Today, the 2015 edition of the gold report “In Gold We Trust” was launched. It is the 9th edition (read the 2013 and 2014 edition). With a global reach of some 1 million readers, it is probably the most read gold report worldwide. The In Gold We Trust 2015 is written by Ronald Stoeferle. He is the managing partner of a global fund at Incrementum AG in Liechtenstein, focused on the principles of the Austrian school of Economics.
2015 EDITION: "IN GOLD WE TRUST"
The gold price has stabilized in 2014, after its collapse in April and June of 2013. Investors' interest in the yellow metal is los. Hence, market sentiment vis-à-vis gold is standing at a multi-year low, maybe even a multi-decade low. History learns that extreme underperformance usually lasts for one year. If history is any guide, than there should be a recovery in the gold price in the foreseeable future. Even with the severe underperformance since 2013, gold is up approximately 9% per year since it started to trade freely in 1971. As seen on the next chart, depending on the currency in which it trades, the average yearly performance is excellent for investors with a long term horizon. In other words, gold does what is always has done throughout history: preserve value and purchasing power.
Preservation of wealth is the primary reason why one should hold gold nowadays. Monetary policies of central banks are extremely unusual. The U.S. Fed could be talking about “normalization,” but with 7 years at zero percent interest rates we are nowhere near “normal” conditions. The most extreme monetary conditions, today, are being seen in Japan. It is really no coincidence that the gold price in Yen is near its all time highs. The gold price in Yen is simply reacting on the extreme expansion of the monetary base by the Japanese central bank. As the next chart shows, the balance sheet of the Bank Of Japan (BOJ) is approximately 65% of the country's GDP. In other words, the assets that the BOJ is holding nears 2/3 of the total economic output of the country. When compared to other regions, it is clear that is a monstrous amount. It seems that Japan is near its endgame.
One of the “reasons” gold has gotten so little attention in the last two years is that investors have been focused on stock markets around the world. The U.S. stock market has seen a huge rally since October of 2012, European stocks catapulted higher when the European version of QE was announced earlier this year, Japan keeps on making multi-year highs in the wake of an ever expanding monetary policy. Meantime, however, stocks are not cheap anymore. On a historic basis, when expressed in a price/earnings ratio according to the Shiller method, the stock market in the U.S. sits at relatively high levels (although no extremes). Although it is not given that the stock market is about to go south, there always is a possibility that the top is set in which case gold should see positive returns. As the next chart shows, during periods of the worst performance of the S&P 500, stocks and commodities have lost significant value while gold remained steady.
A correction in the stock market is certainly in the cards. Why? Because traditionally the gold/silver ratio is mostly negatively correlated with the S&P 500. In other words, as the gold/silver ratio goes down which means there is a disinflationary environment, stocks come down as well. Over the last 25 years, that correlation has held very well, but started to diverge strongly 3 years ago.
Gold is underperforming in a disinflationary environment. That has been one of the key observations in the last In Gold We Trust reports. There was enough evidence in the datapoints so far, but the most up-to-date chart says it all (see below). While the real rates were standing at -4% in 2011, they have gone up steadily since then, and are again in positive territory this year. The gold price has moved in the opposite direction in that same time period. The In Gold We Trust Report 2015 focuses, among many other things, on the correlation between the gold price and inflation expectations. Gold is an inflation sensitive asset. The U.S. 10-Year real yields provide an indication of inflation expectations. As readers can see, a strong divergence is in place since 2013, arguing for a strong revaluation of the gold price as inflation expectations are in an uptrend since then.
Suppose, however, that inflation expectations will change their trend … would that be bad for precious metals? The answer to that question is to be found in the last chart. During deflationary periods, like the ones starting in 1814 or 1864, the Great Depression of the 30ies or the financial crisis of 2008, gold did remarkably well. It is during those periods of “financial stress” that gold shows its real value, i.e. preserve wealth and provide protection against other assets.
The themes in this years 2015 "In Gold Trust Report" are the real value of gold as a financial asset and the end of gold's underperformance.
MOST CRITICAL TIPPING POINT ARTICLES THIS WEEK - June 21st, 2015 - June 27th, 2015
GLOBAL RISK - Bond Funds are Bracing for a Market Crash
Recently, it’s become readily apparent that some of the world’s top money managers are getting concerned about what might happen when a mass exodus from bond funds collides head on with a completely illiquid secondary market for corporate credit.
Indeed, bond market illiquidity is the topic du jour and has almost become something of a cliche among pundits and mainstream financial media outlets years after we first raised the issue in these pages. But just because something has become fashionable to discuss doesn’t mean it’s not worth discussing and indeed, we’re at least pleased to see that the world is suddenly awake to the fact that a primary market supply bonanza catalyzed by rock-bottom borrowing costs and yield-starved investors could spell disaster when paired with shrinking dealer inventories.
