central bankers Archives

Risk Update: Belief That Central Bank Methods Work

by Jeff Clark – Hard Assets Alliance :

It’s painfully clear that Swiss monetary policy failed to work as planned—they pegged their currency to the euro just three years earlier and were unable to sustain it. On top of that, the SNB now charges commercial depositors 0.75% for the privilege of holding their money! Even some retail and private banks have begun to apply the negative rates on large customer deposits.

And yet they’re not the only country with negative interest rates: Two-year government bonds are also negative in…

• Germany
• Finland
• Austria
• Denmark
• France
• Holland
• Belgium
• Slovakia
• Sweden
• Japan

According to the Financial Times, there is now $3.6 trillion of government debt around the world with negative interest rates!

Meanwhile, Japan continues to inject $700 billion a year into their financial system, which equals 12% of their GDP. Their debt now exceeds 250% of GDP, and the government uses more than 25% of tax revenue just to pay the interest on that debt!

Then the ECB unveiled an expanded program where it will increase asset purchases to €60 billion a month through at least September 2016, its biggest push yet, to fend off deflation and revive the economy. So, why are they expanding the program when the prior money-printing efforts didn’t work? What will they do if bigger isn’t better and the program continues to fail?

Central bankers are taking the easy way out, because printing money (QE) reduces the incentive for governments to make structural reforms. This tells us that the ongoing experiments by central bankers—the largest such experiments ever conducted in history—will not accomplish what they had hoped and will hand us some very unpleasant consequences.

We live in a central bank-controlled world more than ever before, yet the odds of central planners steering us out of the corner they’ve painted us all into are remote. The gold you hold will offer a measure of protection against the fallout when it becomes obvious to the mainstream that failure is likely.

Article originally posted in the February issue of Smart Metals Investor at HardAssetsAlliance.com.

Another Reason to Diversify into Precious Metals

by the Hard Assets Alliance Team:

Once upon a time, interest rates conveyed critical information about securities: the higher the rate, the riskier the investment.

Today, bond yields communicate little about underlying security risk and are arguably misleading. Consider the 1.57% yield on 10-year Spanish bonds. That level of return is hardly commensurate for a country suffering 23.9% unemployment.

The culprit for deceptive interest rates is a familiar one. Across the globe, central banks have suppressed rates to fend off crises or boost sagging economies—and zero percent is not the lowest band for this type of manipulation.

As an investor interested in precious metals, you’ve likely watched the growing number of countries shifting from zero interest rate policies (ZIRP) to negative interest rate policies (NIRP). Government bond yields in Germany, Switzerland, Japan, France, Holland, Denmark, and a handful of other countries have recently turned negative.

Negative real interest rates are nothing new, but we are talking about governments actually charging for the privilege of parking money with them. Yet another good reason to diversify into precious metals.

This shift from zero interest rate policies to negative interest rate policies epitomizes how detached financial markets have become from reality. More alarming, these radical polices exacerbate existing market distortions. By punishing bondholders, central bankers are forcing investors up the risk ladder, whether it be into junk bonds or equities.

You are better off tucking cash under your mattress than paying some profligate government to hold your money. But of course, there’s a better way. The utter insanity of a NIRP illustrates the critical importance of diversifying away from fiat currencies… and into previous metals.

Article originally posted in the February issue of Smart Metals Investor at HardAssetsAlliance.com.

Investors Are Coming to Grips with Reality

by Justin Spittler – Hard Assets Alliance:

Today’s financial markets have acquired a knack for ingesting bad news without so much as a hiccup. Lately, that same resiliency—or more appropriately, complacency—has come under pressure.

After lying dormant for months, volatility has come storming back with a vengeance. Investors are finally coming to their senses—much to the delight of the precious metals community.

Patience Wearing Thin

The problems facing the global economy didn’t come out of nowhere. It just took a jolt of volatility to put them in the spotlight—and you can thank the soaring US dollar and the collapse of energy prices for putting investors on high alert.

