Posts Tagged ‘central banks’
Since May, when it was near an all-time low, the U.S. dollar has rallied. Compared to other major currencies of the world, the greenback is up five percent since July, as the chart below illustrates.
The question: should investors get into this U.S. dollar rally?
Dear reader, the U.S. dollar is not moving higher because the fundamentals of the U.S. economy are getting better. It’s moving higher because other parts of the global economy are doing worse than the U.S.
The eurozone economy is so weak that the European Central Bank has lowered interest rates again, pushing the value of the euro lower. In the United Kingdom, Scotland is looking for independence. The crisis between Russia and Ukraine continues without resolution. New troubles are brewing in the Middle East. China reported yesterday it would start pumping money into its largest banks.
Chart courtesy of www.StockCharts.com
Right now, with the majority of major world central banks either printing more of their paper money or bringing interest rates even lower, the U.S. is the best of the worst.
But I believe the rally in the U.S. dollar will be short-lived.
Central banks are trying to move away from the U.S. dollar as their reserve currency. At one point, trade in the global economy was dominated by the U.S. dollar. This is changing, slowly but surely.
Consider just one of many recent examples; the Chinese and Argentinian central banks will be doing an $11.0-billion currency swap operation. This will allow Argentina to increase its reserves and pay for Chinese imports in yuan—the deal was signed in July. (Source: Reuters, September 7, 2014.)
Putting … Read More
The numbers are in…
In the second quarter of 2014, world central banks bought 117.8 tonnes of gold bullion compared to 92.1 tonnes a year earlier—a jump of 28%. Central banks have been net purchasers of gold bullion for 14 consecutive quarters!
According to the World Gold Council, “Economic and geopolitical events throughout the world are sources of ongoing instability and uncertainty. Such events reinforce the requirement for appropriate risk management by central banks through holding gold reserves for asset diversification.” (Source: “Gold Demand Trends Q2 2014,” World Gold Council web site, August 14, 2014.)
Hog wash, I say. Central banks are buying gold bullion because they are slowly moving away from U.S. dollars as their reserve currency and replacing them with gold bullion.
In the second quarter, Russia purchased 54 tonnes of gold bullion, Kazakhstan purchased seven tonnes, and Tajikistan bought three tonnes. Combined, just these three central banks made up more than 54% of all the official purchases of gold bullion in the second quarter.
You won’t see the central banks of France or Germany buying gold bullion because they already have enough (that’s if Germany can ever get its gold back from the U.S.).
So if demand for gold bullion is rising, as evidenced by central banks buying more, gold coin sales near record highs, and gold demand in India rising again now that the government is easing tariffs on gold imports, the million-dollar question is why aren’t gold prices rising?
There is plenty of discussion on the Internet about gold manipulation and how prices are purposely being kept down. I can’t comment on that, but I … Read More
As gold bullion prices declined last year, I said supply would contract as gold miners pulled back on exploration and closed mines that were not profitable at $1,200-an-ounce gold.
For the supply of gold bullion to increase, there needs to be more discoveries. Sadly, the opposite is happening. According to SNL Metals & Mining, gold discoveries have been trending downward. In the 1990s, there were 124 new gold discoveries totaling 1.1 billion ounces of gold bullion. But since 2000, only 605 million ounces of gold bullion in total has been discovered at just 93 discoveries. (Source: Kitco News, July 18, 2014.)
For there to be more gold discoveries, mining companies need to spend more on exploration and that just isn’t happening. In 2013, when gold prices plummeted, major mining companies pulled back on their spending. Furthermore, exploration companies that need funding found it very difficult to get money, so they also pulled back on finding gold.
But gold bullion discoveries aren’t just slowing; the time it takes to start production at a mine is increasing as well. Between 1996 and 2005, it took an average of 11 years to bring a discovery to production. Between 2006 and 2013, this has increased to 18 years. (Source: Ibid.)
With all of this (it being harder to find new gold bullion and it taking too long for production to start once gold is discovered), the supply of world gold bullion is shrinking.
