Archive for fiscal policy
(Posted: April 4, 2013)
Gold has certainly taken a beating in recent days, giving up all of the gains attained during the Cyprus crisis — and down nearly 20 percent from its all-time high back in September 2011.
And, now having suffered two consecutive quarterly declines for the first time since early 2001, some analysts and investors are abandoning the yellow metal, proclaiming that gold’s decade-long bull market has run its course.
I’m no “gold bug” â€“ but I couldn’t disagree more . . . based on solid reasoning and objective analysis.
Short-Term Shock Therapy
What the gold market needs to move higher is a good dose of Zoloft or perhaps, even more extreme, a high-voltage jolt of electroshock therapy to jog the metalâ€™s price out of its current state of depression.
Perhaps this will come from across the Atlantic â€“ where recessions are worsening, social discord is on the rise, and the euro appears vulnerable to further capital flight.
Maybe, unpredictably, it will come from some geopolitical upset â€“ on the Korean Peninsula or in the Middle East.
Or, possibly, it will come from Washingtonâ€™s inability to deal with its mountain of debt, lack of fiscal restraint, or the insidious and still barely apparent effects of sequestration on economic activity and employment.
More likely, the jolt needed to set gold firmly on its long-term upward trajectory will come from a renewed recognition by the Fed and the financial markets that still more monetary accommodation is needed to prevent the economy from stalling.Â Thatâ€™s what fueled the September 2011 run to record high gold prices . . . and this may be what does it again.
For now, goldâ€™s short-term prospects remain uncertain. We could very easily see a further retreat, possibly to $1520 or even lower . . . but much of the recent selling is also price-sensitive — coming from gold ETFs and “paper gold” products in futures and other derivative markets — and will diminish quickly if prices dip much lower and traders begin to bet on the long side of the market.
Meanwhile, physical demand â€“ from emerging-economy central banks and the private sectors in China and other Asian markets â€“ remains strong and can be expected to strengthen further if prices continue their retreat.Â As in the past, price-elastic physical demand will provide some downside insurance.
Gold’s short-term direction may depend largely upon the flow of outside news and black swan events, those surprises that seem to come out of the blue, rather than the internal fundamentals of the gold market. Â Indeed, there is no telling whether the next move will be up or down.
What I can say, however, is that the long-term bull market remains intact . . . and there will be sizable rewards for those with patience who stay the course.
I can also tell you that central bank reserve managers are not worried their gold assets will depreciate.Â Indeed, they continue to buy more. Â But many are worried about the prospective depreciation in the value of their U.S. dollar holdings and view gold as a legitimate monetary asset, diversifier, and insurance policy.
So what are the factors and forces likely to push gold prices higher?
- First, the U.S. economy is doing worse than generally perceived — and thanks to recession in Europe, sequestration in America, and an enfeebled consumer on both sides of the Atlantic we are heading into economic doldrums or worse, a full-blown recession later this year. Anyone who thinks the U.S. economy is really in a sustainable recovery is just kidding themselves. ??As a consequence, the Fed will have no choice but to speed up its money-printing machine, even as inflation expectations begin rising.Â Remember it was the successive waves of quantitative easing that juiced gold up to its record high of $1,924 in September 2011.Â The adoption of still-more aggressive monetary easing by the Fed later this year or in 2014 will again set gold on fire. Other major central banks will be under pressure to reflate along with the U.S. — and some, like the Bank of Japan — are already greasing their printing presses.
- Second, the European economy — and the euro-zone monetary system — is under tremendous strain with the stronger economies increasingly unwilling to continue bailing out the weaker economies for whom there is no room for more forced austerity. Cyprus was just a warm-up of what’s to come. And, next time, it will be a big economy like Spain or Italy that goes belly up, triggering flight from the euro into both the U.S. dollar and gold.
- Third, whatever may come, China’s appetite for gold will remain firm as the domestic market continues to mature. The introduction of new products and channels of distribution (like ETFs) will increase the efficiency of the domestic gold market . . . and increase private household demand. In fact, valuing private-sector gold holdings as a national resource, the Chinese government will continue to support and encourage private gold ownership — and the associated demand will continue to support the price of gold in the world market.
- Fourth, emerging-economy central banks will continue to accumulate gold, especially at times of price weakness when their purchases are least visible. For some, it is merely a desire to diversify reserve assets and gradually wean themselves from over-relience on the U.S. dollar and the euro, which has now been totally discredited as a reliable reserve currency. ??But for China and Russia — the two central banks with the most aggressive gold-accumulation programs — increasing their gold holdings is undoubtedly part of grander plans to have the yuan and the ruble attain reserve-currency status.
