It’s known as the “widowmaker” because Japan’s outsized stock of government debt – the largest in the world as a percentage of GDP – leaves only one conclusion for many traders.
The market has to blow up eventually, right? Except it never does.
Bass has been vocal about his call since 2010. Now, against the backdrop of the monetary policy revolution at the Bank of Japan, which just announced a massive bond buying program, the “widowmaker” trade is back in the spotlight.
Bass replied that he wasn’t naïve enough to think he could guess when it would happen – but he said that on Friday, we saw the first signs that such an event could be coming.
(On Thursday, the Bank of Japan announced its massive new stimulus program. On Friday, there was a big sell-off in short-dated Japanese government bonds, causing yields to spike. The chart below shows the move.)
Bass told Bloomberg TV:
I think it’s important to talk about the BoJ’s “shock and awe” campaign, where they are going to double the monetary base by the end of next year, which is unprecedented. They’re going to buy roughly 60 trillion yen per year of bonds in the next two years, which is 11 percent of GDP, or their whole fiscal deficit.
This is what I find fascinating in the whole situation. [The Bank of Japan] came out and told you: “The new sheriff is in town, and we’ve got you.” Right? “We’re going to buy everything we can buy. Don’t worry.”
And what happened on Friday? Investors in JGBs panicked. Which is, again, it’s really the first diversion from the 20-year norm of their ability to just swallow the numbers and not worry. They actually worried.
According to Bass, this episode illustrates that other market participants are finally coming around to his view on Japanese government bonds.
Bass said in the interview:
You have to think about – you have to get into the heads of the participants, because they all have a collective sense of fatalism.
When you do the quantitative analysis here, you know they are insolvent. Everyone that owns the bonds knows they are insolvent.
It’s a question of how long they can hang on. And what changes their views are a multitude of variables…
You never know what sparks the qualitative perceptions of investors to change, but what I saw Friday was it began to change.
I’m not saying it’s over today. I’m saying, this is the first deviation of the sanctity of that marketplace. And it was a complete panic on Friday.
- Kyle Bass Is “Perplexed” At Gold’s Low Price (financialsurvivalnetwork.com)
- Bass Says Japan Bondholders’ Reaction to Stimulus Telling – Bloomberg (bloomberg.com)
WisdomTree Japan (DXJ : NYSE : US$44.54)
iShares MSCI Japan ETF (EWJ : NYSE : US$10.96)
Last week – Thursday- the new Bank of Japan (BoJ) President Haruhiko Kuroda over-delivered on his promises to double the size of the bank’s balance sheet over the next two years. Indeed, with the objective to achieve a 2% inflation target, the pace of expansion in the balance sheet will increase this year to 5.2 trillion yen/month from 3.6 trillion yen previously.
For 2014, the balance sheet is projected to expand by 5.8 trillion/month yen versus a rate of 1 trillion yen before. Despite this massive stimulus, Japanese 10-year government bond yields surged from 0.32% to 0.65% and triggered circuit breakers as the level at which investors are willing to buy bonds seems at much higher bond yields.
Japanese stocks have been the net beneficiaries of the switch out of bonds rising another 3.5% last week. Speaking with CNBC (via Business Insider), legendary investor George Soros said, “What Japan is doing right now is actually quite dangerous because they are doing it after 25 years of just simply accumulating deficits and not getting the economy growing…So if what they’re doing gets something started, they might not be able to stop it. If the yen starts to fall, which it has done, then people in Japan think it’s liable to continue, and will
want to put their money abroad. The fall may become like an avalanche. You can start it. [But you may not be able to stop it.]“
Soros added, “Nobody believed Kuroda would have the courage to do what he did…The amount of quantitative easing that he’s introducing is the same as in the United States, but Japan is only one-third the size. So it’s three time more powerful than what’s happening in the U.S.”
Reports say Soros has made more than a $1 billion shorting the Japanese yen.
Over the past month, WisdomTree’s Japan Hedged Equity Fund added another $1 billion in new assets. iShares MSCI Japan, which is notcurrency hedged, was also popular with $830 million of inflows.
- 3 ways to play Bank of Japan move (blogs.marketwatch.com)
- The Bank of Japan Listens to Ben Bernanke After Fifteen Years, and Goes for Reflation (delong.typepad.com)
- George Soros: Japanese Policy Dangerous, Yen Could Collapse (valuewalk.com)
old traders are split on whether bullion will plunge into its first bear market since 2008 as economies improve or rally as central banks buy more debt.
