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Posts by: Gary Mead

Soapbox: Kick the can down the road

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Soapbox Kick US Image

Today, 3 December, is the deadline by which the US was to have raised its debt ceiling. The US has a very poor record when it comes to handling money; if it was an individual or family it would have been evicted years ago.

It has for years always spent more money than it collects in taxes – it has a permanent shortfall, which it covers by borrowing. This debt ceiling farce started in 1917, when the US Congress passed the Second Liberty Bond Act, by which it also established a debt ‘ceiling’ on how much debt the government could run up. But America regularly busts that limit – since 1917, the limit has been raised 102 times. In October 1918, the US launched its Fourth Liberty Bond, with a call date – the date on which the issuer has the right to redeem the bond at par, or a small premium, prior to the state maturity date – of 15 October 1933. The terms of this bond included the statement: “The principal and interest hereof are payable in United States gold coin of the present standard of value”, which was common in both public and private contracts of the time, and was intended to guarantee that bond-holders would not be harmed by a devaluation of the currency.

Soapbox US Debt Graph

But when the US Treasury called this fourth bond on 15 April 1934, it defaulted on this term; it refused to redeem the bond in gold; neither did it account for the devaluation of the dollar from $20.67 per troy ounce of gold (the 1918 standard of value) to $35 per ounce. The 21 million or so bond holders therefore lost 139 million troy ounces of gold, or approximately 41% of the bond’s principal, equivalent to $2.866 billion (in 1918 dollars) and $250 billion in 2021 dollars.

The legal basis for the refusal of the US Treasury to redeem in gold was the gold clause resolution dated June 5, 1933. The Supreme Court held this to be unconstitutional under section 4 of the Fourteenth Amendment. But the Treasury got away with this piece of chicanery because President Franklin D. Roosevelt had signed an Executive Order (number 6102) in 1933, which forbade “the hoarding of gold coin, gold bullion, and gold certificates within the continental United States”. So the Supreme Court ruled that the bond-holders’ loss was unquantifiable, and that to repay them in dollars according to the 1918 standard of value would be an “unjustified enrichment”. Not until December 1974 was this ban on holding gold repealed.

The clock ticks loudly

The clock is ticking in the US. Lots of legislation is piling up to be dealt with before the end of 2021. For one thing Congress needs to approve the National Defense Authorization Act, an annual bill to fund the US military. President Joe Biden is also anxious to get his ‘Build Back Better’ Bill, which will plough $1.75 trillion into childhood education, public healthcare and climate policies, passed. Chuck Schumer, the Democratic Senate majority leader, has vowed to get this passed by 25 December.

But perhaps more important (because if it’s not approved it could force a shutdown of many federal services) Congress needs to agree to continue funding the government by raising the debt ceiling. The US national debt is rapidly approaching $29 trillion; that’s around 126% of US gross domestic product (GDP). Some sources put the debt at more than $140 trillion. Janet Yellen, Treasury Secretary, has warned on several occasions that unless Congress agrees to raise the self-imposed debt ceiling the US government risks having what she calls “insufficient remaining resources” after 15 December. Or in less euphemistic language, the government will run out of money to pay wages, bills, and contracts.

That the US government might default would be catastrophic; it would destroy trust in the world’s biggest economy; according to the White House itself, “financial markets would lose faith in the United States, the dollar would weaken, and stocks would fall. The US credit rating would almost certainly be downgraded, and interest rates would broadly rise for many consumer loans, making products like auto loans and mortgages more expensive for families… These and other consequences could trigger a recession and a credit market freeze that could hurt the ability of American companies to operate”. The Bipartisan Policy Center says that “even a short-term default could lead to higher borrowing costs and liquidity concerns for the private sector, increased unemployment, stock market losses, and GDP contraction, further threatening the country’s recovery from the COVID-19 pandemic and recession”.

That’s surely enough to send shivers down the spine of everyone in Congress.

The chair of the US Federal Reserve, Jerome Powell, has often said this year that US inflation is “transitory”; on Tuesday this week he changed his tune and said it “now appears that factors pushing inflation upward will linger well into next year”. With annualised US inflation now above 6%, the US will certainly borrow more, in the certainty that inflation will nibble away at the debt.

Soapbox Federal Debt Graph

We’ve been here before

US journalists are fond of saying that their country has never defaulted on its debts which, as we have seen, is not quite accurate. In 1814, the US Treasury was unable to meet all its obligations, including some interest payments on federal debts at the end of the war with Britain. The US also failed to make timely payments to some small investors in early 1979, and that was seen as a mini-default.

Congress narrowly avoided running the US into a default in August, when it passed a stopgap measure that raised the debt ceiling by $480 billion, to around $28.4 trillion, to enable the country to limp through to December. The Bipartisan Policy Center estimates that the crunch date, i.e. when the US will no longer be able to meet its obligations, in full and on time, will be close to mid-December.

Even the mere threat of a default would produce serious negative ripples in the global economy. And that’s why the whole debate seems somewhat artificial – surely no American legislator would seriously risk the stability of the global economy?

Except that we live in strange times. Leading Republicans have been insisting that Democrats “go it alone” to raise the debt ceiling, by using a complex legislative procedure called reconciliation. In the early 2000s, Republican Congresses routinely used reconciliation to increase the budget deficit. Democrats however are reluctant go down this route, because it’s slow, time-consuming but also because they understandably want to share the guilt around. The most likely outcome is that this can, now the size of a dumpster, will continue to be kicked down the road, and we will be facing this same debt ceiling question in 2022.

Gold for Christmas

That the US Congress is evenly balanced between Republicans and Democrats is clearly a recipe for legislative paralysis. But this speaks to a bigger problem confronting the US – its deep political divisions and the apparently irreconcilable hostility between grass-roots Democrats and Republicans. A year ago the Pew Research Center said of the US “finding common cause… has eluded us”. As inflation has crept back, apparent threats from hostile powers have ratched-up, and new variants of the coronavirus pop out of the woodwork, the healing that many hoped for under the new US President remains elusive. And behind that is an even bigger problem – the sheer scale of US debt. How long can the US carry on piling up this debt? Will buyers of US Treasury bonds, long regarded as one of the safest investments in the global financial markets, continue to buy them ad infinitum? The debt ceiling didn’t even hit $1 trillion until 1982, 30 years ago. The nation isn’t fighting a world war but government is borrowing like it is.

