Royal Bank of Scotland Warns Investors 2016 Will Be “Cataclysmic Year”

Release Date: 
Friday, January 15, 2016

Gold and Silver Prices

Gold prices retraced most of its earlier week’s losses fueled by growing concerns about the health of the world economy.

“Gold prices jumped Friday amid a global rout in stock markets and other risk assets, and comments by a Federal Reserve board member stoking views that the U.S. central bank could pause its plans to raise interest rates.

“Gold futures were up 1.8% at $1,093.40 a troy ounce on the New York Mercantile Exchange, on pace for their largest daily gain since Dec. 4. Gold, which has historically functioned as a haven investment asset in turbulent times, has gained more than 3% since the start of the new year amid evidence of weakening global economic growth and stock market turbulence around the world.” (“Gold Gains Amid Rout in Global Stock and Oil Markets,” WSJ, 1/15/16.)

Gold ended the week down $15.80, closing at $1,089.80. Silver prices closed at $14.01, down $0.02.

Royal Bank of Scotland Warns Investors 2016 Will Be “Cataclysmic Year”
The Royal Bank of Scotland (RBS) issued a dire warning to investors that 2016 will be a financially “cataclysmic year.”

“RBS has advised clients to brace for a “cataclysmic year” and a global deflationary crisis… The bank’s credit team said markets are flashing stress alerts akin to the turbulent months before the Lehman crisis in 2008… ‘This is about return of capital, not return on capital. In a crowded hall, exit doors are small,’ it said in a client note.

“Andrew Roberts, the bank’s research chief for European economics and rates, said that global trade and loans are contracting, a nasty cocktail for corporate balance sheets and equity earnings. This is particularly ominous given that global debt ratios have reached record highs. ‘China has set off a major correction and it is going to snowball…’

“RBS first issued its grim warnings for the global economy in November but events have moved even faster than feared. It estimates that the US economy slowed to a growth rate of 0.5pc in the fourth quarter, and accuses the US Federal Reserve of ‘playing with fire’ by raising rates into the teeth of the storm. ‘There has already been severe monetary tightening in the US from the rising dollar,’ it said…

“RBS is not alone in fearing trouble. UBS issued what it called a “significant change” to its house view late last week, saying policy chaos in China had unsettled markets… Larry Summers, the former US Treasury Secretary, said it would be a mistake to dismiss the current financial squall as froth. Markets often sense a gathering storm when policy-makers are still asleep at the wheel. He has long argued that the world economy is so far out of kilter that it takes permanent financial bubbles to keep growth going, an inherently unstable structure.” (“RBS cries 'sell everything' as deflationary crisis nears,” The Telegraph, 1/11/16.)

Top Money Manager Sees Gold Up 30%
Jeff Gundlack, the new “Bond King,” believes a dismissal global economy in 2016 will lead to a 30% increase in gold prices this year.

“One of America's top money managers predicts gold prices will soon spike.
Gold will shoot up to $1,400 an ounce, according to Jeff Gundlach, the CEO of big bond house DoubleLine Capital. That would be a gain of about 30% from gold's current price of $1,090.

“Gundlach thinks gold recently hit a bottom. It's been rallying since the beginning of the year as investors look for safe havens in the stock market sell-off. Lately, his predictions have been spot on. He was one of the first to predict the sharp oil price crash in the fall of 2014 and then the junk bond turbulence of 2015. He has been dubbed the ‘new bond king’ …

“’2016 isn't looking all that great,’ Gundlach said as he outlined the many problems around the globe. Here's a recap on how he sees the world:

Global growth keeps getting downgraded. China is going to cause more havoc because it will almost certainly have to devalue it currency again… Japan isn't just in a lost decade, it's in a ‘lost generation…’ Emerging markets -- even outside of China -- aren't a good bet either… All of these problems will probably cause gold to rally, although he predicted the gold price spike last year and it didn't happen as gold tumbled to a six-year low in December. Investors in the emerging world are especially likely to stock up on the shiny metal.

