Monday, July 24, 2017

Putin Sees What's Coming: Russia Added 8.5 Tons of Gold in June

Total now 1,717 tons, highest gold-to-GDP ratio of any major nation (5.6%). Putin sees what's coming.

Friday, July 21, 2017

Dear Millennials: You Will Be Wiped Out In The Next Stock Market Crash

It should be well known by now that the Millennial generation was screwed over by factors outside of their control. They were raised by coddling parents, taught from a young age to take on crippling student loans for degrees that would never pay off, and they came of age during the worse financial crisis since the Great Depression. So it’s no surprise that this is the first generation that clearly isn’t as well off as the previous generation.

However, Millennials won’t be able to complain about their lot in life for much longer. They won’t have a right to, because they’re about to screw themselves over this time around, and they won’t have anyone else to blame for it. It turns out that they haven’t learned anything from their parent’s mistakes, as they dive into Wall Street and load up on tech stocks.

Young adult investors are buying shares in tech companies and avoiding dividend-yielding stocks favored by the general investing population, according to Steve Quirk, executive vice president of TD Ameritrade‘s Trader Group.

Quirk, citing a TD Ameritrade report, said millennials’ top stock is Apple, which in early May paid the world’s biggest dividend. But none of the rest of their favorite five stocks — Facebook, Amazon, Netflix and Tesla — pay dividends.

Tesla doesn’t crack the top 10 list for the general population, he said.

Quirk said these investing preferences make sense as long-term strategies for young adults with many years to invest ahead of them.

“Most of them are very interested in technology, but the biggest difference would be the dividend-yielding stocks,” Quirk said on CNBC’s “Closing Bell” Monday.

That should end well. They’re buying lots of stocks from Tesla, a company that can’t sell a single car when the government stops subsidizing them. They’re loading up Netflix stock, which despite costing over $150 per share, actually only earns about 40 cents per share. They’re betting their meager life savings on hideously overvalued social media stocks like Facebook, which has a market cap that is 225 times larger than its yearly cash flow. It turns out that when a bunch of barely-adults buy stocks on their smartphones, they don’t do their research. Surprised?

In any case they’d be naive to buy any stock, much less tech stocks, which are arguably the most overvalued on the market. However, the rest of the stock market doesn’t look much better. In fact, it appears to be primed for a serious collapse.

Since July 2012 – so over the past five years – the trailing 12-month earnings per share of all the companies in the S&P 500 index rose just 12% in total. Or just over 2% per year on average. Or barely at the rate of inflation – nothing more.

These are not earnings under the Generally Accepted Accounting Principles (GAAP) but “adjusted earnings” as reported by companies to make their earnings look better. Not all companies report “adjusted earnings.” Some just stick to GAAP earnings and live with the consequences. But many others also report “adjusted earnings,” and that’s what Wall Street propagates. “Adjusted earnings” are earnings with the bad stuff adjusted out of them, at the will of management. They generally display earnings in the most favorable light – hence significantly higher earnings than under GAAP.

This is the most optimistic earnings number. It’s the number that data provider FactSet uses for its analyses, and these adjusted earnings seen in the most favorable light grew only a little over 2% per year on average for the S&P 500 companies over the past five years, or 12% in total.

Yet, over the same period, the S&P 500 Index itself soared 80%.

It doesn’t take much research to realize that the stock market, and tech stocks in particular, are about to crash and burn. And yet members of the most research savvy generation failed to do their homework, and sunk their money into the most overvalued stocks. They fell for the same Wall Street hucksters that burned their parents in 2008. Now the poorest American generation; a generation that is still struggling to buy homes and start families, is about to lose what little they have.

- Source, Mac Slavo

Monday, July 17, 2017

The Logic of a Modern Gold Standard - Is it Even Possible?