Risks are everywhere. The risk to your hard-earned money is perhaps the least obvious but the most grave. We don’t know where the next major threat to value will come from, but we do know one means of getting protection, one that has proved its resilience throughout history – gold.

At Glint, we make every effort to demonstrate a balanced conversation between gold, crypto and fiat currencies when it comes to purchasing power and, while we strongly believe that gold is the fairest and most reliable currency on the planet, we need to point out that it isn’t 100% risk free. While we have seen a steady increase over time, the value of gold can fall, which means that its purchasing power can also decline.

Bullion Bulletin: India sows confusion over crypto policy

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Bullion India Crypto

India’s policy towards cryptocurrencies has taken a few swerves. Unlike gold, which has a secure place in Indian hearts and minds, cryptocurrencies are the new kid on the block. As many as 20 million Indians have bought cryptocurrencies and have spent about 400 billion Rupees (around $5.3 billion) on them. The most popular cryptocurrency in India is Bitcoin, which dominates on the global stage too.

But the Indian Parliament, the Lok Sabha, will consider a Bill in the current session that might have a profound impact on cryptocurrencies and also India’s payments systems. The Cryptocurrency and Regulation of Official Digital Currency Bill, 2021 – would, says the official announcement, “prohibit all private cryptocurrencies in India” but allow “certain exceptions to promote the underlying technology of cryptocurrency and its uses”. What those exceptions might be has yet to be specified.

The Bill will also “create a facilitative framework for creation of the official digital currency to be issued by the Reserve Bank of India”. Central Bank Digital Currencies (CBDCs) are a hot topic for central bankers these days, as cryptocurrency developments have pushed them into fast-evolving technology as they try to protect their control over money.

India’s finance minister, Pankaj Chaudhary, says the government has already received a proposal from the Reserve Bank of India (RBI, India’s central bank) to amend the Reserve Bank of India Act 134, to “enhance the scope of the definition of ‘bank note’ to include currency in digital form” and that the RBI has been working on an “implementation strategy” to roll out a CBDC “with little or no disruption”.

There are two strands to this news. The most immediate is that the leading cryptocurrencies fell in value by as much as 20% when this news broke. India is (or was) potentially a huge market for cryptocurrencies, even though only around 50% of the country’s 1.4 billion people can access the internet. A tightening of the screws on India’s crypto market follows the crypto-crackdown earlier this year in China. Having the world’s biggest markets officially reduced cannot be good news for cryptocurrency warriors.

But perhaps the longer-term and more important strand is the clear signal that India is going all-out for a CBDC. The development of a digi-rupee may be slow and its implementation may be cumbersome; but Narendra Modi’s government has nailed its colours to this mast.

How might this affect gold? Indians buy a lot of gold but the country’s gold reserves amount to some half a gram per person; match that against Switzerland, with reserves of some 136 per capita. But most of India’s gold is in private hands – it’s estimated that as much as 25,000 tonnes is privately held by individuals and families. Imported gold is regularly the second most-costly import item (after crude oil) for India.

Why do Indians accumulate gold? The fundamental reason is trust. Since independence in 1947 there have been three official devaluations of the Indian Rupee. In 1947 the exchange rate was $1/INR1; today it’s $1/INR75. Gold for Indians is physically safer, and arguably financially more reliable. The country’s CBDC will be controlled, when it comes, by the government; to become a reliable and universally accepted currency will require considerable trust.

Soapbox: The boom goes on

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Soapbox Boom Image

What’s the rationale for Glint? Several benefits come to mind.

For one thing, it’s an inexpensive and easy way of buying and holding physical, allocated gold, gold that truly belongs to its owner – so it suits those of us looking to diversify our portfolio into something that has over centuries proved to hold its value.

It’s also a payments system, one that that enables its users to spend – and in some markets to send – gold as money. It frees its users from networks of fiat, or paper, currencies. Rather than governments controlling what you can use as money, you can choose to use gold for your everyday transactions. It’s also truly democratic; anyone can hold a Glint debit card and use the Glint App in those regions where we operate.

As the world moves closer to unsustainable debt levels, these advantages of having and being able to use gold as money, no matter how tiny the amount, will certainly become more relevant, more useful. For the “cruel tax” (which is how a paper published in 2001 referred to inflation), is back. This paper surveyed almost 32,000 people around the world, asking them about their views on inflation. The conclusion was that inflation “makes the poor worse off”; the poor “suffer more from inflation than the rich”.

And the higher the inflation goes, the deeper the pain. In the US, annualised inflation is now running above 6%, according to government figures ; independent analysts using the methodology that used to be deployed by the government in 1980 put the rate at 14%. In the UK, the official rate of inflation is now 4.2%. In the Eurozone, it’s now 4.1%, although that conceals the fact that energy prices went up by 23.5%.

In the US, the discount retail store Dollar Tree, which has almost 8,000 branches, has been known for its slogan “Everything’s $1”. Soon it’ll need to change that to “Everything’s £1.25” – it recently said it will have to push up prices for most merchandise to $1.25. When prices go up, they tend never to fall back.

So, depending on what fiat money you hold and use, its purchasing power – which surely is what really counts, what you can actually buy with your money – is currently losing that power by at least 4%-6% a year, or, if you shop at Dollar Tree, by 25%. Rich or poor, everyone who relies on fiat money is being punished. The boom goes on, despite underlying evidence that it’s already bust and is living on credit.

