Sunday, June 21, 2020

All About Gold

Whenever economic conditions become unstable and the confidence of the general public is shaken, gold tends to re-surface as a topic of interest. As we have explained here before, gold is one market we monitor because it can provide signals as to how much confidence may be waning in the present system at any given point in time.

If you do any significant research into gold, you know that gold is a topic that for whatever reasons generates a lot of drama and passionate feelings pro and con. Here, we prefer to look at gold without the drama and examine its role over time as money, a hedge, and an insurance policy of last resort. That is what gold has been for thousands of years for billions of people. Anyone who wants to understand the kinds of economic and financial issues that shape world events must have some level of understanding of gold's economic role in both history and at the present time. 

With that in mind, we will feature the two part video documentary below as an educational opportunity for anyone interested in learning all about gold. This documentary does as good as any I have seen in providing that kind of educational opportunity.


The Story of Man's 6,000 Year Obsession

Part I

Part II

My added comments: While this documentary is a few years old now, the information presented is as relevant today as it was when it was released. The documentary traces the historic role of gold as money going back thousands of years, walks you through how gold is discovered, mined and refined into retail products, and attempts to peek into the future to see what role gold may play going forward either inside or outside the official monetary system. No matter how you feel about gold, you cannot watch this documentary and come away without learning anything. For that reason, we will include this article in our Marketplace of Ideas for Monetary System Reform as an educational resource on gold.

Added notes: Jim Rickards authors this recent article he titles "Why Gold?" and Jan Nieuwenhuijs authors: Why Gold and Why Now?

Alasdair Macleod, in this recent article, presents a potential worst case scenario where the US dollar collapses within the next year and only gold and silver survive the carnage. 

Former US Mint Director Edmund Moy says he keeps physical gold close at hand and views it as a hedge.

Reuters- Goldman Hikes 12 month gold price forecast to $2,000

Reuters article: World's Ultra Wealthy Go for Gold (excerpt below):

"Nine private banks spoken to by Reuters, which collectively oversee around $6 trillion in assets for the world’s ultra-rich, said they had advised clients to increase their allocation to gold. Of them, four provided forecasts and all saw prices ending the year higher than they are now."


Additional added note: A thank you to blog reader BK who sent me the comment below by email related to the Reuters article above on wealthy clients being advised to allocate 5% to gold.

"A 5% allocation to gold is, fortunately, only $300 billion, about the market cap of Visa in the Dow.

However, a ton of gold only sells today for about $55 million, so it takes about 5400 tons, at "present prices" to achieve that allocation.

Since China and Russia produce combined about 600 tons of annual gold production, which they do not sell abroad, the total remaining production of about 2400 tons is what is available to fulfill this “new demand”.  So, if no other demand were to compete with these newcomers, it would still take 2 years and 3 months to complete this allocation from new stocks of metal.

But, how likely is it that the traditional sources of demand, augmented by more recent central bank purchases, would suddenly stop?  Will India weddings abandon gold?  World Jewelry demand? Industrial uses?

If I am correct, and the figures above have any validity, the claim that wealth advisors now recommend a 5% allocation to gold, to their super rich clients, is meaningless.  They are, as a group, already “locked out” of the physical market.  If they try to make a move, within a short period of time, they will so quickly spike the price that they will shut down the market. So, how much gold could they acquire without jolting the market?   Perhaps 4,5, maybe 600 tons per year? That might be do-able, but they would need 10 years to complete their acquisition.

One unlikely assumption in all the above is that “present prices” would prevail during this small shift in allocation to gold.  If prices increased by a factor of 10, then much less NEW gold would be needed, and indeed some significant selling from EXISTING private stocks would be expected to occur, particularly from areas ( The East ) where buyers are “price sensitive”. ( they buy when prices drop, and sell when prices have risen )   Would those “super rich” new gold buyers mind that they had to pay a huge premium to achieve their allocation?  That is hard to say.  They clearly don’t mind paying 4 or 5 times as much for a share of stock as they did 2 or 3 years ago, so perhaps they wouldn’t mind doing the same for gold.  (but for stocks, there always has to be a story.  For gold, what would the “story ”be? )

Physical gold has one huge problem for the financial industry, which takes in hundreds of billions in earnings per year in advisory, trading, and market making roles.  NO FEES.  Physical Gold sits quietly in a vault, and apart from minor storage costs, that’s it."  from reader BK

Friday, June 19, 2020

News Note: India Joins US in Opposition to an Increased Allocation of SDR's

The global pandemic which has fed into a global economic crisis has renewed an old debate within the IMF. Some have called for a new increased allocation of SDR's in an effort to boost global liquidity. The US was one of the first major nations to oppose any new increased allocation of SDR's and according to this article appearing in Livemint, has been joined by India. Below are a couple of excerpts from the article followed by some added comments.


