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The Sinking Ship: A Brief Global Economic Synopsis

The Sinking Ship: A Brief Global Economic Synopsis

Dear Readers,

I hope many of our readers managed to grab the fantastic buying opportunity afforded by the dips in the gold price this last week.  The price per ounce dipped from £893 to £823 and is now on the rise again at £840.  If you missed it don't worry.  I suspect the price will bounce a little and the price today is still sitting at what is, in effect, a 5% discount on the prices last month:

"The shiny metal has gained 17 percent this year. The surge has been enough to entice hedge fund guru George Soros to buy into gold funds and related stocks. Behind rising gold prices are a number of factors. Investors have pushed back their expectations for Federal Reserve interest rate hikes, which tend to make gold a less attractive investment compared with the U.S. dollar. The value of top gold company stocks tracked by Bloomberg has more than doubled in 2016." (International Business Times, May 2016)

And the reason is just as we've been discussing within our articles and newsletters over the last few months. Bloomberg also explore these reasons very clearly in the following article published three days ago:  

"Driving the rally is a search for safer assets as global growth flags, along with bullion’s appeal as an alternative currency should inflation accelerate. Billionaire investor Stan Druckenmiller said he wagered on gold after unprecedented stimulus by central bankers led to “the absurd notion of negative interest rates.” Hedge-fund manager David Einhorn says “counterproductive monetary policies” mean prices are headed higher. “When you have to pay to have your money stored, all of a sudden it makes sense to own gold, because even though the metal doesn’t pay you anything, at least you don’t have to pay,” said Alan Gayle, a senior strategist for Atlanta-based RidgeWorth Investments, which manages $38 billion.  The move by Soros and others... “could be a signal that there’s some strong hands in the sector now,” he said." (Strong hands return to Gold in new world of negative yields, Bloomberg, 27 May 2016)  

Incidentally, the above article was published on the day last week when the gold price dipped to £832 per ounce.  Therefore, I can only deduce that many astute investors were watching the gold price for those important buying opportunity dips to enter, or indeed re-enter, the market.  When you watch the price of gold and silver day in and day out for a living, you get to sense when it's going to take a breath, when it's lungs are going to dip and then re-inflate.  Having said that, the market is just as often influenced by large hedge funds, operated by large banks, such as J.P. Morgan together with Central Banks, that swamp the market with paper, to let the price drop, in order to buy back in physical ounces. So, in truth, whether the price is dipping or rising, as long as that rise isn't exponential or in a bubble, physical gold and silver remain the safe haven, for which they are historically renowned.  One could go crazy watching the price continuously; far better to get out in the sun, enjoy some gardening and the wonderful British strawberries just becoming available in our produce isles, in between keeping eye on the Gold and Silver prices.

So, apart from the gold price dip catching my attention this week, as a golden buying opportunity, what else has been the theme? Well, it is the growing hum of the unavoidable truth of our global economic crisis. I'd saying "coming" global economic crisis, but that wouldn't be correct because it's already here, it's just not clearly visible from the surface yet.  Much like a crocodile in a muddy river. If the water was clear, we'd see it and take action immediately.

Looking around the world this week, there are shocking facts coming from Venezuela, China, France and Italy to name a few, with Japan desperately trying to warn the world but being shut down by the G7 group which met in Japan at the end of last week:  "Japanese Prime Minister Shinzo Abe failed in his bid to have Group of Seven leaders warn of the risk of a global economic crisis in a communique issued as their summit wrapped up Friday.  On Thursday, Abe presented documents to the G-7 indicating there was a danger of the world economy careering into a crisis on the scale of the 2008 Lehman shock. Abe has frequently said he would proceed with a planned increase in Japan’s sales tax in April 2017 unless there is an event on the scale of Lehman or a major earthquake." (Bloomberg, 27 May 2016). Well, that was inconsiderate of them, so we thought we'd warn you instead! 

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Interestingly, one of the main topics in their discussions, which wasn't highly publicized here, was the economic woes of China. It is no wonder that Japan is "feeling the brunt" of this, together with Australia and New Zealand due to their geographical trade proximity: "Hence it is not entirely surprising that a coordinated response to an unevenly felt dynamic could not be reached at the G-7 negotiating table. Moreover, the G-7 is obviously aware of the ‘announcement effect’ the official communique has." Again, not very considerate of them. I thought leaders were supposed to warn their citizens of coming dangers, not hush them up...