In last week’s Insight, I analysed the current geopolitical situation and concluded that it was now in the interest of the Shanghai Cooperation Organisation to break from the US dollar completely, by establishing a new monetary and banking systemi. By linking the yuan and rouble to gold, the SCO’s principal currencies would be insulated from manipulation by means of dollar currency rates, and their use as a weapon to undermine the Sino-Russian partnership. This article addresses some of the practical difficulties of establishing such a sound monetary system.

A return to sound money will require a radical reform of financial markets, as well as the laws and regulations under which banks and investment houses work. The weaknesses of the current fiat-money system must be identified and understood by reforming governments. It also amounts to no less than discarding the entire evolution of mainstream economic thinking that has evolved in the welfare-states since the 1930s.

Revolutions of this sort normally occur after a major economic and financial failure, when the shortcomings of received wisdom are so glaringly obvious that it loses all credibility. Just occasionally, this can happen without the crisis occurring first. It appears, from what we can deduce as observers, that the assembly of the Asian and East European continent into a self-contained economic and financial unit presents such an opportunity. That was the thrust of last week’s article.

For those who have a thorough understanding of sound money and the benefits it brings to an economy, the opportunity presented by Asia rejecting the West’s unsound money system should be welcomed. The lunacy of expanding the quantity of money as a cure-all for every economic malaise, real and imagined, has led to the widespread expansion of debt to unsustainable levels. It is no exaggeration to say that the global financial system, being based on the dollar, is now exposed to a final collapse, worse than that of the financial crisis of 2008-09, and leading inevitably to the destruction of the fiat currencies we use today.

The destruction of unsound money will not happen overnight. It will come from the central banks’ response to the next global debt crisis. In such a crisis, the banking system, being geared through the fractional reserve system, will cease to exist without central banks bailing it out with unlimited quantities of raw money.

There is little point in trying to predict the timing of this increasingly certain event, or how the crisis will first manifest itself. We know that the credit cycle progresses remorselessly from rescue, to recovery, to bust. The bust is yet to come. The bust, thanks to the groupthink imposed by forums such as G20 meetings and central banks liaising through the Bank for International Settlements, is increasingly a global affair.

If China, Russia and the SCO can grasp the opportunity to escape the unsound money-system of the Western establishment, they will at least partially insulate three billion people from a global currency disaster. That will ultimately benefit the rest of humanity. We must applaud that, even though the introduction of sound money policies in Asia will almost certainly bring forward the crisis in the indebted welfare-states; that is going to happen anyway. For this reason, the change from unsound monetary policies to the rigid rules of sound money must be progressed in such a way that blame is not apportioned to China and Russia for the monetary disaster that will befall us. Instead, we should be grateful that a significant core of global economic activity will escape widespread monetary destruction. The return to a gold standard and the insulation from financial catastrophe that China and Russia will hopefully provide should guide us in our post-crisis monetary reform.

The effect on commodity prices

By remonetising gold into the monetary system of a large economic bloc, demand for gold will be increased. We saw the reverse of this effect on silver in the period 1875-1900. When most countries with a silver standard demonetised it in in favour of gold. In the late nineteenth century, its price relationship with gold moved from exchange ratios corresponding approximately to Sir Isaac Newton’s ratio of 15.5, to considerably higher levels through a collapse of the silver price. Today the ratio is over seventy. The reason for the relative collapse in silver was not hard to understand. The removal of its use as money (except as coin tokens) meant it was then priced for alternative uses. While industrial uses of silver over the years have changed, its value as an industrial metal was always considerably less than for its former use as money.

Thus, it is with gold, demonetised from the financial system, but with an added twist. Under the cover of limited convertibility with the dollar, the dollar was continually debased following the ban on public ownership of gold under the Gold Reserve Act of 1934. Since the official price was raised to $35, the quantity of dollars and dollar credit has increased at a monthly compounding annualised rate of about 5%, until the last financial crisis, when that rate sharply accelerated to 12%, measured by the fiat money quantity. The monetary arrangements were set by the Roosevelt administration and then by the Bretton Woods Agreement. The objective was to permit the expansion of the quantity of dollars, while retaining the pricing stability of gold. The removal of gold from the monetary system after the Nixon shock in 1971 was the inevitable conclusion of this dishonest arrangement, following which the gold price naturally rose, measured in dollars. Today, gold is approximately $1200 in its current demonetised form.

