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Posts by: Gary Mead

Soapbox: We all want a higher gold price

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GATA – the ‘Gold Anti-Trust Action Committee’ – started life in late 1998 and has for the past two decades been pounding away at its claim that the gold price is suppressed by collusive practices between central banks and large investment banks. It is a classic case of a group of conspiracy-minded people – who might just be right. GATA’s website – www.gata.org – has amassed a huge amount of evidence from publicly-available archives. Whether all this evidence will persuade you is another matter, but it certainly is detailed.

Chris Powell, a US journalist, a member of the Connecticut Council on Freedom of Information, and secretary of GATA, agreed to speak to me. “I’m not a gold ‘bug’,” he says, “I’m a transparency ‘bug’”. He got into successfully fighting trusts as a journalist. “I started reading complaints from internet site proprietor Bill Murphy, who was writing about the monetary metals markets and who went on to become GATA’s chairman. I said we should form a committee and hire an anti-trust law firm and take action. We didn’t think we would be at it more than 20 years. It took us about two years to discern that all this market manipulation was perfectly legal, because the government was doing it”.

Says Powell: “The Gold Reserve Act of 1934, as amended in the years since then, which established the US Treasury Department’s Exchange Stabilisation Fund, fully authorised the rigging of not only the gold market but to secretly rig any market in the world. Our dreams of suing the big New York investment banks went up in smoke. So, we decided our best bet to stop this was to expose it”.

GATA has turned from its hopes of running an anti-trust legal action to lobbying, to keep the pressure on those it regards as manipulating the gold price: “the direct focus of our work today is government intervention. None of this stuff would be going on if it wasn’t government policy”, says Powell. “It’s about sustaining the Dollar as the world’s global currency and driving gold out of the financial system, and to control interest rates. We have the documents. We have asked, via a US Congress Representative, the CFTC (the Commodity Futures Trading Commission) the question “does the CFTC have jurisdiction over manipulative futures trading undertaken by or at the behest of the US government? The CFTC will not answer this question”.

How does GATA believe such alleged manipulation is carried out? Powell again: “A primary mechanism by which this is done is the Central Bank incentive programme. In this programme the (futures’ exchange) operator offers volume trading discounts in all futures’ markets. It’s a matter of national security. Currency markets are being rigged in favour of the Dollar. The government has to do this trading via the brokers of all the big investment banks. Look at our documents, it’s all laid out, is this a forgery? Make up your own mind”.

Basel 3 – new bank regulatory recommendations from the Bank for International Settlements (BIS) – are due to be globally introduced in 2023. The London Bullion Market Association (LBMA) and the World Gold Council (WGC) have protested to the UK’s Prudential Regulatory Authority that Basel 3 will either kill off or make prohibitively expensive trading in unallocated gold, or paper derivatives. The BIS has no regulatory power – it’s up to the 60 individual member states of the BIS to implement Basel 3 if they choose.

Does Powell think Basel 3 will be implemented? “I think there is one plausible explanation for enforcement of the Basel 3 regulations”, says Powell. “That is, there is a new division among the major central banks. There is now an EU/China/Russia faction that is fighting the US/UK faction. Certainly, they have good reason to resent US Dollar imperialism, and the weaponisation of the Dollar. The Dollar is now the primary mechanism of US imperialism. If they can knock the Dollar down by revaluing gold, I can see that happening”.

According to Powell, “we have been living by the sweat of the brow of the rest of the world for many years. There is incredible bloat in the US, in the economy and society now. We have been enslaving the rest of the world and that corrupts us. I want the US leading the world by example and freedom and democracy and liberty. We have destroyed the free market by this rigging of the currency”.

Powell argues that gold is the competitor of the US Dollar and that the “architecture of the whole system” is designed to protect the Dollar and to keep gold in a subsidiary place. Basel 3, if implemented, could knock asunder the gold derivatives market – around 100 times more ‘gold’ is traded via this system than actually is produced each year.

China has huge ambitions for its Central Bank Digital Currency (CBDC) and hopes for Yuan can become the global reserve currency. China has a lot of gold reserves; might it choose to back its CBDC with gold? “I would be very surprised if any government wanted to directly connect its currency to gold again. Central banks were very glad to get rid of the gold standard because it brought them into the era of infinite money. Gold is a very powerful restraint on government. All government wants to do with gold is put it in its box, put it in the vault, double seal it up and make sure it never comes out”, says Powell. “But I do think that that the anti-US governments and central banks have figured that gold is their only weapon against Dollar imperialism. They know they can use gold against the US Dollar”, says Powell.

Whatever one thinks about GATA – and this piece obviously does not explore its claims in depth – if you are a supporter of gold as money then GATA is an ally in a common cause.

Even if you regard – as influential people in the gold world do – GATA as being rather fanatical, then one must recognise that the organisation is a bastion of gold. Gold shines a light on the depreciating purchasing power of fiat currencies – and, as money is power, and central banks control the money supply, central banks have a vested interest in seeing the gold price under control. Glint, whilst appreciating that the value of gold can also go down, affecting its purchasing power to the negative, believes in the longterm benefits of gold and so, sets out its stall to provide a mechanism to use gold as money – liquid, instant, safe and reliable. Although the two are not aligned in all aspects, Glint and GATA are allies in a common cause. The prominence and success of gold as a real alternative to fiat currencies.

 

Soapbox: Basel 3 – it matters for gold

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‘Basel 3’ sounds like the brand name of a nasal spray to combat hay fever. Or the third instalment (yes, there have been Basel 1 and Basel 2) of a horror movie sequence.

But it’s much more important – if rather more obscure – than either of those things and it threatens radically to change the gold world. The connection is convoluted, but crucial.

We are still feeling the effects of the last great banking crash, that of 2008. Almost 13 years on, international banking regulators (grouped together at the Bank for International Settlements or BIS) are just about to introduce a mechanism which they hope will fend off the worst if (surely that should be ‘when’?) another systemic failure happens.

