It would be best not to be short-sighted when it comes to gold; at least that is what one former Fed chair says.
“[T]he risk of inflation is beginning to rise…Significant increases in inflation will ultimately increase the price of gold,” noted Alan Greenspan, Federal Reserve chairman from 1987 to 2006, in an interview published in the World Gold Council’s Gold Investor February issue.
“Investment in gold now is insurance. It’s not for short-term gain, but for long-term protection.”
However, it is really the idea of returning to a gold standard that Greenspan focused on — a gold standard that he said would help mitigate risks of an “unstable fiscal system” like the one we have today.
“Today, going back on to the gold standard would be perceived as an act of desperation. But if the gold standard were in place today, we would not have reached the situation in which we now find ourselves,” he said.
“We would never have reached this position of extreme indebtedness were we on the gold standard, because the gold standard is a way of ensuring that fiscal policy never gets out of line.”
To Greenspan, the reason why the gold standard hasn’t worked in the past actually has nothing to do with the metal itself.
“[T]here is a widespread view that the 19th Century gold standard didn’t work. I think that’s like wearing the wrong size shoes and saying the shoes are uncomfortable!” he said. “It wasn’t the gold standard that failed; it was politics.”
Investing.com – Gold prices slipped lower on Friday, as the U.S. dollar slightly recovered from losses posted in the previous session, although ongoing geopolitical concerns were likely to continue to support safe-haven demand.
On the Comex division of the New York Mercantile Exchange, gold futures for April delivery were down 0.28% at $1,238.05, just off Thursday’s one-week high of 1,240.70.
The April contract ended Thursday’s session 0.69% higher at $1,241.60 an ounce.
Futures were likely to find support at $1,217.30, Wednesday’s low and resistance at $1,243.50, the high of February 9.
The dollar regained some ground on Friday, helped by recent upbeat data and positive comments by Federal Reserve Chair Janet Yellen.
The U.S. Department of Labor reported on Thursday that initial jobless claims increased by 5,000 to 239,000 last week, compared to expectations for a 11,000 rise to 245,000.
Data also showed that building permits jumped by 4.6% to 1.285 million units last month from 1.210 million in December.
The greenback had strengthened broadly after Ms. Yellen told the U.S. Senate Banking Committee on Tuesday that the central bank will likely need to raise interest rates at one of its upcoming meetings.
Ms. Yellen said that waiting too long to raise interest rates would be “unwise,” given the rise in inflation and economic growth.
The U.S. dollar index, which measures the greenback’s strength against a trade-weighted basket of six major currencies, was up 0.09 at 100.54, off the previous session’s one-week low of 100.40.
Elsewhere in metals trading, silver futures for March delivery slipped 0.15% to $18.047 a troy ounce, while copper futures for March delivery dropped 0.50% to $2.705 a pound.
And it will need God to get it done…
The SWAMP is where the injustice arises, writes Bill Bonner in his Diary of a Rogue Economist.
It’s where the win-lose deals are forced onto people. It is where waste, corruption, and larceny steal their time and money.
“To loose the bonds of injustice, to undo the thongs of the yoke, to let the oppressed go free, and to break every yoke.”
– Isaiah 58:1-12
We don’t have to know whether a new law or new policy will actually do what its proponents say it will do. We just have to ask: Win-lose? Or win-win?
In the “public” space, as a general rule, deals must be win-win…or the average person will lose. Thou shalt not steal. Thou shalt not kill. Thou shalt not do win-lose deals.
Because only win-win deals add to wealth, choice, and prosperity.
In a private deal, you can make money by taking it from someone else. But not everyone can make money that way. So, as a general rule or policy, it won’t work. It won’t make the average person better off.
In fact, it will make him worse off. Partly because of the friction, waste, and disincentives it creates. And partly because the average guy is never the winner in a win-lose deal.
Who feels the burden of the yoke? Who is the victim of injustice?
Is it Wall Street, with its millions in contributions to the feds and its key men filling the most powerful posts in the administration? No.
Or the Northern Virginia military/security insiders who have received as much as $50 trillion (in today’s Dollars) of taxpayers’ money since World War II? No.
What about the cronies with their insider deals? The zombies with their payoffs and hush money? The Washington-New York-California establishment? No, no, and no.
