Financial fears to support gold: GRMS

Release Date:  Friday, September 14, 2018

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Gold and Silver Prices

Gold closed slightly down for the week as the dollar gained momentum on Friday following U.S. and China trade developments.

"Gold turned negative on Friday, as the U.S. dollar rose against the Chinese yuan after U.S. President Donald Trump reportedly told aides to proceed with tariffs on Chinese imports.

"'I think that's what's driving gold lower, the dollar higher and the S&P market lower,' said Michael Matousek, head trader at U.S. Global Investors. 'Companies are theoretically going to make less money because they will get that tax.'

"The months-long trade tension between Washington and Beijing has prompted investors to buy the U.S. dollar, in the belief that the United States has less to lose from the dispute. Gold has shown a close correlation to the currency of China, the biggest gold consuming nation, analysts say." ("Gold turns negative as dollar strengthens from U.S.-China tariff spat," Renita D. Young and Eric Onstad, Reuters, 09/14/18.)

Gold ended the week down $3.10, closing at $1,193.10. Silver ended the week down $0.13, closing at $14.03. 

Financial fears to support gold: GRMS - Stutt

With market turmoil and resurfacing finance, gold will be supported.

"Resurfacing financial fears will ultimately be supportive of gold, says Reuters in a study published this month.

"The precious metal is being weighed down by the strong US dollar, and a sell-off is possible, triggered by weakened emerging markets, writes Rhona O'Connell, Head of Metals for the GFMS team at Thomson Reuters.

"'[The] bear market in 2018 has largely reflected the continued strength in the dollar, driven in part by trade wars and latterly by the crises in Turkey and Venezuela, with the contagion into other emerging markets' currencies,' writes O'Connell.

"'Whether any of the central banks of those struggling nations have been sellers of gold . . . has had less effect on the market's sentiment than the belief, well founded or otherwise, that they might be sellers.'

"This week marks 10 years since the collapse of Lehman Brothers, a trigger point in the financial crisis of 2008. Since the collapse the vicissitudes of the financial markets have seen investors returning attention to gold.

"'Lehman Brothers filed bankruptcy on Sept. 15, 2008, and gold rallied hard, reaching $899 on Sept. 23. While there was an inevitable correction, this set the foundations for gold's three-year bull run, peaking on Sept. 5, 2011 at $1,896.50', O'Connell writes.

"The gold market has been through several phases, but is generally viewed as a "safe haven" asset, or a store of value in times of market turmoil.

"In 2013, a substantial amount of gold was a bought by local banks in China...The bull phase of 2016 and 2017 was essentially driven by resurgent geopolitical uncertainty, including the result of the Brexit vote and the U.S. election. The subsequent bear market in 2018 has largely reflected the continued strength in the dollar, driven in part by trade wars.
"With finance fears re-surfacing, GFMS asserts that ultimately, they will prove to be supportive for gold." ("Financial fears to support gold: GFMS," Amanda Stutt, Mining.com, 09/11/18.)

Central Banks Go On Gold Buying Spree Over Dollar Worries - Constable

Central banks focus on purchasing gold as a diversifier to the dollar.

"The world's central banks are on a gold buying spree that has lasted more than a decade. That's the longest period of consistent gold acquisition by the so-called official sector in more than half a century.

"In the distant past, central banks had to buy gold because of its vital role in the global financial system. Now they are choosing to do so because they are worried about the dollar. In other words, they've been scared into this bullion buying binge.

"Here's the detail.

Long gone historical role

"Before the gold standard monetary system was abandoned in 1971, central banks, such as the Federal Reserve or the Bank of England, had to buy and sell gold. Doing so was an essential part of the global financial system that was set up in the closing days of WWII, the so-called Bretton Woods system. As international trade flourished so the need for gold increased. That's why central banks added a lot of bullion to their reserves in the 1950s and 1960s.

"Over the 16 years through 1965, the world's central banks added at least 5 million troy ounces of bullion to their gold stash each and every year. Some years the additions were higher than 20 million ounces, according to data from New York-based commodities consulting company CPM Group.

"That 16-year period may understate the prolonged central bank demand for bullion reserves. Jeff Christian, managing partner of CPM Group, explains:

'[It was] a continuation of a longer-term trend because of gold's role in currency systems, its use as a denominator for the value of national currencies at the time, and its use in settling international trade settlements.'

"It's worth noting that after WWII gold was set at a price of $35 an ounce and other currencies, such as the British pound, the French franc, or the Japanese yen, had a (mostly) fixed exchange rate with the dollar.

