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2015: The Year Of The Slump?
Submitted by Alasdair Macleod via GoldMoney.com,
2014 ended with two ominous developments: the strength of the US dollar and a collapse in key commodity prices.
It is tempting to view both events as one, but the continuing fall in oil prices through December reveals they are sequential: first there was a greater preference for dollars compared with other currencies and this still persists, followed by a developing preference for all but the weakest currencies at the expense of raw materials and energy. These are two steps on a path that should logically lead to a global slump.
Dollar strength was the first warning that things were amiss, leading to higher interest rates in many of the emerging economies as their central banks sought to control investment outflows. Since this followed a prolonged period of credit expansion these countries appear to be entering the bust phase of the credit-driven boom-and-bust cycle; so for them, 2015 at a minimum will see a slump in economic activity as the accumulated malinvestments from the past are unwound. According to the IMF database, emerging market and developing economies at current prices account for total GDP of over $30 trillion, compared with advanced economies' GDP totalling $47 trillion. It is clear that a slump in the former will have serious repercussions for the latter.
As the reserve currency the dollar is central to the exchange value of all other currencies. This is despite attempts by China and Russia to trade without it. Furthermore and because of this dependency, the global economy has become more geared to the dollar over the years because it has expanded relative to the US. In 2000, the US was one-third of global GDP; today it is about one-fifth.
The second development, falling energy and commodity prices, while initially driven by the same factors as dollar strength, confirms the growing likelihood of a global slump. If falling prices were entirely due to increased supply of the commodities involved, we could rejoice. However, while there has been some increase in energy and commodity supply the message is clear, and that is demand at current prices has unexpectedly declined, and prices are now trying to find a new equilibrium. And because we are considering world demand, this development is being missed or misread by economists who lack a global perspective.
The price of oil has approximately halved in the last six months. The fall has been attributed variously to the west trying to bankrupt Russia, or to Saudi Arabia driving American shale production out of business. This misses the bigger picture: according to BP's Statistical Review 2014, at the beginning of last year world oil consumption comfortably exceeded supply, 91.3million barrels per day compared with 86.8. This indicates that something fundamental changed in 2014 to collapse the price, and that something can only be a sudden fall in demand in the second half.
Iron ore prices have also halved over the last six months, but other key commodities, such as copper which fell by only 11% over the period, appear to have not yet adjusted to the emerging markets slump. This complies with business cycle theory, because in the early stages of a slump businesses remain committed to their capital investment plans in the vain hope that conditions will improve. This being the case, the collapse in demand for energy can be expected to deepen and spread to other industrial raw materials as manufacturers throw in the towel and their investment plans are finally abandoned.
Therefore the economic background to the financial outlook for the global economy is not encouraging. Nor was it at the beginning of 2014, when it was obviously going to be a difficult year. The difference a year on is that the concerns about the future are more crystallised. This time last year I wrote that we were heading towards a second (to Lehman) and unexpected financial and currency crisis that could happen at any time. I only modify that to say the crisis has indeed begun and it has much further to go this year. This is the background against which we must briefly consider some of the other major currencies, and precious metals.
Japan and the yen
The complacency about Japan in the economic and investment communities is astonishing. Japan is committed to a scale of monetary inflation that if continued can only end up destroying the yen. The Bank of Japan is now financing the equivalent of twice the government deficit (¥41 trillion) by issuing new currency, some of which is being used to buy Japanese equity ETFs and property REITs. By these means pricing in bond, equity and commercial property markets has become irrelevant. "Abenomics" is about financing the government and managing the markets under the Keynesian cover of stimulating both the economy and animal spirits. In fact, with over ¥1.2 quadrillion of public sector debt the government is caught in a debt trap from which it sees no escape other than bluff. And since Abenomics was first embarked upon two years ago, the yen has fallen from 75 to the US dollar to 120, or 37%.
Instead of learning the lessons of previous hyperinflations, mainstream economists fall for the official line and ignore the facts. The facts are simple: Japan is a welfare state with an increasing and unsustainable ratio of retirees to tax-paying workers. She is the leading advanced nation on a debt path the other welfare nations are closely following. Consensus forecasts that the Japanese economy will be stimulated into recovery in 2015 are wide of the mark: instead she is destroying her currency and private sector wealth with it.