- Fifth, there has been a little recognized structural shift in the world gold market. Many of the “new” buyers of gold in recent years are accumulating gold, not as an ordinary investment to be sold at higher prices for a trading profit, but as a long-term store of wealth to be passed down to the next generation. ??This is true across Greater China where the emerging middle class has more money than ever before and has a cultural affinity and emotional attachment to the precious metal. It is true for the American and European high net worth families and the retail buyer of gold-bullion coins. And, it is true for many central bank buyers — not just China and Russia, but Mexico, South Korea, Kazakhstan, and many others — who are accumulating gold not as an investment, per se, but as a national legacy for generations to come.
Bidding Wars Ahead
Most of this newly acquired gold is in extremely â€śstrong handsâ€ť and will not come back to the market except at much higher prices. As a consequence, the available supply of gold in the marketplace to satisfy future demand — what I call “free float” — is shrinking . . . and future buyers will be forced to bid up prices to higher and higher levels in order to satisfy their hunger to own more.
Jeffrey Nichols is Managing Director of American Precious Metals Advisors consultancy group and serves as Senior Economic Advisor to Rosland Capital LLC.
He has been a leading precious metals economist for over three decades. His clients have included central banks, mining companies, national mints, investment funds, trading firms, jewelry manufacturers and others with an interest in precious metals markets.
In addition to publishing his views online at www.NicholsOnGold.com, Nichols tweets regularly @NicholsOnGold
(Posted: March 15, 2013)
Gold bears have been a gleeful group of late, pointing to the recent decline in gold exchange-traded fund holdings as evidence of investor disinterest in the yellow metal.Â Gold bears also see the market’s rather lackluster performance over the past year and a half - and the failure of prices to move higher - as further evidence the decade-long bull market has run its course.
Yes, gold has retreated some 20 percent from its September 2011 all-time high (near $1,924 an ounce) to its subsequent low (just over $1,520).
Yes, Gold ETFs have seen some substantial and high-profile withdrawals in recent weeks.
These developments in no way diminish my belief that the bull market in gold has plenty of life ahead with the yellow metal’s price doubling (or more) from recent levels in the next few years.
Historically, cyclical upswings in stocks, bonds and commodities have often been measured in decades and bull markets typically end with a rapid advance to record heights followed by a swift and resounding crash.Â This looks more like equity markets today while gold’s appreciation over the past decade has been a measured advance and its recent performance bears no resemblance to a bursting bubble or a mania run its course.
The bears are also pointing to the recent strength of the U.S. dollar in world currency markets and the record highs on Wall Street as confirmation that gold is past its prime.
In my view, the appearance of dollar strength does not reflect a healthy currency.Â The U.S. dollar is merely the least unattractive contestant in a beauty pageant of ugliness.Â As such, flight capital, especially from Europe, seeking a safe haven has been gravitating to dollar-denominated U.S. Treasury debt.
Nor is the record-breaking streak on Wall Street a sign of a healthy economy.Â Who could possibly believe that! It is a consequence of the Fed’s super-accommodative monetary policy and the need for many investors to register positive returns in a near-zero interest-rate environment.
What about the decline in global gold ETF holdings?Â For all the attention in the financial press, the nearly 10-percent decline in gold ETF holdings from their all-time high in December really tells us very little about market fundamentals and price prospects.
First, it is quite possible that some of these sales were from institutional investors choosing to buy and hold the real thing, directly and under their own control, rather than hold a piece of paper representing ownership but not directly accessible by ETF investors.
Second, many hedge funds and institutional investors are driven by the need to perform well in short term - and simply could not resist jumping on Wall Street’s bandwagon where profits in the next month or quarter looked more attractive to them.Â Once gold again shows some real life (and it will), those who jumped ship will get back onboard, expecting gold to deliver relatively attractive short-term gains.
Third, gold sold by ETFs has to go somewhere - and where it’s been going is of great importance.Â On the other side of the market have been central banks, buying for the very long term and unlikely to re-sell anytime soon, perhaps not for decades or longer.Â It’s as if the gold has been permanently removed from the marketplace and indefinitely unavailable to meet future demand - not just from ETF investors but also from investors and jewelry buyers of every stripe. This means that prices will have to rise much more than might be expected as more buyers compete for a smaller supply of available metal.
