What free mortgages mean for gold

Monday, 12 August 2019
Adelaide, Australia
By Bernd Struben

  • Prepare for the ‘full implementation of quantitative easing’
  • The $1 billion gold mine

Our old friend Jim Rickards is heading back Down Under next month.

Long term readers will recall the central bank expert and best selling author formerly penned an advisory service for Port Phillip Publishing. Since then that service, Strategic Intelligence, has moved to our sister publisher, Agora Financial Australia.

You may have read some of his books. I’ve got a number of them on my shelf.

Among those, Jim wrote the book on currency wars. Literally. His first novel, from 2011, is titled Currency Wars: The Making of the Next Global Crisis.

The mainstream media has gotten word of Jim’s pending arrival from the US. And The Australian ran a lengthy interview piece with him this morning.

In that interview, Jim reminds us that today’s currency war is nothing new. In fact, it’s been on for more than nine years now.

We’ve been in a currency war since January 2010, you can date it from Obama’s 2010 State of the Union address when he announced a policy that would only be interpreted as weakening the US dollar and indeed in August 2011 the US dollar hit all-time lows.’

Intrigued, I dug up the following graphic:



chart image
Source: Bloomberg
Click to enlarge

You can see 2011’s all-time low to the left. You can also see that the greenback has gained a remarkable 32% since then.

That’s a mixed bag for US companies. Good for importers and bad for exporters, is the standard — and over-simplified — mantra. Meanwhile, it’s uniformly bad for foreign companies and developing nations with trillions of US dollar denominated debts. And it could help usher in the next global recession.

Trump, then, has a valid concern about the strength of the US currency. And you can see how last week’s decision by China to let the yuan devalue against the dollar would draw his ire. Though this is hardly the first time China played its currency card.

Again from Jim:

August 2015, they did a 3% devaluation over a couple of days — US stocks fell 11% in the next four weeks. In December 2015, they did another devaluation and then between January 1 and February 10, 2016, US stocks fell over 11%.’

With Trump facing re-election in 2020, he’s unlikely to sit by idly as China allows the yuan to slide. Not to mention an already weak euro likely to fall further with additional easing planned by the European Central Bank (ECB).

If Trump gets desperate, we may see him tap the Exchange Stabilization Fund (ESF). I mentioned the EFS last week. In short, the US$100 billion fund enables the Treasury — without Congressional approval — to intervene in foreign exchange markets and devalue the US dollar.

And we’re now almost guaranteed to see further interest rate cuts from the US Fed. Whether that succeeds in depreciating the US dollar, however, is questionable. Especially with central banks across the world heading towards…or even below…zero.

More, after the markets.

Markets

Renewed angst over the trade war–cum–currency war saw another round of selling in Europe and the US.

Not that this should come as surprise. Here’s what I wrote to you on Friday:

Trade war on…trade war off…

The US trade dispute with China continues to dominate investor sentiment. An apparent easing in tensions and moves by the People’s Bank of China to stabilise the yuan saw global markets close strongly higher.

But tomorrow (overnight our time) could again be a different story. Trump has sidelined Chinese telco giant Huawei from doing business with any US companies after China stopped importing US agricultural goods. Futures in US markets have sunk into the red.

Now here’s the headline from today’s Australian, ‘Trade jitters to hit ASX’.

Indeed…

Over the weekend, the Dow Jones Industrial Average closed down 90.75 points, or 0.34%.

The S&P 500 closed down 19.44 points, or 0.66%.

Tech stocks again suffered the brunt of the selloff, with the NASDAQ closing down 1.00%.

In Europe the Euro Stoxx 50 index finished down 41.64 points, or 1.23%. Meanwhile, the FTSE 100 lost 0.44%, and Germany’s DAX closed down 151.61 points, or 1.28%.

In Asian markets Japan’s Nikkei 225 is up 91.47 points, or 0.44%. China’s CSI 300 is up 0.96%.

In Australia, the S&P/ASX 200 is down 19.04 points, or 0.29%.

West Texas Intermediate crude oil is US$54.32 per barrel. Brent crude is US$58.30 per barrel.

Turning to gold, the yellow metal is trading for US$1,498.59 (AU$2,211.29) per troy ounce. Silver is US$16.99 (AU$25.07) per troy ounce.

In the world of cryptocurrencies, one bitcoin is worth US$11,502.58.

