The Gold Non-Rush

Thursday, 17th March, 2016
Albert Park, Australia
By Kris Sayce

  • Aussie central bank losing the battle
  • Gold ghost town
  • No such thing as ‘temporary’
  • Siding with the common man

An article from Bloomberg this morning notes:

“The tone of the FOMC statement and accompanying economic projections was dovish,” Neil Dutta, head of U.S. economics at Renaissance Macro Research LLC in New York, said in a research note. The reference to global risks “pushes the Fed in the role of the world’s central bank. In this role, the Fed needs to let inflation in the U.S. surge to offset disinflation in the rest of the world.”


Overnight, the Federal Open Market Committee (FOMC), the group that sets interest rates for the US Federal Reserve, voted to keep its benchmark interest rate in the 0.25–0.5% band.

The market expected this. But what the market liked was the indication that rates may not increase as much this year as previously suggested.

Why? The FOMC added this to its statement:

However, global economic and financial developments continue to pose risks.

This is part of the statement Mr Dutta referred to in the quote above. The Fed and the markets had previously expected up to four interest rate rises this year.

Now the expectation is for two.

So much for that global recovery we’ve heard so much about. The US and world’s economies are so strong that they can’t even handle interest rates above 2%.

As we’ve said all along: there is no recovery. It’s just a government and central bank-induced bubble, to make you think there’s a recovery.

As it turns out, you don’t need to be an economics expert to understand that. The people are speaking with their wallets. They aren’t spending. That’s why governments are borrowing and spending, and why central banks are printing.

Recovery. What recovery?


That didn’t stop the markets from cheering the news. Overnight, the Dow Jones Industrial Average closed up 74 points, or 0.4%.

It doesn’t sound like much, but the Dow was in the red before the FOMC’s interest rate decision.

The S&P 500 index closed up 0.6%.

Earlier in Europe, the FTSE 100 index closed up 0.6%. The German DAX closed up 0.5%.

In local markets, the Nikkei 225 index is up 0.5%. Hong Kong’s Hang Seng index is up 1.4%.

China’s Shanghai Composite index is up 0.6%, and the Aussie S&P/ASX 200 index is up 1%.

It shouldn’t be much surprise that the stimulatory announcement from the Fed caused the US dollar to fall, and gold and oil to rise.

Gold is trading at US$1,257 per ounce. Oil is trading at US$39.09 per barrel. The Aussie dollar is up just over 1.8% in the last 24 hours against the US dollar.

What’s that I hear you say? The ‘currency wars’ are back on again? In truth, they never ended. This is a perpetual war…

Aussie central bank losing the battle

This is what a currency war looks like:

Source: Bloomberg
click to open in a new window

That’s a one-year chart of the Aussie dollar against the US dollar.

All those ups and downs, every last one of them, is a direct or indirect result of the global currency wars.

Every action or even inaction by any central bank is another battle in the currency war.

Obviously, some ‘battles’ are more significant than others. When the Hungarian central bank raises, lowers, or maintains interest rates, it may have a big impact on the value of the forint, but it only has a tiny ripple effect on the broader currency markets.

But when the European Central Bank or US Federal Reserve act, it has a proverbial tsunami effect on the broader currency markets.

That’s why the Aussie dollar has moved two cents in the past two weeks. It’s why the Aussie dollar has moved up nearly eight cents since mid-January.

These are big moves.

These are the kind of moves that our Currency Wars Trader service attempts to exploit. (Incidentally, the next trade alert for Currency Wars Trader should be available to subscribers this evening. If you’re not yet a subscriber, go here.)

And make no mistake about the use of the word ‘war’. It’s entirely appropriate.

The actions taking place by the world’s central banks are an act of war. Not only on their own people, but on other central banks, other governments, and other nation’s people.

Take the impact of the Fed’s inaction on interest rates on the Aussie market.

For the better part of four years, the Reserve Bank of Australia (RBA) has waged its own currency war battle. The RBA has repeatedly tried to beat the Aussie dollar down as far as possible.

It has succeeded — to a degree.

From a high of US$1.10, the Aussie dollar is now around US$0.75.

But the RBA would like the Aussie to go even lower, as it follows the tried and tested (but not necessarily successful) formula of trying to boost exports.

But, the Fed’s interest rate inaction is now scuppering those plans. As I say, the Aussie dollar is up around eight cents in the past two months.

Now, if the RBA seriously wants to bash the Aussie dollar down again, what can it do? That’s right, expect more interest rate cuts.

But doing so could be a problem. The RBA is already worried about high Aussie house prices. Could lower interest rates push them higher still?

Not necessarily, based on our ‘paradox of low interest rates’ argument. But of course, mainstream central bankers don’t fully understand the ‘paradox of low interest rates’, so they’re unlikely to understand that lower interest rates won’t necessarily help.

Then there’s the unemployment rate. According to the latest numbers, the Aussie unemployment rate is now at 5.8%. That’s down from 6%.

The central bankers’ textbook theory will tell them that lower unemployment is inflationary. Yet other stats show that wages growth is almost non-existent.

What’s a central banker to do?

If we had our way, we’d tell them to leave well enough alone. The more they meddle the more it becomes a muddle…and the worse things get.

If we’re right about the ‘paradox of low interest rates’, and if we’re right about the stubbornness of central bankers, the more they try to stimulate the economy, the deeper they’ll sink into the problems they’re trying to avoid.

All we can do is watch and try our hardest not to laugh.

Gold ghost town

Today your editor spent two-and-a-half hours in a bullion dealer’s, trying to make a transaction.