The Basel Committee on Banking Regulations and Supervisory Practices, based at the BIS in Basel, Switzerland, started life at the end of 1974 after – there’s nothing new under the sun – the collapse of the Herstatt Bank, a middle-sized bank in what was then West Germany. Herstatt went bust because it had borrowed too much to stake bad bets on the direction of the US dollar. A bank gets into trouble because it borrows too much and makes poor risk decisions; sounds familiar.

When it collapsed Herstatt had accumulated losses of almost $30 million (£21 million) against assets of just $2.5 million (£1.76 million). Herstatt’s bankruptcy brought to light systemic risks associated with the increasing internationalisation of banks. That’s when Basel 1 appeared. Basel 2, which we are still living with, happened in June 2004 and was “aimed at rewarding and encouraging continued improvements in [bank] risk measurement and control”. Basel 2 failed; the events of 2008 showed that.

When the heavily indebted US investment bank Lehman Brothers collapsed in September 2008 people began to fret about the collapse of the global credit system. The Basel Committee (as it’s now known) set about trying to “strengthen the regulation and supervision of internationally active banks”. Basel Committee wheels grind slowly but surely.

Two years later, in 2010, the Committee issued a draft of proposals (Basel 3), aimed at the creation of a “global regulatory framework for more resilient banks and banking systems”. Among the many pages of Basel 3 you can find a proposal to raise minimum liquidity coverage ratios for banks and to introduce a Net Stable Funding Ratio (NSFR). Some of Basel 3 will take effect for European banks at the end of June. In the UK, all changes are due to become effective as of 1 January 2023.

The goal of these new regulations is to limit risk levels that banks take on in their eager hunt for profits. One unexpected and possibly unforeseen result of these regulations will be to undermine bullion bank trading in unallocated gold metal. Here’s where it gets really interesting.

Most bullion traded is not physical but a derivative, such as via an exchange traded fund (ETF) and settled on an unallocated account basis. Under this the customer does not own the gold but has only a general entitlement to an amount of metal. Not only does a customer with an unallocated account not own the gold; they are just a creditor of the bank. Legally, they are merely a depositor of gold. So, when, or if that bank collapses the person holding unallocated gold will have to stand in line with many other creditors all trying to get their money back. Bullion banks engage in what could be called ‘fractional precious metals trading’; they trade far more gold than they hold in their vaults. All unallocated gold obligations appear on the bank’s balance sheet.

Gold fans have already started salivating at the possibility of much higher gold prices as a consequence of the introduction of Basel 3; they see a decline in the trading of unallocated gold and a higher gold price. But for now, the link between any potential decline in the trading of unallocated gold and a higher price is purely hypothetical.


Source: Bullion Star

Paper promises

There are about 35 bullion banks active in the global gold market. The London Bullion Market Association (LBMA) says it has 76 full members around the world – refiners, dealers, traders, banks and others. This includes 12 market makers, who are obliged to provide buy and sell quotes. Market members pay the LBMA £26,500 a year for their membership.

In London, all bullion trade is done by a group of bullion banks through a private company called the London Precious Metals Clearing Limited (LPMCL). The majority of gold held by the LPMCL clearing banks is unallocated; this gold can be lent and is held on the bank’s balance sheet. In March alone this year more than 600 tonnes of gold, valued at more than $34 billion (about £24 billion) was bought or sold – ‘cleared’ through the LPMCL. Global mine production in 2019 was 3,300 tonnes of gold. Over the course of a year much more gold is traded than the annual supply. How is that possible?

The answer is that most of this gold is traded via the derivatives market, or contracts that derive their value from an underlying entity. Paper, in other words.

Metal shortage ahead?

Allocated gold is never recorded on a bank’s balance sheets, simply because the bank doesn’t own it; Basel 3 is all about trying to minimise systemic risk in banking, so balance sheets are what count. Bullion banks’ unallocated gold however is recorded on their balance sheets. Basel 3’s NSFR (Net Stable Funding Ratio), would require the banks to hold 85% of the value of this gold. So, to comply with the NSFR banks would either have to create a huge increase in their shareholders’ equity to provide the required reserves, or their dealing in unallocated precious metals will become very much more expensive and also difficult to fulfil. They are unlikely to take custody of many times the quantity of physical precious metals that they now hold – there just isn’t enough physical metal available. Nor do they have the storage capacity to hold enough physical gold.

The bottom-line implication of Basel 3 is that, according to some, trade in unallocated metal in London and New York would be “wiped out”.

All this debate is entangled in conspiracy-minded allegations about how central bank gold lending, with commercial bullion banks willing participants, is done to artificially repress the gold price.

Will Basel 3 become implemented in full or diluted? Some powerful lobbying against Basel 3 has already been started by two of the most powerful forces in the gold world – the London Bullion Market Association (LBMA) and the World Gold Council (WGC). They have sent a joint protest letter to the Prudential Regulation Authority, the UK’s banking regulator, saying “the effects [of Basel 3] would not just be limited to the London OTC (over-the-counter) market but would be felt globally across the entire gold value chain”. So, it may be that Basel 3 gets watered down. It’s too early to tell.

Basel 2 failed, according to one academic, because of ‘regulatory capture’ – “large international banks were able to systematically manipulate outcomes in Basel II’s regulatory process to their advantage, at the expense of their smaller and emerging market competitors and, above all, systemic financial stability”. The fate of Basel 3 – the future price direction of gold – may hinge on the power of “large international banks” which can dictate “the regulatory agenda”. Or on the degree to which the Basel regulators might resist being taken hostage.

I have no opinion on the allegations about the suppression of the gold price. But I do have an opinion on how you should hold your gold – in an account that specifically allocates the gold to you. Glint is not a bank, it is not a member of the LBMA and gold is not regulated by the Financial Conduct Authority. If you hold gold through Glint, no-one can lend, borrow, or otherwise mess with it. Meanwhile, we need to keep an eye on Basel 3.

Soapbox: Mark Mobius speaks – The asset manager who backs gold

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“At the end of the day, when you look at all these currencies around the world, they have all devalued – throughout history all currencies have devalued”. That’s how Mark Mobius, former executive chairman of the Templeton Emerging Markets Group and now a founding partner of Mobius Capital Partners, opened our conversation. The author of many books, his latest (published in 2020) has a timely title – The Inflation Myth and the Wonderful World of Deflation. I spoke to him in his Hong Kong office (via Zoom, of course) to find out what he thinks of gold today and how he sees the rise of cryptocurrencies.

