Money Supply

European equities are seen softer at the North American crossover as continued concerns regarding global demand remain stubborn ahead of tonight’s Chinese GDP release. Adding to the risk-aversion is continued caution surrounding the periphery, evident in the Spanish and Italian bourses underperforming today. A key catalyst for trade today has been the ECB’s daily liquidity update, wherein deposits, unsurprisingly, fell dramatically to EUR 324.9bln following the central bank’s cut to zero-deposit rates. The move by the ECB to boost credit flows and lending has slipped at the first hurdle, as the fall in deposits is matched almost exactly by an uptick in the ECB’s current account. As such, it is evident that the banks are still sitting on their cash reserves, reluctant to lend, as the real economy is yet to see a boost from the zero-deposit rate. As expected, the European banks’ share prices are showing the disappointment, with financials one of the worst performing sectors, and CDS’ on bank bonds seen markedly higher. A brief stint of risk appetite was observed following the release of positive money supply figures from China, particularly the new CNY loans number, however the effect was shortlived, as participants continue to eye the upcoming growth release as the next sign of health, or lack thereof, from the world’s second largest economy.

On occasion of the publication of his new gold report (read here), Ronald Stoeferle talked with financial journalist Lars Schall about fundamental gold topics such as: "financial repression"; market interventions; the oil-gold ratio;  the renaissance of gold in finance;  "Exeter’s Pyramid"; and what the true "value" of gold could actually look like. Via Matterhorn Asset Management.

Erste Group's Ronald Stoeferle, author of the critical "In gold we trust" report (2011 edition here) has just released the 6th annual edition of this all encompassing report which covers every aspect of the gold space. What follows are 120 pages of fundamental information which are a must read for anyone interested in the yellow metal. From the report:  "The foundation for new all-time-highs is in place. As far as sentiment is concerned, we definitely see no euphoria with respect to gold. Skepticism, fear, and panic are never the final stop of a bull market. In the short run, seasonality seems to argue in favor of a continued sideways movement, but from August onwards gold should enter its seasonally best phase. USD 2,000 is our next 12M price target. We believe that the parabolic trend phase is still ahead of us, and that our long-term price target of USD 2,300/ounce could be on the conservative side."

As many observers have noted, you can expand the money supply but if that money ends up stashed as bank reserves, it never enters the real economy, nor does it flow into household earnings. The velocity of that "dead money" is near-zero. M2 declined in the housing bubble as the velocity of money skyrocketed: everyone was pulling money out of housing equity via HELOCs (home equity lines of credit) and spending the "free money" on cruises, furniture, big-screen TVs, boats, fine dining, etc. The recipients of that spending also borrowed and spent as if the "free money" would never end. If M2 expansion is the only thing propping up an artificial market, what happens to the stock market rally as M2 rolls over?

A lack of transparency, a lack of enforcement of law and a compliant media which failed to ask the hard questions and do basic investigative journalism led to the price fixing continuing and the manipulation continuing unchecked on such a wide scale for so long - until it was exposed recently. Similarly, the gold market has the appearance of a market that is a victim of “financial repression”. Given the degree of risk in the world – it is arguable that gold prices should have surged in recent months and should be at much higher levels today. The gold market has all the hallmarks of Libor manipulation but as usual all evidence is ignored until official sources acknowlege the truth. However, like LIBOR the gold manipulation 'conspiracy theory' is likely to soon become conspiracy fact.  It will then – belatedly - become accepted wisdom among 'experts.'  Experts who had never acknowledged it, failed to research and comment on it or had simply dismissed it as a “goldbug accusation.”  Financial repression means that most markets are manipulated today - especially bond and foreign exchange markets.

Josh Barro of Bloomberg has an interesting theory.  According to him, conservatives in modern day America have become so infatuated with the school of Austrian economics that they no longer listen to reason.  It is because of this diehard obsession that they reject all empirical evidence and refuse to change their favorable views of laissez faire capitalism following the financial crisis.  Basically, because the conservative movement is so smitten with the works of Ludwig von Mises and F.A. Hayek, they see no need to pose any intellectual challenge to the idea that the economy desperately needs to be guided along by an “always knows best” government; much like a parent to a child.  CNN and Newsweek contributor David Frum has jumped on board with Barro and levels the same critique of conservatives while complaining that not enough of them follow Milton Friedman anymore.

To put this as nicely as possible, Barro and Frum aren’t just incorrect; they have put their embarrassingly ignorant understandings of Austrian economics on full display for all to see.

A question on the minds of many people today (increasingly those who manage or invest money professionally) is this: How do I preserve wealth during a period of intense official intervention in and manipulation of money supply, price, and asset markets? As every effort to re-inflate and perpetuate the credit bubble is made, the words of Austrian economist Ludwig Von Mises lurk ominously nearby: "There is no means of avoiding the final collapse of a boom brought about by credit expansion. The alternative is only whether the crisis should come sooner, as the result of a voluntary abandonment of further credit expansion, or later, as a final and total catastrophe of the currency system involved." Because every effort is being made to avoid abandoning the credit expansion process -- with central banks and governments lending and borrowing furiously to make up for private shortfalls -- we are left with the growing prospect that the outcome will involve some form of "final catastrophe of the currency system"(s). This report explores what the dimensions of that risk are.

WGC stresses that when looking at the effects of variables like money supply and inflation on the gold price, it is important to look at the global economy, and not concentrate only on what is happening in the US. After the start of the financial crisis in 2007, many governments and central banks in the world implemented monetary and fiscal policies to help their economies, but these policies have led to a large increase in the global money supply.