Of course, there are perks to a strong dollar and cheap energy. A strong dollar makes imported goods more affordable for American consumers, while it’s estimated that weak oil prices will put roughly $500 into the wallet of the average American driver. While neither is positive for precious metals, the euphoria won’t last long.

An appreciating US dollar makes American exports less competitive. Depressed oil prices could cripple the domestic energy revolution, which has been the backbone of the US recovery. The breakout of the dollar also threatens to derail commodity-centric emerging markets, particularly nations that have relied on cheap credit for growth.

Monetary Tools Becoming Dull

The precarious state of the global economy doesn’t just have investors on edge. Policymakers in countries across the globe face a dilemma: risk an economic crash by stepping away from their maligned economies, or provide their debt-addicted with another dose of stimulus. It’s a lose-lose situation.

Yet it’s a no-brainer for central bankers, whose greatest fear is deflation.

The situation is no different in the United States even though the Federal Reserve ended its quantitative easing program in October. Remember, the Fed has said it will be “patient” in raising rates; and you can bet Yellen will fire up the printing press the second that the US economy shows symptoms of flatlining.

Unfortunately, the next round of stimulus won’t be as effective as previous installments, and investors seem to be waking up to that harsh reality.

Perceptions Change; the Case for Gold Stays the Same

As an analyst, I spend most of my days sifting through data, crunching numbers, and gathering different perspectives in an attempt to gain clues about the future. And yet, I’ll be the first to admit that economic forecasting is a silly process. Nonetheless, my feeling is that gold has hit a bottom.

That’s probably something you’re sick of hearing. Some in the precious metals community have been calling an end to the gold market rut for months… others for much longer.

Why do I think that this time is different? It has little to do with fundamentals. The case for owning gold has changed little recently, although we’re receiving more and more reminders. What’s changing is the perception of Western investors.

After witnessing unconventional monetary policies push financial markets to new heights, investors seem to be losing faith in this grand experiment. This uneasy feeling is starting to bring them back to gold—the most crisis-proof asset of all.

Luckily, there’s still an opportunity for investors to pick up gold while incurring little downside risk. There are few sellers at today’s prices, and those holding gold are what I like to call “strong hands.”

Even if gold hits a few speed bumps throughout the year, investors will sleep easier knowing that some of their wealth is held in the most time-tested of all assets.

Article originally posted in the January issue of Smart Metals Investor at HardAssetsAlliance.com.

Bear Market Extremes Equals Bull Market Wealth

by Jeff Clark – Hard Assets Alliance:

I want to congratulate you.

Gold and silver have been in a downtrend for over three years. And yet you’ve held on.

In spite of violent selloffs and a prolonged bear turn in the market, you’ve been patient. You see the big picture. You’ve steeled your emotions and rebuffed the negative mantra from the mainstream. You get it. You understand that sooner or later the fiscal and monetary path the world has embraced and praised won’t work.

And you will soon be rewarded. I can’t give you a date, but I can tell you it’s a question of when, not if.

How can I make such a claim?

History.

The Gold Market at Extremes

I measured the duration and degree of every bear market in gold and silver in modern history and compared them to our current situation. It’s quite revealing.

In each chart, the black line represents our current bear market. Here are the data for gold since the early 1970s:

Gold has endured deeper selloffs, but as you can see, it’s one of the longest on record. And if the price were to slip further and close below $1,142 (on a fix basis), it would officially be the longest bear market in modern history. I’ll also point out that gold declined 1.8% last year, making 2013/2014 the first back-to-back annual loss since 1997/1998.

Silver’s performance is even more dramatic. Since the 1960s, only one bear market has registered a bigger price decline, and only two were longer (assuming the bottom was $15.28 on November 6 last year).

These data all point to a bear market that has reached an extreme level.

That’s not to say prices can’t go lower, but history suggests that the end to the downtrend is close, if not already behind us. Your patience will soon get a vacation.

But does that mean the price is ready to take off again?

Gold Is Insurance, Not an Investment

While you can sell gold for a profit or a loss like any other investment, the most accurate way to view gold is as an alternate currency—the only one history has shown to provide monetary protection during a major currency devaluation. And the ongoing currency dilution around the globe today is comparable to some of the most notorious in history.