Bloating states

The chart above shows that the US is on track to accumulating a lot more debt. The debt level of all countries has soared as a consequence of the economic recession created by the response of governments to the Covid-19 pandemic. The lockdowns were a blunt instrument; the monetary ‘stimulus’ dished out by governments were an equally blunt device to prevent outright economic depression. As people have gradually come to look upon governments as having a duty to protect them and their incomes no matter what, and the world population ages (by 2050 1 in 6 people will be over 65, up from 1 in 11 in 2019), the pressures on states will become ever-greater. The temptation will be for governments, or perhaps the pressures on them will force this, to borrow more to fund immediate welfare needs or demands. Governments can only raise income by taxation, spending cuts, or taking on more debt. The least politically sensitive way is by bloating the debt level, which may help the boom to go on but at the cost of loading repayments onto future generations. Modern Monetary Theory argues that governments who control their own currency need not worry about debts – unless inflation returns, which it has; it’s interesting how little one hears from MMT proponents these days.

According to the Institute of International Finance (IIF), global debt in the second quarter of this year rose to a new record high of almost $300 trillion – $36 trillion more than prior to the pandemic. Over the last 40 years, total debt has more than tripled to 350% of global gross domestic product (GDP). The number of countries whose total debt is more than 300% of their GDP has gone up in the last 20 years from half a dozen to around 24, including the US.

Several questions pop up about this level of debt. Is debt accumulation now beyond control? What will happen to debt levels when the US pushes up interest rates? The first question is probably unanswerable but the second will become more pressing as we approach the point, perhaps by mid-2022, when the US Fed starts putting up interest rates.

We have had a taste of what might happen this past week. When the news broke that Jerome Powell would be re-appointed as chair of the US Fed, the US Dollar strengthened against other currencies and the gold price slipped by about 4.5%. The market ignored Powell’s previous passive record on evidence that inflation is threatening to get beyond control, and assumed that he might put up interest rates faster, and end America’s quantitative easing faster.

But no matter when it happens, the US will start to put up interest rates sometime next year. The US Dollar will strengthen and that will tend to depress the value of other currencies, not least those of emerging markets. The boom will come to a shuddering halt in the US and all the heavily indebted emerging markets.

The gold price will also take a hit from higher US interest rates, which will make for a stronger US Dollar. Higher interest rates will make credit more expensive, so most assets that have boomed during the recent years of easy money and cheap credit will also be hit – think house prices, cryptocurrencies, stock markets. Powell is acutely conscious that he needs to avoid delivering a blow to the US economy, so he will tread softly. But tread he eventually must and the cost of servicing the US debt – which was more than $562 billion for the 2021 fiscal year – will rise.

Full circle

We come full circle. Why hold gold? Clearly gold is not impervious to shifts in wider markets – its value can go down as well as up. At Glint, we strongly believe that gold is the fairest and most reliable currency – and for us it is currency and is to be used as such. And as the world inexorably moves towards heightened macroeconomic and geopolitical uncertainty it seems to me to make sense to possess gold. We don’t give financial advice. But a glance at a price chart, such as the one below, suggests that gold overall gains in value, despite its ups and downs. Gold is not transitory; it is forever.

 

Bullion Bulletin: All the gold in the world

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Bullion Bulletin Gold Image

One of the major selling-points – a unique selling point (USP) if you like – of Bitcoin is its promise that supply will be limited. Supposedly just 21 million coins will ever be created; as of August 2021, 18.77 million have been mined. The origins of Bitcoin are fairly well-known; the first two developers were Satoshi Nakamoto, a mysterious figure whose existence has been questioned and Martti Malmi, a Finnish software engineer. According to Bitcoin.org, “Bitcoin is controlled by all Bitcoin users around the world… nobody owns the Bitcoin network… nobody can speak with authority in the name of Bitcoin”.

Limited supply, controlled by no individual or group, virtually indestructible, highly valued and used as a form of money… that’s gold! But all those qualities are also aspired to by Bitcoin (and other forms of computer-created digital tokens). No-one seems to agree what Bitcoin actually is: the US Treasury categorises Bitcoin as a decentralised virtual currency; the Commodity Futures Trading Commission classifies it as a commodity; the Internal Revenue Service classifies it as an asset. For some, notably former US Presidential hopeful Hillary Clinton, Bitcoin is a threat to the US Dollar’s reserve currency status and “has the potential” for destabilising nations.

Yet if one of Bitcoin’s USPs is its inherent scarcity – which could be overturned if all Bitcoin network users agreed – then surely that’s one of gold’s USPs too. And even though people might long for more gold to be produced, that longing counts for nothing – especially in a world which is inexorably moving against environmental depredations of any kind.

Virtually indestructible, almost all of the gold that has been mined is still around. The World Gold Council (WGC) estimates that total above-ground gold stocks are around 201,000 tonnes, and 53,000 tonnes are under the earth. Jewellery accounts for 46% of the above-ground stock, says the WGC, official holdings 17%, private investment 22%.

If the current rate of production continues at around 3,000 tonnes a year, then known underground gold reserves will run dry in 17.6 years. Of course new gold reefs could be discovered, although in the last three years none have been found. According to S&P Global Intelligence in June 2020, “with production from existing mines expected to begin decreasing in 2022, there is a need for more high-quality assets that can be developed in the medium term”.

One source of additional gold supply is unavailable to Bitcoin – recycling. If new gold supply begins to slow, then the law of supply and demand should hold true – and the price ought to rise. That may encourage some holders of physical gold to sell, which would increase supply. But when prices are going up, the temptation is to hold on for future further gains.

When 21 million Bitcoins have been mined, and if the promises of Bitcoin’s fans hold true (that its price will skyrocket) then its ‘community’ will be sorely tempted to mine more; and fraudulent Bitcoins and Bitcoin scams will become more commonplace. The supply of cryptocurrencies is theoretically unlimited. Bitcoin is currently the favourite; will it always be?

With Glint’s allocated gold, you know your money is safe. While the world tries to figure out what Bitcoin actually is, we have centuries of history that have established gold as money.

