India’s Ban On Large Currency Is A Warning About Fiat Currency – Zero Hedge

Release Date: 
Wednesday, November 23, 2016

India’s Ban On Large Currency Is A Warning About Fiat Currency – Zero Hedge
The financial website Zero Hedge discussed India’s disastrous ban on large denomination bills and what it says about the nature of fiat currencies.

“Last week Jayant Bhandari related the story of the overnight ban of certain banknotes in India under cover of ‘stamping out corruption’ … We would note on this occasion that although what India’s citizens are facing these days may seem a remote danger to most Westerners, it does demonstrate an important point: state-issued paper currency exists only at the sufferance of the State. It can be made worthless by decree…

“Surprisingly, the concept is not really a modern one – it was tested in Great Britain for a considerable stretch of time with the tally sticks system. Although that particular system ultimately failed (just as every currently extant paper currency eventually will), it did show the way to governments… So obviously, governments do have considerable influence on what is used as the means of final payment in the economy. What governments have been unable to do though is to effectively ‘demonetize’ the money previously chosen by the market – namely gold…

“What has just happened in India clearly demonstrates that the nature of state-issued fiat money must be taken into account when considering what to do about the rapaciousness of increasingly desperate and technically insolvent governments. If one wants to safeguard one’s cash holdings against the potential failure of the fractionally reserved banking system … one has to keep this important detail in mind.

“Withdrawing deposit money in the form of cash currency is only an effective strategy as long as governments don’t do what India’s government has just done. And one should definitely never make the mistake of underestimating the lengths to which governments are prepared to go under the cover of “emergency”…

“In the course of the 20th century alone, we have seen such a wide range of government depredations with respect to money, that one has to be extraordinarily naïve to believe repeat performances are no longer possible. What has happened in India should be seen as a clear warning. State-issued cash currency may not be affected by bank insolvencies and ‘bail-ins’, but it is by no means safe. By contrast, gold simply cannot be devalued by government decree. (“India's Currency Debacle: ‘Consider It A Warning,’” Zero Hedge, 11/22/16.)

Gold Correction A Buying Opportunity – Seeking Alpha
A Seeking Alpha commentary explains why the correction in gold prices presents a buying opportunity for investors.

“While I admit being more bullish on gold than returns indicate, the decline in gold does not change my opinion from a medium to long-term investment horizon. This article will discuss why gold remains an attractive investment. In line with this view, I see the recent decline as a good buying opportunity…

I want to start with the interest rate factor as the fed is expecting to hike rates ‘relatively soon.’ There is no doubt that economic activity remains resilient, but I believe that the outlook for gold will remain bullish as long as real interest rates remain negative… I see negative real interest rates as an ongoing QE for the economy. Investors will argue that gold has been depressed even as real interest rates have been negative, but the other factors that I will discuss will support the thesis along with this sustained factor…

“Going by the economic views of Donald Trump, the focus is likely to be on ‘Make in America’ once again. The key point to note here is that the dollar has strengthened in the recent past and this is negative for exports… In my view, once Donald Trump assumes power, there will be focus on ensuring that the dollar trends lower. It would not be surprising to see a stimulus that is targeted towards encouraging manufacturing driven growth. Overall, the current dollar level is not ideal for exports growth and that is likely to change in the coming years…

“[T]here is more uncertainty related to Donald Trump and as capital spending is on hold for many firms, I expect economic weakness in the coming quarters and economic weakness will sustain until there is more clarity on the policies to be adopted by Donald Trump… In addition, if the economic slump is significant, further monetary easing is likely. Overall, this will be an ideal scenario for Donald Trump as it will allow him to use the economic weakness factor to ensure that the dollar trends lower…

“Call it currency diversification or any other factor; central banks are certainly bullish on the only honest currency in the world… Besides gold being a store of value, China is looking for diversifying dollar holdings and China's gold as a percentage of total reserves is still below 5%. This will ensure sustained demand for gold and is an indicator that gold will trend higher in the long-term… In my view, the best investment option is physical gold and investors can consider exposure to the precious metal to the extent of 15% to 20% of their portfolio….” (“Why I Expect Gold To Surge,” Seeking Alpha, 11/22/16.)

Note: Goldline believes that precious metals are appropriate for 5% to 20% of an investment portfolio.

Inflation, Debt Positive For Gold Prices – Day
Adrian Day, chairman and chief executive officer of Adrian Day Asset Management, believes a number of factors including rising inflation and national debt will lead to higher gold prices.

“Gold prices has fallen since Donald Trump won the U.S. presidential election, but look for the metal to eventually turn higher again, said Adrian Day, chairman and chief executive officer of Adrian Day Asset Management…

“Going forward, a Trump presidency is likely to mean increased spending, including infrastructure and defense, but tax cuts and less regulation. Day also looks for higher interest rates, but not too high.  ‘With regard to [Fed Chair Janet) Yellen’s threat for a more “hawkish” Fed to counter-balance fiscal profligacy, we would retort, I knew [former Fed Chair] Paul Volker, and she’s no Paul Volker,’ Day added.

“’We do not expect sharply higher rates, and further out we will likely see higher U.S. debt (already high) and higher inflation (already stirring). So the outlook a little further out—combined with easy money around the world, stronger Indian demand, possible geopolitical turmoil, and a decline in mine production—will be a higher gold price,’ Day noted.” (“Gold prices eventually moving higher: Adrian Day,” Shanghai Metals Market, 11/23/16.)

Gold And U.S. Dollar May Rise Together – HSBC
Analysts at HSBC see a decoupling of the inverse relationship between gold and the U.S. dollar as investors seek the “supreme” paper and hard assets.

“Research Team at HSBC, expects the USD to gain further support in the aftermath of Mr. Trump’s win and the USD and gold have a traditional inverse relationship…

 “’This is logical as gold is regarded as the world’s supreme hard asset and the USD the world’s supreme paper asset. The two do not necessarily move lockstep however and gold and the USD can deviate from this relationship for long periods. This occurred during the financial crisis when for a prolonged period gold and the USD rallied simultaneously. We think it likely that enhanced uncertainty in addition to supporting the USD, will also buy gold.”’ (“USD and gold can rally together – HSBC,” FX Street, 11/21/16.)

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†This material has been prepared for private use. Although the information in this commentary has been obtained from sources believed to be reliable, Goldline does not guarantee its accuracy and such information may be incomplete or condensed. The opinions expressed are subject to change without notice.

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