Twelve analysts surveyed by Bloomberg expect prices to rise next week and the same number were bearish. A further three were neutral. Gold slumped to a 10-month low of $1,540.29 an ounce yesterday and investors sold $9.7 billion from exchange-traded products since their holdings reached a record Dec. 20. Hedge funds cut bets on higher prices by 70 percent since October.
Gold’s 12-year bull rally is probably ending as the U.S. leads a global economic recovery, according to banks from Credit Suisse Group AG to Goldman Sachs Group Inc. Commerzbank AG says it’s too early to call an end to the rally and Standard Bank Plc forecasts prices will climb this year as central-bank stimulus and record-low interest rates spur demand for a protection of wealth. The Bank of Japan said yesterday it will double monthly bond buying to bolster the economy.
“The main driver behind gold’s weakness this year has been the focus on global growth and that’s meant rotation out of defensive assets like gold,” said Joni Teves, an analyst at UBS AG in London. “There’s this weak sentiment and it’s been feeding on itself. Central banks continue to pursue exceptionally loose monetary policies and create a still supportive environment for gold.”
The metal fell 6.4 percent to $1,567.55 in London this year. A close at $1,520.18 would be a 20 percent drop from the peak reached in September 2011, the common definition of a bear market. The Standard & Poor’s GSCI gauge of 24 commodities dropped 2.8 percent this year, and the MSCI All-Country World Index (MXWD) of equities gained 4.3 percent. Treasuries are little changed, a Bank of America Corp. index shows.
Gold rose as much as 1.3 percent today after a Labor Department report showed U.S. employers hired fewer workers than forecast in March and a slump in the size of the labor forcepushed the jobless rate down to a four-year low of 7.6 percent.
Bullion retreated as Federal Reserve policy makers debated the pace of $85 billion of monthly asset purchases and as U.S. equities reached a record. U.S. economic growth will accelerate from the third quarter though mid-2014, according to the median of as many as 74 economist estimates compiled by Bloomberg. The International Monetary Fund is predicting global growth of 3.5 percent in 2013, from 3.2 percent in 2012.
The metal is in “bubble territory” and will fall to $1,375 by the end of the year as a U.S. recovery leads to rising interest rates, Societe Generale SA said in an April 2 report. Credit Suisse cut its 2013 forecast by 9.2 percent to $1,580 two days ago and Goldman Sachs predicts prices will be at $1,600 in six months. Gold averaged a record $1,669 last year.
Hedge funds held a net-long position, or wager on price gains, of 60,126 futures and options by March 26, U.S. Commodity Futures Trading data show. The 39,631 contracts held three weeks earlier were the least since July 2007. The $8.5 billion taken out of commodity ETPs in the first quarter was led by investors selling $9.2 billion from gold products, BlackRock Inc. said yesterday. Gold holdings slid 7.4 percent this year to 2,437.4 metric tons, data compiled by Bloomberg show.
Billionaire investor George Soros, who called bullion the “ultimate asset bubble” in 2010, cut his stake in the SPDR Gold Trust by 55 percent in the fourth quarter, filings showed in February.John Paulson, the largest investor in the biggest bullion ETP, kept his holding now valued at about $3.3 billion unchanged, his filing showed.
Gold will climb to an average of $1,800 in the fourth quarter on demand for an alternative currency and protection from Europe’s debt crisis, Commerzbank said in a March 21 report. Low real interest rates and global liquidity will remain dominant drivers, Standard Bank said in a report last month, forecasting prices as high as $1,780 in the third quarter.
The Fed said March 20 it would keep buying bonds so long as unemployment remains above 6.5 percent and the outlook for inflation is less than 2.5 percent. The BOJ will purchase 7.5 trillion yen ($78.6 billion) of bonds a month and double the monetary base in two years, it said yesterday. The European Central Bank kept interest rates at a record low yesterday.
Bullion reached a three-week high of $1,617.07 on March 21 as delays to Cyprus’s 10 billion-euro ($13 billion) bailout added to concern that Europe’s debt crisis may worsen. The 5.1 percent drop for gold priced in euros this year is less than the retreat for dollar-denominated metal and compares with a 2.6 percent gain for bullion priced in yen.
Falling prices may boost demand. UBS’s physical sales to India, last year’s biggest consumer, on April 3 were among the best in months, the bank said yesterday. While the U.S. Mint’s sales of American Eagle gold coins slipped the past two months, the 292,500 ounces sold in the first quarter was 39 percent more than a year earlier, data on its website show.
Demand from central banks may also support prices, according to Commerzbank. Nations added 534.6 tons to gold reserves last year, the most since 1964, the London-based World Gold Council estimates. They will buy 300 tons this year and the same amount in 2014, Barclays Plc predicts.