In fact, central banks are likely to continue building their gold holdings in the months and years ahead -so that available supply, what I call “free float,” will continue to shrink as gold moves from weak to strong hands.
Ironically, America’s former cold-war rivals - Russia and China - have been the biggest and most persistent central-bank buyers, followed by a diverse group of newly industrialized and emerging economy nations including Mexico, Korea, Brazil, Mexico, the Philippines, Kazakhstan, Ukraine and others.
Both Russia and China see central-bank gold accumulation as an important step toward playing more important roles in the evolving global economic and political order - while ending America’s dominance in the world monetary system.
Moreover, for those central banks under-weighted in gold and over-weighted in dollars and euros, their motivation has been to diversify their official reserve assets and reduce their exposure to the U.S. and European currencies.Â With America unable to address its Federal budget deficit and limit its mounting sovereign debt and with economic policy on both sides of the Atlantic in disarray, central banks around the world have a strong incentive to buy and hold gold as a currency hedge and insurance policy.
When the dollar looks less attractive as a safe haven and easy gains on equities look less certain to investors, gold will once again be the leading beneficiary of the Fed’s easy-money policies.Â In the meantime, support for higher gold prices will come from continued central-bank buying as well as strong private-sector demand from China, India, and retail buyers around the world.
(Posted: February 28, 2013)
Over the past year, short-term changes in the price of gold, both up and down, have largely mirrored shifting expectations of U.S. Federal Reserve monetary policy and the reaction of short-term institutional speculators operating in futures, ETF, and other “paper” derivative markets.Â The past week - with gold first falling sharply then recovering smartly, and then dropping again - has been no exception.
To little surprise, gold registered its biggest one-day gain of the year on Tuesday as Federal Reserve Board Chairman Ben Bernanke, in his semi-annual report to Congress, eased market fears of an early reversal in the central bank’s super-stimulative monetary policy.
Gold-price weakness in the past couple of weeks prior to Tuesday’s swift price rise has owed much to confusion and ambiguity about prospective Federal Reserve monetary policy - confusion prompted by the Fed’s own minutes of its January policy-setting meeting and public pronouncements by some Fed officials advocating an early reversal in the Fed’s exceptionally accommodative policies.
During Tuesday’s report to Congress, Bernanke unambiguously reiterated the central bank’s commitment to maintain its program of quantitative easing (otherwise known as printing money) thereby triggering a swift gold-price advance.
But what the Lord giveth the Lord taketh away: On Wednesday, his second day of Congressional testimony, the Fed Chairman seemed to backtrack (at least to many of the traders calling the tune for gold these days), saying the Fed might review its exit-strategy from easy-money policies some time soon.Â And, predictably, the gold price swiftly tumbled.
What’s the truth about prospective Federal Reserve monetary policies? After all, this is a crucial determinant of the future price of gold. Surely, Wednesday’s promise to review its exit-strategy is not a signal that the Fed has any intention of altering its easy money course any time soon.Â For this reason, I think the latest sell-off will be short lived as traders and other gold-market participants reassess monetary policy prospects for the year ahead.
I’m of the view that the U.S. economy is somewhat weaker than portrayed by recent official statistics and news accounts of the economy’s performance.Â Moreover, fiscal drag this year - and public uncertainty over prospective tax and spending policies - could steal as much as 2.5% from U.S. gross domestic product and push the economy into renewed recession sometime this year.
Washington’s inability to come together with a pro-growth fiscal-policy mix puts much pressure on Bernanke’s Fed to maintain - and possibly even step up - its on-going program of quantitative easing and extremely low interest rates.
Automatic across-the-board Federal spending cuts (sequestration), or even more sensibly managed spending cuts with or without some form of tax increase, or simply kicking the can down the road - whatever the outcome, fiscal drag is likely to further retard economic activity, raising the likelihood of continued - or even increased - Federal Reserve monetary accommodation in the months ahead.
What are the sources of fiscal drag?
- First, households are continuing to adjust to this New Year’s payroll tax hike by spending less;
- Second, some Federal spending cuts, either sequestered (automatic) or negotiated by Congress and the Administration, will likely take place in the weeks and months ahead;
- Third, an increase in Federal taxes, possibly by closing some of the loopholes now enjoyed by business and high-income households, will likely be agreed to sooner or later.
- And, fourth, more spending cuts and tax increases at the state and local level across the country,
In the current political and economic environment - with many households still suffering and deeply in debt, and with the unemployment rate still unacceptably high and the numbers of long-term unemployed or under-employed growing, and with fiscal drag likely to make things worse - the Fed remains the only effective policymaker able to mitigate the economic suffering.