Savers and retirees aren’t the only ones getting screwed by interest rates that have been artificially suppressed by central banks around the world.  These days, banks themselves are finding it increasingly difficult to earn even a nominal return on instruments they consider safe. Just last week, Denmark’s Nationalbanken set its deposit rate below zero for the first time, effectively charging commercial banks and others a fee for parking their surpluses in krones. There are numerous reasons why the krone would be a magnet for idle money. For one, Denmark’s economy is among the strongest in Europe. Also, because Danes rejected euro-zone membership in 2000, they enjoy a degree of political and economic autonomy that their neighbors do not have. This will presumably make Denmark less susceptible to the shock waves that follow the inevitable implosion of Greece, Spain, Italy et al. Small wonder, then, that the global stewards of OPM would consider the krone a safe haven even though it now guarantees them at least a small loss on their money. From Denmark’s standpoint, the decision to follow the European Central Bank’s latest rate cut was unavoidable. The alternative would have been to sit idly by as the krone appreciated, hobbling the country’s exports and destabilizing its balance sheet.

A generation of market participants has grown up knowing only the era of central bankers and the 'Great Moderation' of (most of) the last two decades elevated their status significantly. While central bankers are generally very well aware of the limits of their own power, financial markets seem inclined to overstress the direct scope of monetary policy in the real world.

If markets fall, investors need only to run to central bankers, and Ben Bernanke and his ilk will put on a sticking plaster and offer a liquidity lollipop to the investment community for being such brave little soldiers in the face of adversity

Monetary policy impacts the real economy because it is transmitted to the real economy through the money transmission mechanism. This has become particularly important in the current environment, where, as UBS' Paul Donovan notes, some aspects of that transmission mechanism have become damaged in some economies. Simplifying the monetary transmission mechanism into four very broad categories: the cost of capital; the willingness to lend; the willingness to save; and the foreign exchange rate; UBS finds strains in each that negate some or all of a central bank's stimulus efforts. In the current climate, it may well be that the state of the monetary transmission mechanism is even more important than monetary policy decisions themselves. Some monetary policy makers may be at the limits of their influence.

Steve Forbes has a message for a nation dominated by increasingly short-term decisions made on Wall Street and in Washington D.C., and by ever greater economic, financial and currency instability.  As long as America continues moving away from sound money; away from sound financial and economic policies; and, ultimately, away from freedom, its future grows more dim.  The dot-com and housing bubbles followed by the 2008 financial crisis and the most severe economic decline since the Great Depression serve as powerful lessons.  A future of bigger government, higher taxes, more burdensome regulations, less consumer choice and more unrealistic government promises requires more and more Federal Reserve play money. Steve Forbes has a quintessentially American policy prescription rooted in American history.  The answer to America’s economic problems is—and has always been—new wealth creation.  New wealth creation doesn’t come from the government or from the Federal Reserve’s printing press.  New wealth creation is what happens naturally with stable money based on the gold standard, lower taxes on individuals, a simplified tax code, reduced bureaucracy and free markets.

Recent economic data, and especially today's unemployment numbers reveal the powerlessness of the Fed in the face of underlying economic problems that they fail to understand. The Fed has tried every trick in the book for the past 4 years to revive the economy only to see it continue to weaken. Unfortunately they only know how to do one thing—print. The ultimate effect of this will be more economic stagnation, not real economic growth. Here is why.

"It's impossible to have a political solution to a balance sheet problem" says Paul Brodsky, bond market expert and co-founder of QB Asset Management. The world has simply gotten itself into too much debt. There are creditors that expect to be paid, and debtors that are having an increasingly difficult time making their coupon payments. No amount of political or policy intervention is going to change that reality. (Unless a global "debt jubilee" transpires, which Paul thinks is unlikely). Looking at the global monetary base, Paul sees it dwarfed by the staggering amount of debts that need to be repaid or serviced. The reckless use of leverage has resulted in a chasm between total credit and the money that can service it. So how will this debt overhang be resolved?

Central bank money printing -- and lots of it -- thinks Paul.

Negative interest rates continue to penalise pensioners and savers in European countries and this will lead to further diversification into gold. Financial markets are already starting to wonder about the solidity of last week's summit measures to tackle the euro zone crisis and soon they may question whether even looser monetary policies will help prevent recessions and sovereign defaults. With Independence Day today (Happy July 4th to all our American followers, clients and friends), the ECB decision tomorrow and NFP on Friday, trading should be quite today but as we know illiquid markets can lead to outsized market moves. We tend to try and avoid predictions in GoldCore as the future is largely unknowable and there are so many variables that drive market action that it is nigh impossible to predict the future price of any asset class. However, our opinion has long been that over the long term all fiat currencies will depreciate and devalue against the finite currency that is gold. For this reason we have long held that gold would reach its inflation adjusted high of $2,400/oz and silver its inflation adjusted high at $140/oz and the equivalent in euros, pounds and other fiat currencies. Gold at just over $1,600/oz today remains 33% below its record nominal high in 1980. Silver at just over $28/oz today remains 80% below its record nominal high in 1980. However, we have tended to focus on the important diversification, store of value and safe haven benefits of owning physical gold (and silver) bullion.

The gold exchange standard period, which followed WW2, was a period of unprecedented and unparalleled expansion, productivity growth, technological innovation, and financial stability. The Bank of England’s recent report on the gold standard periods concluded:

"Overall the gold standard appeared to perform reasonably well against its financial stability and allocative efficiency objectives."

The BBC concludes by quoting former Chancellor of the Exchequer Lord Lawson:

"You can’t force a government to stay on gold, so therefore gold has no credibility."

Do you see the cognitive dissonance here? If we are to believe Lord Lawson, gold has no credibility, because governments have previously proven themselves untrue to their word. Surely the thing that has no credibility is not gold, but government promises? And that is the answer to the BBC’s initial question.