Bullion Bulletin: For Muslims, cryptocurrency is haram

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cryptocurrency muslim

A new ruling by Indonesia’s National Ulema Council (MUI) has judged that cryptocurrencies are haram, or banned, on the grounds that it is associated with uncertainty, unlawful betting and harm.

Judging what is halal – i.e. permissible – or haram, that which is not permitted for the Islamic faithful – is tricky, even for Islamic scholars. According to professor Abdulrazaq Alaro, Head of Islamic Law at the University of Ilorin in Nigeria, it is haram to trade in cryptocurrency as it has no intrinsic value, there is high volatility and excessive uncertainty, and a high risk that is akin to gambling; trading in cryptocurrencies is just like a bubble that had the potential of bursting. Moreover, cryptos are used for illicit activities, are plagued by ambiguity and anonymity, and they are not issued/regulated by any government or constituted Shariah (or religious) authority. The Grand Mufti of Egypt – Shaykh Shawki Allam – agrees, as does Shaykh Haitham al-Haddad, chair of the fatwa committee of the Islamic Council of Europe. Other Muslim scholars disagree. The United Arab Emirates has allowed crypto trading in Dubai’s free zone; Bahrain has allowed crypto assets since 2019.

With about a quarter of the world’s population being Muslim, and the rapid growth of cryptocurrencies, deciding whether they and their use is halal or haram is clearly vital. Asrorun Niam Sholeh, head of religious decrees with Indonesia’s MUI, has said that if cryptocurrency as a commodity or digital asset can abide by Shariah tenets and can show a clear benefit, then it can be traded. Crypto transactions amounted to 370 trillion rupiah ($26 billion) in the first five months of the year in Indonesia. Indonesia’s central bank is considering the adoption of a central bank digital currency.

The MUI’s decision doesn’t mean all cryptocurrency trading will be stopped in Indonesia, but it could deter Muslims from investing in the assets and make local institutions reconsider issuing crypto assets.

What of gold and Islam? Muslim men it seems are not allowed to wear gold, although Muslim women are. Under Shariah law gold is generally considered a ‘Ribawi’ item, meaning the world’s 1.8 billion Muslims can’t trade it for future value, or for speculation. But they can, however, use gold as a currency; and Muslim women can own and wear gold jewelry.

Soapbox: Pass the poisoned chalice

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Soapbpx Federal Reserve

By this time next week, we should know who will be the next chair of the world’s leading central bank, the US Federal Reserve. President Joe Biden said this week in response to a reporter’s question: “Yes, as my grandfather would say, with the grace of God and the goodwill of the neighbors, you’re gonna hear that in about four days”. Will he re-appoint Republican Jerome Powell, who was given the job by President Donald Trump, or will he elevate Fed Governor (and Democratic Party supporter) Lael Brainard to the post?

These two are the front-runners; there is hardly a dollar bill between them in terms of their views on monetary policy. Both have recently been ‘interviewed’ by Biden. Powell, ‘Jay’ to his friends, has been on the Fed board since 2012. Brainard has sat on the Fed board since 2014. Her husband is President Biden’s top adviser on Asia. Powell is the bookies’ odds-on favorite. He took the chair in February 2018, replacing Janet Yellen, who is now Biden’s Treasury secretary. Powell’s term as chair expires in February. By previous standards Biden should have made an announcement by now: Powell was nominated by Trump on 2 November 2017; Janet Yellen was nominated by President Barack Obama on 9 October 2013; Ben Bernanke was nominated by President George W. Bush on 25 October 2005 and re-nominated on 25 August 2009.

Whoever it is will be passed a poisoned chalice. They will inherit an inflation rate running at an annualised 6.2%, the highest in a generation, and threatening to become entrenched. Non-official sources, such as Shadow Statistics, which uses the methodology in place in 1980, suggest that inflation is closer to 14%. High inflation is souring American in consumers’ views. For Biden, the choice of Fed chair is not purely economic; he faces critically important mid-term elections in 2022 and he will want someone who might improve his chances at the ballot box. That will mean the person most likely to be able to steer a course towards greater price stability. It could mean ‘better the devil you know’ – Jerome Powell.

In a conventional world – which is not where we are today – such high inflation ought to dictate a rise in interest rates. The US benchmark interest rate, the federal funds rate, was lowered to 0% in March 2020. In its November statement, the Federal Open Market Committee (FOMC), which sets rates, said it intends to keep the benchmark rate at current rock-bottom levels until inflation averages 2% over the long term. The Fed expects inflation to increase by 3.7% this year as the economy recovers, then drop to 2.2% in 2022. That looks a remote possibility right now.

Mary Daly, president of the San Francisco Fed who also sits on the FOMC, is just one influential voice against interest rate increases. She believes that higher rates now would slow the economy just when it will start to motor, in about a year’s time. The US economy is still some 4.2 million jobs short of the total level of payroll employment before the COVID-19 pandemic. Fed officials are keeping a loose monetary policy for fear the nascent economic recovery will hit the buffers.

Inflation is a global problem

The poisoned chalice for Powell, Brainard, Biden or indeed officials from other countries is that what has seemed transitory might become more permanent. If the inflation is down to supply-chain bottlenecks, there’s bad news for the ‘transitory’ adherents: ocean freight rates, what we pay for goods being shipped, may take more than two years to return to ‘normal’ levels according to those in the industry. And almost 60% of British companies are planning to raise their prices to recover rising supply-chain costs and wages, according to a just published, thrice-yearly outlook by Accenture and IHS Markit.

In the UK, the consumer price index (CPI) in October jumped to an annualised 4.2%, against 3.1% the previous month, and the fastest pace since November 2011. That’s more than double the 2% target set by the Bank of England. Moreover that CPI reading feels inaccurate to many people; the UK cost of electricity, gas and other fuels rose by 23%. The average house price in the UK went up in September by an annualised 11.8%, to a record high of £270,000. In the Eurozone, inflation in October rose at the fastest pace for 13 years.

The curse of inflation is not simply that things cost more. Inflation divides societies. Inflation which becomes uncontrolled breeds anarchy. The poisoned chalice spills its contents.

