Do You Own Enough Gold?

  • Watch your inbox on Sunday
  • In the mailbag

Port Phillip Insider readers have flooded the mailbag (well, we’ve received two emails, but given the lack of inbound correspondence recently, that’s a flood) following Wednesday’s comment about what we’re calling the ‘Daniel Rule’.

To refresh your memory — or infuse it freshly if you don’t know what the heck we’re going on about — one of our marketing chaps, Dan, suggested that the next move in monetary stimulus could be for banks to pay you interest for taking out a loan.

It’s ridiculous, of course. But sadly, it’s also eminently possible.

13 of the 15 Eurozone economies monitored by Bloomberg currently have two-year bonds trading with negative yields. In other words, investors receive less over the course of the term than they invested.

As a ‘reward’ for Daniel offering this ludicrous idea, we suggested that if any bank implemented such a plan, they should owe Dan a royalty, and that we would call it the ‘Daniel Rule’.

Well, as ludicrous as it may seem, it appears that Dan isn’t the first to think of this idea. Another Dan (Dan T), a subscriber to one of our investment advisories, sent us an article from the Wall Street Journal.

The article notes:

Hans Peter Christensen got some unusual news when he opened his most recent mortgage statement. His quarterly interest payment was negative 249 Danish kroner.

Instead of paying interest on the loan he got a decade ago to buy a house in this northern Denmark city, his bank paid him the equivalent of $38 in interest for the quarter. As of Dec. 31, his mortgage rate, excluding fees, stood at negative 0.0562%.

As Dan T says, ‘I think the “Daniel Rule” is already in effect.’ Alas, it appears so.

But even if it weren’t, another reader, Ross P, says that royalties from the ‘Daniel Rule’ may not have been as lucrative as we think. Ross writes:

You say that if any central bank implements the “Daniel Rule”, you expect any central bank that implements it to pay Dan a royalty for using the idea.

Unfortunately, in the upside down world that there would then be, they would CHARGE Dan for appropriating and using his idea…

To say we laughed on reading that email would be an understatement. Ross is right. Dan better get his chequebook ready (not that the young whippersnapper has probably ever seen a chequebook), in case the Bank of Denmark comes calling.

Seriously, in the current world of banking, finance, and economics, up is down, down is up, and both are one or neither at the same time — if you get our drift.

In other words, it’s almost impossible to predict what harebrained, or scatter-brained, scheme the busy-body central banking academics will come up with next.

But we know they will come up with something…anything to help them achieve their aim of banishing deflation and stirring up inflation.

Here in Australia, the arrival of more ‘exotic’ central bank policies may be a little while off. But not too far off.

As Commonwealth Bank chief economist Michael Blythe wrote in a research note yesterday:

We had pencilled in another 25bpt rate cut for August. But the level of RBA concern on disinflation and deflation risks is such that we feel obliged to add another cut. We have inserted a further 25bpt cut in November on the usual post-CPI-Pre-SMP timing. The cash rate would end up at an extraordinary 1¼%.

Yes. Yes it would.

Furthermore, we would suggest that 1.25%, or 1.00%, is the edge of the precipice…with zero percent lurking over that edge.

Once interest rates hit that level, the assumption among investors will be that things are so bad that they can only go lower.

And rather than big investors eschewing such crummy bond yields, the opposite takes place. Government bonds typically have a fixed yield. And big institutional investors have relatively few options when it comes to finding somewhere to park a truckload of cash.

As a result, they buy government bonds. They do so because, naturally, government bonds are (supposedly) a low-risk asset.

So, when you’ve got a billion or five to invest, and a bunch of that has to go into bonds…and you’re worried that interest rates are about to fall to zero…that crummy 1.00% yield looks darn good.

But, like every other institution worrying about the same thing, that 1.00% yield doesn’t last for long. Before you know it, bond funds are snapping up yields at 0.9%, 0.7%, 0.5%…and so on, until they’re grateful to take a bond with an effective negative yield.

Even if the Reserve Bank of Australia doesn’t end up with a zero or negative interest rate, once interest rates fall below 1.00%, it’s hard to push them back up again.

Just ask Japan. Just ask the US. And, now, just ask the dozen-plus economies of Europe.

We’ve warned for nigh on eight years that Australia isn’t any different to the rest of the world. We’ve warned that the troubles facing the US and Europe would one day hit home here.

Have we got everything right? No. We’ve gotten things wildly wrong about some things, and on many occasions. One of our biggest mistakes was assuming that inflation and hyperinflation would take hold. It hasn’t.

But, regardless of whether we’ve gotten it right or wrong with the finer details, in my view, we’ve done the job you pay us to do — helping you to grow and preserve your wealth, and helping you to understand what’s really going on in the global economy.