There can be little doubt that the remonetisation of gold for the currencies of a significant portion of the world’s population will drive up the price of gold against the other currencies. This is the reason I recommended that a period should be permitted for the gold price to adjust, before the rate of exchange with is set, first the yuan and then roubles.

It is also important that China, in the first instance, announces it has sufficient gold for the standard to stick, so that it has no need to acquire further bullion from the markets. It is likely, however, that other central banks, particularly the Reserve Bank of India, will want to build their own gold reserves, rather than accept a gold-backed yuan as backing for the rupee. These are political, rather than economic, judgements. India has for some time tried to acquire as a national asset the physical gold held by its citizens and the Hindu temples, with little success. India’s requirements for gold to back its own currency in the SCO is too great to be satisfied at current prices through market purchases. Furthermore, other Asian central banks will also want to add to their gold reserves.

We can conclude therefore that the remonetisation of gold will, with a high degree of certainty, lead to a substantial increase in the dollar price. On this basis alone, the dollar prices of energy and all industrial commodities will be heavily influenced by the decline of the dollar relative to gold. But there is a further consideration. The expansion of derivative markets since the 1980s has amounted to a synthetic supply of commodities generally, suppressing prices below where they would otherwise be without that synthetic supply. We are acutely aware of this effect in gold and silver, but it is not confined to these precious metals.

As the world’s largest importer of energy and industrial materials, this price suppression has been to China’s benefit, so far. Doubtless, China has been broadly content for dollar suppression of commodity prices to continue in the ordinary course of business. Maintaining a stable yuan/dollar rate has also allowed Chinese-based manufacturers to profit from export markets generally, setting in motion a wealth-transfer accumulation in favour of Chinese citizens. But things are changing. Most obviously, President Trump is determined to stop China from running an export surplus with the US, likely to lead to trade tariffs and barriers.

Fortunately for China, she is now almost ready to discard America as a strategic market, building on trade in Asia instead, and with Europe via the overland rail link. The days of exporting cheap goods are over, and the economy is being upgraded towards a greater content of technology, automation, and quality. The similarities with the development of the Japanese economy between 1950 and 1980 are striking. Additionally, China is causing an industrial revolution to occur throughout the Asian continent. In conjunction with Russia (which is along for the ride) Asia, through the SCO, is becoming an integral part of China for economic purposes.

It is now in China’s interest for imported commodities to be as cheap as possible, rather than the yuan being a held as a competitive currency to foster exports. Furthermore, the rapid expansion of bank credit since the great financial crisis has led to an accumulation of bank deposits that is likely in time to reduce the purchasing power of the yuan, unless this tendency is offset by a rise in the exchange rate.

This is the underlying logic for anchoring the yuan to gold. In doing so, the cost of imported commodities will fall at the same time as China faces price inflation pressures from earlier monetary expansion.

The economic effects

Preventing a fall in the purchasing power of the yuan will be a growing priority, as China’s middle classes increase in their numbers. Not only are factory workers and businesses accumulating wealth, but the Chinese authorities plan to redeploy yet more people from the land into the cities. This will add as many as 200 million people to the urban areas to alleviate a looming labour shortage.

The shortage of labour is bound to be reflected in higher wages for a population already holding in aggregate an uncomfortable quantity of cash deposits. The rate of increase in prices has so far been modest, with the CPI annual increase falling from 4.6% in 2010 to under 2% last year. It will be increasingly likely that prices will now rise at a faster pace, the consequence of a shift in preferences from holding excess money to owning goods. In short, the next phase of progress for China, in accordance with the current five-year plan, will require the purchasing power of the yuan to be stabilised.