“The good news is that because of technology the cost of goods and services is going down. Inflation measures don’t really tell us that because they refer to baskets of goods and services which constantly change, so you can’t really compare one period to another. I still believe a gold standard would make a lot of sense because it would prevent governments from over-printing [fiat currency] and devaluing their currencies”.

We stray onto the topic of Central Bank Digital Currencies, about which Mark holds strong opinions. He says: “The entire financial world is being digitised. What is this digitisation? It’s just another way of communicating the value of money from one place in the world to another. So if a central bank says now ‘we’re going to digitise US dollars’, that’s entirely different from Bitcoin for example, which is a created ‘currency’ that has no basis in a government or any foundation. People are getting confused over Blockchain. Blockchain is a very simple mechanism for ensuring safety in transactions. A lot of people think this is a solution to the problem of transferring money – no, this is not a solution because Blockchain can be hacked”.

As for gold, Mobius says that “gold goes through cycles. Sometimes it loses value against fiat currencies but going forward it will continue to rise simply because those currencies continue to be devalued. There’s a limit to the amount of gold available around the world. So I think gold will come back and surge”.

Money is power said the 7th US President Andrew Jackson. Mobius agrees and feels “that’s why these cryptocurrencies will not be available as real money, in other words as money which you could spend. You can see that already – the US government is starting to crack down on the various cryptocurrency exchanges. I think governments will increasingly crack down on these cryptocurrencies because it threatens the very power of governments, which is the ability to create money”.

Elon Musk’s decision not to allow Bitcoins to buy his Tesla cars was couched in terms of “the rapidly increasing use of fossil fuels for bitcoin mining” tweeted Musk; but his abrupt volte-face on Bitcoin – on 24 March he said people could buy a Tesla using Bitcoin – nevertheless shook the Bitcoin price and rocked its claim to currency ‘status’. In the UK, the Bank of England’s deputy governor, has just said that “it looks probable in this country that if we want to retain public money capable of general use, and available to all citizens, the state will need to issue, public digital money”. In other words, if governments want to retain control over money – if they want to keep power – they will soon need to provide digitised fiat currency.

Some countries are already rapidly rolling out their own central bank digital currencies, including China. Might the Chinese Renmimbi be about to topple the US dollar from its international reserve currency status? Mobius thinks “not yet. It will take a while. The big challenge that the Chinese have is that they still want to control the exchange rate against other currencies. The day they give up on that is when the Renmimbi could become a truly global currency. The effort to create a digitised Renmimbi makes a lot of sense for the Chinese because the big problem they have now is they have to work through the US system, in most cases to trade, the Swift system, which monitors and enables the transfer of money. The degree to which they can create a digitised currency which does not require going through this system could be an incredible boon for the Renmimbi”.

Mobius is dismissive of the latest fashion in macro-economics, the so-called Modern Monetary Theory, which argues that it doesn’t matter how much governments print and spend currency. Debt is not a problem, according to this. Balancing budgets is for the birds – just create more money. “This will just devalue currencies further, there’s no doubt about that”.

 

 

Our chat draws to an end but we can’t part without a consideration of the big question of the day – are we in an inflationary or deflationary environment? Mobius considers “we are in a deflationary environment. A lot of economists hate deflation, they think it’s very bad, because they think you have to have inflation to create growth, but in my latest book I point out that we have had growth even during this deflationary period. As for gold, I don’t have a clue what is going to happen to the gold price in the short-term, but in the long-term it’s just going up”.

 

 

Soapbox: Inflation – Who do you believe?

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We’re far away from Weimar Germany but perhaps closer to 1989’s Argentina than we think.

In Germany in 1923 hyperinflation took off; a loaf of bread that cost some 160 Marks at the end of 1922 cost 200,000,000,000 Marks by late 1923.

In 1989 in Argentina inflation hit 2,000% a year. As you did your weekly shop on Avenida Florida you found store assistants ahead of you busily stamping higher-priced stickers over the existing price.

Annual inflation today in Argentina is officially almost 50% but few believe that official figure. At street level, it feels very different, partly because Argentines have lost confidence in their paper currency, the Peso.

Argentina is the world’s biggest exporter of soymeal – crushed soybeans largely used as animal feed. But rather than export their soymeal Argentine farmers are holding back their beans, selling just limited amounts to cover on-going costs; the beans are being held onto as a hedge against probable future declines in the value of the Peso. High inflation and a collapse in the purchasing power of a currency usually go hand-in-hand.

Officially, the annual inflation rate in the US for the 12 months ending in March 2021 was 2.6%, according to the Consumer Price Index, which is based on a market basket of consumer goods and services” according to the US Bureau of Labor Statistics. The US inflation rate from January 2000 to January 2010 was 26.63%. In the UK, the official inflation rate is also based on a basket of goods, the Consumer Prices Index; this rose we are told by 1% in the 12 months to the end of March 2021.

The relatively languid official data about the current level of inflation is disputed. The Sage of Omaha – Warren Buffett – told shareholders of his Berkshire Hathaway company at the start of May “we are seeing very substantial inflation… We’ve got nine homebuilders in addition to our manufacture housing and operation, which is the largest in the country. So we really do a lot of housing. The costs are just up, up, up. Steel costs, you know, just every day they’re going up”.

Manufacturers of core commodities in the Eurozone that expect to put up prices in the next 3 months: Source, European        Commission.

 

That wholesale price inflation will inevitably feed into higher consumer prices. Bloomberg’s commodity index is up by 17% so far this year and has reached record highs. The futures price of crude palm oil, to take one basic agricultural commodity, used in everything from lipstick to processed foods to biodiesel, has gone up more than 100% in the past 12 months. Goldman Sachs said at the end of April that it sees commodities rising by another 13.5% over the next six months on a worldwide reversal of coronavirus curbs, lower interest rates and a weaker dollar.

