On this week’s SD Weekly Metals & Markets, gold expert Alasdair Macleod joins The Doc & Eric Dubin to discuss:
- QEternity: Indications of a renewed bias of global monetary easing
- Negative GOFO rates continue, physical gold supply tightening again
- Bond market implications of the Federal Reserve as bond “buyer of last resort”- how much longer can the Fed maintain control of interest rates?
- China’s golden global hoover: China’s intentions vis-à-vis the US Dollar as reserve and trade settlement currency and how gold fits into China’s strategy
- Alasdair provides an inside look at a Swiss refiner: “They are working 24 hours a day, 7 days a week turning every ounce of gold they see into 1 kilo bars headed to China“.
We’re pleased to have Alasdair Macleod join us this week. We consider Alasdair among the most insightful analysts covering the gold and silver markets. Going forward, we’ll periodically welcome him as a guest. He serves as the research director at GoldMoney. Click here to follow his regular reports.
This week brought further confirmation that global loose monetary policy remains the bias for most nations. Canadian monetary authorities were the latest to indicate their preference for loose monetary policy beyond market expectations. This translated into a rapid decline in the Canadian dollar.
Meanwhile, France signaled this week displeasure with the continued rise in the Euro, a headwind for European exports. Among major central banks, the ECB has kept liquidity relatively tight. That has been possible given that part of the $85 billion in liquidity created by the Federal Reserve each month flows to US-based foreign subsidiaries of European Financial institutions. That helps to shore-up the European banking system, courtesy of the US tax payer while giving the ECB a free ride. But as the Euro moves towards 1.40 against the dollar, expect to see more noise about the need for the ECB to be a bit more accommodative. Whether or not the ECB acts remains to be seen, and Germany remains biased against ECB easing. But German elections are now in the rear-view mirror, presenting less of a risk to German politicians in the event the Euro rises into the upper 1.40 range to the US dollar and calls to “do something” become deafening. Gold and silver investors would be wise to keep an eye on these developments. If the ECB joins the global easing party, that would be very bullish for precious metals.
Since early September, oil has been transversing a relatively steady decline, driven in part by a reduction in risk premium as the US backed off from a belligerent stance against Syria. But this trend is also linked to the perception that US economic growth will slow in the months ahead as employers grapple with the impacts of Obamacare. This will work in Janet Yellen’s favor as she takes over the reins of the Federal Reserve. Conventional (managed!) inflation expectations will remain tame, and Yellen has consistently stressed that so long as the Fed’s inflation target of 2% is not at risk of being breached, she will favor continued Quantitative Easing.
The US stock market has been the beneficiary of all this monetary largess. Traditional notions of sovereign debt from nations like the United States serving as the “risk free” asset of choice now seem a quaint memory. As the Fed continues to crank out liquidity, funds are flowing into the stock market as the “preferred” outlet for monetary inflation.
But all is not well. US consumer confidence has been on a steady decline over the last three months, hitting a new low for 2013. Typically, there’s a high correlation between the stock market and consumer confidence. That is starting to break down over the short-term. Most Americans are not benefiting from the rise in equities. The average American’s exposure to equities has declined over the past two decades and there’s no reason to expect that trend to change anytime soon. Nevertheless, given continued monetary easing the American stock market will likely surpass the expectations of many bulls. The bond market has been in a bubble, to be sure. Stocks might very well join bonds in bubblicious territory over the coming six months, which will only increase the potential for unintended consequences given that bond yields MUST eventually rise.
Financial repression can continue on longer than anyone expects – even for years to come. Nevertheless, the rising stock market is not driven by earnings growth. As these dynamics continue, overall systemic risk will increase. We could very easily be setting up for a nasty correction in equities in 2014, to which Yellen will no doubt respond with ever more liquidity.
(Charts courtesy of ZeroHedge)
Switching gears, SilverDoctors reported on Eric Sprott’s open letter to the World Gold Council earlier this week. We highly recommend reading the letter if you missed it. The WGC responded to Sprott’s analysis – sort of. Barron’s reported on WGC’s response, which included:
“Demand has been robust, particularly in Asia, both this year and over the previous decade – as we have consistently highlighted. The first half of the year has seen records set in terms of gold demand across a number of countries and sectors and the World Gold Council has been at the forefront in disseminating and explaining these outstanding figures.
The World Gold Council has been sharing gold demand data for decades and we place a great emphasis on the quality of our data. Providing greater transparency and accuracy to the supply and demand model is a process in which the World Gold Council is heavily engaged on an ongoing basis.
The use of import data as a proxy to measure gold demand is somewhat simplistic and does not take into account factors such as round-tripping and stocking/de-stocking. To effectively measure gold demand, a more detailed and holistic analysis is required.
Every ounce of gold purchased has to be supplied and, with constrained production, recycling has grown to meet the unprecedented demand we have described. Providing more transparency and accuracy to the supply and demand model is an ongoing process in which we are heavily engaged.”
Needless to say, that’s a pretty weak response to Mr. Sprott’s detailed analysis. Read Mr. Sprott’s letter and judge for yourself.
Bottom-line: gold and silver will remain volatile throughout the rest of the year, but we expect higher prices going forward. The equivalent of this year’s entire gold mine supply has already been absorbed by Asia. Add to the mix a return of negative GOFO rates, rising premiums in Asia, and QE as far as the eye can see and we have the conditions for higher prices going forward. Somebody send some aspirin to Janet Yellen. She’s going to need it.
Enjoy the weekend! — Eric Dubin
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