It’s principal policy tools are monetary accommodation - otherwise know as quantitative easing through the on-going purchase of U.S. Treasury and Agency debt to the tune of $85 billion per month - and maintenance of near-zero interest rates with the hope of stimulating bank lending, consumer spending, home purchases, and business investment.
Of course, these are also inflation-producing policies - and very much pro-gold.Â They always have been - and likely always will.
For all its talk to the contrary, the Fed must be well-aware of the ultimately inflationary consequences of Â quantitative easing. Â Indeed, Bernanke’s Fed must be tacitly counting on higher inflation to erode the real burden of debt (measured by the ratio of debt to gross domestic product) in order to restore household balance sheets sufficient to encourage a meaningful recover in personal consumption, without which the economy will continue to under-perform and unemployment will remain painfully high.
(Posted: February 4, 2013)
In my view, there is a very high probability gold will surpass $2000 an ounce by year-end 2013 - and it could go much higher.Â Moreover, by mid-decade, the metal’s price could double or even triple from recent levels.
Looking backward, gold is off some $250-$260 from its September 2011 all-time high of $1924 an ounce.Â This is a decline of roughly 13 percent - in line with past bull-market corrections.
In the weeks ahead, much depends on institutional speculators at the big banks and hedge funds.Â In the past year or so, these large-scale players have made good money trading futures, options, and other leveraged derivatives based on technical trading models and the latest bit of news — economic or political — out of Washington.
As a result, gold prices have been range bound, most recently trading between $1625 and $1695.Â There is even some chance the price of gold, under pressure from speculative selling, will temporarily dip lower - but, sooner or later, we should see gold break out on the upside, surpassing $1700, and then resuming its long-term bull-market uptrend.
In brief, here are the key bull points promising higher gold prices ahead:
ContinuingÂ official-sector gold accumulation - with China and Russia leading the way as substantial buyers . . . but other emerging-economy central banks are also continuing to build their official gold reserves.
These countries consider their U.S. dollar- and euro-denominated investments to be of higher risk and are trying to raise the proportion of official reserves held in the form of physical gold.
At the same time, private-sector physical demand for investment and jewelry from China, India, and other Southeast Asian gold-friendly countries remains firm - and will continue to grow in the years ahead.
Many investors and jewelry buyers in China, Hong Kong, India, Turkey and elsewhere in Southeast Asia and the Middle East care little of the daily economic and political news out of New York, London and other Western financial centers. Â They just know it’s a good time to buy or have spare income seeking a secure home.
Importantly, theÂ recently announced introduction of gold ETFs on the Shanghai Stock ExchangeÂ (probably by mid-year) will encourage more gold accumulation by retail and individual investors, just as it has in the United States and elsewhere.
These gold buyers — both central banks and private sector — areÂ long-term hoarders, that is “strong hands” unlikely to sell back to the world market even at much higher prices. Â In fact, gold exports from China are prohibited — so any gold that enters the country is indefinitely off the world market and unavailable to meet demand elsewhere.
As a result - unbeknownst to most gold analysts and traders - the physical market is becoming increasingly tightÂ with bullion bars going on a one-way ticket to the Asian markets (as evidenced by the high bar premiums in China and Hong Kong) and to a number of central banks.
Put another way, gold is moving into strong hands — and recent buyers, be they the “man in the street” across Asia or the reserve managers at central banks — are unlikely to sell anytime soon, even at much higher prices.
Sub-par, recession-like, business conditions in the United States with persistently high unemployment — aggravated by inappropriately restrictive fiscal policy - assuresÂ continued monetary accommodation by the FedÂ for at least a couple of years. Â Ditto for Europe.
Meanwhile, if it’s politics as usual in Washington - with continued gridlock over Federal spending, taxes, and the debt ceiling - we could see the credit-rating agenciesÂ downgrade U.S. Treasury debt, sending the greenback lower and gold higher.
Further Mideast turmoil remains an unpredictable wild card that could give gold a surprising skyward kick.Â Â The possibility of regime change in Saudi Arabia and other Persian Gulf states, renewed unrest in Egypt, Syria’s civil war somehow affecting other nations in the region, hostilities between Israel and Iran - any of these could result in a big jump in oil prices, big enough to aggravate global inflation and retard economic activity.
(For more frequent commentary follow us on Twitter @NicholsOnGold)