Eurozone and the euro
In the short-term the Eurozone is being revisited by its Greek problem. Whether or not the next Greek government backs off from confronting the other Eurozone members and the ECB remains to be seen. The problems for the Eurozone lie considerably deeper than Greece, made worse by politicians who have been reluctant to use the time bought by the ECB to address the structural difficulties of the 19 Eurozone members. The result is the stronger northern bloc (Germany, Netherlands, Finland and Luxembourg) is being crippled by the burden of the Mediterranean states plus Portugal plus France. And Germany and Finland have suffered the further blow of losing valuable export business from Russia.
In the coming months the Eurozone will likely face gas shortages from Russia through the trans-Ukrainian pipeline, and price deflation driven by energy and other commodity prices. Price deflation spurs two further points to consider, one false and the other true: lower prices are deemed to be recessionary (false), and falling prices increase the burden of real debt (true). The consequence is that the ECB will seek ways to expand money supply aggressively to stop the Eurozone from drifting into an economic crisis. In short, the Eurozone will likely develop its own version of Abenomics, the principal difference being the Eurozone's timeline is behind Japan's.
US and UK
Japan and the Eurozone account for total GDP of $18.3 trillion, slightly more than the US and added to the emerging and developing economies, gives a total of $48 trillion, or 62% of global GDP for nations leading the world into a slump. So when we consider the prospects for the US and the UK, together producing $20.4 trillion or 26% of the world's GDP, their prospects are not good either. The UK as a trading nation exposed to the Eurozone has immediate risk, while the US which is not so dependent on international trade, less so.
Precious metals
The foregoing analysis is of the primary economic drivers for 2015 upon which all else will ultimately depend. The risk of a global slump can be called a first order event, while the possibility of a banking crisis, derivatives default or other market dislocation brought on by a slump could be termed a second order event. There is no point in speculating about the possibility and timing of second order events occurring in 2015, because they ultimately depend on the performance of the global economy.
However, when it becomes clear to investors that the global economy is indeed entering a slump, financial and systemic risks are certain to escalate. Judging this escalation by monitoring markets will be difficult because central banks, exchange stability funds and sovereign wealth funds routinely intervene in markets, rendering them misleading as price signals.
Precious metals are the only assets beyond the long-term control of governments. They can distort precious metal markets in the short term by expanding the quantity of derivatives, and there is a body of evidence that these methods have been employed in recent years. But most price distortion today appears to have come from bullion and investment banks who are fully committed to partying in bonds, equities and derivatives, and for which gold is a spoiler. This complacency is bound to be undermined at some point, and a global economic slump is the likely catalyst.
The dangers of ever-inflating currencies are clearly illustrated by the Fiat Money Quantity, which has continued to expand at an alarming rate as shown in the chart below.

FMQ measures the amount of fiat currency issued as a replacement for gold as money, so is a measure of unbacked monetary expansion. At $13.52 trillion last November it is $5.68 trillion above the long-established pre-Lehman crisis growth path, stark evidence of a depreciating currency in monetary terms. Adjusting the price of gold for this depreciation gives a price today the equivalent of $490 in dollars at that time and quantity, so gold has roughly halved in real currency terms since the Lehman crisis.
Conclusion
There is compelling evidence that 2015 will see a global slump in economic activity. This being the case, financial and systemic risks will increase as evidence of the slump accumulates. It can be expected to undermine global equities, property and finally bond markets, which are currently all priced for economic stability. Even though these markets are increasingly controlled by central bank intervention, it is dangerous to assume this will continue to be the case as financial and systemic risks accumulate.
Precious metals are ultimately free from price management by the state. Furthermore, they are the only asset class notably under-priced today, given the enormous increase in the quantity of fiat money since the Lehman crisis.
In short, 2015 is shaping up to be very bad for fiat currencies and very good for gold and silver.
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Yes, but what about all the printed prosperity?
Sounds like a broken record. I'll wait until it happens before I rent the kayak and scuba gear to salvage the gold and silver I lost in that unfortunation boating accident.
If I might ask...at what price did you buy the boating accident PMs?
That is part of the beauty accounting difficulty with gold coins...no serial numbers to keep track of a cost basis, and no reporting of the sale to the IRS...if you pay cash at the coin dealer.
.....add to that my memory is not what it used to be.
Bu you are missing my point. At this point in my life, I don't see there ever being a time that I care what the cost basis of any PM that I used to own before it's unfortuate disapperance. I could be wrong, and if I am I'll just do my best to remember what I paid for it a few months prior to the sale date.