Cost-push and demand-pull

Governments have a vested interest in balancing inflation; worried about voters, they try to maintain stable prices but also to inject a little ‘controllable’ inflation into the economy. If an economy is not running at full capacity a little bit of inflation in theory helps increase production – more money swirling around translates into more spending, which means more demand, which in turn triggers more production and greater employment. That’s the theory. The reality is that it is always a tightrope act.

The US explicitly adopted a 2% per year inflation target in 2012 but it has relaxed that recently. The International Monetary Fund (IMF) described inflation targeting as “a pragmatic response to the failure of other monetary policy regimes”. Prior to inflation targeting central banks set targets for money supply or exchange rates.

There are two basic causes of inflation – demand-pull and cost-push. Demand-pull works when consumer demand pulls prices up; cost-push happens when supply-side costs force prices higher. Some economists argue that there is a third cause – an expansion of the supply of fiat currencies, of paper money. Put these things together and we have a heady cocktail. And all three things are now going on at once.

There is cost-push: in the US the latest Institute for Supply Management (ISM) figures say that factories’ waiting time for production materials reached 79 days in April, the longest in records dating back to 1987. US purchasing managers last November said there were just eight materials they were struggling to obtain. Today it’s 24. According to one assessment the price of houses in 25 countries rose by an average 5% in the last 12 months, “the quickest in over a decade”.

Then there is demand-pull. In the US wages in the private sector in the first quarter of this year rose by the most in 18 years. The US National Federation of Independent Business reported in a March survey that about 28% of small businesses put up salaries – the biggest cost for businesses – and started offering signing-on bonuses just to find suitably qualified applicants. More generous welfare benefits and (in the US) the pandemic relief checks are giving workers the chance to be more selective. According to a survey published in April job vacancies were up by 22% during January-March this year in the US while the number of applicants was down by 23%, year-on-year.

And there is vast expansion of money supply. Aggregate money supply increased by $14 trillion in 2020 in the US, China, Eurozone, Japan and eight other developed economies. This exceeds the previous record increase of $8.38 trillion in 2017. “Much of the money that landed in the laps of investors [in 2020] found its way into the stock market, pushing the global value of stocks to more than $100 trillion for the first time and the average stock price for a member of the MSCI All-Country World Index to a stratospheric 31 times earnings” says Bloomberg.

How will this all end? It’s not at all clear. If inflation looks like getting out of control then central banks will have to push up interest rates, which – for now – they show no inclination towards. Not least because too much is riding on the loose money policies – financial markets would tumble and over-leveraged companies would go bust. Janet Yellen, the US Treasury Secretary, said at the start of May that she didn’t think there is going to be “an inflationary problem”. That’s a view not shared by other Americans, and it’s not borne out by the remarkable rise in the price of many basic commodities. The price of copper, for example, has doubled since its pandemic low in March 2020. The New York Fed’s monthly survey of consumer expectations – gauged by a survey of some 1,300 households – found that rental cost expectations increased for the fifth consecutive month and are now expected to rise by 9.5% over the next year.

 

During periods of high inflation, whether in Weimar Germany or 1989’s Argentina or today’s Venezuela people do their best to acquire physical assets. Being able to hold something real and concrete is essential when prices are spiralling – in those situations fiat currency, paper promises by government, tends to lose its meaning. Yet people still need a means of exchange to be able to buy their daily bread. At Glint we believe we offer our clients the ideal means of squaring this circle – hold a physical asset, gold, and yet be able to use that physical asset to be able to spend on the essentials. With Glint you can buy, save – and increasingly relevant perhaps – spend in gold.

Soapbox: Negative interest is no answer

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Governments have thrown just about everything at their economies since the terrible impact of lockdowns eliminated millions of jobs and slashed growth.

Their efforts – trillions in ‘stimulus’ spending, helicopter money, interest rate cuts, ‘furlough’ schemes, holidays on this and that tax – have had some hefty unintended consequences. The pace of developments has been remarkable. One of the macro-economic tools that’s been tried is cutting interest rates, and even making them negative – in other words you would have to pay a bank to deposit your money.

In February, the Bank of England (BoE) formally told the UK’s high street banks they had six months to prepare for negative rates. The possibility of negative interest rates should send shivers down everyone’s spine. This week we may learn if the BoE intends following through on its warning.

A shift into negative rates will however do little to get the economy moving again. It may produce its own distortions – and market distortions can last much longer than the policy changes that gave rise to them. There’s always a time lag.

For example, few people this time last year would have forecast that household wealth would have soared under the pandemic – yet it has. In March average US household income went up by more than 21%, the largest monthly rise since 1959. UK households that same month put £16.2 billion into their bank accounts, 3.4 times the monthly average for the year to February 2020, prior to the first UK lockdown.

In the UK, we have an extra twist. The UK Chancellor Rishi Sunak announced in July 2020 a temporary stamp duty holiday. Stamp duty is the tax levied by the UK government on residential property – on homes. Sunak cut the rate to zero for all properties sold for less than £500,000 ($693,000) until the end of March. He later extended this until the end of June this year. It’s not clear why the Chancellor chose this policy instrument in the anti-Covid/economic slump fight but its effect has been to create a “red hot” property market according to one UK mortgage adviser.

 

Governments lack dexterity

Demand for mortgages in the UK has become “red hot” and – the laws of supply and demand being what they are – average UK house prices went up by an astonishing 7.3% in April year-on-year. In the US, house prices rose by 16% in the past 12 months. The price of lumber – the main component in the typical US house – has risen by more than 230% since the start of the Covid-19 pandemic. UK household wealth has risen to record levels, the equivalent of £172,000 ($238,400) per person. In the US, personal incomes went up by 21.1% in March against the previous month – the highest jump since 1946.

US citizens – even those working and living abroad – have received their $1,400 Biden “stimulus check”. Some UK citizens have been paid by the government while their job is put on pause (“furloughed”).

But the hand of government is by definition clumsy. All state instruments are blunt; they’re not built to take account of individual cases. Thus the Legatum Institute, a think-tank in the UK, estimated last November that almost 700,000 people had been pushed into “poverty” in the UK as a result of the Covid-induced economic crisis. Human Rights Watch, the international NGO, said that eight million more US citizens were living in poverty in January this year than six months’ previously.

