The next fed meeting is approaching, and I don’t care…
- Gold is an insurance policy
- Gold is best long term bet
- What if the Fed does raise rates?
- Gold is money (once again)
‘Ironically, if you look two years out, longer than most investors look out, all commodities look bright. If you believe that you’re going to buy a new car or fridge in five years from now, you believe that the nickel price is going to go up. It just doesn’t need to go up quickly.’
Legendary commodities guru, Rick Rule on 29 September
Resource Speculator readers know that I follow Rick Rule’s work closely. He’s one of the smartest people I know.
At the moment, however, he’s not looking at buying nickel stocks. That is, despite the nickel price surging on Philippine mine shutdowns. Based on environmental concerns, the world’s top supplier of nickel ore closed 20 mines this week. The mines under review accounted for 55% of the 32 million metric tons of nickel ore the Philippines produced last year, according to Bloomberg.
That’s a problem for China…
The mining clampdown has forced the world’s second largest economy, which is heavily reliant on nickel ore imports, to look beyond its neighbourhood for supplies.
I wouldn’t get caught up in all the drama. In my opinion, nickel is yet to make its final low.
Indonesia, once China’s largest supplier of nickel ore, is considering lifting its exports ban. Indonesia’s nickel output could climb by 36% to 217,500 tonnes this year, and to 363,000 tonnes in 2017, said another industry group, the Indonesian Smelter and Minerals Processing Association.
There’s also a ‘nickel’ elephant in the room that no one is talking about — New Caledonia.
In April, The New Caledonian government authorised the exportation of low grade nickel ore to China. New Caledonia has a quarter of the world’s nickel reserves. If it could easily support China’s growing needs, flooding the market with nickel ore in the months ahead. In fact, I’d be surprised if that doesn’t happen.
Based on my analysis, I can see why Rick Rule doesn’t want to buy nickel miners yet. At the moment, Rick’s attention is on a different commodities sector.
But, before I explain more, let’s consider something far more important — footy…
There will be no market data today. Today is a public holiday in Victoria, to celebrate the AFL Grand Final. Sorry to any Sydney supporters out there, but go the doggies!
The Western Bulldogs haven’t won the AFL/VFL Premiership since 1954 (back then they were plain old Footscray). Aside from the emotional side of cheering on the Doggies, in today’s Money Morning, Kris Sayce points out that based on that single Premiership, the market has performed well in the 10 years following a Bulldogs triumph. (Granted, it’s a small sample size!)
Between 1954 and 1964, the Aussie All Ordinaries index gained 120%. That’s a nice return. And it’s far better than the 10-year average return of 55% following every Sydney Swans (previously, South Melbourne) Premiership win.
So, if nothing else, cheering for the Bulldogs seems like the smart move to me.
Gold is an insurance policy
Back to commodities. In particular, gold. Rick Rule is extremely long-term bullish on gold.
In most investors portfolio’s, gold is more of an insurance policy than anything else. But that’s physical gold. Of course, that’s not the only type of ‘gold’ you can buy. In Rick’s view, gold stocks should generate shareholders significant wealth in the years ahead.
The whole narrative surrounding gold at US$1,900 per ounce — fiscal deficits, off-balance sheet liabilities, rising debt loads, slowing economies — remains today.
One fact, however, has changed: interest rates.
Back in 2011, who could have dreamed about negative interest rates?
Not me! Not most people. The idea would have seemed idiotic. Yet today, mainstream analysts and commentators talk about negative interest rates as if it’s an entirely normal state of affairs.
For that reason, Rick believes that negative interest rates are the catalyst for higher gold prices in the years ahead.
And looking at the slowing global economic landscape, there’s almost zero chance that governments can service their debt levels — especially if interest rates do go up. Another reason to believe interest rates will stay low…or even negative.
So, Rick Rule believes that interest rates will stay lower for longer. And, as a consequence of that, he sees gold higher…much higher.
Now, despite my short term bearish outlook on the gold price, I’m a die-hard, long-term gold bull. I agree 100% with Rick Rule’s argument.
As you’ve read in Port Phillip Insider all this week, confidence in government is collapsing world-wide. Negative interest rates are blowing the government bond bubble into oblivion.