For illustrative purposes, here’s a look at turnover in corporate credit…
...and a snapshot of shrinking dealer inventories and ballooning bond funds…
...and finally, here's UST market depth…
What all of these charts show is that whether you’re talking about corporate credit or “risk free” government debt, liquidity simply isn’t there and as was on full display last October, wild swings in illiquid markets will be exacerbated by the presence of parasitic HFTs.
Meanwhile, Treasury market participants are shifting to futures and corporate bond fund managers are using ETFs to offset “diversifiable” outflows, phenomena which prove investors are actively avoiding credit markets by resorting to derivatives, a practice which only serves to make the underlying markets still more illiquid.
Of course one way to mitigate risk is simply to move to cash (as we noted over the weekend, some managers are even moving to physical cash), a strategy TCW’s Jerry Cudzil is currently implementing in order to ensure he’s not one of the ones “looking silly” after the crash. Bloomberg has more:
TCW Group Inc. is taking the possibility of a bond-market selloff seriously.
So seriously that the Los Angeles-based money manager, which oversees almost $140 billion of U.S. debt, has been accumulating more and more cash in its credit funds, with the proportion rising to the highest since the 2008 crisis.
“We never realize what the tipping point is until after it happens,” said Jerry Cudzil, TCW Group’s head of U.S. credit trading. “We’re as defensive as we’ve been since pre-crisis.”
TCW isn’t alone: Bond funds are holding about 8 percent of their assets as cash-like securities, the highest proportion since at least 1999, according to FTN Financial, citing Investment Company Institute data.
Cudzil’s reasoning is that the Federal Reserve is moving toward its first interest-rate increase since 2006, and the end of record monetary stimulus will rattle the herds of investors who poured cash into risky debt to try and get some yield.
Of course, U.S. central bankers are aiming to gently wean markets and companies off zero interest-rate policies. In their ideal scenario, borrowing costs would rise slowly and steadily, debt investors would calmly absorb losses and corporate America would easily adjust to debt that’s a little less cheap amid an improving economy.
That outcome seems less and less likely to Cudzil, as volatility in the bond market climbs.
“If you distort markets for long periods of time and then you remove those distortions, you’re subject to unanticipated volatility,” said Cudzil, who traded high-yield bonds at Morgan Stanley and Deutsche Bank AG before joining TCW in 2012. He declined to specify the exact amount of cash he’s holding in the funds he runs.
Price swings will also likely be magnified by investors’ inability to quickly trade bonds, he said. New regulations have made it less profitable for banks to grease the wheels of markets that are traded over the counter and, as a result, they’re devoting fewer traders and money to the operations.
To boot, record-low yields have prompted investors to pile into the same types of risky investors -- so it may be even more painful to get out with few potential buyers able to absorb mass selling.
“We think the market’s telling you to upgrade your portfolio,” Cudzil said. “Whether it happens tomorrow or in six months, do you want look silly before the market sells off or after?”
Well, preferably neither, but point taken and we would have to agree that if ever there were a time to take one's money and run — before the realities of a dealer-less corporate credit market and/or an HTF-infested, VaR shock-prone government bond market conspire to prove, once and for all, that in today's world, the idea that bonds are any safer than other asset classes is completely and utterly false — this is it.
1- Bond Bubble
RISK REVERSAL - WOULD BE MARKED BY: Slowing Momentum, Weakening Earnings, Falling Estimates
JAPAN - DEBT DEFLATION
EU BANKING CRISIS
MACRO News Items of Importance - This Week
GLOBAL MACRO REPORTS & ANALYSIS
US ECONOMIC REPORTS & ANALYSIS
CENTRAL BANKING MONETARY POLICIES, ACTIONS & ACTIVITIES
TECHNICALS & MARKET ANALYTICS
RISK - Post Q2 Quadruple Witch - Institutional Money Changing Direction
Capital is flowing away from the US and back to international markets and economies.
Credit markets are starting to get worried.
Europe does not appear to have changed any economic policy sufficiently to affect their long term growth arc.
Japan is improving but only slowly.
Most people seem to think that China has a stock market bubble that will end badly.
Australia, Canada and most of Latin America are dependent on China.
It seems best to trust what the market is saying. So, forget the Fed. Don’t fight the market.
Investors whose strategy is to follow the Fed – in the belief that stocks will advance as long as the Fed does not raise interest rates – are free to place all their eggs in Janet’s basket. On the other hand, for investors whose strategy is historically informed by factors that have reliably distinguished market advances from collapses over a century of history, our suggestion is to consider a stronger defense. Our greatest successes have been when our investment outlook was aligned with valuations and market internals, and our greatest disappointments have been when it was not. Both factors are unfavorable at present, and our outlook is aligned accordingly.