The plunge has pushed gold’s 14-day relative strength index to 28.4, below the level of 30 that indicates to some analysts who study technical charts that a rebound may be imminent. It fell into a bear market in June 2006 and August 2008, before as much as doubling to a record $1,921.15 in September 2011.
Gold’s drop this year compares with a 11 percent slide for silver, which entered a bear market this week. Soybeans, wheat and corn, which surged last year as drought in the U.S. parched fields, also fell into bear markets since November.
- Why Gold Prices Will Explode Following Disappointing First Quarter (fool.com)
- Gold ‘bubble’ will turn into bear market – SocGen (business.financialpost.com)
- Korea Joins Russia, Kazakhstan in Boosting Gold Holdings (bloomberg.com)
- Central Banks’ Gold Purchases in 2012 Most Since 1964 (marketcurator.com)
- Banks stop offering gold loans (vietnamnews.vn)
here is the headline for Gold Bugs and Conspiracy Advocates -
it is not the position of THE AMP
Bernanke Announces Return To Gold Standard
For years, investors and analysts have heavily criticized the actions of Federal Reserve Chairman Ben Bernanke. Bernanke has earned himself a slew of nicknames for his money printing, with the most popular being “Helicopter Ben.” After studying the Great Depression for many years, Bernanke felt that the reason the U.S. slipped into such a rough patch was because of the lack of money supply in the economy. This is one of the main reasons that he has maintained his quantitative easing programs that have involved exorbitant money printing.
But after pumping trillions into the system, Bernanke seems to have found himself cornered. National debt is at an all time high, and the Chairman has decided that a bold and abrupt change is needed if the U.S. wants to continue on the path to prosperity. Late yesterday, Bernanke made the shocking announcement of the return to the gold standard, which was abandoned decades ago. “The safest way for the economy to proceed is through a new system that holds more accountability for the U.S. dollar and its value in the global markets,” Bernanke said in his statement [for more gold news and analysis subscribe to our free newsletter].
The Gold Standard
In something of a mea culpa moment, the Chairman admitted that while his increased money supply has done well to prop up markets for the time being, it is not a sustainable solution. The reversion to the gold standard, he hopes, will allow the economy to march forward in a more stable manner. “The flexibility of a fiat currency has guided the U.S. through the toughest era since the Great Depression, but the time has come for a change,” said Bernanke.
The move comes after a wave of fears sparked by the Cyrpus banking scare. At a time when investors have little to no confidence in their local bank, the Chairman wanted to ensure that savings and investments will always be safe on American soil, hopefully giving citizens peace of mind to continue to trust local financial entities [see also 50 Ways To Invest In Gold].
One important thing to note is that the timeline for the return will be relatively drawn out and smooth. The Fed mandates that by 2015 all currency must be backed by at least 30% of its value in gold. That figure will increase to 50% by 2017 and to 100% by 2020. The move brings up a number of big questions, like whether or not the Fed will audit For Knox or other institutions that conspiracy theorists have been attacking for years. For now, we will have to wait for more specifics, but investors can already begin preparing.
Prepping for a Gold Standard
With a hard seven-year timeline, investors can already begin allocating to gold as this move will surely spark interest in the commodity. Some may choose to utilize stocks and ETFs, but physical bullion will likely be the most popular, as this will likely spark fears of a gold confiscation in order for the Fed to have enough bullion to justify the move. While a confiscation is extremely unlikely, there are those who still fear such a move.
The final question that remains to be seen is what happens in 2014 when Bernanke’s term ends. The Chairman has already hinted that another term is likely not in the books for him, so what will happen when someone else takes the reigns? Hopefully the change will be relatively seamless, but it will be worth keeping an eye on [see also Investing In Gold: The Definitive Guide].
The Bottom Line
With such monumental news coming seemingly out of nowhere, there is something that investors need to keep in mind. Today is April 1st April Fools day. Let’s be honest, Bernanke is going to print money until the U.S. runs out of ink. But for a few paragraphs, it was fun to live in the fantasy world of a gold standard reversion. Happy April Fools Day to all, feel free to get your friends and co-workers with this article!
A More Rational Way to Profit From Gold:
The proposal to impose a levy on Cypriot bank depositors as a condition of the latest euro zone bailout package has elicited a bearish reaction across risk assets and put a bid under gold – up through the US$1,600 level for the first time in several weeks.
Credit Suisse does not believe the Cyprus bailout is likely to morph into an existential crisis for the euro zone. Credit Suisse also does not expect any major announcements to emerge from this week’s Federal Open Market Committee (FOMC) meeting and do not expect the pace of stimulus to change – maintain the $85 billion monthly asset purchase pace for now. It is possible, however, that further comments about the Fed’s exit strategy from QE might be forthcoming.
