Financial and investment markets at mid 2010 have rarely presented an equivalent challenge.
The growing concensus in early May of a V-shaped recovery abruptly shattered by June against the morphing of the international crisis of housing and banking into a sovereign debt crisis. This materialized with the exposure of the unsustainability of southern European national finance and social policy through their negative impact on the Euro. The outcome briefly made it appear that the US dollar was inherently strong. But it soon became apparent that the effect was only one of relationships, during which the Euro's decline simply accelerated to catch up with a decline that had already occurred in the US dollar.
Muddied over by the ongoing news coverage of the gulf of Mexico ecological disaster, the dawning understanding that the US housing debacle's effect had not yet played out occurred just as the inability of the federal government to continue its monetary stimulus made the dreaded W-recovery (or double-dip) loom as the more likely outcome. US consumers appeared to be spending on current needs by ceasing mortgage payments on houses in which they had no equity and from which they were unlikely to be evicted. State and municipal tax revenues continue to plunge.
New financial regulations (the so-called FINREG bill) may become within the US are expected imminently. However, the investment community feels that as presently constructed, they will serve banking interests far more than consumer interests as originally proposed.
While that works its way along, there is the realization that the post-2008 monetary easing is for the first time occurring within a fully engaged and therefore essentially closed global system, which now needs to be priced into international debt and equity markets. During the leadup to the Toronto G20 meeting, increasing angst and ink was spent on the relationship between the US dollar, the Chinese yuan (RMB) and gold. Gold morphed from an inflation play to a fiat currency issue and reached new current (non inflation-adjusted) highs. Saudi Arabia disclosed a major proportionate increase in gold among its reserve holdings. Already the largest producer, China continued to lock up more non-Chinese gold properties throughout the world by commercial deals, at the same time stating it saw no reason to buy more on the open market, such as from the IMF. Its latest currency adjustment makes gold cheaper within the domestic market.
The slow decline policy of the yuan from its former US peg as newly revealed this past weekend will allow elasticity for consumer demand in the US and elsewhere to remain more intact than it would have been with the major one-off revision the US had pushed for. Since wages are rising in China and domestic demand there will be stimulated, any success of the revised Chinese export policy will mean the rest of the world will pay for the rise in the Chinese standard of living without being able to correct their own trade deficit issues. The sovereign debt issue will persist.
The relative rise in the dollar over the last month helped the US Treasury successfully sell more debt to income-starved investors around the world at ultra-low rates of return. As economic historian and Harvard professor Niall Ferguson stated in a CNBC interview today (June 21), a realization among investors is bound to arise - within 2 to 4 years at best, sooner at worst - that rates must rise. The outcome, when translated into the billowing aggregate global debt, will be that debt maintenance - let alone reduction - will have already moved beyond reach. If and when that day arrives, bond values will plunge as demand for higher yields force them down. The impact on many ordinary and institutional investors - especially the more conservative ones - will be disastrous.
The challenge right now is serious. Many mature investors will be hard pressed to survive with their lifestyle intact and with a recovery doubtful for them in a meaningful time frame, while most younger ones appear to be carelessly texting and tweeting into their financial fate. Collectively, it is not clear if the various national publics affected, from Greece to Britain and the US, will be willing to accept the necessary fiscal medicine as politically palatable, in view of the high economic price that, with hyperinflation the other option, needs to be paid.
Monday, June 21, 2010
Wednesday, June 9, 2010
Further Notes on Precious Metals ETFs
Last week I mentioned the US-dollar denominated Exchange-Traded Funds, the gold SPDR listed as GLD, whose custodian is JP Morgan, and the iShares silver ETF listed as SLV, whose custodian is HSBC Bank. As a cautionary note, these 2 banks are known as respectively among the largest gold and silver short traders in the market. This position is arguably not congruent with the interest of the investors purchasing these ETFs as investments in the metals themselves.
It has also been repeatedly noted that within the lengthy prospectuses of these two ETFs, important factors such as transparent disclosure concerning how much bullion is actually held and the changes in these holdings over time (they should be rising if net new investment is rising), is not disclosed by their prospectus and cannot be determined. As a result, though commonly recommended by many advisors, the shares should rightly be regarded as mere proxies for the metals, not certificates representing ownership of actual redeemable gold or silver. In a flash panic such as affected several ETFs recently or some other extreme event, knowing exactly what you own is important.
On the other hand, the recently-launched Canadian-managed (2010, by Sprott) US-denominated physical gold ETF listed as PHYS discloses its actual gold holdings, which are held and sequestered by the Bank of Canada. While its short market history and smaller comparative size make the shares of PHYS more thinly traded at present, for the more capital-protective and self-protective investor, the crucial aspect of actual ownership may be more important than its trading volume.
Disclosure: No positions
It has also been repeatedly noted that within the lengthy prospectuses of these two ETFs, important factors such as transparent disclosure concerning how much bullion is actually held and the changes in these holdings over time (they should be rising if net new investment is rising), is not disclosed by their prospectus and cannot be determined. As a result, though commonly recommended by many advisors, the shares should rightly be regarded as mere proxies for the metals, not certificates representing ownership of actual redeemable gold or silver. In a flash panic such as affected several ETFs recently or some other extreme event, knowing exactly what you own is important.
