When the central banks stumble…

Thursday, 18 July 2019
Adelaide, Australia
By Bernd Struben

  • Just one gold coin donation, please…
  • ‘Risk-reducing and return-enhancing’

It is also a good time to ask what will be the next-best currency or storehold of wealth to have when most reserve currency central bankers want to devalue their currencies in a fiat currency system.

Billionaire investor, Ray Dalio

Last week I warned of investors’ obsession with interest rates and trade wars. An obsession that’s developed for good reasons.

The mere hint that central banks — dominated by the US Fed — could drop rates is enough to see stocks rally. Fundamentals be darned.

To deflate that rally, just add a tweet from Trump saying trade negotiations with China are stalling.

With the outsized impact central banks and the US dispute with China have on global markets, you can forgive investors their fixation. But the danger with obsessions is they tend to overshadow other vital issues you should be tracking closely.

Like company earnings.

As I wrote last week, ‘sooner or later earnings…or lack thereof…will be coming home to roost.’

Judging by today’s market action it looks like that’s happening sooner…rather than later.

This headline comes from Bloomberg, ‘Stocks Drop as Earnings Roll In’. The article continues:

“Stocks’ strong gains are finally succumbing to profit-taking,” said Alec Young, managing director of global markets research at FTSE Russell. “Earnings and guidance so far have been mixed and, given the big run-up, it’s no surprise there’s little investor tolerance for even a hint of disappointment.”

The Fed is still widely expected to drop the US cash rate by 0.25% when the FOMC meets on 31 July. And if stocks go into full retreat the Fed will most likely cut again this year. That’s despite a fairly robust US economy.

Lower rates — and the expectation of more cuts on the horizon — can and will continue to buoy markets. But at the end of the day (or year, or…) company earnings will determine whether a stock swims or sinks. If enough sink, they’ll take the index down with them. And the profit taking will begin in earnest.

We’re catching a glimpse of how that will play out today.

Every major global index is in the red. That slide’s likely to continue through the middle of next week as more companies deliver their second quarter results.

Why the middle of next week?

Because the FOMC makes its rate cut decision on Wednesday. Even though a cut is expected — and so broadly priced into the markets — confirmation should be enough to distract investors’ attention from any laggardly earnings.

And the game continues…

Markets

Overnight, the Dow Jones Industrial Average closed down 115.78 points, or 0.42%.

The S&P 500 closed down 19.62 points, or 0.65%.

In Europe the Euro Stoxx 50 index finished down 19.78 points, or 0.56%. Meanwhile, the FTSE 100 lost 0.55%, and Germany’s DAX closed down 89.94 points, or 0.72%.

In Asian markets Japan’s Nikkei 225 is down 389.05 points, or 1.81%. China’s CSI 300 is down 0.72%.

In Australia, the S&P/ASX 200 is down 36.95 points, or 0.55%.

On the commodities markets, oil slipped again overnight. West Texas Intermediate crude oil is down 2.0% to US$56.53 per barrel. Brent crude is US$63.50 per barrel.

Gold headed the other way, up 1.5% since I wrote to you yesterday. The yellow metal is trading for US$1,425.32 (AU$2,034.14) per troy ounce. Silver is US$15.94 (AU$22.75) per troy ounce.

Bitcoin also edged up overnight. One bitcoin is worth US$9,687.53.

The Aussie dollar is worth 70.07 US cents.

Just one gold coin donation, please…

As you saw in the markets section above, every index we commonly track here is down. That’s true for the other major indices we don’t normally quote, as well. Like the NASDAQ — down 0.46% — and France’s CAC 40, which closed down 0.76%.

Gold, on the other hand, gained. At AU$2,034.14 per ounce, it’s again close to a new record high in Aussie dollar terms.

Which is certainly good news for this Aussie coin:



chart image
Source: AFP / The Australian
Click to enlarge

That’s a one tonne solid gold coin. Or, as The Australian helpfully calculated, more than 32,000 troy ounces.

