Yesterday and in Friday's Weekly Wrap we discussed the development of China dumping US Treasuries (bonds). An Article Greg Canavan which is probably the best explanation we’ve read yet. If you haven’t gathered, we think this is very important and not simplistically because gold is the safe haven alternative to bonds. If you’re reading the AFR today you will see a group of economists in the US are now back up again to 40% thinking the Fed will raise rates this month after dropping to 25% during the ‘old news’ of last week’s market crashes. Indeed they state the Fed wants to, and is looking for excuses to do it, not otherwise. This is the conundrum we’ve discussed at length – they know they need to, to stop this bubble getting bigger without fundamentals, but they also know if they do last weeks ‘crash’ could well be just a little correction before the real crash. Again - “bubbles don’t correct, they explode”. There is support in the gold price on any scenario: If the Fed raises rates, not only could this trigger a big crash that would see a flight to gold/silver (and particularly with bonds looking decidedly un-safe), but there is a robust view that in doing so they are effectively raising the discount rate by which all investments are measured in the US. That simply means less investments stack up and you get a declining USD. There is a strong correlation between falling USD and rising Gold/Silver price. As above but the higher rates, in a world of zero, sees the USD strengthen, initially putting pressure on gold but then seeing US business decline through global non-competitiveness and easing (QE4) start all over again. Should, as Greg and many others suggest, there is instead a QE4 response given all the US Treasuries that need buying in the absence of real buyers (but deficits to keep funding), you would expect a complete loss of faith by smart money and again a flight to gold. There is an alternative thesis by Bill Holter who draws the distinction between QE which is the Fed printing money to buy off (and hence credit) its member banks and what would be needed in this situation. He calls it QT and its enormously bullish for gold: “The Federal Reserve had to buy the $100 billion worth of bonds. This is "reverse" QE or as they now say "QT" (quantitative tightening). As the great credit unwind continues, more and more Treasuries from China and other sources will hit the market and force the Fed to buy them. This will take more and more "space" on the Fed's balance sheet but they will have NO CHOICE unless they want interest rates to skyrocket. In the end, the inflation we exported for so many years will come washing back on our shores like a tidal wave!”. Our commitment for these daily news pieces is to (normally) keep them relatively short and succinct. There are many more theories and indeed it is a complicated global financial web we find ourselves in. The fact is no one knows and that’s why a balance of investments is the prudent way forward.
I have to ask, is using CT just less expensive than buying your own web address and renting server space to publish your blog?
I always wonder why, if holding some gold is so sure fire an investment, these people are so keen to sell it.
This poster is all over Kittenco too. That being said, point #1 has support for reasons not touched upon, which is because: http://www.mineweb.com/news/gold/the-weekend-read-why-a-fed-rate-hike-could-be-good-for-gold/ To further expound upon this line of thinking, raising interest rates makes all outstanding debt more expensive to hold. That amounts to positions needing to be sold to offset the added cost. It is the same effect as increasing margin requirements: more dollars are needed to maintain the position. Because the managed money is now net short, that means any liquidation they need to do to cover the added costs of an interest rate hike would amount to reducing their short position if they need to get out of the gold market. Reducing a short position removes downward price pressure from the market, thus allowing the price to rise.
I think interest rates (as far as this specific aspect is concerned) affect on PM prices are a net zero scenario. Basically, the PM markets get shorted by selling futures contracts. The contracts are priced to market daily, and the profit/loss are credited/debited, accordingly. Unless the seller of the contracts is cashing out their profits daily, they aren't paying any margin interest, since they aren't on margin. Example: Account sells 1000 Dec 17 contracts of a brick of gold (100 Troy Ounces) priced at $1200. The contract settled at 1151 today, so as of today, the seller account holds $4.9mm and is net out 1000 contracts. Until the price of gold exceeds $1200 or the holder sweeps the cash, there would be no margin. In fact, with interest rates raising, the seller has additional incentive to hold the position, since they'll profit from the drop in price of the underlying asset AND additional interest on the cash position. The maintenance requirement is met by the cash in the account. If interest rates continue to rise, the price of gold will continue to drop. The effect of short cover will only happen once interest rates exceed the investor tolerance for zero risk. So, basically, until interest rates are high enough for the holder to believe they will make more in cash, short positions will be held onto. Eventually, this will lead to further drops in the price of gold, as buyers will stop buying, opting for safety, instead, in cash. This will cause further drops in the price of gold. Eventually the price will flatten out or interest rates will stabilize. That's when short covering will cause a dramatic price shift, but not before that.