And demand for gold bullion, well, it just keeps rising. Aside from investors buying gold coins and jewelry at near record levels (with India now easing its stiff tariffs on gold … Read More
The resilience the stock market continues to have is a reflection of what continues to be extreme monetary stimulus. And while the stock market is a leading indicator and a bet on a future stream of earnings and economic activity, throughout history, the underlying goal of central banks has been price inflation.
Seemingly, the capitalist economic system is based on two basic underlying factors: property rights and price inflation. And in modern history, the latter, through central bank intervention, is the most important catalyst for the stock market.
In capital markets, long-run history is a very good guide and an important tool in helping to shape your market view. And most importantly, it’s very helpful in laying the groundwork for separating present-day conjecture from what has actually transpired before.
I’m reminded of J. Anthony Boeckh’s book titled The Great Reflation, which provides a non-political long-run analysis on the U.S. economy and its cycles.
It’s a historical breakdown of interest rates, inflation, and monetary and fiscal policies, and how they have affected the stock market. It is required reading for any serious long-term investor.
Written in 2010, the book breaks down financial crises and looks at the long-run effects of price inflation and the effects on capital markets. Boeckh offers some poignant analysis on all kinds of financial topics, and many of his observations have not only come to fruition, but they are also worth consideration.
Boeckh plainly states that the global financial system is flawed because of fiat paper money. And because we use paper money, price inflation exists and capital markets are subject to bubbles.
Add in … Read More
From our recent reader survey, I see our readers are not that concerned about what happens in the eurozone. But there’s a phenomenon occurring there that I believe every investor who is interested in gold bullion should be aware of.
Let me explain…
It’s a known fact that when central banks print more of their paper money, it’s usually bullish for the yellow metal. We saw this after 2009, when the Federal Reserve started to print more paper money; gold bullion prices skyrocketed.
In the eurozone, there continues to be major economic problems in the region. Italy, the third-biggest economic hub in the eurozone, has reported its unemployment rate hit 13% in February—the highest unemployment rate ever recorded in the country. (Source: Reuters, April 1, 2014.)
To help countries like Italy, Greece, Spain, and Portugal with their economic woes, the European Central Bank (ECB) has lowered its benchmark interest rate—but that hasn’t spurred bank lending as bad debts on the books of major eurozone banks keep piling up. Even once-strong eurozone countries like France are under economic scrutiny.
Now, as no surprise, the ECB has started talk about following the same route the Federal Reserve has taken—printing paper money.
At a conference last week, one of the ECB’s Executive Board members, Yves Mersch, said the ECB is ready to turn on its printing presses. The president of the ECB, Mario Draghi, has also said quantitative easing in the region may be needed if inflation in the eurozone continues to remain subdued. (Source: Reuters, April 7, 2014.)
Hence, to the printing presses of the Federal Reserve, the Central Bank … Read More
When news first broke from the Federal Reserve that it would slow down the pace of its quantitative easing program, the consensus was that the U.S. dollar would start to rise in value as the Fed would be printing fewer new dollars and actually eliminating all new paper money printing by the end of 2014.
But the opposite has happened.
Below, I present the chart of the U.S. Dollar Index, an index that compares the value of the dollar to other major world currencies.
As the chart clearly shows, the dollar started on a strong downtrend in July of 2013. When I look at the dollar compared to individual currencies like the euro and British pound, the picture looks even worse.
The common belief since the Credit Crisis of 2008: when there’s uncertainty, investors run towards the safety of the U.S. dollar. But something started to happen in mid-2013. Despite China’s economic slowdown, despite the situation with Russia and Ukraine, and with the Federal Reserve cutting back substantially on its money printing program, one would think the U.S. dollar would rally in value—but the opposite is happening.
Two reasons why the greenback is falling in value so fast:
First, world central banks have been slowly selling the U.S. dollars they keep in their reserves, as the percentage of world central banks that use the dollar as their reserve currency has fallen from more than 70% in the year 2000 to just over 60% today.