Yes, I think we’ll all make a lot of money in our HAA accounts. But gold’s primary role as insurance is more important right now.

Consider the risks we investors and consumers face:

• What if banks begin lending out the money the Fed has loaned them?

• What if the Fed decides it needs another round of QE, regardless of what they call it?

• What if interest rates rise, whether initiated by the Fed or pushed higher by the markets?

• What happens when—not if—the stock market enters a correction and mainstream investors begin losing money? What if the average investor remembers 2008 and decides to bail? How will the Fed react?

• What will be the mainstream reaction if the real estate market goes flat or reverses? How would the Fed respond?

• What happens if the economy legitimately grows—and kickstarts inflation?

• What happens if the debt load overwhelms the Fed’s printing efforts? Will they give up or double down?

• What if a developed country selectively or fully defaults on its debt?

• What if we reach a tipping point where other countries tire of the nonstop currency dilution and slow or reverse their treasury purchases?

• What happens if the markets lose confidence in the Fed or other central banks’ ability to manage their respective economies and markets?

• What if politicians don’t institute serious fiscal reforms, and Fed interventions are reduced to nothing more than monetizing deficit spending by causing inflation?

• How would global central bankers respond if deflation takes root?

• What happens if the geopolitical conflicts deteriorate and lead to war?

• What happens when—not if—control of the gold market shifts to China, away from North America?

The point is that we face increased systemic risk. Central bankers have painted themselves into a corner, and there is no easy exit from their policy mistakes. Since these issues have not been dealt with effectively, and political leaders show no sign of doing so, systemic risk has greatly increased. Sooner or later there must be a reckoning—the math doesn’t work, and history has demonstrated the outcome of such fiscal setups numerous times. Certainly, more caution is warranted than what most mainstream commentators suggest.

This is a major reason why I continue to buy gold and silver, and why I recommend you do, too. It’s not a speculation on rapid gains, but essential wealth insurance. In fact, the next bull market in gold will likely be spurred by one or more of the above risks materializing.

So instead of wondering if the gold price has bottomed, I recommend asking these questions:

• How much have you personally allocated to precious metals to offset the risk of a currency or similar crisis of major proportion? The need for monetary insurance against those risks is high, and rising. Given the elevated risk, a commensurate level of insurance is necessary. Fire insurance is designed to provide enough funds to rebuild your entire home, not just the basement. So one ounce of gold or one tube of silver won’t cut it.

• Does your portfolio stand on a foundation of mostly paper assets? If stocks and bonds comprise the lion’s share of your investments, your overall investment risk is very high.

• How correlated are your investments to the stock market? If mainstream investments decline, how will your overall portfolio be impacted? Gold and the S&P are typically negatively correlated; with both at extremes, now is a good time to make sure you strike the right balance.

• Have you stored some assets outside your political jurisdiction? The prospect of capital controls has grown.

In other words, it is less about the exact price and date of the bottom for this market and more about how you will protect yourself against the risks outlined above—they are real, in spite of what we read in mainstream headlines. If any transpire, they will wreak havoc on your investment portfolio and your ability to maintain your current lifestyle. That’s worth insuring.

In the meantime, the extreme nature of the current bear market means that current prices are a potentially life-changing opportunity.

Join me in creating bull market wealth—by taking advantage of current bear market prices.

Article originally posted in the January issue of Smart Metals Investor at HardAssetsAlliance.com.

Capitalism and Creditism and Corporatism, Oh My!

submitted by jwithrow.

Journal of a Wayward Philosopher
Capitalism and Creditism and Corporatism, Oh My!

December 26, 2014
Hot Springs, VA

The S&P opened at $2,084 today. Gold is flat around $1,198 per ounce. Oil is still checking in at $56 per barrel. Bitcoin is at $326 per BTC, and the 10-year Treasury rate opened at 2.24% today.