Nixon nixes gold

"Eventually, this gold-based system died. Officially, U.S. President Richard Nixon nixed it in 1971 when he stopped countries from exchanging dollars for gold... Unofficially, the end of gold's vital role in trade came in 1966 as individuals started to demand gold in exchange for their dollars, says Christian. Eventually, they were shut out just as the countries were excluded.

"What this all means is that since 1965, when the gold standard started to look iffy, central banks have mainly sold their metal... Over the period of 1966 through 2007 central banks mainly ditched their gold holdings. That is to say, they sold right up until the global financial crisis really hit home in 2008.

Crisis boosts central bank demand

"As the global financial system seized up in 2008 and early 2009, global central banks caught the gold buying bug again. It's a trend that looks likely to continue.

"Starting in 2008 central banks have continuously added gold to their reserves. At first, the net acquisitions additions were relatively small. In 2008 and 2009, such institutions added 580,000 and 210,000 ounces of the metal respectively, again according to CPM data. Since then the buying binge has accelerated, with around 11 million ounces getting purchased in 2017, with likely a similar amount forecast for this year.

Russia leads the pack

"'Today central banks are buying gold to diversify their monetary reserves,' says CPM's Christian.' Most central banks want to diversify away from the dollar."

"Most see their gold holdings in a similar way to investors. That is it makes up a small value of total assets but also acts as a useful diversifier of risk, he says. However, other countries are going further. Christian explains:

For countries, such as Russia, the change may be partly driven by the idealistic need to ditch dollars and unentangle their countries from the U.S. banking system.

"Every year starting in 2005 Russia added to its gold reserves. It has also been the biggest driver in the trend of central banks adding to overall holdings of the metal. For instance, in 2017 Russia's gold buying activities accounted for two-thirds of the total 10.95 million ounces of net gold buying by central banks during the year. Kazakstan, the next closest behind Russia, took 12.6% of the total (1.38 million.)

"Meanwhile, this year Russia's central bank bought another 3.381 million ounces in the year through June, according to CPM's Christain. And Turkey bought 1.223 million ounces over the same period, he says.

"Relations between Russia and the U.S. have broken down lately. Similar is true of the relationship between Turkey and the western powers...

The trend will continue

"It is entirely possible that the central bank buying binge will continue apace, according to an August-dated report from ETF Securities (U.S.) LLC. The research notes that central banks have remained solid buyers of the metal despite soft demand from investors and high levels of bets for a price decline in the futures market.

"Of course, it could be that central bankers are buyers when prices are relatively weak, which also tends to coincide with periods when investment demand is soft.

"Whatever, the reason, it would seem that things are different now than they were over the decades from 1966 through 2007. Now when bullion prices are slipping, it might be reasonable to assume that at least some central banks will enter the gold market with orders to buy. That's quite a turnaround from 20 years ago when consistent selling was the rage in the official sector." ("Central Banks Go On Gold Buying Spree Over Dollar Worries," Simon Constable, Forbes, 09/11/18.)

Gold-To-Silver Ratio Spikes To Highest Level In 27 Years - Hamlin

Current gold-to-silver ration shows how undervalued silver is.

"The gold-silver ratio has been one of the most reliable technical "buy" indicators for silver, whenever the ratio climbs above 80. The gold-to-silver ratio has now spiked above 85, which is the highest level of this entire 18-year bull market! In fact, you have to go back 27 years to 1991 for the ratio to be higher than it is today. Amazingly, the ratio is currently higher than it was at the depths of the 2008-09 financial crisis...

"The gold-to-silver ratio is a powerful trading signal that can help to identify buying or selling opportunities in the precious metals sector. The ratio represents the number of silver ounces it takes to buy a single ounce of gold. It might sound simple, but this ratio is more powerful than it may seem at first blush.

Historic Ratios for Comparison

"The ratio of silver to gold in the earth's crust is 17.5:1. In Roman times, the price ratio was set at 12 to 1. In 1792, the gold/silver price ratio was fixed by law in the United States at 15:1, which meant that one troy ounce of gold was worth 15 troy ounces of silver; a ratio of 15.5:1 was enacted in France in 1803. The average gold/silver price ratio during the 20th century, however, was 47:1.

"Over the past 20 years, the ratio has averaged right around 60:1. Thus, the current ratio of 85 is very high historically and nearly 60% above the 20-year average. The ratio is signaling that silver is extremely undervalued relative to gold at this point in time.

"The all-time high for the gold-to-silver ratio occurred in February of 1991, at the height of an economic recession. The recession of the early 1990s lasted from July 1990 to March 1991 and was driven by a restrictive monetary policy and Iraq's invasion of Kuwait in the summer of 1990. The latter drove up the world price of oil, decreased consumer confidence, and exacerbated the downturn that was already underway." ("Gold-To-Silver Ratio Spikes To Highest Level In 27 Years," Jason Hamlin, Seeking Alpha, 09/11/18.)