Secondly, with the Japanese and Chinese reducing the amount of U.S. Treasuries they buy and with the Federal Reserve reducing the paper … Read More
Copper is considered an industrial metal, used in industries across the board. When copper prices fall, it’s usually an indicator of a slowdown in the global economy. On the contrary, gold bullion isn’t much of an industrial metal; rather, it is used as a hedge against uncertainty in the global economy.
When you look at these two metals together, often referred to as the gold-to-copper ratio, they tell us something very important: the ratio of how many pounds of copper it takes to buy one ounce of gold bullion has long been an indicator of sentiment in the global economy.
If the gold-to-copper ratio is in a downtrend, it means investors are betting on the global economy to grow. In contrast, if it is increasing (if the number of pounds of copper it costs to buy an ounce of gold is rising), it tells us investors are concerned about protecting their wealth in a slowing global economy.
Below, you’ll find a chart of the gold-to-copper ratio.
Looking at the chart above, it is clear something happened at the beginning of 2014. Investors became very worried. Since the beginning of the year, the gold-to-copper ratio has increased more than 28%—the steepest increase in more than two years.
And the weekly chart of copper prices looks terrible too:
Copper prices have been trending downward since 2011. In 2013, these prices broke below their 200-day moving average and recently, they broke below a very critical support level at $3.00. While all of this was happening, on the chart, there was also a formation of a … Read More
Earnings estimates for Microsoft Corporation (MSFT) are going up and the stock, which recently accelerated, finally looks like it has broken out of a 13-year consolidation.
Microsoft has been an income play for quite a while. Currently yielding three percent, the company’s forward price-to-earnings ratio is around 12.5 and is not dissimilar from many other blue chips.
Then there’s Intel Corporation (INTC). This company has been struggling for capital gains, but it’s yielding 3.6% and isn’t expensively priced.
What these technology companies illustrate so well is the business cycle, both in terms of operational growth and also as equity securities. Getting the cycle correct (the right place/stock at the right time) is the toughest thing for any investor or businessperson.
Regarding stocks, both Microsoft and Intel’s long-term charts clearly show how extremely overpriced their share prices were during the bull market of the 90s. Intel’s long-term stock chart is featured below:
Chart courtesy of www.StockCharts.com
The benefit of the very long term is that it provides a normalized but still decent rate of return with these kinds of stocks. No enterprise or investor can escape the business cycle, whether it is industry-specific, a local reality, or the general economy.
Railroad stocks have been super hot over the last several years, but for long periods of time, they were not. The solid dividend-payers that they are, you’d be hard-pressed to find Union Pacific Corporation (UNP) competing with Apple Inc. (AAPL) or Google Inc. (GOOG) for headlines.
I feel that stocks have broken out of their previous consolidation phase in favor of a new long-term cycle. But while last year’s stunning … Read More
Fasten your seatbelt, dear reader. We’re in for a global financial crisis, a currency fiasco, and a stock market collapse all in the same year!
I’m being too bearish? Not after you read this…
In their search for economic growth in 2009, the Federal Reserve and other major central banks in the global economy started lowering interest rates and printing paper money.
While the central banks of the world wanted economic growth, they inadvertently created the “trade” for big investors like financial institutions and banks. I talked about this last Friday. (See “Stock Market: The Great Collapse Back to Reality Begins.”)
The “trade” had investors borrowing money from low interest rate countries and buying bonds in high interest rate countries, pocketing the spread. In the world of finance, this is often referred to as the “carry trade.” It works as long as the currencies of the low interest rate country and the higher interest rate country stay stable.
But now, the “trade” is backfiring as the currencies of emerging markets go into free fall.
China, the biggest economy in the emerging markets and second-biggest in the global economy, got most of the “trade” money. According to the Bank for International Settlements, in 2013, foreign currency loans and borrowing by Chinese companies from other countries was close to a trillion dollars. In 2009, it was only $270 billion. (Source: Telegraph, February 1, 2014.)
European banks have the biggest exposure to emerging markets, having lent them $3.0 trillion. Breaking down this number even further, British banks have loaned $518 billion to the emerging markets; Spanish banks come in second … Read More
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