Note that the FOMC’s Summary of Economic Projections will be updated and point out that recent U.S. data have tended to be stronger than expected. Gold, Credit Suisse thinks, will be vulnerable to renewed selling if the FOMC meaningfully changes its U.S. outlook for the better. Results of this week’s meeting will be released in three stages.
The FOMC policy statement will hit the wires today at about 12:30pm EDT. This will be followed by updated FOMC economic and fed funds rate projections at 2:00. Fed Chairman Bernanke will then hold a press briefing at 2:15. Is everyone getting bullish on the U.S. dollar?
Cyprus’s Four Options to Avoid
The only thing worse than Cyprus accepting the rotten bailout program that European policy makers agreed on late last week was Cyprus rejecting it. Yesterday, the parliament voted decisively against the terms of the bailout, with 36 members opposing it, the ruling party abstaining and not a single vote in favor.
Policy makers will have to come up with a new plan, and they had better hope the European Central Bank buys them enough time to do so before Cyprus’s financial system melts down.
A bank holiday was declared at least until tomorrow to prevent panicked savers from withdrawing their deposits from banks when they learned over the weekend that a levy may be imposed on deposits as part of a bailout program.
If depositors were worried about losing their savings before, they should be even more worried now. Last week, the ECB threatened to cut off emergency liquidity assistance to Cyprus’s two main banks in the absence of a bailout program. This would result in the immediate collapse of both banks, and they would default on their debt and most, if not all, of the 30 billion euros ($39 billion) in deposits they hold.
Faced with a bank run and the collapse of its largest financial institutions, Cyprus would only be able to rescue its banks and its economy by printing money and leaving the euro.
Luckily, this needn’t happen. A much more likely outcome is that the ECB will first impose capital controls. The euro area is founded on the principle of freedom of goods, labor and capital, but Article 65 of the Treaty on the Functioning of the European Union stipulates that capital controls are allowed when “justified on grounds of public policy or public security.” We have already seen capital controls this week in Cyprus, with the bank holiday and transfers frozen.
Once banks reopen — scheduled for tomorrow but probably postponed until next week — we can expect deposit flight from Cypriot banks. A bank run is no problem as long as the ECB continues to finance it by plugging the gap with continued emergency liquidity assistance. After parliament’s rejection of the bailout deal, the ECB announced yesterday that it would offer Cyprus liquidity within “existing rules,” a strong indication that it will back down from its earlier threat to take the punch bowl away and shut down emergency funding to banks.
Capital controls and the ECB’s emergency financing can buy time for Cyprus, but the tiny island will still need at least 17 billion euros in bailout funding. So far, the 10 billion euros that the International Monetary Fund, the European Union and the ECB offered in the original deal are still on the table, but Cyprus needs to find an additional 7 billion euros. There are four potential sources.
The best option would be for the government to accept that wealthy Russian depositors have already been well and truly scared off from Cypriot banks, given developments over the past few days, and impose a big enough levy on uninsured deposits to avoid having to tax insured deposits. The government remains stubbornly protective of the country’s status as a tax haven, so this option seems unlikely, though not impossible.
Cyprus could try to piece together 7 billion euros from other sources. The nation could force losses on unsecured senior bank bondholders, but for the two biggest banks this would generate less than 200 million euros in savings. Yesterday, Mario Mavrides, a member of parliament, admitted the government was considering raiding pension funds, as was done in Ireland to help finance its bailout program. This would bring in less than 500 million euros.
Cyprus could also discount the net present value of future revenue from gas reserves lying off its coast. These reserves are notoriously difficult to value, and delays in establishing the infrastructure to capture and transfer them are inevitable.
A third option would be for Cyprus to go back to the troika of lenders — the IMF, ECB and EU — for more money. It would probably reject such a request for the same reason it originally did: A 17 billion-euro bailout would cause Cyprus’s public debt burden to balloon to unsustainable levels, even more so now because gross domestic product is set to contract further, given deposit and capital flight.
The final option is for Cyprus to negotiate aid from Russia. Finance Minister Michael Sarris traveled to Moscow yesterday to meet with President Vladimir Putin. A plain vanilla loan from Russia could cause the troika to withdraw their support for Cyprus for the same reason the troika won’t offer the extra funds themselves: It would make Cyprus’ debt unsustainable. Russia could offer money in exchange for rights. There has been speculation that OAO Gazprom (GAZP) may offer to recapitalize Cyprus’s banks in exchange for ownership of gas fields and factories near and on the island. The EU has opposed Russia increasing its foothold in the region, but having botched the original bailout deal so appallingly, euro-area policy makers may have lost their right to have an opinion on this.