So, Japan, Australia and New Zealand are already in proven economic trouble, due to their exposure to China. But, are there any other countries already affected by the massive debt to GDP ratio of China? Yes, and in a sense it affects us all:

"In 2008, all it took was a handful of investment banks to throw the entire world into recession. Imagine what a Chinese financial crisis could do. Unfortunately, a famous billionaire and short seller doesn’t think we’ll need to imagine it for much longer. Jim Chanos, the man who unearthed the Enron scandal, thinks China is on the brink of an economic collapse that will make 2008 look like a warm-up. (Source: “Jim Chanos: China’s balance sheet looks a lot like U.S. banks in 2008,” Acast, May 22, 2016.)  His argument is fairly simple: China is making the same mistakes as the West, but on a much bigger scale. It’s hard to disagree with him when you look at the amount of Chinese debt in the world. The country is on thin ice. “We’re getting into some really scary debt-to-capital kind of numbers in China right now,” said Chanos on Business Insider’s Hard Passpodcast. “[They’re] at 300% of GDP [gross domestic product] as opposed to 100% of GDP the last time they had a big problem.”

I found the above article particularly fascinating to study, because - as I have said before - economics is as much about people and ideologies as it is about numbers. And Chanos doesn't miss this but goes on to explain the compounding economic disaster created because China is a communist country, whereas at least the capitalist market in the West in 2008 saved certain segments of the market from bail outs, at least so far:

"This level of borrowing makes it difficult for China to avoid a financial crisis because unlike the United States, China doesn’t just bail out the banks. The country bails out everything. Let’s not forget that China is still a communist nation. There are tons of state-owned enterprises that the government would never let fail, so instead of letting the market work its magic, China saves them from financial ruin. But this type of socialism is doomed to fail. Chinese banks would have to borrow even more money to prop up their economy. They’d pay off debt with…you guessed it, even more debt, perpetuating a cycle that can only end in disaster. But here’s the worst part: China’s economic collapse could start a chain reaction around the world. It is the biggest player in trade and manufacturing, meaning its financial crisis would hit commodity-rich countries in South America and Africa. “Any country whose prime export market is China, which tends to be the commodity exporters…represents 40% of global GDP,” Chanos said. “If China really does go into a decline, then you’re going to see an awful lot of other countries be dragged down with it.” (Profit Confidential, 31 May 2016)

So, let's add South America and Africa to our list of countries already on the sinking economic ship of China, Japan, Australia and New Zealand.  And by South America, there is no more striking and shocking example, that the global financial meltdown is already here, than the horror stories coming out of Venezuela this week.  Again, this hasn't been heavily reported in our media, maybe because it might remind us of Greece-on-steroids! And with the E.U. Referendum only 22 days away, our government doesn't seem to want to remind us of the awful economic mess that is the eurozone. So, 99% of the news coverage of the food, energy and fuel shortages in Venezuela are occurring in the American and Australian press, but not the British press. And  what would Greece look like if it got any worse?  It would look like Venezuela:

"Aracas, Venezuela — The courts? Closed most days. The bureau to start a business? Same thing. The public defender’s office? That’s been converted into a food bank for government employees. Step by step, Venezuela has been shutting down and keeps drifting further into uncharted territory. In recent weeks, the government has taken what may be one of the most desperate measures ever by a country to save electricity: A shutdown of many of its offices for all but two half-days each week. But that is only the start of the country’s woes. Electricity and water are being rationed. Many people cannot make international calls from their phones because of a dispute between the government and phone companies over currency regulations and rates. Coca-Cola Femsa, the Mexican company that bottles Coke in the country, has even said it was halting production of sugary soft drinks because it was running out of sugar. Last week, protests turned violent in parts of the country where demonstrators demanded empty supermarkets be resupplied. The growing economic crisis - fuelled by low prices for oil, the country’s main export; a drought that has crippled Venezuela’s ability to generate hydroelectric power; and a long decline in manufacturing and agricultural production - has turned into an intensely political one for President Nicolas Maduro. This month, he declared a state of emergency and ordered military exercises. " (The New York Times, 28 May 2016)

The similarities between Greece and Venezuela don't stop there. Both are Socialist countries, where governments grew too big and the working population could not support the system of welfare benefits needed for large sections of the population attempting to draw upon it. No wonder David Cameron, George Osborne and ilk do not want that critical and unavoidable life message to reach us here in Great Britain over the next few weeks!

So, what about closer to home?  Could we not argue, naively - even in a world joined by the touch of a financial button and in many ways without borders, regardless of whether we'd like them - that all these countries are too far from home to worry about? No need to prepare, because South America is so far away, the financial disasters they are currently living through will not affect us here?