"IMF is contemplating redistributing the existing unused special drawing rights (SDRs) of rich member countries to low income countries in dire need for assistance. The move comes following opposition from countries like India and the US to the proposal by the multi-lateral agency to issue fresh SDRs to member countries to empower them to fight the economic fallout of the coronavirus pandemic.

Speaking at a webinar organized by Princeton Bendheim Center for Finance, IMF chief economist Gita Gopinath said the SDR allocation issue is being discussed and that there is no consensus on it at this point. “Let’s be clear what the SDR can do. When you do a general SDR or increase SDR allocations, most of it goes to the countries that don’t need it. Because it is proportional to your quota, it goes to the very large economies. It does not go to the low income countries in very large numbers," she said.

Gopinath said IMF is discussing an alternative mechanism with its members under which wealthy countries that don’t need it can loan their existing SDRs to low income countries. “There is certainly a lot of appetite for this second strategy and that’s something we are working on at the IMF," she added."


My added comments: In recent months issues like this have moved to the back burner in the US due to the media focus on the pandemic, the economic fallout from the pandemic, recent tensions in race relations, and of course how all that will impact the upcoming US Presidential election.

Our view here is that we are not likely to see any new major dramatic changes at the IMF or at the major central banks at least until after the US elections. The US election contest is viewed as a close race that most likely will stay close with both sides claiming a path to victory. Institutions like central banks and the IMF are not going to want to "take sides" in this kind of environment because they don't know who is going to emerge in power. The safest play is to just try and keep the status quo functioning with massive injections of liquidity by the major central banks. This is now an established policy with the public and my take would be that the belief is that the present system can be "held in place" until the election to see who wins. (note that the current IMF strategy described above is to encourage the use of existing SDR's in loans between member nations rather than any kind of substantial increase in new SDR's)

How would we expect "who wins" to impact things? 

This is a fairly easy forecast to make based on what we know at this time. If President Trump is re-elected, he no doubt will simply continue his America First populist agenda. He is not likely to defer important systemic changes to international organizations like the IMF or The World Bank. We can expect that he would not propose major monetary system changes until and unless the present system completely fails and there is no other alternative available.

If former Vice President Joe Biden is elected, we can expect a shift back to a more "globalist" policy approach. All of the policy initiatives that were disrupted by the election of President Trump likely return, but with a more progressive tone due to the makeup of the new base of the Democratic Party. A Biden Administration is far more likely to look to the IMF for major monetary system changes if the present US dollar based system falters.

This analysis is supported by a recent statement by the World Economic Forum that hosts its annual summit in Davos. The theme for its 2021 conference is - The Great Reset .

It is clear from the statement from the WEF that an economic reset is considered a key part of this initiative. It is clear that the thought leaders for the event will come from organizations like the IMF. Here are a couple of excerpts from the statement:

“In order to secure our future and to prosper, we need to evolve our economic model and put people and planet at the heart of global value creation."

. . . . .

"The announcement of the Great Reset was made by HRH The Prince of Wales and Professor Schwab during a virtual meeting, followed by statements by UN Secretary-General António Guterres and IMF Managing Director Kristalina Georgieva."

We can expect that a Trump Administration will be opposed to most of the policy proposals coming out of this Great Reset summit while a Biden Administration is likely to be much more favorable.

All this supports the analysis that we are likely to see a waiting game until the Novermber elections are over and a winner has emerged. The results of that election are likely to determine how much support the World Economic Forum gets from the US for its Great Reset proposal.

Interestingly, no matter which side wins the US election, many analysts from a broad spectrum of opinion anticipate a diminishing role for the US dollar as the global reserve currency in the future. Their differences of opinion on this are more a matter of timing. Some believe the US election may speed up the process for change away from the present dollar based system, while others still see a gradual pace of change unfolding over many years. 