Unfortunately, while central bankers think they’re smart, they can’t manipulate the world forever. All they can do is try to control interest rates. But ultimately, it’s the market that will determine interest rates. Bond prices move inverse to bond yields. When bond prices go up (like they are now), bond yields go down. When bond prices crash in the years ahead, yields should skyrocket.
When the majority start to lose confidence in government and central bank policies, they will start selling bonds.
In my view, that’s not too far away…
That will be bad news for governments. At the moment, governments worldwide can borrow money at record low interest rates.
But what happens when rates go up?
To pay for the welfare promises, government will have to auction their long-term bonds at higher yields. That means they will have to find more money to spend on interest payments in the future. That probably means higher taxes, which means less money in your pocket — and more money in the pocket of the world’s elites.
Here’s the catch…
When the majority realise that the bubble exists in bonds — and not stocks — they might not want to buy any government bonds. If that happens, government might not be able to pay for its welfare obligations.
Also, don’t forget, government has to issue new debt to pay for its old debt. It’s a massive Ponzi scheme, except the politicians can get away with it because they have the power to create seemingly unlimited amounts of debt and unlimited amounts of freshly printed money. Of course, governments could do the ‘honourable’ thing and default, thus ending this sham. But we’ll see. Regardless, one thing seems certain: It’s going to be a disaster.
It will effect banks, pension funds and sovereign wealth funds. It will effect big investors, small investors, private investors, businesses, and governments. It will even effect ordinary people who have never invested a dollar in their lives.
Gold is best long term bet
Investing.com reported yesterday:
‘Gold prices rose in Asia on Thursday as Fed Chair Janet Yellen avoided a hard timeline for a rate hike, though a colleague did suggest the topic was up for discussion in November.
‘Cleveland Federal Reserve Bank President Loretta Mester said Wednesday that the November FOMC will be an “active meeting” and repeated her views another hike in the Fed funds rate is appropriate. The Investing.com Fed Rate Monitor Tool shows the market sees a 10.3% chance of a rate hike in November.
‘On Tuesday, prices sank $13.70, or 1.02%, the biggest one-day loss in almost a month, as investors took heart from an apparent win for Democrat nominee Hillary Clinton over her Republican rival Donald Trump in the first U.S. presidential debate.
‘Fed Vice Chairman Stanley Fischer said Tuesday evening that the U.S. central bank should avoid raising interest rates too much. He added that rates should rise but that “I don’t know when” that should happen.
‘Speaking shortly afterwards, San Francisco Federal Reserve Bank President John Williams said that the Fed can raise interest rates without threatening the U.S. economic recovery, while adding that the central bank risks doing more harm by continued inaction.’
Does anything ever change?
The mixed messaged are back.
Central bankers have become a sideshow. It’s like watching a reality TV show.
Regardless of their hopeless intentions, the game goes on…
Loretta Mester’s comment that November is a ‘live’ meeting is bordering on laughable. Remember, earlier in the year central bankers said that they would raise rates in June — before the BREXIT. They said that the BREXIT had nothing to do with their policy decisions because the Fed is an ‘independent’ institution.
Well, we know how that turned out…
The Fed got cold feet. There’s little to no chance that it will raise rates during the US election month. There is, however, a chance that it could raise rates in December. Although colleague, Jim Rickards, isn’t even so sure on that.
What we do know is that central bankers are losing significant credibility. If the data continues to be strong into December, we could see a rate hike — just like last year.
What if the Fed does raise rates?
But let’s keep an open mind. It’s always important to do that as an investor.
Let’s suppose the Fed does raise interest rates, what will happen? Well, if it doesn’t raise interest rates, this year or ever, you could see a big bull market for gold.
But, if the Fed does raise interest rates, you could expect the gold price to turn the other way, resulting in a big crash.
That’s a big risk, so don’t rule it out.
It’s one reason why I’m not backing a specific type of gold stock. I’m talking about gold producers and developers. I’m not even backing the best of the producers and developers. I’m giving them all a wide berth.
In my view, it’s just not time.
I think there are far better opportunities to make money in gold. And that’s in the speculative end of the gold market.
As I’ve said all week, speculative gold stocks don’t care about what Yellen does tomorrow. Speculative gold stocks don’t care what she does in December this year, December next year, or December the year after that.