This is the economic reason for the yuan to go onto a gold standard. It is likely to be a popular move with the people as well, who have been encouraged to accumulate gold in recent years. A golden yuan will reward savers, and it is savings that drive successful economies. Witness Germany and Japan in the post-war years, and compare them with the Keynesian failures of consumption-driven economies, notably that of the UK. Furthermore, the yuan will need enhanced credibility from gold, if it is to become the trade currency of choice throughout Asia, because gold is regarded as the saver’s money throughout the continent.

Modern economists will say that a sharply revalued yuan will undermine the terms of trade. This is to misunderstand the origins of trade imbalances, which arise principally from differentials in rates of growth of money supply and savings. So long as these are unaffected, a rising currency rate does not alter the balance of trade, only affecting the short-term profitability of exporting businesses. The response of an exporting business to a rising base currency is to invest in more efficient production to restore margins. Again, this is confirmed by the empirical evidence of Germany and Japan in the last century. China is already automating labour-intensive functions to a degree never seen before, rapidly improving output per worker.

The balance of trade will only deteriorate if the savings rate deteriorates, and if China’s savings rate remains significantly higher than those of her trading partners, she will continue to run a trade surplus, even on a stronger dollar/yuan rate. Furthermore, China, with the addition of the other SCO members, is due to become the largest internal market the world has seen since Roman times, marginalising the trade balance issue anyway.

We can therefore be sure China will continue to have a trade surplus, even with the yuan tied to gold. More worrying is the destabilising effect of introducing sound money on the other (unsound) currencies. If, as I suggested in my earlier article, China imparts a 4% yield to gold through the mechanism of an irredeemable bond yielding that rate on a currency-gold convertible basis, the effect on markets with gold lease rates of about 0.25% will be to drive the gold price sharply higher. This is another reason there must be a period between the announcement of the new gold standard and its implementation.

The effect on the dollar’s purchasing power would be to undermine it relative to that of gold. It will not take very long for this to be reflected in the dollar prices of other commodities, because commodity prices tend to be more stable expressed in gold than in fiat currencies. The undermining of the dollar’s purchasing power against commodities may not be immediate, but it is likely to accelerate as markets adjust to these new price relationships, making price inflation the dominant problem in America. The rise in interest rates that is bound to follow will certainly lead to systemic difficulties for the American banks.

Bank regulation

The reintroduction of sound money will have a major impact on the way banks operate. Fortunately, the Chinese government owns the major banks, so it can dictate banking policy without the repercussions that the Americans would face in the same situation from a powerful banking lobby. This is the crux of the argument in favour of a monetary system based on sound money, because the state must restrict the growth of bank lending to supress the credit cycle.

The degree to which sound money can be mixed with unsound money banking practices is necessarily very limited. If China embarks on a gold-backed yuan, it cannot continue to use unbridled credit expansion as a monetary or economic tool.

The history of the gold standard in the nineteenth century clearly showed that the expansion of bank credit always ended in a credit crisis. To avoid the crisis, the solution is to do away with bank credit. It is an open question whether the Chinese would be bold enough in its banking reform to do this, and whether they understand that the business cycle is in fact no more than a credit cycle. On this point hangs the durability of a sound-money arrangement.

If China does grasp this nettle firmly, it will need to separate deposit-taking from loan business. For customers, there must be a separation of spending liquidity from their savings. Spending liquidity can be maintained in cash or electronically in a custody account at a state bank, for which there will necessarily be service charges and no interest paid. Savings are recycled to borrowers through lenders who are forbidden to lend money they do not possess, only lending money they have already had pre-committed for the purpose. In short, public savings do not become the property of a lending bank.

Insurance companies are already in this business, as are peer-to-peer lenders. There will be plenty of alternative sources of funds for borrowers in an economy without fractional reserve banking, and modern advances in financial technology make both deposit-taking and the loan business cost-effective.