Cyprus’s path forward is highly uncertain, and even though the island is tiny, it stands to set an important precedent in the euro area. This goes not only for how policy makers structure the bailout, but also for how Cyprus responds to it. The government has surprised investors by being the first to stand up to the troika of lenders by rejecting the proposed bailout. I doubt it will be the last.
(Megan Greene is a Bloomberg View columnist and chief economist at Maverick Intelligence. She is also a senior fellow at the Atlantic Council. Follow her on Twitter at @economistmeg. The opinions expressed are her own.)
To contact the writer of this article: Megan Greene Megan Greene – the chief economist at Maverick Intelligence
Cyprus Is Right to Make the
The Cypriot government’s plan to levy a 9.9-percent tax on uninsured deposits has met with a vitriolic response in Russia and the U.K., whose citizens and companies have favored Cyprus as an offshore haven for their money. Russian Prime Minister Dmitri Medvedev deemed the move “confiscatory.” Billionaire Mikhail Prokhorov went so far as to call it an assault on “the foundations of Western civilization, the sanctity of private property.”
Actually, in the recent history of Western civilization, it’s common practice for uninsured depositors to suffer losses when a bank goes bust. In cases where the government must get involved, forcing losses on such creditors — who, after all, should have known they were taking a risk — is necessary to protect insured depositors and minimize the cost of that protection to taxpayers.
In the U.S., for example, the Federal Deposit Insurance Corp. frequently imposes losses when it steps in to take over insolvent banks. From 2007 through 2011, uninsured depositors at 32 banks suffered an average haircut of 67 percent, according to a recent paper by two FDIC economists. European countries, too, have bailed-in uninsured depositors. In 2011, for example, state administrators in Denmark forced depositors to share losses when they took over the insolvent Amagerbanken A/S.
As the editors of Bloomberg View have written, the disastrous part of Cyprus’s plan is the imposition of losses on insured deposits — that is, on balances of less than 100,000 euros. The breach of trust could lead people to question the value of insurance throughout the euro area. It’s also patently unfair. Insured depositors presumably accepted a lower interest rate in return for safety. Other creditors, by contrast, knowingly entrusted their money to banks with junk ratings.
It would be well within reason, and within historical precedent, for Cyprus to raise its full 5.8-billion-euro share of its bailout package by imposing much steeper losses on uninsured depositors and bondholders. Concerns that the move could destroy the island nation’s reputation as an offshore haven are misplaced. The damage is already done: Foreign depositors will start pulling cash as soon as the banks reopen. If the government doesn’t do the right thing now, the money will be gone.
Top Bankers: Too Much Central BankEasing Is Becoming Dangerous
And the Stock Rally Is Due to Money-Printing
Now, top bankers are saying that the amount of liquidity which the central banks are flooding into the economy is becoming dangerous.
- Top Bankers: Too Much Central Bank Easing Is Becoming Dangerous (washingtonsblog.com)
- Over the weekend, rising politician Beppe Grillo, leader of Italy’s anti-establishment Five-Star Movement, told German newspaper Bild that he supports an online, non-binding referendum on euro membership in Italy. Nearly half of Italians think they would be better off without the euro.
- During incoming Bank of Japan chief Haruhiko Kuroda’s confirmation hearing last night, Kuroda said he would do “whatever it takes” to end deflation. Using this phrase, Kuroda borrowed from ECB President Mario Draghi‘s playbook. Draghi famously said these words in July 2012, reversing the course of upward-spiraling government borrowing costs in the euro area. However, the Japanese yen did not continue its downward trajectory against the U.S. dollar on the news.
- Federal Reserve Chairman Ben Bernanke gave a speech on long-term interest rates on Friday night at 10 PM ET. In the speech, Bernanke sought gave an explanation of why interest rates are so low and sought to re-assure that the Fed is not looking to tighten monetary conditions any time soon.
- In an interview with CNBC this morning, Warren Buffett said he was buying stocks now, but not because he thought they would keep going up. Instead, he said he was buying them because they were a good value. The comments follow the release of Buffett’s annual shareholder letter after the closing bell on Friday.
- Sentix euro zone investor confidence tumbled to -10.6 from -3.6 in January. Economists were only predicting a much smaller drop to -4.3. According to Sentix (via the Guardian), “The reason for this setback is obvious: it is the outcome of the election in Italy which has caused uncertainty over the country’s future development to skyrocket….This has had a negative impact on the whole euro zone.”
- RT: ‘Italy may abandon euro if debt not renegotiated’ – politics kingmaker Grillo (aworldchaos.wordpress.com)
- So, how’s that Euro going? (forexlive.com)
“ The Gold Investor’s Handbook “ by Jack A. Bass, B.A. LL.B.