A monetary phenomenon

The US economist Milton Friedman would not be surprised at where we are today. He once said “inflation is always and everywhere a monetary phenomenon in the sense that it is and can be produced only by a more rapid increase in the quantity of money than in output”. The generous financial supports from governments everywhere during the Covid-19 pandemic are now starting to be felt. In September 2021 money supply growth in the US, i.e. basic M1 currency plus demand deposits, was almost double what it was prior to the pandemic. As economies start to get back on their feet, this money supply explosion has led to some crazy things, such as a stock valuation of would-be electric vehicle maker, Rivian, of $105 billion, zooming past that of Volkswagen, despite Rivian having almost no revenue. Loose money has encouraged greater risk taking and intensified the hunt for yield; it’s also one reason why cryptocurrencies have been so strong. People are generally flush with cash, and they want to spend it, and hope to make a quick buck with it.

Tick the boxes

Yet there are political obstacles to the simple reinstatement of Powell.

For one thing he is, for Democrats and some Republicans, tarnished by having been appointed by Donald Trump. Senator Elizabeth Warren, one of “the nation’s leading progressive voices” according to her website , a forceful Democrat, wants to impose a ‘soak-the-rich’ tax on “fortunes worth over $50 million to generate $2.75 trillion in revenue over ten years – enough to pay for universal child care, student debt relief, and a down payment on a Green New Deal”. Warren called Powell “a dangerous man to head up the Fed” in September and said that she would oppose his re-nomination. She thinks Powell in dangerous because he isn’t tough enough on banking regulation – Warren is still fighting the last war, that of 2008, rather than preparing for the next. Warren’s side of the Democratic Party favours Brainard; she also wants to see tighter bank regulation. But banks and their misdemeanours are not hot button topics right now.

Who will be better?

As gold owners and users, it probably doesn’t matter to us who sits in the Fed chair. Our mild preference should probably be for Brainard, as she is likely to be marginally more dovish when it comes to raising interest rates; she will hold off raising them for as long as possible. Pushing up US interest rates would make the US Dollar relatively stronger and thus damage the gold price.

But Powell, who seems to have the backing of Janet Yellen, has also been remarkably dovish in his handling of monetary policy. In July he told Congress that he didn’t want to raise interest rates “prematurely… One way or the other, we are not going to be going into a period of high inflation for a long period of time, because of course we have tools to address that. But we don’t want to use them in a way that is unnecessary or that interrupts the rebound of the economy”.

Fed officials have already pulled back on one leg of their ultra-easy policy, slowing the large-scale bond purchases they’ve been making for more than a year and a half to keep borrowing costs low and financial markets functioning smoothly. Those same markets are increasingly betting that the next step – rate increases – will kick off by the middle of next year.

Biden has a lot on his plate right now; he will be 79 on 20 November, an age when most people are thinking of pruning flowers rather than pruning a deficit. In December, he has to navigate through an evenly-split Congress, an increase to the limit on the federal debt (now $29 trillion or £15.57 trillion) and also hopes to persuade Congress to approve a $1.75 trillion (£1.30 trillion) spend on expanding the social safety net and climate change issues.

Biden has his own poisoned chalice; should he choose the continuity candidate (Powell) or reward his party faithful and select Brainard? For gold holders and users of gold as an alternative to fiat money it probably makes little difference. What will matter is the moment the Fed starts to push up interest rates. But neither Powell nor Brainard will think about pushing up rates until mid-2022 at the earliest. Which means that crazy stock valuations, higher house prices, more cryptocurrency gains, are likely. Biden probably needs a Fed chair (and will find it easier to get Congressional approval for) a candidate who at least tries to look hawkish; so Powell should be a shoo-in.

Soapbox: It’s the economy, stupid

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Soapbox It's the economy, stupid

Joseph Robinette Biden was elected the 46th President of the US a year ago, winning a record number (more than 81 million) of votes. Now 78, he’s spent his lifetime in politics, and was first elected to the US Senate from Delaware at the age of 29 in 1972. He has experienced personal pain; in December 1972 his first wife and year-old daughter were killed in an auto accident. He recovered from two brain aneurysms in 1988. His eldest son, Beau died of a brain tumour in 2015. His other son, Hunter, has long struggled with addictions and in 2014 joined the board of a Ukrainian company despite suspicions that it was connected to money laundering.

Biden spent eight years as Barack Obama’s vice-president. He gained the Presidency on what seemed like a tidal wave of loathing for Donald Trump but nevertheless was a very close vote – the nationwide popular vote was 51.3% to Donald Trump’s 46.9%.

Since he entered the White House in January this year Biden has scarcely had time to take a breath. Dealing with Covid, facing a China flexing its muscles, trying to achieve a bi-partisan consensus for his big spending plans, turning a blind eye to a soaring US national debt (more than $29 trillion by the time you read this), inflation threatening to get beyond control, Russia fighting a proxy war through Belarus, mid-term elections coming in 2022, trying to bring together a deeply fragmented nation, exiting Afghanistan…the problems stretch into the far distance. And his approval rating is slipping.

 

Gold under Biden

In the past 12 months, the gold price has slipped from $1,882.70 per ounce (£1,420.19) to $1,824.90 (£1,350.80), or about 4% in Dollar terms and 5% in Pound Sterling. For those who pin their faith on gold being a hedge against inflation, this is an alarming surprise. Annualised US consumer price inflation (CPI) jumped to 6.2% in October, bigger than consensus forecasts compiled by Bloomberg and the highest since 1981, when it hit 8.9%. The CPI went up by 5.4% in September. Your Dollar is currently losing around 6% of its purchasing power a year; it’s surely better to hold something that – so far this year – has lost 2% less?

Or maybe you should try your hand with a cryptocurrency? Maybe you feel you have missed Bitcoin’s boat; but new cryptocurrencies come along all the time. They hold out ‘get-rich-quick’ temptations; but they also can contain ‘get-poor-faster’ traps, as we saw recently with the Squid Game token scam. It all depends on what your goal is – is it yield or security? If it’s yield, gold’s not for you – it has no yield. But if it’s security, then a quick look at any historical gold price chart spells long-term security, despite ups and downs.

