Gold Macro

Not So Fast

On November 20, 2020

Post US election and Vaccine announcement euphoria seems to have morphed into range bound tranquillity for financial markets this week, as we all await the source of the next “stimulus”. The “peaceful” nature of financial markets right now is an amazing feat, given what’s actually happening and happened to the world economy this year, so far.

Before we get too carried away with this newfound financial peace let’s have a quick update on the state of the, not over, US election! Starting with a summary of how a US election normally works.

Elections held early November.
Votes are tallied in the presence of officials from both parties.
Provided officials are present during votes tallies and there no credible accusations of fraud or software glitches, the vote tallies are ratified.
If the vote margin between winner and loser is 0.5% or smaller, recount is required.
If the margin between candidates is larger than 0.5% and someone wants to dispute the result, they can pay for a recount at a cost of around $3m per state.
Once a recount is complete, or a recount is not necessary, the individual states formally declare the winner on December 14^th, when they officially cast their electoral college votes.
Then, in early January of the next year, congress meets to count the vote and declare the actual winner.
The new President is sworn into office on January 20^th.

Did you notice any mention of the media in the process above?

Nope, as it turns out, despite best efforts, the media cannot decide the winner, despite well organised commitment.

Even here in Strayafornia, one expects the left leaning ABC lynch mob to promote whatever virtuous narrative they see fit, but everyone else as well? News, 7, 9, AFR (9), et al….or perhaps we missed something, again. It’s just been poorly constructed populist journalism wherever you look, or worse.

It is quite understandable that Trump is a (un)popular target. Sheer buffoonery and a failure to adhere to any 2016 election commitments may have contributed! But as it was in 2016, there are/were only 2 poor choices for a superpower in secular decline. It does matter that, as it was in 2016, “the polls” are/were COMPLETELY WRONG, again.

As it stands, Biden is not President elect, and, at the time of this writing no swing state has declared Joe Biden as the winner of its electoral college votes!! This is just a fact; the media cannot do anything about it.

The fact needs to be stated that this is no ordinary election, and it has quite a way to play so we suggest that for reasons of close margins and fraud accusations, one might try for oneself to ignore the hysteria (no matter what you wish for) and just watch this one play out.

We could go into more detail but don’t want to be cancelled by a woke “twitter mob”, and this blog is for economic commentary anyway! One thing is for sure, whoever is in power in the US, will not change this budgetary structure below.

Presenting, JUST ONE MONTH!

And estimated for 2020. Quite the sight.

Moving on, did anyone else see any irony in the timing of all the recent vaccine announcements? Financial markets didn’t, it was like someone screamed, “alright, everyone move to the other side of the boat”!! Energy stocks supercharged, Airlines, Travel Co’s and, especially Healthcare, all on their way to the moon.

Gold down (2%), Bonds sold heavily (means rates rose), all on the Pfizer Vaccine news, before a more measured Moderna Vaccine announcement this week. Interestingly, the Pfizer announcement was good enough for the Company’s CEO, Albert Bourla, to sell 65% of his stock, ON THE SAME DAY AS the announcement. Hmmm!! At the very least, poor optics!! As Dr Bourla’s sale portends, this 90% vaccine has a long way to roll out.

In the meantime, in the US and Europe (Australia?), lockdowns are back, despite the economic consequences. As we’ve already discovered, the economic and social consequences of hard lockdowns are irrelevant. Or are they? This divergence below has been an effective leading indicator, one of them is going to be right.

As if the economic consequences of this Corona period aren’t enough to bear, co-ordinated Global Climate Change agendas seem to have cranked to 11 over the last few weeks. The noise seems to be coming from everywhere. To be sure you know what we’re potentially dealing with, let’s let the Virtuous European Climate Champs explain.

The European Green Deal.

The Green Deal formulated by the European Commission is based on three main goals:

eliminating net greenhouse gas emissions by 2050;
decoupling economic growth from resource use; and
leaving no person and no place behind.

How they pay for this or anything else “green” in this economic climate is no mystery, out of thin air, newly created digital. The sheer amount of Fiat money creation needed to appease Climate Change agendas as well as a Covid Economy without a Vaccine until, at the earliest, April next year is truly mind boggling.

To think this can be done without consequence is pure fantasy and luck will favour the prepared investor. A well-diversified, prepared investor. Which brings us to the amazingly under owned precious metals market.