Unfortunately, the sinking economic ship is a whole lot closer to home.  And one of the biggest financial and demographic nightmares is just a few miles from our doorstep:

As The Telegraph warned last week; "If you want to know why the eurozone will eventually end in tears, look no further than the other side of the Channel. The scenes in France are disgraceful, with petrol stations closing, and militant, far-Left unions wreaking misery and havoc. As ever, the poor, the elderly and the sick are being hit the hardest. The reason? In a country plagued with crippling unemployment, especially youth joblessness, the unions object to minor liberalisation of the labour market. In a welcome move, the government wants to dilute the 35-hour week, allowing variation; it will become easier for companies to cut pay; layoffs will be a little less difficult; and firms will be able to handle holidays and other absences more flexibly. It’s sensible stuff that will make hiring someone less risky, reduce unemployment and boost entrepreneurship. It’s hardly revolutionary, and it will still leave France with a hopelessly over-regulated labour market. Sadly, even that is too much for France’s ludicrously over-powerful trade unions. Even though they now only represent a tiny proportion of the workforce – just 8pc or so, far lower than in the UK – they continue to be able to disrupt people’s ordinary lives in an extraordinary way.  Around a third of the country’s 12,000 or so petrol stations were said to be running low; many have run out completely; refineries and ports have been hit by strikes, and around 6pc of France’s nuclear capacity has been removed by strikers. Innocent shopkeepers and drivers have seen their property vandalised by thugs. One reason is that the rule of law is still not applied properly in France, and egregious behaviour from politicised protesters is tolerated. " (Crisis-ridden eurozone matters less and less to UK, 26 May 2016)

We probably all know roughly which newspapers support the U.K. leaving the EU and which generally push for the UK to remain in the euro-project (The Guardian, for example).  I like to read the daily papers from the left and right side of the political isle, if nothing else but to remain amazed in disbelief at how bias some of them really are, but also to challenge myself to see all sides of an issue. This is because I believe at it's best, capitalism is altruistic and the best businesses and governments make a profit, or continue to be voted for, precisely because they treat their customers or citizens well.  Ethics in business, capitalism and government are self-rewarding, i.e.: the definition of altruistic capitalism. But does The Telegraph conclude the end of the eurozone simply because the author believes the U.K. would be better off leaving the failing eurozone before it sinks? It doesn't appear so, because the same economic nightmare brewing in France is also reported in The Independent, a paper more inclined to the left than the right. In fact, The Independent go further and extend the economic concern to Italy too!  "France and Italy could be the next European economies to crash. Denied the option of devaluation, both countries have relied on debt-funded public spending to maintain economic activity and living standards. The people and their representatives refuse to face reality." (29 May 2016)

The author of this piece gives a powerful allegory of financial economic collapse and it's spread which is hard to forget, even though denying reality is not to be strived for:

"Certain diseases attack the peripheries before vectoring in on vital organs. Following a similar trajectory is the European debt crisis, moving ever closer to the core. Italy and France are now especially vulnerable. Italian total real economy debt (that is, government, household and business) is around 259 per cent of GDP, up 55 per cent since 2007. France’s equivalent debt is around 280 per cent of GDP, up 66 per cent since 2007. This ignores unfunded pension and healthcare obligations as well as contingent commitments to eurozone bailouts. France and Italy cannot avoid a financial crisis in an environment of low growth and low inflation. Real GDP growth would need to be around twice the current projected rates to stabilise and then reduce government debt-to-GDP ratios."

Isn't it any wonder that major investors around the world are returning to the Gold and Silver markets in headline-making waves?

"According to official numbers via Reuters, Russia increased its gold holdings by 16.2 tons, while China ramped up its gold holdings by 10.9 tons. Surprisingly, Kazakhstan was another major buyer as it accumulated 3.2 tons. Turkey took on 2.6 tons. Last year, central banks accounted for nearly one-fifth of global gold demand. Ostensibly, central banks are attempting to diversify their holdings by gradually getting rid of U.S. Treasuries in favour of the precious metal.

Venezuela, the socialist paradise, was one of the few central banks to sell off its gold reserves. The socialist government sold 34.2 tons in February and an additional 8.5 tons in March. This comes as the socialist government is trying to prevent a complete economic collapse thanks to its price controls and central planning endeavours." (28 May 2016, Economic Collapse News)  

I understand we, the average member of the British public, do not have the same large funds available to buy physical Gold and Silver.  But just a small amount might guard family wealth and help off-set interest lost at the bank.  Or, gold and silver coins make beautiful investment gifts to children and grandchildren, which are less likely to be frittered away than cash.