As the shocking October US inflation level was building, Janet Yellen, US Treasury Secretary, told CNN’s viewers on 24 October that “I don’t think we’re about to lose control of inflation”. Inflation is transitory, all due to supply-side bottlenecks, it’ll get better… these (or similar) words of comfort from Jerome Powell, the US Federal Reserve’s chairman, and Janet Yellen, are falling on stony ground. By this time next year all 435 seats in the US Congress’s House of Representatives and 34 out of the 100 seats in the Senate will be up for grabs. Donald Trump may be making noises off-stage but he will still be two years away from challenging for the White House and so will be less of a bogey-man at the ballot boxes. US voters are likely to remind the Democratic Party “it’s the economy, stupid” and flock to the Republicans.

 

Devil and the deep blue sea

The conventional economic action to be taken when confronting inflation is to raise interest rates. Make money and credit more difficult to come by, more expensive, and people will have less to spend, so demand will drop and prices stabilise.

Yet this obvious manoeuvre seems impossible for Powell & Yellen. The US economy was disappointing in the third quarter of 2021, just 2%, the slowest since the end of the 2020 recession. Consumer spending, which accounts for 69% of the $23.2 trillion economy, grew by just 1.6% after rising by 12% in the second quarter. The Fed has a dual mandate – price stability and “full” employment. The trouble is, while US employment has certainly recovered from its collapse in 2020, it’s still far from being “full”, however that’s defined. There are still five million fewer jobs in the US than prior to the Covid-19 pandemic. The rate at which Americans have been quitting their job is the highest it’s been in the history of the data; half of all US firms say they are unable to fill their positions.

Powell and Yellen are caught between the devil and the deep blue sea. The surge in demand, which has been fuelled by the combination of monetary and fiscal stimulus from the White House, is running into not just supply-chain logjams but a shortage of raw materials, energy, inventories, housing and workers. The Fed has signalled that it will taper its asset purchases but it’s too nervous about putting up interest rates in case that chokes off economic growth.

Yet as research from the US-based investment management firm Bridgewater Associates says: “Ongoing stimulative financial conditions have further lowered debt service costs, and incomes have also benefited as economies have reopened. In short, households are wealthy, flush with cash, and ready to spend—setting the stage for a lasting, self-reinforcing surge in demand… the gap between demand and supply is now large enough that high inflation is likely to be reasonably sustained, particularly because extremely easy policy is encouraging further demand rather than constricting it”.

Workshop of the world

In China, the world’s workshop, the producer price index (wholesale prices) rose to a record 10.7% in September – prices in mining and coal went up by almost 75%. Coal may be the bad boy of climate change activists – but it’s going to be burned by China, India, and elsewhere for years ahead.

Unlike President Biden, China’s President Xi Jinping has no need to worry about upcoming mid-term elections, although he might be a little nervous about a challenger lurking among the corridors of the Forbidden City. Nor need he worry too much about someone whispering in his ears “it’s the economy, stupid”.

This week Xi has supervised the annual plenum of China’s central committee, where he has consolidated his place as one of the country’s so-called ‘transformational leaders’, alongside Mao Zedong (said to have unified China) and Deng Xiaoping (said to have made China rich). Chinese media effusively refer to President Xi as “a man of determination and action, a man of profound thoughts and feelings, a man who inherited a legacy but dares to innovate, a man who has forward-looking vision and is committed to working tirelessly”.

David Winston, a Republican pollster, told the Los Angeles Times this week: “Expectations were high after [Biden’s] election… people expected COVID to be over; it isn’t. Voters thought they were electing normalcy, but that’s not what they’re getting… Biden’s problem isn’t just that several things have gone wrong; it’s that nothing seems to be going right”.

Next week it’s believed that the two Presidents, Biden and Xi, will hold a virtual meeting; likely to discuss their new working relationship. On Wednesday this week, they committed to work together to slow global warming. It’s probable that there will be other matters on the agenda too, all one can tell at this stage is that Biden is in trouble on many fronts, and Xi is riding high – bolstered, no doubt, by his country’s steady accumulation of gold and its readiness to roll out a national digital currency, showing how China is aware of the importance of both the old and the new. And maybe even linking them up.

Glint always tries to demonstrate balance between gold, crypto and fiat currencies when it comes to purchasing power. While we strongly believe that gold is the fairest and most reliable currency on the planet, we need to point out that it isn’t 100% risk free. While we have seen a steady increase over time, the value of gold can fall, which means that its purchasing power can also decline.

Bullion Bulletin: Nigeria gets the e-currency bug

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Bullion Bulletin Nigeria

Regular readers will know that The Treasury closely watches developments in the digital currency world. We’re convinced that while the use of cash is in decline, governments will fight tooth and nail to retain control over fiat currencies, because control over what we use as money is what really gives governments their power.

This largely explains the explosive growth of cryptocurrencies since the creation of Bitcoin. All the different types and models of cryptocurrencies share at least one thing – a determination to wrest control over currency out of the hands of governments and to place it in the hands of individuals none of whom can debauch the currency.

It hasn’t worked quite like that ideal. Bitcoin was developed in 2009, a conscious reaction against the turmoil of the 2008 global financial crash. We are still living through the ripples of the 2008 crash – many trillions of Dollars spent in quantitative easing (QE) programmes have been expended around the world since then.

Money, thought Bitcoin’s creators, was too precious to be left in the hands of governments and their lackeys. We need a form of money that’s stable, independent, for everyone – not just a privileged few. That’s part of the Bitcoin (and its imitators) philosophy and it’s what Glint believes too.

This is why the steady roll-out of Central Bank Digital Currencies (CBDCs) is so important. Representatives of the official sector – governments, central banks, international financial institutions – make a lot of noise about CBDCs being a cheaper and faster way of moving money around the world, or being about extending greater financial inclusion to the unbanked poor, and these things might be true.