The Aussie dollar is worth 67.77 US cents.

Prepare for the ‘full implementation of quantitative easing’

Central bankers trying to stimulate their economies and politicians trying to devalue their respective currencies face the same problem.

Interest rates across most of the world are close to zero. Which raises the real spectre of negative rates. Only a few years ago that would have been unthinkable. Not so today…

At a recent gathering celebrating the anniversary of the Bretton Woods agreement, Jim Rickards met with a range of senior figures, including two top Fed officials and another from the ECB. It wasn’t long before negative interest rates came up.

According to Jim (quoted by The Australian):

I thought it would be a delicate subject and they’d tiptoe around it and they said no, rates have got to come down, because real rates are too high — that’s the key to this whole thing. We’ve got to lower nominal rates so that real rates can also be lower.

And then one of the Fed officials brought up the subject of negative rates, and they didn’t say it was going to happen or that any decision had been made, but again they were very relaxed about the fact that this might happen.

With a cash rate of 2.25%, the Fed has a bit more wiggle room than the Reserve Bank of Australia (RBA), which recently cut the rate to a record low 1.0%.

But then the RBA’s rate looks downright cheerful compared to rates in the Eurozone, Sweden and Denmark. As you can see in the chart below, rates there have been negative for five or more years:



chart image
Source: Bloomberg
Click to enlarge

Retail customers have been spared from having to pay for the privilege of lending their money to the Nordic and Eurozone banks so far. The banks are rightfully afraid of a consumer backlash for charging you interest on your savings. But slumping profits could see them overcome that fear soon enough.

This headline comes from Bloomberg, ‘Depositors Are Next as Nordic Banks Buckle Under Negative Rates’.

The idea of customers paying banks to hold their money has some prominent supporters. That includes Kari Stadigh, CEO of Finish holding company Sampo Oyj. How else can the central banks keep working their magic?

Here’s Kari’s take:

I don’t think the ECB will reach their goals with the present thinking that they have on monetary policy unless they are able to enforce a framework where all banks would have negative interest rates on their deposits. The theory works only when fully implemented, and a full implementation of quantitative easing requires negative deposit interest rates, so that people start to invest and consume, also in the private sector.

In case you think it can’t actually happen…it already has.

UBS Group now charges interest on its Swiss accounts for customers with more than €500,000 (AU$825,000).

So if customers need to pay their banks to hold onto their money, will we see banks pay their customers to take out loans?

The short answer is yes. In fact, that too is already happening. From Zero Hedge:

Denmark’s third largest bank is now offering borrowers mortgages at a negative interest rate, effectively paying its customers to borrow money for a house purchase.

Jyske Bank said this week that customers would now be able to take out a 10-year fixed-rate mortgage with an interest rate of -0.5%, meaning customers will pay back less than the amount they borrowed…’

Now that’s one residential mortgage-backed security (RMBS) I don’t want any part of.

You have to imagine, though, that the Danes are expecting some moderate deflation ahead for the krone. Without deflation, I can’t see how negative consumer rates make any sense at all.

In a deflationary world the banks might try to charge you to hold your money. But your cash in hand will be as good as gold. Well, maybe not that good…

The $1 billion gold mine

Newcrest Mining looks to have reached a coveted milestone with its New South Wales Cadia mine this past financial year. According to the AFR, Newcrest is expected to announce it generated more than $1 billion of earnings from the mine.

An uptick in production alongside record Aussie dollar gold prices are to thank.

But it’s not only Aussie dollar gold at record levels. According to Bill Murphy, Chairman of the Gold Anti-Trust Action Committee (quoted by Zero Hedge), ‘Gold is at all-time highs in 73 different countries.’

And it’s getting ever closer to knocking out its 2011 US dollar high of US$1,917 per ounce. According to Crisis & Opportunity’s Greg Canavan, we can expect to see that happen by next year…latest.

Whether Trump succeeds in devaluing the greenback or not, the outlook for Australia’s gold miners hasn’t looked better in many long years.

Many miners and producers have already enjoyed a great run in 2019. The share price for Newcrest, for example, is up 77.9% so far this calendar year.

No one will complain about gains like that. But the potential gains Greg forecasts for three select Aussie gold juniors could dwarf that figure.

If you haven’t checked those out yet, you can do so here.

Cheers,
Bernd