The arrangements of a banking system based on sound money are relatively simple to understand. The restrictions to its introduction lie elsewhere, because the global banking system as currently constituted has too many vested interests for sound-money systems to be adopted by Western governments. Bank regulators and bank executives have no experience of how a sound-money system works, instead seeking to control lending risk in a highly-leveraged fiat-money system. The essential flaw in this approach is to assume a state regulator understands commercial risk. And because the regulator is out of his depth, the system is always open to being gamed by the banks, while regulators are under political pressure not to admit to the presence of systemic weaknesses.

It is not only the regulators and the bank executives who are locked into a banking system that must ultimately fail. The economists that advise them are firm believers in the expansion of bank credit as a means of encouraging business activity and consumer spending. Keynesians and monetarists alike view the support of sound money policies as a form of mental aberration. But this is more than anything else a reflection of how far state-driven thinking has become removed from the realities of the markets.

Concluding remarks It is one thing to advocate sound money policies to replace the unsound money we all use today, but it is another to implement them. It requires a new revolution in economic thinking, and an understanding of why sound money matters with respect to prices. Its introduction is likely to disrupt the currencies and economies of the countries that remain with unbacked fiat money systems. Furthermore, if a sound-money arrangement for a currency is to be long-lasting, it will require the end of fractional reserve banking.

The purpose of this article has been to draw attention to just a few of the practical difficulties in reintroducing sound money. Sound money is radically different from what we have today, and so the only chance it will be reintroduced for the Western currencies is in the wake of a financial crisis so great that these unsound currencies are destroyed.

While this outcome is increasingly likely, no government or central bank is likely to give up easily the power of creating money out of thin air. This is certainly true in the West’s welfare-states, where there are enormous future commitments, considerably greater than can be covered through taxation. It is less true in China, Russia, and the member-states of the SCO, who could relatively easily adopt gold backing for their currencies, for the long-term benefit of their economies.

However, it would be a stretch of imagination to assume that the Chinese and Russians, as leaders of the SCO, fully grasp the implications with respect to monetary reform of this nature. Instead, the move towards gold backing for the yuan and then the rouble, if it happens, is likely to be on strategic grounds, or politically motivated.

That was the assumption in my original Insight article, published last week. This is a move that, if it happens, will be driven by evolving geopolitical interests, which appear to have accelerated since President Trump came to office. That being the case, we can only assume that once introduced, a sound-money yuan, or a rouble backed by gold, will be just the start of a revolution in economic thinking, exposing Keynesian and monetarist myths that are now so obviously undermining the future of the welfare-states.

- Source, Alasdair Macleod

Friday, July 14, 2017

Bitcoin Price Suppression?

Cryptocurrencies are a threat to the U.S. dollar. Economist Jerry Robinson cautions investors the rules of the game can change. “Anything that challenges U.S. dollar dominance, is going to be heavily regulated.” 

Cryptocurrencies are under-owned by investors, Robinson says. Only about three percent of U.S. retail investors have exposure to cryptocurrencies. Robinson predicts we’re still in “the early innings” of the boom/bust cycle in cryptocurrencies. 

But remember: the rules of the game can change! Robinson says cryptocurrencies could be regulated and suppressed. Stay tuned to learn Robinson’s strategy to prepare for rule changes in the investing world…

- Source, SD Bullion

Monday, July 10, 2017

Real Physical Gold vs Manipulated Paper Gold

Long time readers of The Daily Coin may remember we interviewed Peter Boehringer, the architect for the German Gold Repatriation Movement. Peter has been skeptical of the information provided by the Bundesbank since day one. Bundesbank, Germany’s Central Bank, has never once produced a gold bar serial number, an assay or any actual tangible proof that Germany has ever received any of the gold they requested from clutches of the Federal Reserve. 

This would have never been a question as Germany would have all their gold had World War II turned out different and the Germans feared the Russians would steal their gold. So, they allowed their gold to be moved to the New York Federal Reserve and France for “safe keeping”. I feel confident the Germans were strong-armed by the “allies” after WWII and forced to give up a portion of their gold. Even in the 1940’s, it seems, “Russia did it” was the meme of the day. – but I digress.