But the real reasons why they are all going to embrace CBDCs is that if they wish to maintain control over currencies they need to use new technology or be left behind; and they are nervous that their control over what can and cannot be used as legal tender is slowly slipping away.

In October the G7, the world’s wealthiest liberal democracies issued guidelines for CBDCs, which said in part that any CBDC must “support and do no harm” to the bank’s ability to fulfil its mandate on monetary and financial stability, and must also meet rigorous standards. Such currencies must not infringe upon the central banks’ mandates, and they must meet rigorous standards of privacy, transparency and accountability for protection of user data, said the G7.

Meanwhile countries are rapidly adopting CBDCs. Nine months ago Nigeria’s central bank effectively banned all private cryptocurrencies, which had (understandably) been thriving in the country where the currency – the Naira – has lost 78% of its value against the US Dollar in the last two decades.

Yet Nigeria has now launched its own CBDC, the ‘eNaira’, even though more than half of Nigerians don’t have a bank account and 95% of transactions are still done in cash. The informal economy represents more than half of Nigeria’s gross domestic product (GDP). According to the Atlantic Council’s tracker, 87 countries, representing 90% of global GDP, are now “exploring” a CBDC, up from 35 in May 2020.

Some Nigerians are concerned that the eNaira will make it even easier than it already is for the government to examine and shut down accounts belonging to political opponents. That’s not a concern for China, which is preparing to introduce to the world its own CBDC at the February 2022 Beijing Winter Olympics.

But can you imagine the complete paralysis the long-deliberated eDollar will face? Jerome Powell, chairman of the US Federal Reserve, said towards the end of September that a US CBDC “is such a fundamental issue, it would be ideal if this were to be a product of broad consultation and ultimately authorising legislation from Congress”.

In other words, he threw this particular hot potato into someone else’s lap. Democracy is great – just rather slow.

Soapbox: The tapering starts

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Soapbox Tapering starts

While the world media’s attention was focused on Glasgow and the COP26 summit, another meeting took place 3,400 miles away in Washington D.C. The Washington meeting will have a much more profound short-term impact for investors and all users of fiat money than that of Glasgow. The Washington meeting of the Federal Open Market Committee (FOMC) – the Federal Reserve bank committee that is responsible for US monetary policy – deliberated for two days and came to the well-flagged view that it should start to scale back its $120 billion per month asset purchase programme, otherwise known as quantitative easing or QE. The tapering starts.

The market had already pencilled-in a ‘tapering’, or a reduction in this massive money injection, of $15 billion per month, meaning the QE programme will end by mid-2022. At the start of December the ‘tapering’ will tighten further; just $60 billion in treasury bonds and $30 billion in agency mortgage-backed securities.

The FOMC said it was “prepared to adjust the pace” of the tapering process “if warranted by changes in the economic outlook,” adding that the remainder of the bond-buying programme would “foster smooth market functioning and accommodative financial conditions” to “support the flow of credit to households and businesses”.

Abrupt actions to tighten monetary policy have been adopted by the Reserve Bank of Australia and the Bank of Canada. The Bank of England surprised everyone by not raising interest rates on Thursday this week, despite inflation (the consumer prices index, the government’s referred measure) now at an annualised 3.1%, 1.1% above the Bank’s target. Investors are betting that the European Central Bank (ECB) could raise rates next year despite recent pushback from its president, Christine Lagarde.

The context

For those who don’t recall how or why the US Fed started making its mammoth monthly asset purchases – it’s an uncomfortable memory so your amnesia is entirely understandable – it’s a bit of a tangled history.

The scheme was put in place in 2020 in the US to support the economy through the Covid-19 economic downturn. Japan has been doing QE for more than a decade; Sweden started its QE in 2015; Switzerland in 2013; the UK since 2009, the European Central Bank the same year. All these countries adopted QE because they feared deflation – they injected huge amounts of fiat currency into their economies to stoke inflation, in the belief that a dose of it would reverse a deflationary trend, stimulate demand, and thus economic growth.

So shortly after Covid-19 broke out in the US, the Fed pledged to buy $120 billion of Treasury bonds and agency mortgage-backed securities each month until it had seen “substantial further progress” towards average inflation of 2% and maximum employment. “My own view is that the ‘substantial further progress’ test is all but met,” said Jay Powell, chairman of the Fed, said towards the end of September.

We’ve been here before. In November 2008 the Fed started buying $600 billion (£440 billion) in mortgage-backed securities. By March 2009 it held $1.75 trillion of bank debt, mortgage-backed securities, which rose to $2.1 trillion (£1.54 trillion) by mid-2010. Since then the Fed has done three further rounds of QE. On 19 June 2013 Ben Bernanke, the then chairman of the Federal Reserve, tried to end QE3.

He said then that the Fed could scale back its bond purchases from $85 billion to $65 billion a month and suggested that the bond-buying programme could wrap up by mid-2014. While Bernanke did not announce an interest rate hike, he suggested that if inflation achieved a 2% target and unemployment decreased to 6.5%, the Fed would likely start raising rates. The stock markets dropped by approximately 4.3% over the three trading days following Bernanke’s announcement, with the Dow Jones dropping 659 points between 19 and 24 June. As for gold…over eight trading days after Bernanke’s words gold collapsed 13.4%. Gold had its worst quarterly performance in 93 years.

The nasty markets’ response to the proposed ending of the QE programme was enough to make the Fed hold off reducing its asset purchases. In December 2013, it said would begin to taper its purchases in January 2014; purchases were eventually halted on 29 October 2014. By then the Fed had accumulated $4.5 trillion in assets. As of 20 October the Fed’s assets stood at $8.5 trillion (£6.22 trillion).

What was once unconventional is now ordinary. This sustained expansion means that the Fed’s balance sheet (and those of other central banks) has become more exposed to market developments: a fall in the value of foreign assets or a rise in long-term interest rates could reduce the value of their assets while leaving the value of their liabilities intact. At some point, the capital of the central bank could be put at risk.