That means introducing you to ideas. Some of those are controversial ideas. Others are profitable ideas. Others still are ideas that turn out to be plain wrong.

But you’re an adult. You understand that we aren’t gods who can direct the economy or investment markets as we see fit. In fact, I’d say we’re the opposite of gods. We know, understand, and admit that we are mortals.

We make mistakes, we get things right. Hopefully, whether we’ve gotten something right or wrong, we learn from it.

Our hope is that you do the same. Don’t beat yourself up if you make a mistake. Just make sure that, when you’re trying things, you’re not reckless, risking too much. Be sensible and sober. That’s the way to invest and plan for what’s coming in the world.

As for gods, unfortunately, those in government and the central banks, knowingly or not, believe they are gods. They believe they can steer an entire economy or market in the direction of their choosing.

And when it’s shown that they can’t, like some of the ancient gods, they become angry. And instead of learning from their mistakes — and realising that there are false gods — they insist on manipulating and meddling with the economy even more.

They can’t help themselves. They are a dangerous breed. Whether they are doing it intentionally or not, with malice or not, they are destroying the world’s monetary system and, most importantly, contributing to the destruction of wealth and livelihoods the world over.

In a way, we hope they succeed with their destruction. The current monetary system of money backed by nothing is an experiment…a terrible experiment at that.

The sooner it is put out of its misery and replaced by a new system (actually, an old system — gold), the better.

Paper money never lasts. That’s proven throughout history. Money backed by nothing is worth what it is backed by. In other words, nothing.

For paper money, read electronic money too. Arguably, the transition from paper to government-mandated electronic money will be even more destructive to wealth.

We are schizophrenic when it comes to central bankers’ policies of negative interest rates and inflation. On the one hand we despise them for their actions. On the other, we wish they would just bloody well get on with destroying the current setup, so we can all move on.

As Jim Grant is wont to say in his fortnightly newsletter, Grants Interest Rate Observer, when discussing negative interest rates and money printing, ‘Do you own enough gold?

We ask you the same thing. After all these years of warnings, we hope you’re able to give the right answer.

Watch your inbox on Sunday

The central bank meddling with interest rates, and intentional or unintentional destruction of wealth, is the key theme of our upcoming conference in October.

If Commonwealth Bank chief economist Michael Blythe is right, by the time of our conference, the RBA’s Cash Rate will stand at 1.5%.

And if he’s right about the trajectory of interest rates thereafter, within days of us pulling down the bunting at our conference, the Cash Rate will stand at a diminutive 1.25%.

How cute it will look…such a tiny size.

But what will happen next? Could the RBA Cash Rate fall to, and below, 1.00% next year? It could. No doubt it’s one of the many things the speakers will talk about at our conference this October.

As I mentioned yesterday, this weekend we’ll show you how to put your name on the priority invitation list. Details will be in your email inbox around 11:00am AEST on Sunday morning. Look out for it.

There’s no obligation to do anything by putting your name on the priority invitation list. It simply ensures that you’ll be among the first to see what the conference is all about, where we’re holding it, and the make-up of our great line-up of speakers.

Check your email inbox on Sunday around 11:00am.

Again, 11:00am on Sunday morning we’ll send you an email explaining how you can get your name on our priority invitation list for the 2016 Port Phillip Publishing investment conference.

Spaces will be limited, and we expect the event to sell out. If today’s Port Phillip Insider makes any sense to you, or if you have any concerns about the future of your wealth, in my view, our investment conference this year is a must-attend event.

Check your inbox this Sunday. 11:00am. You’ll see how you can be among the first to find out everything you need to know about this year’s Port Phillip Publishing investment conference.

Look out for the email then — 11:00am AEST Sunday.


Overnight, the Dow Jones Industrial Average gained 9.38 points, or 0.05%.

The S&P 500 index fell 0.35 points, or 0.02%.

In Europe, the Euro Stoxx 50 index fell 21.25 points, or 0.72%.

Meanwhile, the FTSE 100 index fell 0.95%, and the German DAX closed down 1.13%.

In Asian markets, the Nikkei 225 index is down 156.81 points, or 0.94%.

China’s CSI 300 index is down 0.18%.

In Australia, the S&P/ASX 200 index is 35.5 points lower, or 0.66%.

On the commodities markets, West Texas Intermediate crude oil is trading for US$46.37 per barrel. Gold is trading for US$1,272 per ounce.

The Aussie dollar is worth 73.02 US cents.

In the mailbag

Another letter, this one from reader Christine:

As a contrarian, the fact you are wondering if you are wrong probably means it is just close to when you will be right.

Thanks for the reminder. When the last contrarian turns bullish in a rising market, that’s the time to bail out.

From this point on, we’ll read Vern Gowdie’s work very carefully. If he even hints at telling his subscribers to buy stocks, I’ll be out of this market in a flash!