These stocks can outperform during any market conditions. If their fundamentals perform, these stocks can go up hundreds of percent in days — not weeks, but days. Regardless of what Janet Yellen and the gang of central banking elites do with interest rates.
As much as we like to talk and write about central banks and interest rates, in many ways, the best thing you can do is to forget about the next central bank policy move and global uncertainty, and instead focus purely on the fundamentals, the prospective fundamentals of tiny gold stocks.
It’s a controversial view. And I know there are many investors who won’t want to hear it. But as we see it, this could be one of the most lucrative ways for investors to clock up big gains as the market continues its volatile ways.
For more details on this exciting new project, go here.
Now over to Jim Rickards for his latest take…
Gold is Money (Once Again)
One of my favourite quotes on the topic of gold is attributed to Lord Nathan Rothschild, a legendary 19th-century banker and gold broker to the Bank of England.
He said, ‘I only know of two men who really understand the true value of gold — an obscure clerk in the basement vault of the Banque de Paris and one of the directors of the Bank of England. Unfortunately, they disagree.’
Another favourite quote, even more succinct, is from J.P. Morgan, who said in 1912: ‘Money is gold, and nothing else.’
We also have a modern take on the meaning and value of gold from none other than Ben Bernanke, former chairman of the Federal Reserve. On 18 July, 2013, Bernanke said, ‘Nobody really understands gold prices, and I don’t pretend to understand them either.’
These quotes illustrate the perennial challenge investors face in deciding what role gold should play in their portfolios. Few understand how to value gold, and even fewer understand that gold is not really an investment — it is money. Of course, if you want a portfolio that preserves wealth, money is a good place to start.
Saying gold is not an investment may seem strange, especially since I recommend some gold in an investor’s portfolio. To illustrate this point, you can reach into your purse or wallet and pull out a one dollar coin.
You think of the dollar as ‘money’, but you do not think of it as an investment.
An investment has some element of risk, and typically has some yield in the form of interest, dividends or rent. Money can be turned into an investment by using it to buy stocks, bonds or real estate. But as a one dollar coin, it is just money; it has no yield and will still be a dollar tomorrow or next year.
Gold is the same. It has no yield. An ounce of gold today will be an ounce of gold next year and the year after that. It will not mysteriously turn into two ounces. It will not rust or change shape or colour. It is just gold. Yet it is money.
It’s true that the value of gold may change when measured in dollars. It is also true that the value of a US dollar may change when measured in euros or ounces of gold. But these changes in relative value do not turn these units into investments; they just reflect supply and demand for different forms of money.
If holders of euros have a preference for US dollars, the euro may fall relative to the US dollar. If holders of US dollars or euros have a preference for gold, then the value of gold may rise relative to both. Still, these changes reflect changing preferences for different forms of money, not a return on investment.
While gold is money, this fact is frequently ignored by investors. Gold often trades like an investment and is said to be ‘up’ or ‘down’ in dollar value — the same as a stock is said to be going up or down. Gold also trades like a commodity. In fact, the primary trading venue for paper contracts in gold is the Commodity Exchange, or COMEX.
In that context, gold typically goes up in US dollar terms during inflation, and down in US dollar terms during deflation — just like other commodities, including oil and copper.
That’s why the chart below is so fascinating. It compares the price of gold with the Continuous Commodity Index, an index of major commodities that has been maintained consistently since 1957.
The index includes gold, copper, cotton, crude oil, natural gas and 12 other widely traded commodities.
Throughout 2014, the gold price closely tracked the commodity index, as might be expected. The price trend of both was downward, which reflected the strong deflationary trends that began to prevail last year. But in November, this correlation broke down and gold began to diverge sharply from the overall index.
That was not the only significant development in gold in late 2014. As this chart shows, the pace of gold shipments out of the Federal Reserve Bank of New York increased sharply in October and November of 2014. In those two months alone, over 90 tonnes of gold were shipped out of the Fed to their rightful owners abroad.
That was more than half the total amount of gold shipped out for the entire year. Bear in mind that prior to 2012, almost no gold had been shipped from the Federal Reserve Bank of New York since the 1970s.