On this front, it’s been a horrible couple of weeks for the miners, despite a fairly stable USD gold price, which should not surprise anyone that knows this is generally what happens when the global economy goes though periods of “fixed”. Holders of Gold mining shares are some serious nervous nellies, traumatised by 2012 to 2018, a finger constantly on the sell button!! Pushing through buying opportunities, again?

The reality is that the economic, geopolitical and monetary risks that confront the world today are as great as any seen in living memory. We expect many more financial analysts to join the Goldman Sachs recent upgrade to its gold price forecast on the back on increased inflationary and systemic risks.

“QE to infinity” as we and others have dubbed it does not appear reckless as financial “media” completely fails to analyse the real monetary risks and continues to cheer-lead our central banks as “saviours”!!

Most recently The Bank of England has again boosted its quantitative easing (QE) “stimulus” package by another £150 billion, as central bankers use the coronavirus and attendant lockdowns to justify even greater currency creation in order to buy vulnerable government bonds and other assets, as well as funding budget surpluses.

Same as it ever was!!

Save the planet!

Countdown

By Gold Macro

On October 26, 2020

In Blog

Welcome to a new week, the last of October 2020!

Another week of markets treading water whilst awaiting the next “stimulus” fix, knowing that its coming down they pipe, for if it didn’t, well……let’s not worry about letting air out of MOAB.

It feels fitting to have a US presidential election in late 2020, same day as the Melbourne Cup, November 3^rd and almost as hard to pick a winner.

2020, the year that Covid “green lit”, any and all unconventional fiscal and monetary policies as conventional, by all sides of politics.

We mean ALL sides of politics, even the current conservative Australian administration recently handed down spending, deficit and debt policies that had its “Left” Labor party rivals drooling with envy.

And currently, in the US, the current “new” fiscal stimulus package is being held up by an argument over a mere USD200b, in a (another) multi trillion dollar package.

All this is happening just as the populist “Modern Monetary Theorists” are gaining serious traction. Tearing down any remaining resemblance of fiscal restraint appears to be the primary objective. After listening to their main cheerleader this week (through Macro Voices), Professor Stephanie Kelton, we think they’ll get there. Very persuasive.

This MMT lot believe the only problem with what money printing has been done so far is the size, or more specifically, lack of “size”!!! As in not enough money printing and “stimulus”. An attractive proposition to any Bureaucrat.

So, as they make their way into the corridors of US Fed and ECB policy buildings, they’ll stretch your imagination beyond what you thought was possible. How much money can a government can truly print, WITHOUT consequence. We’re going to find out very soon. More on this to follow over the next few weeks.

As we’ve mentioned before, it’s not really who wins in the US that matters, from a monetary point of view, what matters is, for now, US treasuries still occupy the “bedrock” of the current financial system.

It’s also important to remember the contribution, for now, of the US economy to global GDP. Represented below.

The US represents 4% of the world’s population and 24.42% of GDP, according to World Bank numbers.

Unfortunately, it’s hard to watch, but the economic and ideological social divides in the US seem irreconcilable right now.

The financial policy outcome of who wins the US election should matter little to investors portfolio’s, what matters is recognition that the financial system as we’ve know it, since Brenton Woods in 1944, is in its last innings.

Add this to the, hard to watch, seemingly irreconcilable, social and economic divides in the US and it makes for some worrying reading.

Investors are well advised to steel themselves for more violation of their fiscal peace and the associated response of Global Central banks to prevent any change to status quo.

Recognising key risks is essential. One key risk being written off as “manageable” by the MMT crew is inflation. The confidence of the aforementioned Professor Kelton to control inflation, from where and whence it came, is outstanding. It’s just not been done before.

Some central banks are directly warning of inflation, for example, the Reserve Bank of Australia (RBA) had this to say a couple of weeks ago, “not to increase the cash rate target until progress is being made towards full employment and it is confident that inflation will be sustainably within the 2–3 per cent target band’.

So, interest rates are almost 0% and inflation is x + whatever they say it is, or whatever the increase is in your living costs?? 3%+ is ok?

How does one plan to combat this? It’s really time to think about one’s asset allocation with this background.

We are moving to a different phase now.

The very consistent message from our benevolent Central banks, particularly in NZ and AUS is we should worry about how low Gov debt is and increase it immediately. For those feeling a little alarmed, the RBA had this chart below in a presentation from earlier this month. We’ve got so much “catching up to do”, they say, if you want to catch Japan that is.