CHANGING INSTITUTIONAL FLOWS
COMMODITY CORNER - AGRI-COMPLEX
THESIS - Mondays Posts on Financial Repression & Posts on Thursday as Key Updates Occur
Macroeconomist Gordon Long says elite bankers want and need negative interest rates. How do they get them? Long says, “We need a cashless society in order to get negative interest rates. We have had negative real interest rates for some time. That’s the whole premise of paying down the government debt by effectively debasing it. But we have run up against a wall, and we have run up against that wall. Clearly, quantitative easing isn’t working.”
Long says the bankers are not through distorting the system, and a cashless society is the next step. Long explains, “We are still early in the second or third innings of what’s to come. We are trapped in a globalization trap. With quantitative easing . . . we are bringing demand forward. Debt is nothing but future demand. So, we are really pushing at demand, but we can’t bring anymore forward. In fact, real disposable income is falling. People don’t have money to spend, and jobs are not there. The issue now is not demand. . . .The issue is oversupply. Cheap money doesn’t just allow you to buy something, it also allows producers to produce.”
So, will a cashless society put off the next crash? Long says, “We have run out of runway, but never underestimate the ingenuity of a trapped politician and central bankers to come out with new policies and new ways to extend this. We are going to see some pretty violent volatility and corrections. We are going to be in there guaranteeing collateral because our issue is . . . there is a shortage of collateral. The Fed sucked all of the bonds out of the market. There is a shortage of them. So, we have a major liquidity problem. That’s the runway we are running out of, and flows are starting to slow dramatically. Now, that says it’s getting unstable, but that doesn’t mean the world is coming to an end. It does mean we are going to do something else, and one of those things is negative nominal rates and cashless society. That’s the reason why we are going to have a cashless society. You are going to see this (cashless society idea) accelerate in the next six months.”
Long predicts, “The next crisis is going to be in sovereign debt, and it’s going to be in the bond market. I think it will stem out of the insurance and pension problem where they can’t fund it. Credit is going to collapse around muni bonds, who are using this money to pay pensions. Yes, we are out of runway. . . . We have north of $200 trillion in debt structures. Right now, it’s paying on average 4% or $8 trillion a year. The global GDP is only $72 trillion. The debt is now consuming our seed corn, so to speak. We are not only eating the seed corn, we are borrowing the money; and at some point, somebody is no longer going to lend you money. That’s kind of where we are right now.”
So, is hyperinflation what is coming next? Long says, “It’s coming, but not next. Hyperinflation is a currency event. Hyperinflation is not about prices going up but your currency going down, which means things are more expensive to you. When hyperinflation happens, it is very quick and very short. It is a lack of confidence. What triggers a lack of confidence? All of a sudden, you have an alternative to the debasement in these developed countries. . . . I believe we are going to have more deflation. We are going to have both inflation and deflation, but we are going to have more deflation first because of this oversupply I talked about. Excess supply is going to start to collapse collateral values which are going to hurt assets (bonds held as collateral). I believe, very quickly, that governments will move to guarantee collateral. When that happens, then we get into the hyperinflation. So, there is a down, then a panic and then we go up. We could have a Minsky melt-up, but not
Long adds that it will be “2008 all over again, but on steroids.”
Join Greg Hunter as he goes One-on-One with financial expert Gordon T. Long.
(There is much, much more in the video interview.)
After the Interview:
Gordon Long adds he sees trouble coming with “September options expirations” this fall. He also expects a “big credit freeze coming that may last for two weeks before mid-2016,” but he’s quick to say that credit freeze could literally “happen at any time.” Long puts free commentary onGordonTLong.com. He also offers a paid subscription newsletter that you can see by clicking here. (Right now he’s running a two month free trial.)
Gordon T Long is not a registered advisor and does not give investment advice. His comments are an expression of opinion only and should not be construed in any manner whatsoever as recommendations to buy or sell a stock, option, future, bond, commodity or any other financial instrument at any time. Of course, he recommends that you consult with a qualified investment advisor, one licensed by appropriate regulatory agencies in your legal jurisdiction, before making any investment decisions, and barring that, we encourage you confirm the facts on your own before making important investment commitments.
THE CONTENT OF ALL MATERIALS: SLIDE PRESENTATION AND THEIR ACCOMPANYING RECORDED AUDIO DISCUSSIONS, VIDEO PRESENTATIONS, NARRATED SLIDE PRESENTATIONS AND WEBZINES (hereinafter "The Media") ARE INTENDED FOR EDUCATIONAL PURPOSES ONLY.
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Gordon emperically recommends that you consult with a qualified investment advisor, one licensed by appropriate regulatory agencies in your legal jurisdiction, before making any investment decisions, and barring that, he encourages you confirm the facts on your own before making important investment commitments.
Information herein was obtained from sources which Mr. Long believes reliable, but he does not guarantee its accuracy. None of the information, advertisements, website links, or any opinions expressed constitutes a solicitation of the purchase or sale of any securities or commodities.
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