The gap between the “haves” and the “have nots” has just got bigger; the collective wealth of the more than 600 US billionaires has gone up by 36% during the pandemic. The richest 1% of Americans have added about $4.8 trillion of wealth from the end of March to the end of December 2020.

 

Continental lessons

 

 

We should be wary therefore of any attempt to stimulate growth by making interest rates negative. The money that would supposedly be teased out and put to productive use (into the “real” economy of making things people need to buy) will not necessarily end up there. Those who put their spare cash in banks would find themselves forced to pay for the privilege. Savers in cash are already punished by record low-interest rates; they would suffer even more punishment if rates went negative.

Nor is there any guarantee that the cash would flow into the economy; since the European Central Bank (ECB) introduced a negative deposit rate in 2014 physical cash holdings in Germany have trebled to €43.4 billion ($52 billion, £37 billion). People prefer to hold cash than pay banks, or to risk it by investing it. People have become even more wary of spending on anything but tangible assets in the wake of Covid. In the seven years since then the 19 countries within the Euro area have grown very sluggishly – peaking at 2.6% gross domestic product (GDP) growth in 2017 and as low as 1.3% in 2019 – the year before Covid-19 struck. Their example of negative interest rates does not seem to encourage growth.

Governments right now want to see their populations spending, injecting money into the economy and theoretically driving economic growth. Negative interest rates – which would have a knock-on effect on many financial products and institutions, from tracker funds to banks – are not the answer when economic growth already appears to be rebounding. The “reflation trade” has become a buzz phrase in recent weeks; crafting policy to ensure that inflation does not get out of hand is rapidly becoming the main concern for the US and others.

With interest rates so low, taxes bound to rise, prices soaring – lumber is only one example – protecting what one has is becoming daily more important. The gold price is having one of its periodic dips; but if history is any guide, then gold remains an important part of anyone’s portfolio.

Soapbox: It’s payback time

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US President Joe Biden has given away trillions of dollars to American citizens, is preparing to give trillions more – and then to claw back some of that ‘free’ money.

A President who comes from Delaware, the state which is a kind of US onshore tax haven – companies that are incorporated in Delaware can pay a corporate tax rate of 0% – risks looking like a hypocrite if he clobbers people too much.

The US Congress listened on Wednesday evening this week as the President outlined his ideas as to how to fund his American Families Plan. This plan is the third big economic package since he took office, following his $1.9 trillion fiscal stimulus plan in March and a proposed $2 trillion infrastructure bill, still fighting its way through Congress.

This third plan, called the American Families Plan (who would be so churlish as to oppose a plan for families?) proposes more generous child support until 2025, extra funds for universal pre-kindergarten schooling and community colleges, and other social welfare ideas; to pay for it the total capital gains tax for the richest Americans would go up to almost 44 %. The top rate of income tax would rise from 37% to almost 40%. Americans earning more than $1m a year would face the application of ordinary income tax rates to capital gains and dividend payments.

These ‘reforms’ would also hit private equity and hedge fund managers – easy targets one might think – by effectively eliminating the preferential tax treatment of their profits, or ‘carried interest’. At the moment, carried interest is taxed at the lower capital gains rate rather than ordinary income, but Biden would equalise their tax treatment. The president is also considering taxing unrealised capital gains passed on to heirs at death. Taxes on capital gains and dividends are currently 20%; under Biden’s plans they would be treated as ordinary income, at a 39.6% rate.

The mere whisper of some of this on 22 April invoked an immediate response. The S&P 500 index fell 1%. Next day, Bitcoin fell below $50,000, leaving it almost $14,000 lower in value since it hit a record high the previous week. People were nervous that capital gains tax rises would hit their pockets, so they got out of some assets while the going was good. The gold price also dropped, from $1,793 per ounce at midday on 23 April to $1,774 by 3pm that day. US corporations are well-accustomed to finding tax loopholes – 60 years ago corporations paid around a third of federal tax revenues but today its just 10%. No wonder the US Treasury Secretary is keen to gain support for a global minimum corporate tax rate. Without that, much of the intended corporate tax take will still elude the Treasury.

The ‘wannabe’ FDR

In May 2020, New York magazine ran a feature on Biden under the title “Biden is planning an FDR-size presidency” – the FDR being Franklin Delano Roosevelt, the former Democrat President who in the 1930s faced the Great Depression and started many state-funded programmes to get America working again. FDR is either a US 20th century hero or a bogeyman, depending on whether you believe it’s the state’s duty to rescue a society or that such a rescue should be left to the free market.

Biden sees himself following in the footsteps of FDR; he told CNN in April 2020 that the challenge being faced by a Covid-wracked US economic collapse “may not dwarf but eclipse what FDR faced”. The financial sums are certainly much bigger – under Roosevelt’s New Deal US debts grew from $22 billion in 1933 to $33 billion by 1936. In those days, the word ‘trillion’ was hardly ever used. The devaluation of the US dollar can be felt in the ease with which we have moved from talking about ‘billions’ to ‘trillions’; a US Dollar today buys less than 5% of what it would in 1933.

Under the Biden American Families Plan, the tax rates on individual incomes below $400,000 would not increase. New and expanded tax benefits, including provisions for child care, first-time homebuyers, educational debt relief, retirement savings, health insurance, and long-term care insurance, could reduce taxes for average families. Those who will suffer will be corporations and those taxpayers with incomes of $400,000 or more. Individuals with incomes of more than $1 million would pay the same rate on investment income as on wages.

Will it work?

Raising taxes, especially on the ‘rich’, and spreading money and welfare on the ‘poor’ is a classically populist measure. Whether social engineering will make America ‘more equal’ (whatever that means) is an open question. FDR’s New Deal hired Americans to work on the improvement of their own country; as they worked for the government, so the government worked for them. Legacies of the New Deal can be seen all across the country, from bridges, tunnels, roads, schools and libraries to monuments, murals and sculptures. What the New Deal called for was a greater sense of rights and duties – the state funnelled money into work-creation schemes and the citizenry were called on the step up to the plate and reciprocate and work on behalf for the state’s projects. American society is very different today from 1933; will citizens today step up to the plate or just be happy to take the money?