At today’s price of AU$2,034.14 per ounce, this coin is worth a cool $65.09 million. Thanks to the bump in the gold price, it gained $942,080 overnight.

If you look carefully, you can see the coin is displayed in front of the New York Stock Exchange. It was brought to the US, temporarily, courtesy of the Perth Mint’s CEO Richard Hayes.

Hayes is doing more than showing off the Perth Mint’s capacity to cast the world’s largest pure (99.99%) gold coin. He’s in New York spruiking Perth Mint’s gold exchange traded fund (ETF) to investors.

Their ETF launched a year ago. To date it’s managed to draw in US$133 million. Or the equivalent of about three-times the gold in Hayes’ monster coin. That’s not bad.

But according to The Australian, US ETFs dwarf that amount. They claim some US$52 billion in funds. Those ETFs are backed by bullion secured in vaults. Hayes is highlighting that Perth Mint’s gold ETF is the only one backed by a government guaranteed mint.

For investors worried about only owning ‘paper gold’ that’s a good selling point. And Hayes’ AU$65 million gold coin parked in front of the New York Stock Exchange is a great marketing gimmick.

With gold back in the spotlight as the price marches higher, all gold ETFs should see their funds continue to grow. Whether Hayes’ 32,000 ounce coin drives more investors towards Perth Mint’s ETF remains to be seen.

Either way, I’ll never think of a gold coin donation the same way again.

‘Risk-reducing and return-enhancing’

Sticking with gold, Crisis & Opportunity’s Greg Canavan isn’t the only one recommending you add bullion to your portfolio…alongside the miners that produce it.

(Details here…)

In a missive posted on LinkedIn, billionaire Ray Dalio, founder of investment management firm Bridgewater Associates, touted gold’s benefits in a world where interest rates can’t go much lower and debts can’t go much higher.

From the Australian Financial Review (AFR):

Ray Dalio thinks the current era of low interest rates and quantitative easing might be coming to an end, and his answer to a new market paradigm that could see escalating conflict between capitalists and socialists is simple — gold.

“I believe that it would be both risk-reducing and return-enhancing to consider adding gold to one’s portfolio…

“The big question worth pondering at this time is which investments will perform well in a reflationary environment accompanied by large liabilities coming due and with significant internal conflict between capitalists and socialists, as well as external conflicts…”

Dalio makes some good points. I might not share his belief that low interest rates are about to end soon. However, rates in the developed world are so low already central banks are almost out of wiggle room. In Australia we’re down to 1.0%.

When the central banks’ tanks run dry, we could indeed see the power struggle between capitalist and socialist forces ramp up. Gold should do well in that scenario. As should the companies that dig it up.

Deutsche Bank is also jumping on the gold band wagon.

Deutsche Bank’s analysts are concerned about the possibility of a full blown currency war between China, the US, and Europe. They point to Trump’s swipe at China earlier this month, when he said the Chinese are playing a ‘big currency manipulation game’.

From Bloomberg:

Should U.S. foreign-exchange policy spur a global currency conflict, Deutsche Bank AG sees gold as the ultimate victor…

‘“With a currency war most likely to be fought on USD/CNY and EUR/USD terrain, one approach would be to steer clear of the direct conflict,” [Deutsche Bank strategist Alan] Ruskin wrote in a note Monday. “By far the most direct and simple way to trade the complexities of a currency war is by going long gold.”

The spectre of currency wars, central banks’ incompetence and growing impotence, and a whole lot of global uncertainty should all work to drive gold higher.

That’s seen gold garnering all kinds of headlines lately. Yet no one in the mainstream is reporting on the coming supply crunch, which Greg Canavan’s research reveals is set to hit the sector.

Greg believes this will drive the gold price beyond US$1,700 per ounce. And it could see a select group of junior mining stocks’ share prices rocket by hundreds of percent…or more.

Greg explains why, along with tipping his favourite gold plays, in his new report. You can find that here.

Cheers,
Bernd