“Gundlach is also no fan of the Federal Reserve. He believes Fed officials are out of touch with reality and far too rosy in their forecasts of how much the U.S. and world will grow in 2016.” (“Jeff Gundlach: Gold prices will spike 30%,” CNN Money, 1/13/16.)

Gold Necessary In Good Times and Bad – Holmes
U.S. Global Investors CEO Frank Holmes discussed gold’s continued role as a safe haven asset especially given the turmoil in the world markets.

“Who says gold lost its appeal as a safe haven asset? After five straight positive trading sessions last week, the yellow metal climbed above $1,100, its highest level in nine weeks, on a weaker U.S. dollar. The rally proves that gold still retains its status as a safe haven among investors, who were motivated by a rocky Chinese stock market, North Korea’s announcement that it detonated a hydrogen bomb last Wednesday and rising tensions between Saudi Arabia and Iran…

“It’s worth remembering that about 90 percent of physical demand comes from outside the U.S., mostly in emerging markets such as China and India. In many non-dollar economies, buyers are actually seeing either a steady or even rising gold price. The metal is up in Russia, Peru, South Africa, Canada, Mexico, Brazil and many more…

“[T]he World Gold Council (WGC) writes in its 2016 outlook that gold’s role as a diversifier remains ‘particularly relevant’: Research shows that, over the long run, holding 2 percent to 10 percent of an investor’s portfolio in gold can improve portfolio performance. The reason for this is that gold has tended to have a low correlation to many other asset classes, making it a valuable diversifier.,,

“For the last three years, gold has disappointed many because other investments, specifically equities, have seen such huge gains. But with global markets hitting turbulence, the yellow metal is looking more attractive as insurance against the currency wars. I always recommend 10 percent in gold...

“This should be the case in both good times and bad, whether gold is rising or falling. As highly influential investment expert Ray Dalio said last year: ‘If you don’t own gold, you know neither history nor economics.’” (“How Gold Got Its Groove Back,” Kitco Commentators, 1/11/16.)

“Acute Shortage” of Physical Gold To Send Prices Higher - Hathaway
Writing in the financial journal, Barron’s, John Hathaway, manager for the Tocqueville Gold Fund, told investors that an acute shortage in physical gold is growing.

“An acute shortage of readily marketable physical gold is developing that we believe will deepen in years to come. This possibility seems to be unrecognized by those who are short the gold market through paper contracts. The relentless dumping of synthetic or paper gold contracts since 2011 by speculators in Western financial markets has caused the shortage. The steady selling has driven down the price of physical gold, hobbled the gold-mining industry, and drained the stores of gold held in the vaults of Western financial centers.

“We believe that the shortage will worsen because (1) the precursors of production (exploration, discovery, reserve life) are very negative, (2) the mining industry has little financial credibility and seems unlikely to attract capital even with a big rise in gold prices, and (3) refining capacity limitations tend to create supply bottlenecks when physical demand spikes. Therefore, absent any significant and sustained rise in the gold price, we expect few new mines to be built for many, many years to replace depleting and aging mine reserves. In addition, refining capacity should remain static for the foreseeable future…

“There are numerous catalysts to trigger a change in direction for gold. These include, but are not limited to, a bear market in financial assets, a downturn in the global economy, continued currency turmoil, and of course, bullish supply-and-demand fundamentals. To this list, one must add geopolitical issues; the headlines speak for themselves. We expect these catalysts to interact and feed on each other.

“We have suggested over the past year that a bear market in financial assets would lead to a loss of confidence in central bankers and an impulsive, uncontainable rise in the price of gold. To us, the dollar price of gold and confidence in central banking are inversely related… We therefore believe that the latent demand for the risk protection that gold can provide is vast, and that it will be activated in a reflexive, convulsive fashion when confidence in central banking evaporates…

“The pool of liquid gold to meet that need has been severely depleted. We believe that the stage has been set for a significant repricing of gold in all currencies, including the US dollar….” (“An ‘Acute Shortage’ in Gold Can Boost Prices,” Barron’s, 1/14/16.)

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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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