Imposing more taxes on the ‘rich’ is no doubt politically popular but without addressing loopholes such as the Delaware get-out it will seem unbalanced. Biden has scarcely been in office more than 100 days; his intentions remain a work in progress, and will no doubt face stiff Congressional opposition. The dramatic loss of purchasing power of the Dollar since FDR’s time, however, shows no sign of halting.

Soapbox: China re-opens the gold door

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“May you live in interesting times” runs the old curse, often (erroneously) attributed to a Chinese source. The nearest Chinese expression is believed to be 寧為太平犬,不做亂世人, which translates to “better to be a dog in times of tranquility than a human in times of chaos”. Times are certainly interesting today, not least in China.

Reuters has reported that China “has given domestic and international banks permission to import large amounts of gold into the country”, according to “five sources”. The country’s central bank, the People’s Bank of China (PBoC), controls the amount of gold that can be imported, and has apparently given the green light to these imports, which could total 150 tonnes (worth around $8.5 billion at current prices) and be shipped either this month or next. If this turns out to be true such a big gold import should certainly underpin the gold price, which has been climbing off its recent low and is nudging $1,800 an ounce. Since February 2020, China has imported about 10 tonnes per month; in 2019, it imported about 75 tonnes a month. Importing 150 tonnes over April/May would therefore signify a return to pre-pandemic days.

A source at one of the commercial banks which has been granted permission to import gold told Reuters: “We had no quotas for a while. Now we are getting them… the most since 2019”. I hope they manage to preserve their anonymity – talking to journalists unofficially about China’s gold is a serious no-no.

China is today the biggest miner of gold, producing 380 tonnes in 2020 according to the US Geological Survey. The Chinese state exercises tight control over gold (and silver) and pursues “a policy of unified control, monopoly purchase and distribution of gold and silver”, tightly supervising private individual trading and exports. As of late last year, all China’s commercial banks – including state-owned ones – suspended the opening of new precious metal accounts, under the guise of protecting gold holders from ‘volatility’. Together with India, China accounts for around 40% of annual gold demand. In February, India reduced gold import duties by an effective 1.25% which was seen as an effort to reduce gold smuggling. In March this year, India’s gold imports rose 471% year-on-year to 160 tonnes.

Back to normal or something else?

There are at least two possible views of this re-opening of the door to gold imports.

The first and most likely is that China’s relationship with gold is merely returning to the status quo ante bellum. Chinese citizens like gold, both to wear as jewellery and as a means to tuck away their savings. China’s appetite for gold has led it to explore overseas’ mining ventures, not always successfully – the Canadian government last December blocked on grounds of “national security” the state-owned Shandong Gold Mining Company from taking over and developing a gold mine in the remote Nunavat region. And while China officially acknowledges it holds almost 2,000 tonnes in official reserves – the precise figure is a closely-guarded state secret – the actual figure is believed to be more be 14,500 tonnes, or 1.8 times bigger than US reserves.

But there is another possibility, which ties in with China’s launch of its own Central Bank Digital Currency or CBDC, which eventually will eradicate cash from Chinese society and enable tighter social surveillance.

This state-controlled digitalisation of the Renminbi could also, some are arguing, hasten the decline of the US dollar’s dominance as the global reserve currency and insert the Renminbi instead. The Renminbi was already awarded the status of a reserve currency by the International Monetary Fund (IMF) in 2015.

More than 60% of the world’s currency reserves are dollar-denominated, as they have been for at least the past 20 years. But they fell last year; meanwhile allocations to the Renminbi have risen; that currency is now the fifth most-used for global payments, rising from 35th place in 2010.

China’s President Xi Jinping has grand ambitions and is in a hurry to stamp his place in history. The country’s remarkable 18.3% rate of growth in the first quarter of 2021 over the same period in 2020 has clearly strengthened his hand. He said this week at the Boao Forum for Asia that “bossing others around and interfering in other countries’ internal affairs will not be well received”, which was widely seen as a criticism of the US.

But strong words will not alone be enough to persuade investors and trade to ditch the Dollar in favour of the Renminbi. Greater security regarding foreign investment in China – currently being tested in a Chinese court over the default by Peking University Founder Group (PUFG) of some $7 billion of bonds – is under scrutiny. Foreign bondholders have collectively taken on some $82 billion of China-issued debt backed by nothing more than “keepwell deeds”, a credit protection tool commonly used by Chinese companies issuing debt offshore. These deeds are used in offshore finance transactions, particularly those that use bonds relating to Chinese transactions. Keepwell deeds are used in around 16%, or $96 billion, of outstanding Chinese offshore bonds. The legal enforceability of such deeds is opaque.

Gold behind China’s CBDC?

If the digital Renminbi or CBDC is to truly present a challenge to the US Dollar as the world’s global reserve currency then it will have to overcome deep political and economic scepticism from Western investors as to China’s reliability as a partner. The momentum is moving in that direction, but erratically; the state clearly exerts the kind of interference in corporate life (such as last year’s block against the IPO of the massive Chinese company Ant Group) that private investors find discouraging. If all that ‘backs’ the digital Renminbi or CBDC is the word of the Chinese government, then it is unlikely to ever succeed in knocking the US Dollar off its perch.

But if something universally respected, trusted, and valued – such as gold – was declared by China to back its CBDC – that would be a very different prospect. Stranger things have happened. The implications would be deeply disruptive of the world’s financial system and would anger many policymakers in the West – but President Xi has proved time and again his indifference to such matters.

Fractional banking and gold

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If you hold your gold physically, at home or in your office safe, you are obviously exposed to the risk of burglars stealing it. You’ll be able to take it out and fondle it, but it’s not entirely risk-free.

Maybe you choose to hold your gold in an ‘unallocated’ account. You may be surprised to learn that this unallocated gold, no doubt on deposit in a bullion bank vault, while probably safe from burglars, is not entirely risk-free either. Because when push comes to shove you don’t really own that gold.

That’s because it’s part of the ‘fractional reserve’ system, the system used by commercial banks across the world. Under fractional reserve banking only a fraction of the bank’s deposits are backed by actual cash on hand and immediately available for withdrawal. The clue is in the name. The same is true for that unallocated gold – if everyone who ‘holds’ that gold demanded its redemption there would not be enough to go round. Unallocated gold accounts are really just an exposure to the price of gold.