The next financial crisis: Why it is looking like history may repeat itself - Li

The too-big-to fail banks are bigger than ever which means a fall can be harder than ever.  

"Sept. 15, 2018, will be the 10th anniversary of the collapse of Lehman Brothers, the fourth-largest investment bank in the United States. It was the definitive moment that pushed the U.S. economy into the Great Recession and the worst economic crisis since the 1930s. It can happen again. In fact, the current direction in federal policy suggests it even may be likely.

"After unprecedented policies by the government to stabilize financial markets and reverse the economic carnage, the economic recovery is approaching its tenth year, but significant headwinds threaten to undo the progress made in the aftermath of the financial crisis. These concerns can be broken down into three key areas: deregulation of the financial sector, uncertainty in the future Federal Reserve policy, and the increased speed of the revolving door between Wall Street and Washington, D.C.

"At the top of this list is the continued prevalence of too-big-to-fail banks and the current deregulatory environment in Washington. Today only six banks manage half of the assets of the entire banking industry. Currently, 10 banks - including J.P. Morgan, Goldman Sachs and Citigroup - own more than 50 percent of the assets of the top 100 commercial banks.

"Among them, J.P. Morgan has grown by 100 percent since before the financial crisis, and Bank of America's assets have increased by more than 50 percent over the last 10 years.

"But the bigger they are, the harder they'll fall. Even though the post-crisis requirements, like increased capital and stress testing, have been good developments, that is set against the fact that the biggest banks are bigger today than they were 10 years ago. If deregulation leads to a worst-case scenario, they will fall even harder this time. It was precisely the pre-2008 deregulatory agenda, including the elimination of barriers between investment and commercial banking, that led to the development of complex financial instruments, such as credit default swaps and derivative markets. This encouraged excessive risk-taking by banks and mortgage lenders. By rolling back these regulations and dismantling portions of the Dodd-Frank Act, the Trump administration is removing the safety net and creating a perfect storm that could lead to a crisis even worse than 2008.

"Congress recently began repealing portions of the Dodd-Frank Act of 2010, which was enacted to prevent another financial meltdown. Smaller and midsize banks would now be exempt from the more stringent oversight and stress tests designed to access the ability of these banks to withstand another crisis.

Trump attacks on Federal Reserve could bring back stagflation

"The economic outlook also presents challenges to policymakers and, in particular, Federal Reserve Chairman Jerome Powell. The latest year-to-year CPI figures show overall inflation near 3 percent, the highest levels in six years...

"Rising prices highlight the importance of the FOMC to continue monetary policy normalization and follow through on at least one or two additional rate hikes this year. Even so, Trump has broken tradition and publicly voiced his disagreement with the policy of his appointed Federal Reserve Chair, Jerome Powell, of raising interest rates. Powell's Fed has already raised the Federal funds rate twice this year for a total of 50 basis points.

"An independent Federal Reserve is at the core of a sound monetary policy and its goal of maintaining price stability. If the Fed complies with the undue pressure to keep interest rates low, as it did during the Nixon administration, the days of stagflation will return with a vengeance.

Top regulators all have ties to Wall Street

"Industry insiders policing the markets exacerbates many of the issues that led to the financial crisis.

"The head of the major financial regulatory agencies appointed by Trump all have strong ties to Wall Street and have stated their commitment to reversing the regulations implemented since the financial crisis. Among them are Treasury Secretary Steve Mnuchin, who was a hedge fund manager and partner at Goldman Sachs; SEC Chairman Jay Clayton, former partner at Sullivan & Cromwell, specializing in mergers and acquisitions; and Comptroller of the Currency Joseph Otting, who was vice chairman at U.S. Bank. Powell was a managing director at Banker's Trust when the bank was caught up in a derivatives trading scandal, and partner at the Carlyle Group investment company.

"Every administration includes some members of this revolving door, but the Trump administration has a disproportionate number of top regulators from the financial industry and Wall Street.

The current state of the U.S. economy appears strong...Indeed, the recovery it has made since the depths of the Great Recession has been nothing short of miraculous.

"However, brewing below the surface is the undoing of the prudent regulatory and monetary policies of the last decade. If this continues, it spells a recipe for another financial crisis that will bring back the days of high inflation and high unemployment not seen in more than 30 years.

"Those who do not learn history are doomed to repeat it." ("The next financial crisis: Why it is looking like history may repeat itself," Victor Li, CNBC, 09/14/18.)