To our list we could easily add Portugal, Ireland, Spain, the Middle East oil producing nations already in war and crisis, to name a few.  And of course, the biggest elephant in the room, the United States of America, so heavily indebted it's national debt now runs at a mind blowing $19 trillion dollars. For more of the world's debt clocks and to have a peek at how many in Europe have debts to GDP over 100% click here.

Italy's is second only to Greece reported at between 134%-139% of it's GDP, so why aren't we hearing more about this?  Well, we are if we look carefully but such reporting can be shouted down as "fear mongering."  But, as Liam Halligan of The Telegraph puts it, "This isn’t “Project Fear”. This is “Project look at the facts, however uncomfortable”. The Italian economy has done extremely badly under the euro, suffering second only to Greece.  Italy has grown, on average, by just 0.2pc a year since the single currency was launched in 1999. Locked in a high-currency strait-jacket, it has lost 30pc in terms of unit labour cost competitiveness against Germany over that period.  The official Italian unemployment rate of 11.4pc, while high (it’s 5.1pc in the UK), is widely dismissed as an under-estimate. In Campania the level is 53pc. In Calabria it’s 65pc. Youth unemployment, having averaged 23pc during the first decade of the euro, is now a heartbreaking 37pc. That’s one reason why polls show almost 50pc of Italians want to leave the EU, with several mainstream parties openly discussing the prospect of quitting the euro. Italy’s ongoing lack of growth has badly aggravated its debt crisis, with government liabilities standing at €2,170bn, or 134pc of GDP."  Halligan discusses the following:

"I was in Milan last week, giving a talk on Brexit, when news broke that Italy’s biggest bank had lost its chief executive. UniCredit is close to crisis, its share price having plunged 40pc during 2016. The entire Italian banking sector is looking extremely fragile, in fact, with bank share prices down, on average, by a third since the start of the year. You don’t think that matters to the UK? Well, think again. We’ve heard a lot of blood-curdling statements about “the dangers of Brexit” over recent weeks from the Treasury and the Bank of England, vital institutions which, regrettably, now seem to be entirely politicized. But we hear much less from officialdom about the considerable dangers of staying in the European Union. One concern looming large in the British public’s consciousness, of course, is immigration, which rose to a net 333,000 last year, including a record 184,000 from the EU. I’m not anti-immigration – not for one moment – but I do believe vast wage differentials across the EU, combined with the more general mass movement of people from Africa and the Middle East to Europe, mean “freedom of movement” is not only naive but increasingly dangerous. [But] the Remain danger I want to highlight this week concerns Italy – and, in particular, the country’s economic performance within the single currency and related chances of a banking crisis in the EU’s fourth-biggest economy."  Great Britain by the way is currently the fifth!  It's an insightful article and I recommend a full read: "Italy's broken banks show the danger behind the euro, 28 May 2016."

In conclusion, if I'm tempted to think that the shocking situation in Venezuela doesn't affect me in a Britain that is currently in the economic and political union of the eurozone I need to reassess the facts.  Because, the trail is short.  This week, Lufthansa, the German airline, announced it is cancelling all it's flights to Venezuela as of June 18th. Why?  Because Venezuela now can't pay Germany!  In fact, due to currency controls Venezuela owes Germany more than $100 million!  "Like other airlines, Lufthansa  has struggled to repatriate revenue held in the local bolivar currency due to exchange controls and had reduced flights to Venezuela to limit its exposure, before its weekend announcement of a suspension. A Lufthansa spokesman said that the Venezuela government owed it a “low three-digit million” amount, later adding that the amount had already been written off." (Fortune, 30 May 2016). To put this in perspective in its effect on the eurozone airtravel cost burdens, Lufthansa is not only the largest airline in Germany but, when combined with its subsidiaries, also the largest airline in Europe, both in terms of passengers carried and fleet size.

By the way,  you'd have been hard pressed to find this in the British newspapers and our government won't talk about it. So, already the eurozone has lost a vast sum of money to the South American country in financial collapse, which at first glance seemed a world away. But it's not.  Just as The Independent said, "Certain diseases attack the peripheries before vectoring in on vital organs. Following a similar trajectory is the European debt crisis, moving ever closer to the core."

So, the ship is sinking and a brief global economic synopsis leads us to conclude that it would be wise to put wealth and investment protection high on the "To-Do" List.  

Bleyer stock a wide variety of Gold and Silver bars and coins.  To discuss your investment please call one of the team on 01769 618618 or email [email protected] 

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