Proponents of fractional banking argue that such a system creates liquidity; it enables the increase of money and credit supply. Opponents assert that such a system is inherently risky, as it increases the supply of money beyond what actually exists in the bank.

For hundreds of years fractional reserve banking has resulted in bank failures as depositors lost their money because their bank could not immediately pay them the full amount they had on deposit. Anyone who has seen the 1946 movie It’s A Wonderful Life starring James Stewart can see what happens when confidence in fractional banking evaporates. Life falls apart; the difference with real life is that no angel (as in the movie) will come to our rescue. Fractional banking is a kind of Ponzi scheme, whereby fresh deposits are used by the bank to extend credit to new borrowers.

 

The fractional reserve system underlays the Great Financial Crash of 2007-09; thanks to it, banks such as Northern Rock (in the UK) and Bear Sterns (in the US) succumbed to irrational exuberance and lent excessively, far more than they had on deposit. In the US the fractional banking system enabled banks to give mortgage loans to ‘Ninjas’ – people with ‘no income, no job or assets’. At the height of the boom UK banks were offering so-called ‘suicide loans’ of up to 120% of the value of a house with only self-certification of income.

You would think that banks and regulators had learned some lessons from then. Yet on 26 March 2020 the US Federal Reserve announced it was reducing the reserve requirement ratio for US banks from 10% to 0% across all deposit tiers. The Covid-19 pandemic was used to justify this. There’s no indication that the US Fed is going to re-impose it’s (already light-touch) reserve requirement any time soon. In the UK, the minimum reserve requirement for banks is 12.5% and for ‘finance houses’ at least 10%.

Under a ‘full reserve’ system – whereby a bank would be required to hold sufficient reserves to pay all depositors their full deposit on demand – the inherent risk of that bank collapsing (and the further risk of a systemic meltdown) would disappear. Proponents of a full reserve banking system argue that because it would separate money creation from bank lending, greater economic stability would result – although bankers would no doubt protest at their reduced bonuses, which would happen if they were unable to lend so freely.

What’s this got to do with gold?

Unallocated gold accounts do not physically store ‘your’ gold; they use the gold for other investments or loans, and promise to re-pay you the gold on demand. Unallocated gold accounts are within the fractional reserve system in other words. Unallocated gold is only credited to the investor – the bank or dealer remains the owner. If the gold holder of your unallocated gold goes bust, all you will be left with is a promise that you will get your gold or money back – but you will have to wait in line along with other angry creditors and may eventually lose what you thought you owned.

What about gold held in paper form, in an exchange-traded fund (ETF)? That too is not free of risk. It is standard practice for Authorized Participants, such as banks and brokerage houses, to contribute baskets of purchased or borrowed assets to ETFs; the bullion therein may be borrowed. In the event of a 2008-style financial crisis, the lending institutions would have first claim to the gold when borrowed, leaving shareholders in a precarious position.

Even trying to buy physical gold can run into difficulty. The august Royal Mint in the UK has been swamped recently by customers who have placed orders for gold and silver coins which the Mint has been unable to deliver because the paid-for items are out of stock.

Glint’s allocated gold

If you own gold through Glint you genuinely own it – it’s allocated to you and the gold is held in allocated storage under a custody agreement. Banks or financial institutions cannot lease out those bars, because they can’t access the allocated bullion. Moreover if you buy gold through Glint you have certainty that the price you pay is for the actual amount of gold you want.

And you avoid the inherent risks associated with fractional banking – and burglars. Moreover, unlike physical bullion or unallocated gold, with the gold that you own through Glint, you can also use it for transactions in your daily life, from buying a coffee to a family holiday; online and in-store.

Soapbox: Fractional banking and gold

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If  you hold your gold physically, at home or in your office safe, you are obviously exposed to the risk of burglars stealing it. You’ll be able to take it out and fondle it, but it’s not entirely risk-free.

Maybe you choose to hold your gold in an ‘unallocated’ account. You may be surprised to learn that this unallocated gold, no doubt on deposit in a bullion bank vault, while probably safe from burglars, is not entirely risk-free either. Because when push comes to shove you don’t really own that gold.

That’s because it’s part of the ‘fractional reserve’ system, the system used by commercial banks across the world. Under fractional reserve banking only a fraction of the bank’s deposits are backed by actual cash on hand and immediately available for withdrawal. The clue is in the name. The same is true for that unallocated gold – if everyone who ‘holds’ that gold demanded its redemption there would not be enough to go round. Unallocated gold accounts are really just an exposure to the price of gold.

Proponents of fractional banking argue that such a system creates liquidity; it enables the increase of money and credit supply. Opponents assert that such a system is inherently risky, as it increases the supply of money beyond what actually exists in the bank.

For hundreds of years fractional reserve banking has resulted in bank failures as depositors lost their money because their bank could not immediately pay them the full amount they had on deposit. Anyone who has seen the 1946 movie It’s A Wonderful Life starring James Stewart can see what happens when confidence in fractional banking evaporates. Life falls apart; the difference with real life is that no angel (as in the movie) will come to our rescue. Fractional banking is a kind of Ponzi scheme, whereby fresh deposits are used by the bank to extend credit to new borrowers.

The fractional reserve system underlays the Great Financial Crash of 2007-09; thanks to it, banks such as Northern Rock (in the UK) and Bear Sterns (in the US) succumbed to irrational exuberance and lent excessively, far more than they had on deposit. In the US the fractional banking system enabled banks to give mortgage loans to ‘Ninjas’ – people with ‘no income, no job or assets’. At the height of the boom UK banks were offering so-called ‘suicide loans’ of up to 120% of the value of a house with only self-certification of income.

You would think that banks and regulators had learned some lessons from then. Yet on 26 March 2020 the US Federal Reserve announced it was reducing the reserve requirement ratio for US banks from 10% to 0% across all deposit tiers. The Covid-19 pandemic was used to justify this. There’s no indication that the US Fed is going to re-impose it’s (already light-touch) reserve requirement any time soon. In the UK, the minimum reserve requirement for banks is 12.5% and for ‘finance houses’ at least 10%.