Source: Bullion Star
Click to enlarge
It’s a mistake to read too much into short-time series of data such as the gold/CCI correlation or the gold shipments from the Fed. Every analyst knows that correlation of factors does not prove causation. But these two charts do suggest that, suddenly in late 2014, gold stopped trading like an investment or a commodity and started behaving like what it has always been — money.
Late 2014 was a period when commodities generally declined because of deflation, and currencies generally fell against the dollar as part of the currency wars. The declining currencies were also a symptom of deflation because currency devaluation is a way to import inflation from trading partners in order to stave off domestic deflation.
Only three major assets went up strongly in the past six months: US dollars, Swiss francs and gold.
The US dollar/gold correlation was most striking because they had been inversely correlated since 2011, with the dollar getting stronger and gold getting weaker. Suddenly, gold and US dollars were gaining strength together against commodities, euros, yen, yuan and most other measures of wealth.
Using my causal inference models, our tentative conclusion is that gold is behaving like money again. This could be an early warning of a breakdown in the international monetary system as a result of persistent deflation and currency wars. Investors are moving to safe havens, and US dollars, gold and Swiss francs are at the top of the list.
However, our intelligence collections and inferential models suggest something even more profound may be going on. Russian and Chinese gold acquisition programs have been going on for years. But those acquisitions have now passed the point that Russia and China need to have a seat at the table in any new international monetary conference.
Both countries have caught up to the US in terms of the all-important gold-to-GDP ratio. Yet massive gold acquisitions by Russia and China continue. Can something else be going on?
At a minimum, Russia and China are using gold to hedge the dollar value of their primary assets. In the case of China, those assets consist of US$3 trillion of US Treasury and other dollar-denominated debt. In the case of Russia, those assets consist of oil and natural gas, both of which are priced in dollars on world markets.
For China, the hedge is simple. If the US inflates the value of the dollar, China will lose on its debt holdings but will make large gains on its gold. Converting some portion of its dollar reserves to gold is a good way for China to hedge its exposure to US dollars.
For Russia, the case is more convoluted. In the short run, Saudi Arabia is suppressing the dollar value of oil, which hurts Russian receipts, since Russian oil is also priced in US dollars. But this deflation has also tended to keep gold prices low in recent years.
When Russia sells oil at a low dollar price, it immediately converts the dollars to gold, also at a relatively low dollar price. When inflation returns, the dollar price of Russia’s gold will soar, thereby compensating it for the ‘lost US dollars’ or the earlier sales of oil.
What China and Russia have in common is they are both protecting themselves against US dollar and oil price manipulation by converting their export sales into gold. While investors may have missed this development, other central banks have not.
The withdrawals from the Federal Reserve represent efforts by central banks in Germany, the Netherlands and elsewhere to take physical possession of their gold in advance of a systemic monetary breakdown.
The correlation of US dollars and gold, the divergence of gold from commodities, the repatriation of gold from the Fed, and continued large acquisitions of gold by China and Russia, are all visible from the data.
The conclusions that gold is beginning to behave like money rather than a commodity — and that Russia and China are using gold to hedge US dollar exposures in oil and Treasury securities respectively — are reasonable inferences using our models.
But is something else going on? Something that is not apparent in the data and for which the inference would be less certain? Could Russia and China be trying to corner the market in gold?
Leaving aside blatant government intervention (such as President Roosevelt’s 1933 gold confiscation), there has not been a successful effort to corner the gold market since Jay Gould and James ‘Big Jim’ Fisk tried it in 1869.
Even that corner was broken when the US Treasury unexpectedly sold large quantities of gold after Fisk and Gould had been assured by insiders that the Treasury would not do so.
The Hunt brothers infamously tried to corner the silver market in 1979 and 1980. That corner was broken by a combination of scrap silver flooding the market in the form of tea sets and silverware, and changes in exchange regulations, which increased margin requirements and hurt the Hunts’ ability to maintain their leveraged futures positions.
A Russian corner of the gold market would not be leveraged on futures exchanges, because Russia is a cash buyer of physical gold. Russia is also immune from US regulation; the US has no enforcement powers in Russia.
As in the cases of Gould, Fisk and the Hunt brothers, patience and stealth are needed at the beginning of a successful corner.
All the best,