( available from Amazon)
1oz 1984 Krugerrand Transferred from en.wikipedia (Photo credit: Wikipedia)
Why Invest in Gold and Gold Stocks – and Why Now ?
Historically, gold has been a proven method of preserving value when a national currency was losing value. If your investments are valued in a depreciating currency, allocating a portion to gold assets is similar to a financial insurance policy. In the past year, the climb in the price of gold above $1600 per ounce is due to many factors, one being that the dollar is steadily losing value.
- The dollar is weak and getting weaker due to national economic policies like quantitative easing , which don’t appear to have an end.
- Gold price appreciation makes up for lost interest, especially in a bull market.
- The last ten years are a major bull move similar to the 70′s when gold moved from $38 to over $800.
- Central banks in several countries have been increasing their gold holdings as part of their foreign reserves, instead of selling.
- All gold funds are in a long term uptrend with bullion get ready for an new gold bull market surge in 2013.
- The trend of commodity prices ( such as food stuffs ) to increase is relative to gold price increases.
- Worldwide gold production is not matching consumption. The price will go up further with demand.
- Most gold consumption is done in India and China and their demand is increasing with their increase in national wealth.
- U.S. government economic policies over the past decade have systematically projected the U.S. economy down a road with uncontrollable federal spending and an uncontrollably increasing trade deficits. Both will cause the dollar to lose in international value and will increase the price of alternative investments, such as gold.
Investment Alternatives :
- Gold bullion. - Refiners produce gold bars from one gram to 400 ozs.
- Gold coins. - The most popular are one oz coins such as the American Eagle, Canadian Maple Leaf, the South African Krugerrand, and the Austrian Vienna Philharmonic. They are easy to keep and transport and closely match the price of gold with a small premium.
- Numismatic coins. - Older coins which fit the description of collectibles have a premium to the value of gold included in the coin. The holder is dependent upon an accurate and fair appraisal.
- Gold Mining stocks. - Stock ownership of a company traded on one of the exchanges. The price movement is dependent not only upon the price of gold, but also upon the future of the corporation and management. It’s price movement is almost always more than the movement of gold itself. Market Vectors Gold Miners ETF (GDX) is one way to invest in stocks.
- Jewelry. - Representing the largest consumption of gold each year, jewelry is a major method of savings in developing economies.
- Exchange Traded Funds (ETF)- Perhaps the safest method of buying and owning gold by buying shares in a fund based solely on the existing market price of gold. No leverage or storage problems. GLD, GDX, and SLV.
- Gold Mutual funds. - A relatively safe method of buying and owning gold stocks allows the owner to diversify among many stocks and allows the investing decisions to be made by a professional. Investment methods vary among funds and provide many different styles of portfolio management for an investor to choose from. Prices move faster and further in both directions than the price of gold.
- Gold Price at an Extreme (wallstreetpit.com)
- Why The Correction In Gold ETFs Is Not Over (GLD, IAU, SLV, DZZ, UGL)(etfdailynews.com)
- Why Gold Miner ETFs Have Lagged Gold Prices (stocktipsinvestment.blogspot.com)
- Eric Sprott with Greg Hunter: Price of Gold and Silver are Being Suppressed & No Gold in the Treasury. Financial System, At Some Point, It Blows(financialsurvivalnetwork.com)
When Shinzo Abe was elected Japan’s prime minister in December, he immediate announced a $118 billion economic stimulus plan – despite a national debt equal to 200 percent of GDP, the world’s highest ratio. Then he went to the Bank of Japan and bullied the governor to raise the nation’s inflation target from 1 percent to 2 percent. Abe’s intent was plain: to re-orient economic policy toward job creation and inflate away part of the national debt. Instead, he ignited rumors of a global currency war.
Finance ministers and central bankers—not to mention currency traders—were all a-dither last week, girding themselves to fight the arriving danger. The euro was too high and choking a nascent recovery; the yen had lost roughly 20 percent of its value against the dollar and the euro since last November; the dollar was at the $1.33 level against the euro after trading in the $1.20 range a few months ago. We must stop this “economic warfare,” one European official said.
“Abenomics,” as Japan’s new policies are known in the markets, is Keynesian deficit spending by any other name. And they have so far shown a positive result. Japan had a lousy fourth quarter, but that was not Abe’s doing. Apart from stimulating the economy, Abe has also brought down the value of the yen—by about 25 percent against the euro and 13 percent against the dollar since the start of the year. This is not currency manipulation. It is Keynesian economic policy.
