‘Greatest country in the world’ loads up on gold

Wednesday, 10 July 2019
Adelaide, Australia
By Bernd Struben

  • Why are these countries snapping up gold?
  • A race to the bottom

Kazakhstan, greatest country in the world

All other countries are run by little girls

Kazakhstan, number one exporter of potassium

All other countries have inferior potassium

Sacha Baron Cohen, Borat

Sacha Baron Cohen’s irreverent brand of satire isn’t for everyone.

I won’t even show you any more of his spoof national anthem for Kazakhstan, for fear of offending. We’ll leave that to Google.

But his 2006 film Borat Cultural Learnings of America for Make Benefit Glorious Nation of Kazakhstan went over like gangbusters in Curacao.

I know because I was living there at the time, spruiking the attractions of the Dutch Antilles for international tour operators. I saw the film in the island nation’s only cinema.

The Antilleans have a penchant for crude, slapstick humour. They know when someone’s tongue is planted in their cheek. They weren’t about to take offence at Cohen’s politically incorrect jokes. In fact, from the reactions in the packed theatre, the more politically incorrect the better.

Now I mention Borat for a reason. That’s because, rather embarrassingly, 13 years after the movie’s release, it’s still the first thing that leaps to my mind when Kazakhstan comes up.

And Kazakhstan has been making headlines of late. No, not because of its apparently prodigious — and superior — potassium production.

Rather Kazakhstan’s central bank has been on a gold buying spree.

I showed you this, from Bloomberg, yesterday:

Buying from central banks in the first five months of this year is 73% higher than a year earlier, with Turkey and Kazakhstan joining China and Russia as the four biggest buyers, according to data released on Monday by the WGC. [World Gold Council]’

According to the WGC, total central bank purchases in 2019 have already reached 247.3 tonnes. Kazakhstan’s own central bank has bought 20.5 tonnes of gold so far this calendar year. That makes it the fourth largest bullion buyer in the world.

To steal a line from Borat, ‘very nice!

Kazakhstan’s gold splurge isn’t an isolated incident. It’s part of a larger trend playing out among emerging nations.

The graph below comes courtesy of John Mulligan, Director of the World Gold Council:



chart image
Source: Refinitiv GFMS, World Gold Council
Click to enlarge

As you can see, the fastest growing regions in the world are also the ones snapping up bullion at record rates. Roughly 70% of gold demand is driven by emerging markets. And that demand is only likely to increase over the coming years.

So why are these central banks stocking up on gold?

To answer that question we turn to Greg Canavan, writing in today’s Rum Rebellion:

‘[M]any years of quantitative easing by the world’s major central banks, and their inability to raise rates without crashing their economy, has left a huge amount of cash sloshing around the financial system…

Many emerging central banks don’t want to hold too many US dollars or euros as reserves. The obvious non-fiat currency candidate is gold.

Greg’s been keeping a sharp eye on the gold market lately. This comes after he uncovered a little known hitch he expects to cause a major upheaval in gold’s supply and demand dynamics. One that could send the gold price rocketing.

He lays it all out in his new special report. And he’s targeted four small Aussie gold stocks he believes could ride gold’s price surge for multi-bagger gains.

That report was published yesterday. You can find it here.

Now, a look at the markets…

Markets

Overnight, the Dow Jones Industrial Average closed down 22.65 points, or 0.08%.

The S&P 500 closed up 3.68 points, or 0.12%.

In Europe the Euro Stoxx 50 index finished down 14.01 points, or 0.40%. Meanwhile, the FTSE 100 lost 0.17%, and Germany’s DAX closed down 106.96 points, or 0.85%.

In Asian markets Japan’s Nikkei 225 is down 15.16 points, or 0.07%. China’s CSI 300 is up 0.12%.

In Australia, the S&P/ASX 200 is up 21.21 points, or 0.32%.

On the commodities markets, West Texas Intermediate crude oil is US$58.65 per barrel. Brent crude is US$64.82. per barrel.

Turning to gold, the yellow metal is trading for US$1,394.23 (AU$2,013.33) per troy ounce. Silver is US$15.08 (AU$21.77) per troy ounce.

One bitcoin is worth US$12,625.14.

The Aussie dollar is worth 69.25 US cents.

A race to the bottom

Staying with central banks, the US Federal Reserve is widely expected to cut interest rates at the end of July. That would bring the US cash rate down to 2.25% from the current 2.5%.

Traders have also been banking on a second rate cut from the world’s most watched central bank later this year. But that’s been thrown into doubt, partly by the far better than expected jobs report out of the US last week.

This puts Jerome Powell, the world’s most watched central banker, under even greater scrutiny this week. Powell is testifying before Congress today (overnight our time) and Thursday.

In line with the mantra that bad news is good news for stocks, bullish traders are hoping for hints that all is not well in the US. If Powell thinks the world’s biggest economy is limping towards recession, a second interest rate cut becomes far more likely.

That could see US markets marching back to new record highs. And it would please Powell’s boss. A lot.

Donald Trump, as you probably know, likes cheap money. And he’s been pressuring Powell for some hefty rate cuts. In a Friday night tweet he took another swipe at the Fed, writing, ‘Our most difficult problem is not our competitors, it is the Federal Reserve.’

He accused the Fed of raising ‘rates too soon, too often.’

Regular readers will know we’re no fan of record low interest rates and the record debt levels they help fuel. Not to mention the resulting equity market inflation that leaves us all dependent on continued low…or ever lower…rates to keep the markets from crashing.

But Trump has a point when he mentions the United States’ competitors. At least from an ‘America first’ perspective.

The People’s Bank of China’s governor Yi Gang doesn’t need to be browbeaten with a series of tweets. He readily — and wisely — dances to Xi Jinping’s tune. Which is providing China with a lot more staying power in the simmering trade war.

And those dastardly Europeans aren’t above some of their own central bank manipulation to spur their laggard economies and push down the euro. Which, of course, makes US imports pricier while lowering the cost of European exports.

Consensus forecasts tell us that European Central Bank president Mario Draghi will move to cut rates by another 0.10% in September. Expectations are also high that the ECB will commence with a fresh round of QE next year.

But Draghi may move sooner. And cut deeper.

The ECB next gathers on 25 July. Less than a week before the US Fed makes its interest rate call. And as this snippet from Bloomberg reveals, some of Draghi’s top advisors are urging decisive action:

‘[T]wo of his colleagues on the six-person Executive Board — the two who make presentations to the council — have given recent speeches suggesting a need to move fast. Chief economist Philip Lane said central banks must be “proactive” and Benoit Coeure, head of market operations, said loose monetary policy is needed now “more than ever.”

In just those few words Benoit offers a frightening glimpse of what lies ahead.

It’s been 11 years since the ECB headed down the road of ever-lower interest rates. 11 years since it began toying with quantitative easing, injecting cash into the system with billions of euros of government bond purchases.

11 years. And loose monetary policy is needed now ‘more than ever’.

Buckle up. This is going to get interesting.

Cheers,
Bernd