Our view here in this post is mostly short term. We don't see much major change likely until after the election. Our focus here will be to continue to monitor key news events and present content we view as educational for readers interested in these issues as we find it. Long term we will watch to see if those that say the present US dollar based monetary system is nearing an end are correct.

Added note 6-25-2020: Fox Business runs this article on the upcoming Great Reset Summit to be held in Davos next year that we talked about here just above. This article notes that this is a potential major news story somewhat under the radar. But not here.

Wednesday, June 17, 2020

NY Sun Article by John Mueller Calls for Drastic Monetary Change

A thank you to a reader for pointing me to this article by John D. Mueller appearing in the NY Sun. This article suggests that the current pandemic and related economic disruption offers an opportunity to look back at the work of a French economist for some historical perpsective.

We featured an article that included some comments to us from John D. Mueller back in 2017. Mr. Mueller is the Lehrman Institute Fellow in Economics. Below is an excerpt from his recent NY Sun Editorial.


"As President Trump charts his course back to prosperity, the confusing economic situation is signaling that the best sage for him to consult would be Jacques Rueff. He was the French economist who, during a long career, advised Premier Henri Poincarè in the 1920s and President de Gaulle in the years after World War II.

It was Rueff who first explained the relationship between monetary policy of central banks and inflation and between the fiscal policies of elected governments and unemployment. He steered France to prosperity not once but twice by hewing to a policy of honest money defined in gold.

What is so apt about Rueff is that he emerged in the wake of one of the worst pandemics in history. The Spanish flu of 1918 killed 50 million persons, 675,000 in America. It superimposed medical insult upon monetary injury."

Monday, June 15, 2020

News Note: Financial Times: We May Be Heading Towards a Post Dollar World

A thank you to a blog reader for pointing me to this article recently appearing in The Financial Times. In this article, Rana Foroohar asks if we might see a future where the role of the US dollar as global reserve currency is diminished. It's a good question and right in line with what we cover here. Below is a brief excerpt from the article. Readers should follow the link to read the full article on The Financial Times.


We may be heading towards a post-dollar world

"The world is more likely to become tripolar — or at least bipolar — with more regionalisation in trade, migration and even capital flows in the future. There are all sorts of reasons for this, some disturbing (rising nationalism) and others benign (a desire for more resilient and inclusive local economies).

That begs the question that has been seen as controversial -- are we entering a post-dollar world?"  . . . . . . . . .        Click here to read the full FT article

My added comments: In his most recent update on Fed policy Fed Chairman Powell made it clear that the Federal Reserve will do whatever is necessary to support a return to full employment in the US as soon as possible. Rates will be kept down for at least 2 and 1/2 more years and whatever money creation and asset purchases are required will be undertaken. As I understand this policy statement, it means the Fed is willing to let the US dollar slide as a result of this policy if that is what has to happen. Chairman Powell did not state this directly, but it was clear that such a slide in the US dollar would not cause the Fed to change policy course to try and support the economy. It is reasonable to assume that the dollar is likely to fall in reaction to this policy.

Added notes: Stephen Roach writes that the role of the US dollar as global reserve currency will diminish in the years to come and writes a followup to that article in response to those who argue there is no reasonable alternative to the US Dollar. Links to both articles are just below:

A Crash in the Dollar is Coming

Dollar Crash: How Will it Unfold?

More here on CNBC - Dollar Crash is Almost Inevitable

6-19-2020: Alasdair Macleod presents a potential worst case scenario where the US dollar collapses within the next year

Monday, June 1, 2020

Ray Dalio on Monetary History and Where We Are Now

Recently we featured an article by hedge fund manager Ray Dalio that took a deep dive into how the purchasing power of fiat currencies compares over time versus goods and services, stocks, debt, and gold. I got quite a bit of positive feedback that his information was helpful. This article by Ray Dalio was the most recent article in a series that takes an even deeper dive into history and looks at the rise and fall of nations, monetary systems and currencies. It also talks in depth about how history tends to move in both short term and long term cycles. 

Ray Dalio says he feels we are near the end of a long term debt cycle and also possibly the monetary system we have known for most our lives. Since that is exactly what we watch for here on this blog, below I have linked to the entire series of three articles with an excerpt from each article to provide a feel for the issues discussed. I will add this post to our market place of ideas for monetary system reform. While Mr. Dalio does not offer a specific proposal for reform or for a new monetary system, he does discuss many of the factors that historically have led to this kind of major change. Given his career and resume, I felt his articles deserve to be added to the marketplace so that readers can easily find them there if desired in the future. Any underlines below I added for emphasis.