- Read More on Sprott Money, Here

Thursday, July 6, 2017

Prepare For Asset Price Declines of 50 to 75%

Any sense of prosperity in today's economy is based on a falsehood, claims Steve St. Angelo, proprietor of the SRSrocco Report website.

Like we here at, Steve is a student of energy. He shares our worldview that net energy per capita has been in steady decline, and a result, future growth will be limited. Also like us, he notes that the "growth" seen over the past several decades hasn't been due to surplus net energy (which makes being able to do more possible). Instead, it has been fueled by debt -- which essentially steals prosperity from the future and consumes it today.

Any third-grader with a crayon can quickly tell you that kind of scam can't last forever. And it can't. Once the can can't be kicked any further and the next economic and/or financial crisis is upon us, Steve sees today's over-inflated asset prices quickly dropping by a gut-wrenching 50-75%.

- Source, Peak Prosperity

Monday, July 3, 2017

Alasdair Macleod’s Market Report: Half-Year Blues

Gold and silver prices were hit on Monday by a $2bn sale of Comex gold futures at about 0400 hrs EST, when US traders were not around to challenge it. Rumours of a “fat finger” appear wide of the mark. More likely it was a too-big-to-fail bank taking out all the stops to window-dress its books ahead of the half-year accounting deadline.

Derivative markets in gold and silver are generally directionless, so it is a good time for this sort of operation. Consequently, gold is down $13 from last Friday’s close, and silver off about five cents, in early European trade this morning (Friday). Since 31st December, gold is up 8.25% and silver 4.65%. Silver’s underperformance is notable, though it appears to be finding a base.

It is time to look at gold priced in the major currencies, which is our next chart.

This chart exposes the relative weakness of the dollar, because the performance of the gold price in the other currencies has been more disappointing. Priced in euros, gold is up only 1%, and in sterling and yen, less than 5%. While global physical ETF holdings have remained generally stable (meaning the public are holding their positions) there can be little doubt that public interest in Europe, the UK and Japan is subdued.

That may be about to change. Recently, year and half-year ends have proved to be turning points. They are also the time when accounts are made up, and traders’ bonuses calculated, which is almost certainly why markets have been weak ahead of the event, recovering afterwards. Importantly, for Asian value buyers this half-year effect and dollar weakness means gold is now up less than 5% in Indian rupees, and up only 5.4% in Chinese yuan. Besides central bank buying, physical demand from these important sources appears to be putting a floor under the gold price.

A separate consideration is what is happening in base metals. Earlier this year, the Chinese authorities decided to take out the investment funds (aka wealth management products) which were front-running the state’s purchases of industrial materials. Copper, the bell-weather for industrial demand, had run up sharply to $2.74 per pound before the State intervened in February, falling to as low as $2.48 in mid-May. Since then, WMPs have been absent from the market, and under the influence of dollar weakness, the copper price has recovered back to $2.68.

This indicates that China’s deliberate attack on Chinese speculators, who were creating bubbles, has generally succeeded and is behind us (we must reserve judgement on crypto-currencies), and state buying programmes aimed at stocking up for infrastructure spending in both China and for the Silk Road projects has resumed. Aluminium, lead, nickel and zinc are all confirming copper’s improving trend.

These developments could be giving some relative support to the silver price, as dealers note firming base metal prices. In any event, silver appears under-priced, with the gold-silver ratio back up at 74.8. This is our last chart.

All in all, there appears to be a better-than-evens chance that precious metals will recover from current depressed levels in the coming weeks, as the half-year accounting affect passes, and sentiment begins to reflect the influence of rising base metal prices.

All in all, there appears to be a better-than-evens chance that precious metals will recover from current depressed levels in the coming weeks, as the half-year accounting affect passes, and sentiment begins to reflect the influence of rising base metal prices.

- Source, Gold Money

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