Good grief, I don't even remember what we are talking about.
Hey EscapeKey, [Yes, but what about all the printed prosperity?]
It's a four letter word. It's called, "poof".
;-D
"Sounds like a broken record. I'll wait until it happens before...salvage the gold and silver"
I agree, Its very unlikely the bottom of the dollar is going to fall out in 2015. The Yen will probably fall first and I doubt Japan will fail in 2015. I think PM's may decline in 2015 (Buying opportunity) since I see the global economy falling back into recession. Hopefully we'll see a collapse in PM prices in 2015, just like oil has.
Its about damn time.
Prepare for the collapse by transferring your wealth into gold and silver.
Help me here....price of Gold has already risen to point where buying now would make no sense since it will get monkey hammered soon back down to $ 1,100.00. Just the buyer's fee will eat up any potential profit.. I don't see how any money can be made in physical gold in this environment with the commissions and fees eating up all of the profit margins Might as well buy some physical soybeans since there is at least a market where you buy it directly from any producer. Silver is cheap, until you start adding on commissions to buy it. So exactly do I buy gold or silver without being upside down upon delivery.?
If you are looking for a trade and trying to estimate the profit in buying and selling PMs, you shouldn't be buying it. If you don't know why I said that, you have made my point.
Crystal ball much?
"Cash For Gold" is the second episode of South Park, Season Sixteen. It explains exactly how to buy gold without being upside down upon delivery.
That video is no longer available.
One. You must be willing to click on my hyperlink.
Two. You must be willing to take advantage of old people.
Three. You must be willing to take advantage of child labor in third world countries.
Or you can skip 1-3 and just pay a nominal premium to your local coin dealer for providing a valuable service.
Four. Go read this comment. Think about it before you buy anything.
Five. If you still don't get the point, read "one second after".
Six. If you now are beginning to think I'm a blathering idiot, stick to savings bonds.
The goal of buying gold is not to make money. Gold IS money. The idea is that since United States Dollars, bonds, stocks, debt, and all other paper assets will soon be worthless, gold is an easy way to RETAIN your purchasing power.
Here's a good chart for buy points.
http://www.nowandfutures.com/images/cot/GC.png
Commercials go more short into rallies, then go less short into dips.
In my book, trading in and out is not an option. I look at it as exiting the dollar until sanity prevails. That's years (forever?) away.
I thought that as the money supply goes up ... the dollar goes down. But, Iguess, the old adage is better ... "If we print it, they will come"
Nope. Money gets destroyed as well.
And I don't mean old currency destroyed by the Fed or Treasury.
Yeah of the slump, followed by central bank doing the rump hump to everyone holding dollars.
In reality, this thing should have imploded a long time ago. Who's to say that this cannot keep going for a dozen more years?
We are living in a matrix right about now, who can say it is gonna stop anytime soon.
pods
Real crashes happen when everyone has decided the party will continue on forever........I agree, I don't think we are there quite yet, but it becomes alot more likelly in the next 2-3 years as all the naysayers are converted one by one.
Agreed. The crash cannot cvome under a black man as President. It can only occur under a REP President as that maintains the Fed Reserve and Inv bank status quo of playing both sides against the other.
What matters is, it happens during a transition period so both sides can blame the other.
During that time, the HNIC will tell everyone how he lowered unemployment and the stock marker is the highest ever and it's Bush 3rds fault
..
Agreed sir. I drink a blue pill coctail each night but the effects are never lasting.
In short, 2015 is shaping up to be very bad for fiat currencies and very good for gold and silver.
written by GoldMoney.com, lulz
There is compelling evidence that 2015 will see a global slump in economic activity.
The slump has been ongoing for a long time. Question is whether the algos will stand down to allow the veil of the uber-inflated equities market to reconnect with reality.
Kinda like this: ?
http://fofoa.blogspot.com/2014/12/global-stagnation.html
I remember some ZHer arguing way back in 2008 that gold was poised to skyrocket to $50K/oz. He even had some pretty charts to defend his assertion. Six years on and it's still the same nonsense here. Gold won't do shit for you if the world goes to hell, but have at it anyway!
2008 ? Says the guy in 2015 with a 4 year 46 week history. (Impressive time length)
Hmmm, well seeing as there are posts in 2008 about gold being substantially 'lower than-it-should-be' I would conclude the same thing.
