarding the sustainability of the current monetary system. In other words, the monetary system is the most debased it has ever been. Furthermore, not only is the monetary system at an all-time high stress-point, but also, this comes at the worst possible time relative to other key conditions.
Together, these factors will ensure that the outcome of the current monetary distress, will be much worse than any previous ones. There were previous significant monetary stress-points in the early 1930s and 1971. Although, the outcomes from those events were very bad, it did not lead to a complete loss of confidence in the system itself.
The extent of the current monetary distress, with all other things considered, is such that it will likely result in a complete loss of confidence, which could mean the end of the US dollar.
We can judge (or measure) the system by the quality of the monetary base. The ability to pay gold (or gold backing of the monetary base) is the measure by which we will know how corrupt and leveraged the system is.
In August 2015, I estimated that the US would need to have 114 771 tons of gold to back the monetary base. By some estimates, this is about 67% to 74% of all the world’s gold (above the ground). They claim to have about 8 149 tonnes, with 22 000 tonnes being the most gold reserves the US has held at any point in time. They would never be able to obtain that much gold. Furthermore, a full gold backing of the monetary base would have gold priced at around $15 000 an ounce.” (Gold price Forecast: Gold’s Final Warning of Impending Monetary Collapse, June 2016)
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