All is quiet in the markets this holiday season. We may look back on this time period in a few years and say that we were presented with a tremendous opportunity to buy beaten down energy and commodity stocks during the tax-loss selling season of 2014. We probably will say that we had a great opportunity to accumulate some gold throughout 2014 as well. Just be sure to follow your asset allocation model if you decide to capitalize on these opportunities.

Yesterday we examined our current economic circumstances and realized that we were employing capitalism but we had no capital! Today we must ask the question: How can you have capitalism without any capital?

The obvious answer is you can’t. It’s like making potato soup without potatoes – try as you might it just won’t work.

So if we don’t have capitalism then what do we have? My answer is that we have some weird blend of creditism and corporatism. Governments have colluded with large corporate interests, especially in the commercial banking sector, to rig the economy in their favor.

Though we could go back further, let’s start our story (from the American perspective) at the end of World War II. Prior to the war governments didn’t think they could do everything they wanted due to financial constraints. That didn’t stop them from doing half of what they wanted to do but it forced them to make a choice. Did they want guns (warfare) or butter (welfare)?

The U.S. came out of WWII looking like gold… literally. The U.S. economy was the least damaged by the war which ravaged Europe and it came out holding the world’s largest stash of gold reserves. This relative economic strength gave U.S. politicians the wrong idea: they started to think they might not need to make any choices. Then President Lyndon Johnson came along and he wasn’t shy about it – guns and butter it will be!

So we got the Vietnam War and the Great Society together! And gold steadily flowed out of the U.S. Treasury until President Nixon pulled the switch-a-roo in 1971 and closed the gold window. All of a sudden the international monetary system became elastic. With no more gold restraint, dollars and yen and pounds started to pile up as central banks and commercial banks discovered they could conjure money into existence largely at will. But this was a different kind of money than the gold-backed variety – it was credit-based.

This credit-based money was extremely popular and the money supply grew 50-fold between World War II and 2008. Everyone got used to a constantly expanding money supply and now both the economy and asset prices are dependent upon it. It is the expansion of credit, not real capital, that supports all of the federal spending programs, all of the wars in the Middle East, the mass imports from China and Vietnam, the new housing developments and shopping malls in Middle America, the massive car lots across the country, most of the skyscrapers dotting the city skies, and current real estate and stock market valuations.

Here’s a fun example: do you know how much debt is still owed on the tax-funded Meadowlands Sports Complex in New Jersey? I’ll tell you: more than $100 million is still owed on the facility. Oh, and I am talking about the old Meadowlands Stadium that was closed and demolished in 2009 to make way for a new $1.6 billion facility now known as MetLife Stadium. New Jersey taxpayers are still on the hook for $100 million on a sports complex that no longer exists! New Jersey built the stadium, used the stadium, and demolished the stadium but never bothered to pay for it.

Such nonsense can only occur in a world of ever-expanding credit-based funny money.

This applies to the massive bank bailouts and banker bonuses that one side of the fictitious aisle rails against just as it applies to the massive welfare programs that the other side of the false political-divide takes issue with. None of it exists without perpetual credit expansion; none of it exists without creditism and corporatism.

Capitalism would have nothing to do with any of it.

It is important to understand that we have only seen one side of the credit cycle within the current monetary system. Credit has been expanding constantly for more than forty years now. But if we look around our world we can clearly see that nothing expands forever. Waves rise then fall. Trees grow then mature. Balloons inflate then pop.

One day credit will have to contract; it is inevitable. What happens when that day comes? Ludwig von Mises, the late Austrian School economist, offered some insight:

“There is no means of avoiding a final collapse of a boom brought about by credit expansion. The alternative is only whether the crisis should come sooner as a result of a voluntary abandonment of further credit expansion or later as a final and total catastrophe of the currency system involved.”

Was he right? Time will tell.

More to come,

Joe Withrow
Wayward Philosopher

For more of Joe’s thoughts on the “Great Reset” and the fiat monetary system please read “The Individual is Rising” which is available at http://www.theindividualisrising.com/. The book is also available on Amazon in both paperback and Kindle editions.