Peter Schiff Update On Fiscal CliffPosted: December 9, 2012 | |
|DITCHING BEFORE THE FISCAL CLIFF By Peter Schiff
Turn on the TV and this is what you’ll hear: The US budget is heading for a fiscal cliff. If a deal isn’t reaching in Congress by the end of this year, a combination of automatic tax hikes and budget cuts will sink America into economic depression. There is no escape.
Of course, my readers know that the fiscal cliff is merely an example of the piper having to be paid. The problem isn’t the bill, but that we ran it up so high in the first place. Any deal to avoid the cliff by borrowing even more money may allow the piper to keep playing a while longer, but when the music finally stops, the next fiscal cliff will be that much larger.
My readers also know that there are several ways for investors to avoid the cliff altogether. Perhaps the most secure is buying precious metals. However, given what we know, it may seem confusing that the spot prices of gold and silver have been moving sideways.
However, these headline prices have largely concealed a more important indicator: physical bullion sales are booming.
An Under-the-Radar Rally
The figures are astounding. For US Gold Eagle coins, mint sales are up some 150% from the QE3 announcement on September 13th. Despite what the spot prices show, there has been a tremendous surge in people buying physical gold.
But why hasn’t this translated into higher spot prices?
It seems clear that the spot prices of both gold and silver are being driven right now by a large pool of institutional capital moving into and out of instruments like commodity ETFs. The movements have been predictable: When there is a sign of a deal coming out of Washington, the spot prices move up. If negotiations are faltering, there is instead a major selloff.
Physical bullion investors are a different breed. We are in this market for the long haul. When I increase my physical gold and silver holdings, I do it because I see the long-term fundamental picture for the US getting worse.
Getting a Read on the Bullion Bull
While the ETF speculators are trying to anticipate the market’s – and each other’s – immediate reaction to whatever 11th hour deal is struck, I believe physical bullion investors are sending a clear signal: this whole debate is out of order.
A J.P. Morgan study concluded that 82% of the hit to GDP if we go over the fiscal cliff would be related to tax increases, not spending cuts. And if the legislators reach a deal? It will only result in more tax increases and much fewer spending cuts. These guys just don’t get it.
Looking back to the debt ceiling debate of August 2011, we saw big movements into physical gold there as well. What investors are concluding as they hear these grand debates is that whatever the result, the budget, the dollar, and the taxpayer will lose.
They are deciding to get off this runaway train. Because the real fiscal cliff isn’t coming on December 31st – it is coming when there is a global flight from the US dollar.
The Real Fiscal Cliff
The Democrats are complaining that the fiscal cliff imposes too steep demands on those who receive entitlements. Republicans are trying to protect the military budget. What no one seems to want to address is what happens as foreign creditors increasingly decide to stop financing this bonanza.
To a large extent, this is already happening. China has already become a net-seller of Treasuries and is diverting more of its reserves into gold. The Chinese government recently approved banks holding gold as a reserve asset and made it easier for banks to trade gold amongst themselves.
While Japan and other Keynes-drunk governments have filled some of the gap with increased purchases, a supermajority of new issues are being bought directly by the Fed. That was the idea behind QE3 Plus, as described in last month’s commentary.
Because of the acute trauma in Europe and certain institutional mandates to hold Treasuries, much of this new inflation is being absorbed. This has caused what may be the most dangerous of situations. It has allowed the inflationists to paint people like me as the boy who cried wolf. It seems to them that no matter how irresponsible Congress and the Fed are, we are immune from economic consequences.
In reality, all this money printing is like pulling back a spring. Pent up inflationary forces are building, and when they are unleashed, the debate will be over faster than they can say “oops.”
The Only Way to Win Is Not to Play
Those buying into physical gold and silver see this inevitability and are getting prepared. We believe there is no sense playing Russian roulette with our savings. Every time Washington raises that debt ceiling or announces another stimulus, it’s like one more click of the trigger.
When the global markets finally wrap their heads around the scale of US insolvency, the response will be as fierce as it is rapid. In such a once-in-a-century scenario, physical gold and silver are among the few assets without counterparty risk. From the looks of the physical bullion sales charts, I’m not the only investor who has figured this out.