You see with gold you need a seller and, unfortunately, a buyer. And, imo, when shit hits the fan (I think it will be due to soaring water prices) gold wont help you AT ALL. You will just be one of those idiots who has gold - along with all the others who have gold that no one will want to buy.
You know what people will want? Having property near a nice lake, or river, that isnt getting dredged by Nestle or Monsanto.
So go buy some lakefront property instead of gold coins. You will make more money with the property anyways, looking at historical trends.
Gold is one of the most actively traded properties in the modrn world. Look at the Forex market. Every day over 300 billion dollars is traded with the symbol XAU. All of this is paper gold but there is a physical market too that must exist to give the paper market validity. If this physical market fails the paper market and all that trillions of dollars in trading each month will severely impact the rest of the forex and all derivative markets. Those who just look at the Comex are missing the much bigger picture. Gold is central to the world monetary system. If you doubt that just re-read the CBGA.
http://www.gold.org/reserve-asset-management/central-bank-gold-agreement...
...all 4 of them!
try again, Zero Hedge didn't start until Jan 09.
Gold= portable land. The best of both worlds,especially if you need/want to move.
Yes, it will suck. So what's new?
This shit show should have gone tits up years ago as everyone knows. The central banks will keep right on doing what they have been doing.
Distortions will contiune to grow and at some point become to grotesque to deny or cover up. Of course as long as the majorty buy into to the illusion to charade goes on!
The outcome will be...FUBAR
I remember only too well the government apparatchiks and commentators who disdained those trying to point to the evidential based fact that a crash was coming, two months before it happened in 2008.
Is that chart legit? Is it true that there is 15 trillion dollars of total fiat currency on earth while Citbank put the state on the hook for 300 trillion in losses? Can someone please explain this to me?
It's too legit to quit, son.
-100 for quoting MC Hammer Lyrics ;)
It used to be called a deflationary depression. Now in wuss speak its negative inflation
A lot of hype lately or more like stinking bullshit to be straight on the matter of a recovery.The fascist U.S. Government has a completely Centrally planned manipulated Market.You could call it "Central planning Soviet Union style".The drop in oil is manipulated and it's not just to try to break Russia.It's the Fed's attempt to try the present angle on the economy hoping it'll stimulate but it will backfire once again.Here's where we are with millions on food stamps and the labor participation rate at all time lows.Now they destroy all the good paying jobs across the country in the oil patch.They'll destroy the Texas next.The rest of the bullshit just plain stinks(CNBC).
http://soberlook.com/2015/01/rising-deflationary-risks-in-united.html
....and Eric Holder said just today that his greatest fear is "domestic terrorism". DHS is not here to protect the people from the bogeyman. DHS is here to protect the elites from the people.
Yes and Kerry said global warming was a HUGE cloud hanging over the whole world. Much worry about "says big brother"
>>>
2015 is shaping up to be very bad for fiat currencies and very good for gold and silver
<<<
The trouble is it is shaping up very good for one currency (USD), very bad for commodities generally, and if we really do get a global slump then gold is going much, much lower...
Watson
Alasdair, like all money-grubbers, is talking his book and his book just happens to be gold.
I'll tell you for whom 2015 is shaping up to be good. Rich fucking bankers, politicians, wall street traders, anybody who likes to fuck with the system, various car dealers, CEOs, school teachers, cops, firemen and public paper pushers who get paid a shitload more than they should.
In total, 2015 should be a good year for anybody who is at least marginally informed and not a complete, clueless moron. Banks are loaning me money at 0% interest for 18 months, but, on the other hand, won't give me a mortgage on a home I can afford, even with 30% down.
So, who's the fucking moron in the room. Me, for taking their money, stashing it away and then buying real estate with their cash (which I may or may not pay back, but probably will), or them, for loaning me scads of short term unsecured money at 0% and even more at anywhere from 19 to 23%, while at the same time denying me access to a place to fucking live with secured money on a longer term at 4-5-6%?
Basically, don't answer that. It's an educated bet. Probably, we're both stupid, but I'm just a little, tiny bit dumber than the bankers.
No mention of the G-20's plans to implement monetary reform in 2015, Al?
https://g20.org/wp-content/uploads/2014/12/2015-TURKEY-G-20-PRESIDENCY-F...
"...words have played their part. 2015 will be the time for the deeds and the year of implementation.”