Holdup Men, Shysters, and Bully Boys
We’ve gotten considerable feedback on our formula. Some good…some bad…and some that leaves us scratching our head. (Modestly, we’ll put our formula up against Thomas Piketty’s silly “r>g” formula any day.)
Ours is not a universal formula, however. It is not like the second law of thermodynamics or “All you need is love.” It is just a description of how a civilized economy works.
And it seems to lead to a shocking and impossible conclusion. If win-win is good and win-lose is bad…why do we have a government at all? Every one of the government’s deals is win-lose.
“Did you know that there are robber bees?” asked a local beekeeper on Saturday. “They don’t gather honey. They just steal it from other hives. We have to keep an eye out for them.”
Yes, dear reader, there are bees that practice win-lose, too. The robber bees win. The robbed bees have less.
Our formula doesn’t tell us what to do about them…It only tells us that we’d be better off without them. And we’ll accept the cost of preventing and deterring them, doing our best to keep it as low as possible.
But that’s just life, isn’t it? There are inevitably some holdup men, shysters, and bully boys. And, as far as we know, there is inevitably government.
Some win-lose deals – imposed by the feds – may be necessary. But what the formula tells us is that Jefferson was right: The fewer of them you have, the better off you are.
“The government that governs best,” he said, “governs least.”
In order for Trump to govern well, he must reduce the reach of government. He must drain the swamp.
He must chase the moneylenders out of the temple…send the soldiers back to their barracks…and stop old people from exploiting the young.
Tall order? You betcha…
In our recent meeting in Baltimore with former US Fed chief Alan Greenspan, the wily old fox tossed a grenade.
The discussion had arrived at the biggest topic in finance: WWDD?
What would Donald do?
Then the bomb exploded: “Tax cut? A tax hike is more like it…”
Mr.Greenspan was explaining why President Trump’s program won’t work. No tax cut, no Main Street boom.
Readers ask why we are suddenly writing so much about politics generally…and Donald J.Trump specifically.
We’ve been writing a daily column since the Clinton years. But rarely did we focus on government. And only twice have we gotten so much negative feedback from readers.
The first time was at the end of the 1990s when readers did not appreciate our view of the dot-com boom.
“It’s a fantasy,” we said.
Then, after President George W.Bush invaded Iraq, they thought it was unpatriotic of us to say that it was most likely going to be a disaster.
It turned out to be an even bigger disaster than we had imagined.
Now President Trump has divided readers – one from another and us from many of them, too.
“Now, you need to pay attention to politics,” says Ray Dalio, the manager of the world’s largest hedge fund.
Understanding politics is now crucial to making investment decisions.
Never before have we had a president with so much power (given to him by gutless courts and congresses over the last five decades). And never before have we had a president so ready to use it.
President Trump’s economic plan centers on cutting taxes and regulation while boosting government spending on infrastructure. The combination is supposed to double GDP growth rates, taking them back to where they were when America really was great.
If this seems likely to you, you may want to keep your money in Dollar-based assets and profit from the boom you see coming.
If not, sell your stocks and bonds. They’ve had a marvelous 35-year run; time to get out.
As to the regulations, we have no doubt our new president is on the right track. Regulations are win-lose deals. They impose restrictions, costs, and requirements that get in the way of voluntary win-win deals.
Remember, there’s no magic or mystery to our formula: S = rv (w-w – w-l).
The net satisfaction in a society equals the real value of the win-win deals minus the cost of the win-lose deals.
To make it super simple: The fewer deals in which someone is forced to do something he doesn’t want to do (win-lose), the better off we all are.
The biggest win-lose deals in America fit into three major categories with three major winners – all of them swamp critters:
The military-industrial-security complex at a rate of about $1 trillion a year, including the estimated $7 trillion bill for the Iraq debacle.
The Wall Street-Fed complex, with its control of the fake-money system.
The medical-pharmaceutical-zombie complex.
To “drain the swamp,” Mr. Trump must take them on. Not just symbolically…not individually by calling out single companies and persons…and not by tweet.
Instead, he has to slash their budgets, clip their crony deals, and curb their power. He will have to limit their “wins” so that the average American feels his burden lightening and his yoke loosening.
And he can’t do it using any of the Fed’s trickery.
It is no use cutting taxes if government spending isn’t also cut. And there’s no use pretending to “stimulate” growth by lowering borrowing costs. It won’t work.