Under a ‘full reserve’ system – whereby a bank would be required to hold sufficient reserves to pay all depositors their full deposit on demand – the inherent risk of that bank collapsing (and the further risk of a systemic meltdown) would disappear. Proponents of a full reserve banking system argue that because it would separate money creation from bank lending, greater economic stability would result – although bankers would no doubt protest at their reduced bonuses, which would happen if they were unable to lend so freely.

What’s this got to do with gold?

Unallocated gold accounts do not physically store ‘your’ gold; they use the gold for other investments or loans, and promise to re-pay you the gold on demand. Unallocated gold accounts are within the fractional reserve system in other words. Unallocated gold is only credited to the investor – the bank or dealer remains the owner. If the gold holder of your unallocated gold goes bust, all you will be left with is a promise that you will get your gold or money back – but you will have to wait in line along with other angry creditors and may eventually lose what you thought you owned.

What about gold held in paper form, in an exchange-traded fund (ETF)? That too is not free of risk. It is standard practice for Authorized Participants, such as banks and brokerage houses, to contribute baskets of purchased or borrowed assets to ETFs; the bullion therein may be borrowed. In the event of a 2008-style financial crisis, the lending institutions would have first claim to the gold when borrowed, leaving shareholders in a precarious position.

Even trying to buy physical gold can run into difficulty. The august Royal Mint in the UK has been swamped recently by customers who have placed orders for gold and silver coins which the Mint has been unable to deliver because the paid-for items are out of stock.

Glint’s allocated gold

If you own gold through Glint you genuinely own it – it’s allocated to you and the gold is held in allocated storage under a custody agreement. Banks or financial institutions cannot lease out those bars, because they can’t access the allocated bullion. Moreover if you buy gold through Glint you have certainty that the price you pay is for the actual amount of gold you want.

And you avoid the inherent risks associated with fractional banking – and burglars. Moreover, unlike physical bullion or unallocated gold, with the gold that you own through Glint, you can also use it for transactions in your daily life, from buying a coffee to a family holiday; online and in-store.

Soapbox: Guard Against Fraud

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Perhaps one of the least expected by-products of the Covid-19 pandemic has been the surge in fraud, no matter where you live.

According to a PwC 2020 global fraud survey of more than 5,000 companies and individuals, 47% said they had experienced fraud in the past two years.

The bottom line of PwC’s findings is staggering – it concluded that in the previous two years $42 billion (more than £30 billion) was reported lost globally as a result of fraud.

In the UK, online fraudsters cheated consumers out of a record £479 million in 2020 according to UK Finance, the banking industry body. UK Finance found there was a 94% increase in “impersonation scams” – criminals posing as trusted organisations conning the public out of money.

Matters are scarcely any better in the US; financial fraud in the US rose by more than 104% in the first quarter of 2020 compared to the same period in 2019. The same source says that on the dark web a social security number – key for many kinds of financial transaction in the US – can be bought for little more than the price of a Starbucks’ latte. Stolen PII (Personally Identifiable Information) packages, which typically include the victim’s name, social security number, driver’s license number, passport number and email address, can be had for as little as $4 (under £3). There has never been a time when your personal data has been so valuable to you and so cheap for criminals.

Fraudsters have taken advantage of the explosion in online activity which has followed Covid; in the UK Office for National Statistics says the proportion of online sales in the UK has surged from 19% in February 2020 to 36% of the total by January this year.

Scammers have used outbreak of online activity as a cover for fake websites for vaccinations, or for false fines for breaching lockdown rules; the rise of online shopping has assisted criminals to target shoppers with fake messages about missed parcel deliveries, and to pose as software providers to target homeworkers.

Source: US Federal Trade Commission

 

UK Finance says that last year saw impersonation registering the “biggest increase of any scam type, almost doubling in 2020 compared to 2019”. Around half of last year’s total fraud loss was via payment cards, with 38% being from “authorised push payments”, i.e. victims of the fraud being manipulated into making real-time payments to fraudsters.

Know your enemy

UK Finance and the UK government have collaborated on a programme – called Take Five – to educate consumers about the nature of potential fraud and ways of mitigating risk. The risk is in a state of permanent flux, as development of the internet and artificial intelligence offer wider possibilities. According to Action Fraud, the UK’s National Fraud and Cyber Crime Reporting Centre, reports of scams relating to cryptocurrency investments went up by 57% (to more than 5,500) in 2020 and victims lost an estimated £113 million last year.

The UK’s banking industry introduced a voluntary code in May 2019 under which victims of authorised push payment scams could be reimbursed but, according to UK Finance this voluntary scheme “is not always working as intended, with a lack of consistency in consumer outcomes and a lack of clarity for signatories in how to implement it”. Caveat emptor is a sensible piece of advice, but criminals are using ever-sophisticated techniques. Banks are spending ever-bigger amounts on combatting fraud, but more can perhaps be done to educate their customers about the threats.

Security at Glint

At Glint, we take security very seriously indeed. We will continue to provide assistance and guidance to Glint clients in the light of new threats and vulnerabilities. We do our utmost to protect clients against fraudulent activity regarding their Glint accounts. If in doubt, clients can always block their Glint card via the Glint app. We always update clients about improvements in our security procedures that may affect them regarding payment services. Nevertheless, clients should immediately raise concerns regarding suspected fraudulent or malicious use of their Glint account.

To arm yourself against the criminal take these steps:

STOP: Taking a moment to stop and think before parting with your money or information could keep you safe.

CHALLENGE: Could an email or SMS be fake? It’s ok to reject, refuse or ignore any requests. Only criminals will try to rush or panic you.

PROTECT: Contact Glint immediately if you think you’ve fallen for a scam or have been the victim of fraud. Always report scams and fraud to Action Fraud in the UK and to the Federal Trade Commission (FTC) in the US.

We believe that gold is the only true form of reliable currency – and we want to make sure you hold onto your gold, so you can use it safely in your everyday life, to either help protect your savings against inflation, or to spend, anywhere in the world that accepts Mastercard®.