Peter Schiff is CEO and Chief Global Strategist of Euro Pacific Precious Metals.
If you would like more information about Euro Pacific Precious Metals, click here. For the fastest service, call 1-888-GOLD-160.
RENEWED INTEREST IN GOLD AS A FINANCIAL ASSET
By Valentin Petkantchin
You may be among those investors who had the opportunity, but did not seize it, to buy gold cheap in the early 2000s. You may also be willing, but hesitant, to do so at current prices, while still desiring the “anti-crash insurance” it represents.
However, you should be aware that the yellow metal is increasingly valued as a reserve asset, which will tend to push the price up, independently of all other factors. Due to new regulations, you may also have to bid in the future alongside financial institutions, including several banks, to acquire it.
First, let’s take a step back, at least as it regards central banks’ attitude towards gold. The fact is that it has considerably changed. Central banks, which had sold gold for decades, have become – for the “first time in 21 years”, dixit the World Gold Council – net buyers in 2010, i.e. the total quantities purchased by them have exceeded the quantities sold.
Net Purchases (Green) / Net Sales (Red) of Physical Gold from the Official Sector
The official sector is comprised of central banks and other official institutions.
Source: World Gold Council
So while central banks fueled the supply of gold by 400-500 tons per year on average between 1989 and 2007, they are now increasing demand by the same factor. If this trend is to gain momentum due to the current crisis, the price of gold could soon become inaccessible to individual investors.
But central banks are not the only ones. There is also a renewed interest in gold as a safe and highly liquid asset, and this for two reasons:
First, physical gold is increasingly accepted – and therefore sought – as collateral in cases, for instance, of margin calls or securities loans. A growing number of clearing houses – such as CME Group (including its branch in Europe), ICE Europe, or LCH Clearnet Group – or of banks, like JP Morgan, now accept physical gold as collateral on their own.
Added to this is the willingness of public authorities – in line with the G20 meetings in 2009-2010 – to regulate the OTC derivatives market, including the eligible collateral that market intermediaries and central counterparties should accept. Thus, for instance, the new EU regulation on market infrastructure adopted last summer explicitly lists physical gold among the types of eligible “highly liquid collateral with minimal credit and market risk,” alongside cash or government bonds. Scheduled to become fully operational in the summer of 2013, this regulation may have a clear bullish impact for the gold price in the longer term.
Second, commercial banks could also be a source of additional demand for the yellow metal due to the intricate regulation trying to transpose the so-called “Basel III” regulatory framework. Among other things, this framework introduces new criteria such as liquidity coverage ratios, requiring banks to hold certain assets considered highly liquid to serve, presumably, as a buffer in case of a liquidity crisis.
Despite its long history as a safe haven and its high liquidity (even during war times), gold was not originally included as part of those assets in Basel III, nor in the legislative package destined to its implementation in the EU and originally proposed by Brussels. The European Banking Authority, the European Securities and Market Authority, and the ECB are supposed to transmit to the Commission no later than June 30, 2013 a report that defines which assets should be considered, in their bureaucratic jargon, of “high and extremely high liquidity and quality.”
The amended proposal by the European Parliament and the EU Council explicitly states in that regard that “it shall be assessed whether gold or other highly liquid commodities (…) can be considered” as such liquid assets.
Debates about the legislative package are still in progress, and the vote in Parliament is expected before the end of the year (with entry into force in 2015). But if gold is included in the finally adopted regulation, it will mean that in the next few years, the commercial banks could be compelled to buy gold just to meet their legal liquidity ratio requirements.
If you have not yet purchased your “anti-crash insurance” but you are willing to do it, you should follow closely those regulatory developments and act before they become fully effective. If you think the current price of gold is too high, wait to see what will happen when commercial banks start rushing to buy it too.
Valentin Petkantchin is a French economic and financial analyst. He holds a PhD in Economics from the University of Aix-Marseille III and is most recently the founder of the Economic Education Initiative (www.economic-education.org), a project aimed at publicizing sound economic thinking through comic books and cartoons.
- Peter Schiff: Gold Prices Can Only Go Higher (etfdailynews.com)