Central banks in the US, Japan, and Europe have been at it for years, including the last seven years of near-zero interest rates. We’ve seen what happens: The rich get richer; the poor and middle classes lose ground.
Ultra-low interest rates mislead people. This causes misallocations of capital…and mistakes.
The losers, in the real Main Street economy, stoop under the burden. The winners are flush as the funny-money funds Wall Street, the empire…and the welfare state.
The best thing about this fake-money system – at least from the insiders’ point of view – is that the masses don’t know what is going on.
Not one person in 10,000 understands how he is ripped off by his own money.
And who knows how much military spending is enough?
“You can’t be too safe,” people say to one another.
Everything is subject to the law of declining marginal utility: The more you have of something, the less each additional increment is worth to you.
And as we explored in our book Hormegeddon: How Too Much of a Good Thing Leads to Disaster, the excess often becomes toxic.
One dessert is great; by the time you’ve eaten your fifth, you’re ready to throw up. Excess military spending is worse: It leads to meddling and reckless adventurism.
As President Eisenhower warned in his farewell address, eventually, the military you pay to protect you becomes a danger – to you.
Muddling into pointless wars and destabilizing foreign governments makes you less safe. And by the time you figure it out and try to bring the spooks and soldiers under control, it’s too late.
They have the guns, after all.
“Whoever has the gold makes the rules” runs the old saying.
So, where’s the gold?
Who’s producing? Who’s buying? Who’s selling?
In today’s Money Morning we look at international gold flows – with a particular focus on China.
The US government has the biggest gold pile – but for how long?
The US government remains the world’s largest gold owner. It has 8,133 tonnes – amounting to more than 70% of US foreign exchange reserves – most of which is stored in Fort Knox. That’s almost an ounce per citizen, and close to 5% of all the gold that has ever been mined (roughly 175,000 tonnes).
Data-superman Nick Laird projects that if you add private and institutional holdings to that number, there are 26,000–27,000 tonnes in the US. That would be about 15% of all the gold that has ever been mined.
The US is top dog. It has the gold. And, internationally, it makes the rules.
But for how much longer? There are changes afoot.
China is now the world’s largest gold producer. It has held this title since 2007 when it overtook South Africa and it shows no sign of handing back the mantle.
Chinese gold production amounted to around 453 tonnes in 2016, according to the China Gold Association. The next largest producer, Australia, is some way off – about 180 tonnes lower. We don’t have the exact numbers yet for 2016, but it is likely to be close to the 273 tonnes it produced in 2015.
In third place we have Russia (250 tonnes), followed by the US (216 tonnes) and Peru (176 tonnes). South Africa has slid to a lowly seventh place.
In other words, about 15% of total global production is Chinese. And here’s the thing – of all that gold it produces, China barely exports an ounce. It keeps all of it. Not only that, but China is the world’s biggest importer. This title used to belong to India, but China became the leader in 2014.
Importing gold was something China began in earnest in 2011 – around about the time that gold peaked at $1,920 an ounce. The longer the bear market has gone on, the more China has bought. I’m not sure if that makes them canny buyers or the opposite, but something is going on and, when you consider the cumulative effects, it is something big.
China’s huge gold hoard is only getting bigger
China does not give us the precise import figures – arriving at them involves some sleuthing and there’s no one better at this than precious metals analyst, Koos Jansen.
In 2011 China imported most of its gold via Hong Kong, which does provide the figures. Imports came in at just below 400 tonnes – considerably more than the entire reserves of the UK (310 tonnes).
In 2012, China started importing from Switzerland too. In 2013, imports reached 1,400 tonnes. In 2014, China added the UK to the list of countries it imports from and in 2015, Australia. 2015 was a record year for imports – not far off 1,600 tonnes, roughly equivalent to Russia’s entire reserves.
And so to 2016. Jansen collates the export numbers from Hong Kong, Switzerland, the UK and Australia to arrive at the figure of 1,300 tonnes, down slightly on the previous year, but still 30% higher than total Swiss reserves.
In total, since 2011, China has imported more than 5,000 tonnes. That’s more than is in the vaults of the International Monetary Fund (IMF), and more even than Germany’s holdings (around 3,400 tonnes). Another three years at a similar rate, and China will have imported more gold than there is at Fort Knox.
The cumulative impact is astonishing. Add China’s domestic production into the equation, as well as the recycling of scrap, and it seems that since 2009, more than 12,000 ounces of gold have either been produced in, or imported to, China.