The Changing World Order - Chapter 1 - The Big Picture in a Tiny Nutshell

Where We Are Now

"As previously explained, the last major period of destroying and restructuring happened in 1930-45, which led to the new period of building and the new world order that began in 1945 with the creation a new global monetary system (built in 1944 in Bretton Woods, New Hampshire)and a new American-dominated system of world governance (located the United Nations in New York and the World Bank and the International Monetary Fund in Washington, DC).  The new American world order was the natural consequence of the US being the richest country (it then had 80% of the world’s gold stock and gold was then money), the dominant economic power (it then accounted for about half of world production), and the strongest military power (it then had a monopoly on nuclear weapons and the strongest conventional forces).

It is now 75 years later, and we are classically near the end of a long-term debt cycle when there are large debts and classic monetary policies don’t work well for the world’s reserve currency central banks.  This is happening as we are simultaneously in a deep economic and debt contraction that is producing income and balance sheet holes for people, companies, nonprofit organizations, and governments, while politically fragmented central governments are trying to fill in these holes by giving out a lot of money that they are borrowing.  Central banks are helping them do that by monetizing government debt.  All this is happening at the same time that there are big wealth and values gaps and there is a rising world power that is competing with the leading world power in trade, technology development, capital markets, and geopolitics.  And on top of all this, we have a pandemic to contend with.

At the same time, we have great human capital and thinking technologies that can help us see how to best deal with these challenges and do the inevitable restructurings well.  If we can all deal with each other well, we will  . . . ."


The Changing World Order - Chapter 2 - Money, Credit, Debt, and Economic Activity

"Because what most people and their countries want the most is wealth and power, and because money and credit are the biggest single influence on how wealth and power rise and decline, if you don’t understand how money and credit work, you can’t understand the biggest driver of politics within and between countries so you can’t understand how the world order works.  And if you don’t understand how the world order works, you can’t understand what’s coming at you

For example, if you don’t understand how the Roaring ’20s led to a debt bubble and a big wealth gap, and how the bursting of that debt bubble led to the 1930-33 depression, and how the depression and wealth gap led to conflicts over wealth all around the world, you can’t understand the forces that led to Franklin D. Roosevelt being elected president. You also wouldn’t understand why, soon after his inauguration in 1933, he announced a new plan in which the central government and the Federal Reserve would together provide a lot of money and credit, a change that was similar to things happening in other countries at the same time and similar to what is happening now.  Without understanding money and credit, you wouldn’t understand why these things changed the world order nor would you understand what happened next (i.e., the war, how it was won and lost, and why the new world order was created as it was in 1945), and you won’t be able to understand what is happening now or imagine the future.  However, by seeing many of these cases and understanding the mechanics behind them, you will be able to better understand what is happening now and what is likely to happen in the future."

Finally, here is the link to our previous article featuring his article comparing the purchasing power of fiat currencies versus debt, stocks, goods and services, and gold over time.

"As previously explained, there is a real economy and there is a financial economy, which are intertwined but different.  The real economy and the financial economy each has its own supply and demand dynamics.  In this section we will focus more on the supply and demand dynamics of the financial economy to explore what determines the value of money."

Printing and Devaluing Money is the Easiest Way out of a Debt Crisis

"While people tend to think that a currency is pretty much a permanent thing and believe that "cash" is the safe asset to hold, that's not true because all currencies devalue or die and when they do cash and bonds (which are promises to receive currency) are devalued or wiped out. That is because printing a lot of currency and devaluing debt is the most expedient way of reducing or wiping out debt burdens."

. . . . 

"Since 2000, we have seen a more gradual and orderly loss of total return in currencies when measured in gold, consistent with the broad fall in real rates across countries during those decades."

My added comments: The only comment I can add here is that Ray Dalio in these articles talks about many issues that we have covered here on this blog for years and also emphasizes that understanding these issues is very important for each of us. This is also what we have said here for many years.

Added note: Ray Dalio has followed up the three articles linked above with another one that talks about The Big Cycles Over the Last 500 Years that you can find here. He also added this new article on his thoughts about the most recent turmoil in the US.