And yet the Fed, like central banks everywhere, is caught between the devil and the deep blue sea. It needs to push up interest rates, if only to show it is willing to quash inflation. But to do that risks knocking the wider post-Covid economic recovery for six.

Unlike 2013, when the bond market threw a tantrum at the mere mention of a taper, this announcement by the Fed that it’s ending QE has so far escaped causing a tantrum. Treasury yields ended the day higher, but the move was more pronounced on longer-dated maturities that are more sensitive to inflation expectations. The yield on the benchmark 10-year Treasury note ended the session back above 1.60% for the first time in a week, while the yield on the 2-year Treasury note, a proxy for Fed interest rate expectations, ticked fractionally higher to about 0.46%.

Perhaps the calm is deceptive and owes more to a persistent refusal to raise interest rates; the Fed’s chairman, Jay Powell, repeated his ‘inflation is transitory’ message, and that the Fed will stay patient and wait for more job growth before raising interest rates.

This is risky. Inflation in the US is likely to hit 6% – it’s been running at twice the Fed’s annual 2% target for the last five months. The Fed’s benchmark overnight interest rate is near zero. “We don’t think it is time yet to raise interest rates. There is still ground to cover to reach maximum employment,” said Powell on Wednesday this week.

The political context

Monetary policy in the US cannot be separated from political life, which remains as divisive as ever. The Republican, Glenn Youngkin has just been elected the next governor of Virginia, which will have sent shivers down the spine of President Joe Biden.

According to a commentary by Charles Lipson, emeritus Professor of Political Science at the University of Chicago: “on a national level Democrats have delivered only failure: inflation, onerous mandates, empty store shelves, racially-divisive school lessons, and a humiliating withdrawal from Afghanistan.” Kamala Harris, the US vice-president, said last week before the Virginia vote “What happens in Virginia will in large part determine what happens in 2022, 2024 and on.” Democrats now fear that she was distressingly correct.

Biden wants to push through Congress a $1.2 trillion (£880 billion) infrastructure package and a revised $1.75 trillion (£1.28 trillion) ‘build back better’ plan investing in childcare, public health and climate initiatives. But Congress is paralyzed and Biden is facing a widespread backlash in the mid-term elections next year and a fresh Presidential election may see the return of Donald Trump. Biden’s dreams may already be dust.

Implications for gold

History never repeats exactly, and the ending of QE in the US looks like having a very different impact on gold than in 2013. Gold-futures speculators have already done large amounts of selling in anticipation that the Fed will start tightening its loose money policies. The gold longs are relatively low and the shorts relatively high. This bearish positioning slashes the odds of a big gold sell-off on the latest tapering move. And the background context remains deeply uncertain. When the US starts to raise interest rates – probably not before mid-2022 at the earliest – the US Dollar will strengthen relative to other currencies. But it will still have lost around 5% of its purchasing power, thanks to inflation. Historically, gold has endured through thick and thin. The value of fiat currencies everywhere is being eroded by inflation; it’s time for an alternative form of money – gold.

At Glint, we make every effort to demonstrate a balanced conversation between gold, crypto and fiat currencies when it comes to purchasing power and, while we strongly believe that gold is the fairest and most reliable currency on the planet, we need to point out that it isn’t 100% risk free. While we have seen a steady increase over time, the value of gold can fall, which means that its purchasing power can also decline.

Bullion Bulletin: Gold buying in China leaps

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China’s affection for gold is proving robust in 2021, according to data published by the China Gold Association or CGA. The CGA says that between January and September this year China bought 813.59 tonnes of gold, more than 48% higher for the same period than in 2020. That’s already close to the figure for the full year’s consumption in 2020, which was 820.98 tonnes. In 2019, the figure was 1,002.8 tonnes.

Gold jewellery purchases during January-September went up by 54.21% (to 529.06 tonnes); gold coins and bars went up by 50.25% (to 214.13 tonnes); and gold for industrial uses went up by 12.66% (to 70.4 tonnes). During the same period China’s gold production was 236.75 tonnes, a year-on-year fall of 26.18 tonnes.

How much of China’s gold is in private hands and how much belongs to the state? It’s a fascinating and probably unanswerable question. The World Gold Council (WGC) says China has 1,948 tonnes of official gold reserves but other sources put Chinese gold ownership – and official reserves – much higher.

Why is China accumulating gold? It’s no secret that China wants to displace the US Dollar as the world’s international reserve currency, perhaps with a gold-backed digital currency. China’s central bank – the People’s Bank of China or PBoC – is elaborating the country’s Digital Currency Electronic Payment (DCEP), the e-CNY, which is due to be formally introduced at the next Winter Olympics, in Beijing, in February 2022.

At the 4th Digital China Summit in April this year, the PBoC showcased a machine prototype which can convert 16 foreign currencies into e-CNY. Visitors to China or returning nationals with valid passports can place foreign banknotes into the machine, which will then issue a physical e-CNY card based on the prevailing exchange rate. The card prototype can be used in retail shops that have an e-CNY payment terminal.

More than 25 million eWallets are now in use in China and able to use the digital e-CNY. China has made all private cryptocurrency transactions illegal but its state-controlled digital currency is steadily going to become the de facto method of payments for all Chinese.

This has profound implications for not just China but the world. For one thing the SWIFT (Society for Worldwide Interbank Financial Telecommunication) system, which currently governs cross-border transactions between banks, may become obsolete. SWIFT is overseen by the G-10 central banks (Belgium, Canada, France, Germany, Italy, Japan, The Netherlands, United Kingdom, United States, Switzerland, and Sweden), as well as the European Central Bank, with its lead overseer being the National Bank of Belgium.

Governments could also have direct visibility of financial transactions instead of having to ask banks to provide data. The long-term potential of the e-CNY could be that it undermines the US Dollar by enabling countries that are sanctioned by the US (and deprived of Dollars) to trade more easily and directly with China. It’s likely then, that the US will also gradually lose its ability to enforce trade penalties against companies such as Huawei.