It’s pretty easy to start drawing the conclusion that China is planning to return the world to some kind of international gold standard and thereby undermine US imperial and economic might by destabilising the dollar.
China isn’t going to return us to the gold standard – yet
It’s at this stage that I have to say: “Slow down! Slow down!” Not all of the gold is going into the vaults of the People’s Bank of China (PBOC). No need to make a run for the hills just yet.
China has encouraged private accumulation of gold, so much of the gold is falling into domestic hands. Again, just how much is difficult to quantify. Bron Suchecki of the Perth Mint, studying gold flows, argues that China aims for private citizens to accumulate 55% of flow – with the remaining 45% going to commercial banks and the Chinese central bank (the PBOC).
The latest statement from the PBOC is that it holds 1,842 tonnes. Given the amount of gold that has made its way to China, that 1,842 tonne number does seem suspiciously low – or at least towards the lower end of what is credible.
And it is likely that the Chinese would understate this number, first so as not to push the price up when they are still in accumulation mode; secondly, so as not to throw down any “we’re as powerful as you” gauntlets at the US.
But that is pure speculation on my part. Jansen tells me that his sources think the number is probably double the official number.
He has put together this chart, which estimates not all the tea, but all the gold in China.
Chinese gold chart
But that growth in reserves since 2009 is quite something. At this rate China will soon be making all the rules.
It’s worth noting by the way that while US holdings amount to more than 70% of its foreign exchange reserves, China’s official gold holdings amount to just 2%. China could double or triple the amount of gold it owns, and it would still only amount to 4% or 6%. Even the UK’s paltry hoard amounts to 8.5%.
China needs more gold, and it seems to be trying to acquire it as discreetly as possible.
There are several takeaways from all this.
First, all of the gold that has made its way to China over the last few years stays there. It doesn’t come back. If ever there was a symbol of the transfer of wealth and power from east to west this is it.
Chinese gold imports may be down ever so slightly on 2014, but it is still an accumulator of physical metal – by far and away the world’s biggest.
If ever there is a Western buying spree, and China continues to hoard what it has, the lack of supply is going to push the price higher more quickly than in previous bull markets. We got a taste of this in the first six months of last year.
If China becomes a net seller, look out below. But I don’t think there’s too much danger of that.
Gold futures scored back-to-back gains Thursday, sending prices to their highest finish in more than three months.
“The dollar is weaker, Treasury yields are down and stocks are lower,” said Michael Armbruster, principal and co-founder at Altavest. “That is a nice trifecta for gold.”
April gold GCJ7, -0.20% rose $8.50, or 0.7%, to settle at $1,241.60 an ounce after tacking on 0.6% on Wednesday. The settlement was the highest since Nov. 10, according to FactSet data.
The yellow metal’s gain on Wednesday snapped what had been a four-session fall stoked by expectations that the dollar would rise on heightened expectations for U.S. interest-rate hikes, following two days of testimony this week on Capitol Hill from Federal Reserve Chairwoman Janet Yellen.
See MarketWatch’s blog on Yellen’s congressional testimony
Some analysts, however, believe that gold’s modest near-term gains look vulnerable as U.S. equities remained near record highs amid optimism for the Trump administration’s plan to deliver tax reforms.
“The move [higher for gold] may have reflected profit-taking after markets exhausted the week’s Fed policy-defining news flow,” said Ilya Spivak, strategist for Daily FX. “Jitters ahead of a coming G-20 foreign ministers’ meeting—the first to be attended by members of the Trump administration—may have encouraged a cautious disposition.”
Read: Gold investors smell a rate in this ‘animal spirits’ market—this is how
0:00 / 0:00
Boomers struggle with rising debt, dwindling savings(1:52)
America’s 75 million baby boomers have piled up more debt while holding less savings than generations before them, a mix that is crimping their hopes of a comfortable retirement.
Meanwhile, a trio of mostly solid economic reports Thursday covering jobs, housing and regional manufacturing did little to change the interest-rate outlook.
Jobless-benefits claims inched up to a still-low 239,000, while the Philadelphia Fed said its manufacturing index soared in February to a reading of 43.3 from 23.6 in January. That’s the highest level since early 1984. Meanwhile, housing starts fell 2.6% in January.