While there was once a time where I would have agreed with this, history shows there is a positive correlation between price and interest rates, not an inverse correlation. https://en.wikipedia.org/wiki/Gibson's_paradox
Using Gibson's Paradox as a springboard, we could reasonably attribute global deflation to zero % interest rate policy. This actually makes perfect sense from the standpoint that any interest rate other than the free market interest rate is market coercion, leading markets further away from equilibium. This creates pressure in the opposition direction of whatever action was taken out of coercion. Low interest rates being inflationary creates deflationary pressure thereafter. After all the very purpose of bonds and their interest rates is to serve as a measure of risk in the market, and that purpose is being circumvented by central banks cannibalizing their own bonds for the sake of controlling the interest rate. The quagmire that central banks are in now is that the nations they are exploiting have acquired so much debt made possible by inflationary policy that to raise rates any amount whatsoever would risk insolvency and default. So they absolutely need to raise rates, but they cannot do so without making the situation they've created worse.
Gibson's paradox applies primarily to consumed commodities. While non-consumed commodities may see an increase in price, it would be entirely due to inflationary pressure, not due to a direct causal relationship to interest rates. How about this instead: Net of inflation, gold prices will drop when interest rates rise; gold prices will normalize once prices normalize; gold prices will rise with falling rates; gold prices will normalize once prices normalize. As for central banks, interest rates and solvency of sovereign nations... I disagree vehemently. Fixed investments are fixed investments. In rising rate environments, previously issued bonds lose value. Under Obama, the national debt increased $7.6T. For the sake of argument, let's just say that was all issued in some form of IOU. By the time our next President is sworn in, the total debt under QE policies for the US will be around $8.2T. Now, realistically speaking, $3.2T ($400B deficit spending) of that would have come to fruition without any new policies, so let's go with $5T in QE bonds. $5T at 3% on the 30-yr and 0% on the 30-day. US Govt raises interest rates to 4.25% by Dec 2016, 5.5% by 2017, 6.25% by 2018, holding that rate through Jan 2020. The $8.2T that we incurred at 3% will be worth about $3.9T at 6.25%. So, the solvency issues are somewhat of a wash. Honestly, what likely happens is interest rates increase, and the US Govt forces Fed Reserve Depositories to buy US paper at lower rates, knowing that their books will take a hit on paper. The trade off will be lowered reserve rates. So, the banking industry privatizes the $4.3T "loss" on their books in exchange for easing restrictions. If we really don't care about our trading partners overseas, then that $4.3T gets mirrored in the form of bonds issued to other sovereign nations. "Magically" the next President, regardless of who it might be, unless they choose to restart QE and wage inequality through higher minimum wages, will reduce the national debt by $8.6T in their first term, assuring a second term.
Sovereign nations are already insolvent. Debt to GDP ratio is a runaway train for pretty much everybody, because debt grows exponentially due to exhorbitant interest, where as GDP grows linearly at best but is currently flat or contracting, and thus it is literally impossible for GDP to rise quickly enough to pay down the debt. Raising rates simply makes nations even more insolvent as the existing debt becomes even more expensive to pay back. Any privatizing of the bonds requires Fed money to be pumped into the (also insolvent if not for free money) primary dealers for that purpose, which means money printing, which means debt creation.
Doesn't the National Debt constantly growing mean anything to anyone anymore? It speaks volumes to me or am I crazy? Buy that shiny stuff (silver)!