On the other hand, the recently-launched Canadian-managed (2010, by Sprott) US-denominated physical gold ETF listed as PHYS discloses its actual gold holdings, which are held and sequestered by the Bank of Canada. While its short market history and smaller comparative size make the shares of PHYS more thinly traded at present, for the more capital-protective and self-protective investor, the crucial aspect of actual ownership may be more important than its trading volume.
Disclosure: No positions
Tuesday, June 8, 2010
Currency, Sovereign Debt and the "Gold Bubble"
The following valuable perspective is acknowledged from the respected Calafia Beach Pundit blog of June 7, 2010. The issues of sovereign debt, currency movements and the inflation/deflation question are aspects of the economic machinery that the global gold price reflects in the present cycle stage we may come to call the Keynsian end-game.
...............................................................................
"The euro (as the extension of the DM) and the dollar have been moving pretty closely together relative to gold. That is to say, both have depreciated by almost the same amount since 1978, with the dollar for the most part leading the way. You might say the euro's current weakness is more in the nature of "catch up" to the dollar than anything else. Recently, the euro was trading at a nice premium to the dollar, but that premium is no longer justifiable given eurozone credit concerns and the bailout of Greece.
"The euro - relative to its purchasing power parity vis a vis the dollar - has not changed much at all since 1978. It was slightly overvalued then as it is now. In other words, relative to 1978, one euro today will buy you about the same basket of goods and services in Europe as it would in the US. So the message is that both the euro and the dollar have fallen by more or less the same amount relative to gold. The yen is the only currency that is worth more today, in terms of gold, that it was in 1980.
"Regardless, the movements of all major currencies relative to each other are now dwarfed by the movement of all currencies relative to gold. ...If gold is still the timeless standard against which to measure currrencies as it has been for centuries, then today it can be said that the relative valuation of one major currency relative to another is an order of magnitude less important than the relative valuation of all currencies relative to gold.
"If all major currencies are losing value relative to gold, that is a good sign that the world's supply of money exceeds the demand for it, and that is a necessary precursor to rising inflation. We should expect to see inflation rising in just about every country, and it ought to show up first in lesser-developed countries, since their economies are generally more exposed to international trade and have a lot less inflation "inertia" than the US economy.
"I continue to believe that it makes a lot more sense to worry about inflation than it does to worry about deflation, given the significant rise in gold over the past 10 years."
..................................................................
For investors, physical gold can be held through the US ETF PHYS and more popularly but perhaps less securely in the US ETF GLD. Gold stocks on whatever market vary in quality from investment grade (primarily based on proven reserves) to speculative (unproven or proximity to proven reserves) but are generally seen as being more responsive (leveraged) to gold price movements than the metal itself.
Disclosure: long Jinshan Mines (JIN), soon to be renamed China Gold International Resources.
...............................................................................
"The euro (as the extension of the DM) and the dollar have been moving pretty closely together relative to gold. That is to say, both have depreciated by almost the same amount since 1978, with the dollar for the most part leading the way. You might say the euro's current weakness is more in the nature of "catch up" to the dollar than anything else. Recently, the euro was trading at a nice premium to the dollar, but that premium is no longer justifiable given eurozone credit concerns and the bailout of Greece.
"The euro - relative to its purchasing power parity vis a vis the dollar - has not changed much at all since 1978. It was slightly overvalued then as it is now. In other words, relative to 1978, one euro today will buy you about the same basket of goods and services in Europe as it would in the US. So the message is that both the euro and the dollar have fallen by more or less the same amount relative to gold. The yen is the only currency that is worth more today, in terms of gold, that it was in 1980.
"Regardless, the movements of all major currencies relative to each other are now dwarfed by the movement of all currencies relative to gold. ...If gold is still the timeless standard against which to measure currrencies as it has been for centuries, then today it can be said that the relative valuation of one major currency relative to another is an order of magnitude less important than the relative valuation of all currencies relative to gold.
"If all major currencies are losing value relative to gold, that is a good sign that the world's supply of money exceeds the demand for it, and that is a necessary precursor to rising inflation. We should expect to see inflation rising in just about every country, and it ought to show up first in lesser-developed countries, since their economies are generally more exposed to international trade and have a lot less inflation "inertia" than the US economy.
"I continue to believe that it makes a lot more sense to worry about inflation than it does to worry about deflation, given the significant rise in gold over the past 10 years."
..................................................................
For investors, physical gold can be held through the US ETF PHYS and more popularly but perhaps less securely in the US ETF GLD. Gold stocks on whatever market vary in quality from investment grade (primarily based on proven reserves) to speculative (unproven or proximity to proven reserves) but are generally seen as being more responsive (leveraged) to gold price movements than the metal itself.
Disclosure: long Jinshan Mines (JIN), soon to be renamed China Gold International Resources.
Subscribe to:
Posts (Atom)