RECOGNIZING THE DIFFERENCE
The best thing to come out of last week’s remarkable turmoil in the currency markets and the bland-beyond-belief communiqués to emerge from the Group of 7 in Brussels and the Group of 20 in Moscow is that we no longer have to worry about currency wars. This is so not because anybody has narrowly averted one. It is because we now know there is no such thing.
A snippet from the G–20 communiqué issued over the weekend said, “We will refrain from competitive devaluation.” “We will not target our exchange rates for competitive purposes, will resist all forms of protectionism and keep our markets open,” the group of advanced and middle income nations stated.
Currency values are an important feature of a nation’s economy. You want a strong currency if you want to be a safe haven for investors and if you want to invest overseas. You want a weak currency if you want your exports to do well and keep your economy globally competitive.
But currency values are not a function of policies, except in some developing countries. Neither Washington nor London nor Tokyo nor Frankfurt has a currency policy per se. In the era of free exchange rates, the worth of a given currency reflects the overall health and economic policies of the issuing nation, notably (but not only) its interest rates. Debt, deficits, and much else figures in.
THE CHINA EXCEPTION
The only exceptions are countries that manipulate their currencies, and in this respect China is getting away with something near murder. Presumably to get its signature on the G–20 communiqué, ministers and central bankers agreed not to single out China for “targeting” the exchange value of the yuan. Of course it does: China suffers a distorted dependence on exports. So in the case of China we are now in the business of saying the sky is not blue.
This brings us to what we are witnessing amid all the unnecessary turmoil in the currency markets and the statements and counter-statements issuing from ministerial offices. I count two important turns.
First, as the Japanese example demonstrates, what we are actually seeing—from Tokyo to Washington to Brussels and even to London—is not the start of a currency war but a shift in fundamental economic priorities from a neoliberal obsession with inflation and price stability to the need to stimulate jobs and therefore demand.
This is proceeding at various paces. Fed Chairman Ben Bernanke is on the record as of December: American interest rates will remain at historical lows until unemployment gets pounded down to 6.5 percent. That is not terribly different from what the Bank of Japan is now doing.
The Bank of England still puts price stability above “growth and employment,” as its mandate reads, but the Conservative government is coming under increased pressure—not least from Olivier Blanchard, the International Monetary Fund’s influential chief economist—to adjust its priorities.
The Europeans—leave it to them—are bickering about the pace at which they should shift toward stimulus, but they are getting there. French President François Hollande has been calling for a targeted exchange rate—meaning let’s bring the euro down as a matter of policy—but that is a misreading of the moment.
Second comes a more philosophic question. Is it time to call central bank independence the fiction that it is? Prime Minister Abe practically pinned the Bank of Japan’s governor to the wall to get his agreement on the inflation question. It is a case in point. The financial crisis that has now been with us five years has exposed the fallacy that central bank officials—think of Alan Greenspan, the pre-crisis “saint” —operate without reference to the political or ideological leanings of the administrations under which they serve. The Bank of Japan now reflects Tokyo’s economic policy; Ben Bernanke reflects the White House’s.
What we have been calling “the currency wars” these past couple of weeks is nothing more than a process of adjustment. Exchange values will settle. We have entered a period where economic priorities are changing on a global scale. This reflects a shift in views even from last autumn, when austerity was still the faith. This adjustment will have its effect on currency values, let there be no question. Do not mistake it for a war.
- Currency Wars Return, 1930s Style: Who Will Lose Out? (socioecohistory.wordpress.com)
- Draghi dismisses talk of currency war, but watching euro (Reuters) (newsdaily.com)
- Bank of Japan on Stimulus (financialsurvivalnetwork.com)
Gold traders are the most bearish in more than a year on mounting speculation that improving economic growth from the U.S. to China will curb demand for this year’s worst-performing precious metal.
Twenty analysts surveyed by Bloomberg this week expect prices to fall next week, while 11 were bullish and three were neutral, making the proportion of bears the highest since Dec. 30, 2011. Hedge funds cut bets on higher prices by 56 percent since October and are approaching their least bullish stance on gold since August, government data show. The metal fell to a five-week low yesterday, and billionaire investors George Soros and Louis Moore Bacon reported reduced stakes in exchange-traded products backed by gold.
First-time jobless claims in the U.S. decreased more than estimated last week, while a Chinese government-backedsurvey showed manufacturing expanded in January. Growth will accelerate in the world’s two largest economies in coming quarters, according to more than 100 economists surveyed by Bloomberg. Investors cut record bullion holdings in exchange-traded products this year and added to funds backed by other precious metals that are used more in industry.