For the entire time we were there, one other person came in. Five years ago, at the same dealer’s, there was a queue out the door. The queues were so bad that they took to installing a deli counter ticketing system.

Today the ticket machine was empty and the counter on the wall was turned off. I doubt if they’ve filled the ticket machine in months.

Our conclusion: everyone hates gold.

No such thing as ‘temporary’

The old saying in sports is that a manager or coach’s position is safe until the club chairman gives the manager or coach a vote of confidence.

That’s when the manager or coach knows it’s time to clear their desk.

It’s a similar story in politics.

Beware the politician who claims something is only ‘temporary’.

Be even more alarmed when they actually put ‘temporary’ in the name of something. Proof of this is in a story from the Sydney Morning Herald:

The Turnbull government is being called on to retain the temporary budget repair levy on high-income earners, which is due to expire next July, after conceding this week that tax cuts for individuals may be unaffordable in this budget due to lack of funds.

The temporary 2 per cent loading on the top tax bracket is scheduled to be removed in July 2017, giving high-income earners on more than $180,000 an effective tax cut.

But now the Greens are calling on the Turnbull government to make that 2 per cent loading permanent, and also to introduce a new 50 per cent tax bracket specifically for ultra-high income Australians earning more than a million dollars a year.

Nothing is temporary. Everything is permanent.

Siding with the common man

The Greens are always thinking about the common man. They clearly want to make sure that taxpayer dollars are spent in the appropriate way.

The Sydney Morning Herald quotes Greens leader Richard Di Natale:

“Today, the Greens are putting these costings on the table and calling on the government to recognise that making the deficit levy permanent makes good economic sense,” he said.

“The alternative is to continue dismantling our social safety net and slashing funds for schools and hospitals, which is a recipe for a more unfair society.”

In unrelated news, last month The Australian reported:

Greens senator Sarah Hanson-Young has to repay $15,186 to taxpayers — almost twice the debt she was originally thought to have — after blowing her electorate staff travel budget.

The South Australian senator, who holds three portfolios for the Greens, has previously come under scrutiny for the use of charter flights and overseas trips to environmental meetings and refugee camps.

The good old Greens, sticking up for the little Aussie battler…from the comfort of a private jet. Any more champagne, anyone? Pip, pip.

In the mailbag

Comment on Kris’ musings on low interest rates.

I think Kris is struggling to explain why consumption and credit growth is not expanding, bravely struggling, but frankly quite unconvincing. …Definitely looked like one of his “mailed in” contributions actually.

What does this mean, “Governments and central banks cut interest rates in an attempt to avert the perceived problem of excessive spending.” …Surely he meant “insufficient”, not “excessive”?

He states “asset prices are still high“, but which assets does he think businesses and consumers consider high? He did not explain. As I wrote above, “mailed in” piece.

Subscriber, Bryan C

Like a dagger through the heart!

Bryan continues:

Anyway, enough criticism, I want to offer an explanation of my own.

Perhaps the consumers don’t want to borrow at these low interest rates because they are smarter than the central bankers think that they are. If the rate drops from 2% to 1.75%, of course your interest bill is potentially reduced by 12.5% But I think that most borrowers are sceptical that the rate will stay low. After all, many have been told or remember about “the recession we had to have”. Take home lesson: Interest rates do rise eventually. If your new “business” is in the middle of recouping the investment on a marginally profitable business plan, made possible only by ultra-low interest rates when the rates are reset because the reserve bank is all of a sudden concerned about inflation targets…you could all of a sudden not have a profitable business.

So what are average people doing? I think that they are making their business and purchasing decisions based on likely interest payments over the life of the loan, not over the rates for the next month. This is what I mean by “people are smarter than central bankers assume”. As others are pointing out, institutional investors can dump derivatives as soon as interest rates start making their marginally profitable investments less profitable. But physical investment is less liquid. You can’t put a program branch point to test interest rates and then direct their brokers to sell a condominium or a new production line.

Thus, so long as interest rates for most people are adjustable, after the rates drop to a certain level they will not take on more risk. This is because risk is based on the interest rate over the pay back period for the loan. Bank swap rates become less and less relevant to purchasing decisions as they drop lower and lower below the average perceived long term maximum interest rate.

I think that this theory explains why more interest rate cuts affect consumption and credit growth less and less as the rates are less and less.

Instead, more sensible people are taking the opportunity to reduce their net debt, and paying off their highest interest loans now. Perhaps more people are seeing, even if unconsciously, that their life is better off with less debt. Well to the statisticians that is the same as more net savings, and credit contraction in the face of lowering interests rates. Note to Kris: Paradox explained.

‘I quite like explaining paradoxes, I hope he likes mine.

I don’t have a problem with Bryan’s explanation at all. It sounds completely rational. Although, I’m not sure that the explanation is much different to those I’ve given over the past couple of days, so maybe I’m biased.




End of day market data

If you have any ideas about what you would like us to include in our end of day market data drop us a line at, and type ‘Market data’ in the subject line.

52-week highs: 18 stocks, including Catalyst Metals Ltd [ASX:CYL], Mayne Pharma Group Ltd [ASX:MYX], and Orora Ltd [ASX:ORA].

52-week lows: 19 stocks, including GrainCorp Ltd [ASX:GNC], Huon Aquaculture Group Ltd [ASX:HUO], and Virgin Australia Holdings Ltd [ASX:VAH].

Note: The stocks listed above are stocks that hit an intra-day 52-week high or low during today’s trading. The stocks didn’t necessarily close at the 52-week high or low.