We also now know, from the last six months, directly injecting money into peoples bank accounts for doing nothing, has no downside. No wonder MMT is super popular.

With all this “background” above we still find it amazing how few investors own gold, let alone profitable, low cost producers.

We might touch on the possibility of gold returning, in some form, to the bedrock of this financial system in coming weeks.

For now, it’s fair to say that just about anyone can see that we stand at the doorstep of an epochal change in the global monetary system. The Great Keynesian Experiment is failing, as the monetary growth needed to service the existing global debt is finally exceeding the capacity of the system to provide for itself. Put another way, the global central banks are now permanently in a mode where only the continual and rapid creation of additional fiat currency can feed The Beast of exponential debt.

We wonder what former Managing Director of the IMF and current European Central Bank President, Madame Christine Madeleine Odette Lagarde, has to say about all this.

Lacking Exposure

By Gold Macro

On September 21, 2020

In Blog

Looks like we’re going to start the week like any other over the past, however many, years, all eyes on central banks.

The rhetoric will be the same, “whilst we don’t believe there is a bubble in any asset market, we’ll do every accommodation we can think of to make sure that we replace all air currently leaving any bubble with more air into any bubble, that doesn’t exist”.

Accommodation like, money printing on scale never seen, like below:

And, like last week from the US Fed, the promise of low interests rates ~~until~~ almost forever. Even in Australia, rates are arguably already negative.

Even though “there is no bubble”, the bubble has created a new type of speculator, the types that are using the fresh $ their benevolent .gov has gifted them and instead of pursuing a weekend on sports bet, have migrated to the stock market.

The reason is represented in the background of the “poster child” of this new type of “investor” below, Dave Portnoy. Cripes, this guy has been so “hot” in recent months, he’s even met the POTUS.

The problem is, through unhinged self-belief and a solid dose of leverage he’s feeling quite a bit of pain right now. But he knows it’ll be ok because, “stocks only go up”, or ‘buy the dip”, has been a solid strategy over the last 12 years or so.

Now here is where things get interesting. Dave may or may not realise that his entire investment strategy is completely dependent on the Europeans, Japanese and US Fed catching up to the Japanese and Swiss Central banks in the money printing caper, to keep the asset bubbles afloat, that don’t exist.

See chart below and don’t say we never send you anything positive. There “appears” to be so much MORE to do!!

We also understand that these international Central Banks machinations may seem a long way from the business news that may come through domestic news feeds but please remember the financial system as it exists today, has the USD as a global reserve currency, of sorts. This is why it matters most!!

As such, US Treasuries have been the bedrock of this current system since inception post WW2, give or take a few weeks, like the US removing any “relevance “ of gold to the USD in 1971.

The largest looming problem to this system is the perilous state of US finances, even compared to “normal” and its relationship to its currency.

Those that argue the point of “the clean dirtiest shirt” in defence of the US dollar are also the ones that argue there can never be change to this system as there is no viable alternative. We certainly agree with the second point but as to the first, not so much.

Here’s some context as to the trajectory of the US budget!

Now, if you add the quadrillion pieces of derivative paper attached to every asset class……don’t worry, it all nets out.

With the USD looking increasingly weak as a “petrodollar” reserve currency, particularly in view of battery tech emergence, how amazing that it’s taken this long for some asset managers and private family offices to start allocating some serious money to gold, either through shares or actual bullion. It is interesting that most private investors still use ETF’s for precious metal exposure.

Even so, according to many analysts, gold as a percentage of overall investable assets sits somewhere between 0.4% and 0.5% currently versus a multi decade average of over 5%, including multi-year allocations of 10% not being uncommon.

It was with interest that when we came across this chart in Marc Faber’s latest monthly analysis.

Global Family Offices’ Strategic Asset Allocation 2019ealth

So, even professional family offices have less than a 1% exposure to gold right now? Even with the current money printing madness and inflationary threats breathing down our necks?

It’s hard to see this staying under 1% for much longer. Precious metals have the smallest market share of savings and investment products they’ve ever had globally. The question will be, what price will those late to the party have to pay for entrance?

We look forward to collating some commentary on allocating to Precious Metals in the near future!! In the meantime, this 1930’s analogue for equities remains in play!! Dead cat bounce anyone?