“The global economic recovery is on track,” said Andrey Kryuchenkov, a commodity strategist in London at VTB Capital, a unit of Russia’s second-largest lender. “The persistently decent macro data is denying gold its usual safe-haven properties. You can get better returns elsewhere.”
The metal fell 2 percent to $1,641.88 an ounce in London this year, reaching $1,637.95 yesterday, the lowest since Jan. 4. Gold climbed 7.1 percent last year in the longest annual rally in at least nine decades. The Standard & Poor’s GSCI gauge of 24 commodities is up 5 percent this year and the MSCI All- Country World Index of equities gained 4.8 percent. Treasuries lost 1.1 percent, a Bank of America Corp. index shows.
Gold’s drop compares with a 0.6 percent gain for silver this year. Platinum and palladium rose at least 9.4 percent on concern mine supply will fall as demand increases. An ounce of platinum bought as much as 1.054 ounces of gold yesterday, the most in 17 months, data compiled by Bloomberg show. Industrial usage accounts for about 10 percent of bullion consumption, compared with more than half for the other three metals.
Gold ETP assets reached a record 2,632.5 metric tons on Dec. 20 as policy makers from the Federal Reserve to the Bank of Japan pledged more action to stimulate growth. Holdings are down 0.9 percent this year, while silver products rose 2.9 percent, platinum 9.9 percent and palladium 13 percent, data compiled by Bloomberg show.
Soros Fund Management reduced its investment in the SPDR Gold Trust, the biggest fund backed by the metal, by 55 percent to 600,000 shares as of Dec. 31 from three months earlier, a U.S. Securities and Exchange Commission filing showed yesterday. Bacon’s Moore Capital Management LP sold its entire stake in the SPDR fund and lowered holdings in the Sprott Physical Gold Trust. Paulson & Co., the largest investor in SPDR, kept its stake at 21.8 million shares, a filing showed.
Bullion is unlikely to return to its September 2011 high of $1,921.15 because of accelerating U.S. growth and contained inflation, Credit Suisse said in a Feb. 1 report. Goldman forecast in a Jan. 18 report that gold will climb to $1,825 in three months and peak this year.
U.S. economic growth will accelerate every quarter this year to a median 2.7 percent in the final three months, according to 87 estimates compiled by Bloomberg. China’s expansion will pick up to a median 8.3 percent in the third quarter from 8.1 percent in the first, according to 34 estimates compiled by Bloomberg.
Even as the recession in Europe deepened more than economists forecast last quarter and Japan’s economy shrank, the International Monetary Fund predicts global growth will climb to 3.5 percent this year from 3.2 percent in 2012.
“There’s a lack of imminent financial disasters at the moment,” said John Meyer, an analyst at SP Angel Corporate Finance LLP, a broker and adviser in London. “Investors are going for a more risk-on approach and that tends to lead them away from gold.”
Gold generally earns returns only through price gains and some investors buy it as a hedge against inflation and currency declines. While consumer-price gains are below the Fed’s 2 percent target, inflation expectations measured by the break- even rate for five-year Treasury Inflation Protected Securities jumped 13 percent this year and reached a four-month high on Feb. 6.
Finance ministers from the Group of 20 gather this weekend in Moscow amid concern of a fresh “currency war” as countries weaken their exchange rates to make exports more competitive.
Buying also may pick up as China’s markets open after this week’s New Year holiday. China accounted for about 25 percent of consumer gold demand last year and narrowed the gap between top buyer India to the smallest ever, the London-based World Gold Council said yesterday. The group said consumption from both countries may rise at least 11 percent in 2013.
Central banks from Brazil to Russia are buying more gold to diversify from currency holdings. They added 534.6 tons to reserves last year, 17 percent more than in 2011 and the most since 1964, the council said in yesterday’s report. Those purchases helped stem the first annual drop in total demand in three years, as investment slid 9.8 percent and jewelry demand fell 3.2 percent.
Money managers held a net-long position of 86,926 futures and options in the week to Feb. 5, U.S. Commodity Futures Trading Commission data show. That was 5.9 percent more than the previous week, when wagers on gains were the lowest since Aug. 14.
Gold’s 8.3 percent slump since Oct. 4 took prices below the 200-day moving average, indicating to some who study technical charts that more declines may follow. Prices are down 1.3 percent in February, and a fifth straight monthly drop would be the worst run since 1997. Gold fell in March in six of the last nine years, according to data compiled by Bloomberg.
- Gold Near 2-Week High as Stimulus Seen Sustained; Platinum Falls – Bloomberg (bloomberg.com)
- Gold Lures Japan’s Pension Funds as Government Pledges Inflation – Bloomberg (bloomberg.com)
- Gold Forecasters Splitting on Peak for Bull Market (bloomberg.com)