Bond yields paused the gains seen in the wake of relatively hawkish comments this week from Yellen on the nation’s interest-rate picture. Bond yields TMUBMUSD10Y, +0.41% pulled back Thursday, although trimmed that decline when Fed Vice Chair Stanley Fischer early Thursday echoed Yellen’s signal for more gradual rate increases in coming months. Bond yields and nonyielding gold typically move inversely.
Higher interest rates can provide a lift to the dollar and increase the absolute cost of the asset as well as the cost of storing commodities, making them less attractive for investors seeking better returns.
The ICE U.S. Dollar Index DXY, -0.04% was down by nearly 0.7% after trading at four-week highs in the wake of Yellen’s Tuesday comments.
On Comex, futures prices for silver ended above $18 an ounce, to log their highest settlement since Nov. 10, according to FactSet data.
March silver SIH7, -0.13% rose 11.1 cents, or 0.6%, to $18.074 an ounce.
“Silver has been pointing higher this week,” as “smarter money recognizes the incredible risk in speculative equity markets,” said Ned Schmidt, editor of The Value View Gold Report.
“Gold, silver and gold stocks have outperformed [the] equity market since the December [U.S. interest] rate increase,” with money flowing to the strongest sectors, he said—and “odds still favor gold and silver beating the U.S. equity market in 2017.”
Read: Gold isn’t done climbing, says ‘Precious metals Investing for Dummies’ author
Round out metals action, March copper HGH7, +0.18% fell 2.2 cents, or 0.8%, to $2.719 a pound.
Read: Copper pulls back from recent highs
April platinum PLJ7, -0.02% tacked on $5.80, or 0.6%, to $1,015.70 an ounce and March palladium PAH7, -0.38% rose $7.10, or 0.9%, to $793.30 an ounce.
The exchange-traded fund SPDR Gold Trust GLD, +0.54% and the iShares Silver SLV, +0.65% each rose by 0.6%.The VanEck Vectors Gold Miners ETF GDX, +1.08% gained 1.4%.
Feb 16 Gold prices rose on Thursday as the dollar drifted down from one-month highs hit in the previous session on upbeat U.S. economic data that boosted the prospects of an interest rate hike by the Federal Reserve next month.
U.S. retail sales rose more than expected in January and consumer prices recorded their biggest gain in nearly four years.
Spot gold had ticked up 0.2 percent, to $1,235.01 per ounce at 0529 GMT, while U.S. gold futures were up 0.3 percent, to $1,236.2.
“Gold is approaching a turning point and the upward trend in prices could end in the near future,” said Jiang Shu, chief analyst at Shandong Gold Group.
“Perhaps the market is currently underestimating the prospects of an interest rate hike by the U.S. Federal Reserve in March, given the strong economic data. The impact (on gold prices) would probably show in the medium term.”
Gold is highly sensitive to rising U.S. interest rates, as it increases the opportunity cost of holding non-yielding bullion, while boosting the dollar, in which it is priced.
The dollar index fell 0.3 percent to 100.91, with traders booking profits following the greenback’s rally to its highest since Jan. 12 at 101.76 on Tuesday.
The Fed aims to raise rates in the months ahead as long as the economy continues to grow a bit above its trend and if, as expected, fiscal policies provide a boost, New York Fed President William Dudley said on Wednesday.
The comments by Dudley reinforced the central bank’s cautious optimism that the Donald Trump administration would not derail plans for gradual rate hikes in the months and years ahead.
Uncertainty surrounding the European Union and the policies of President Trump could always provide some short-term support for bullion, Shu said.
“The real question is whether Trump’s policy … will alter the Fed’s interest rate policy, and if so, it would have a long-term effect on gold,” he added.
Spot gold may retest resistance at $1,249 per ounce, according to Reuters technical analyst Wang Tao.
“We suspect that investors continue to expect more reflation (and inflation) coming out of the U.S. and are therefore reluctant to get too bearish on the precious metal,” said INTL FCStone analyst Edward Meir.
Meanwhile, spot silver edged up 0.1 percent, to $18 per ounce, while platinum also inched up 0.3 percent, to $1,012.80 as of 0529 GMT.
Palladium was mostly unchanged at $789.90 per ounce, after touching its highest since Jan. 24 at $792.70 earlier in the session.
(Reporting by Arpan Varghese in Bengaluru; Editing by Joseph Radford)