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Posts by: Gary Mead

Soapbox: Going for broke!

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‘Voodoo economics’ is dead but won’t lie down.

The UK’s Chancellor, Kwasi Kwarteng, scythed a field of taxes last Friday, pushing the Pound Sterling almost to parity with the US Dollar, its lowest since 1971. That’s good and bad news – Britain’s exports have thereby become more competitive but its imports have got pricier; bad news for inflation, already nearly 10%.

The Sterling slump was the judgement of the financial markets – they think that Kwarteng’s tax cuts – the most sweeping since 1972 – in an effort to kick-start economic growth, will very soon run into a brick wall.

The last time the country saw such tax cuts was in 1972, when a pint of beer cost 14 pence (in London today the price is around £7) and the average house price was £5,158 (as opposed to today’s average of £292,000). As Kwarteng spoke, the gold price (in Pound terms) immediately shot up by more than 1%, from around £1,496 to almost £1,517/ounce. In early trading on Monday this week the gold price (in Pound Sterling terms) was around £1,534/ounce – up by 2.5% from the day when Kwarteng made his announcement.

Back in 1972, Anthony Barber was the (Conservative Party) chancellor. He slashed taxes in what became known as a ‘dash for growth’. Economic growth was indeed stimulated but inflation rose, many workers went on strike, the country was put onto a ‘three-day week’, the economy fell into stagflation, and the Conservative Party lost the general election in 1974. Not an example Kwarteng wants to follow.

Kwarteng’s tax cuts will be funded by borrowing – the Institute for Fiscal Studies, a British think-tank, estimates that the UK’s borrowing will rise to £190 billion this year, the third-highest peak since the Second World War. Prime Minister Liz Truss reckons the tax cuts will stimulate economic growth of 2.5% a year over the medium term, confident that the money not snaffled up by the government will ‘trickle down’ into the wider economy.

It’s essentially the same plan adopted by the 40th President of the US, Ronald Reagan. Its roots go even further back, to the 1890s, when it was called ‘Horse & Sparrow economics’, the idea being that if you stuffed your horse with more oats than it could digest then its manure would contain undigested oats, which sparrows could pick at. The 29th US President, Warren Harding, used Horse & Sparrow Economics to tempt voters in 1920, promising to cut the then 91% tax bracket to 25%; he won the election, the ‘Roaring 20s’ resulted. Reagan reinvented Horse & Sparrow economics and called it trickle-down economics. Very little is new under the sun.

Reagan’s supply-side policies involved very favourable tax cuts for the richest Americans in the belief/hope it would promote economic growth as society overall became richer. A subsequent President, H. W. Bush, sceptically called Reagan’s policies “voodoo economics”. Prime Minister Liz Truss and her Chancellor are now trying voodoo economics all over again. “Lower taxes lead to economic growth, there is no doubt in my mind about that”, said Truss. She’s out of step with US President Joe Biden, who has said he is “sick and tired” of trickle-down economics and that “it has never worked”.

Biden shares the almost universal scepticism that the extensive tax cuts Kwarteng announced will bring about 2.5% economic growth. The UK has had more than a decade of sluggish growth; between early 2008 and early 2022, trend growth of output per UK worker was 0.5%/year. Reversing that trend will be difficult and take much longer than the two years the Truss government may have before it faces a fresh general election.

Moreover, this massive fiscal stimulation is being criticised for other reasons: it’s seen by trade unions and special interest groups as extremely unfair. Those earning £1 million a year will have £54,400 ($60,700) extra in their pockets while those earning £25,000 ($27,900) will benefit to the tune of about £280 ($312). The government has also removed the cap on bonuses for bankers, who many believe escaped serious punishment for their role in the Great Financial Crash of 2008.

Social divisions will be fuelled; the UK is already racked with inequality, and is the fourth most unequal state in Europe according to the Organisation for Economic Cooperation and Development (OECD). Making the wealthy even wealthier is ‘unfair’ but by definition the poorer in society spend a proportionately higher amount of liberated money on immediate consumption; the hope is that the richer will do more investing with their much more ample extra cash.

But the biggest contradiction inherent in this latter-day Horse and Sparrow economics is that it flies in the face of the Bank of England’s mission to foster price stability. With inflation in the UK currently almost 10% – five times higher than its target – the Bank is already struggling. The Bank has just raised its base interest rate to 2.25%, making mortgage, credit card, and other debts more expensive – and squeezing many people already anxious about how they can pay their bills. Cutting taxes at any level is bound to throw some fuel on the inflation fire.

Whether it’s dressed up as ‘supply-side’ economics, ‘trickle-down economics’, ‘voodoo economics’, or ‘Horse and Sparrow economics’, the bottom line is that the Truss government is going for broke. Martin Weale, the academic economist who served at the BoE from 2010 to 2016, said it will “end in tears” and a run on the pound – which has already started.

Totally nuts

Willem Buiter, a former Bank of England rate-setter and Citi’s chief global economist until 2018, said Kwarteng’s plans to ramp up borrowing were “totally, totally nuts”.

“I think the UK is behaving a bit like an emerging market turning itself into a submerging market… I think Britain will be remembered for having pursuing the worst macroeconomic policies of any major country in a long time”. That’s the view of Larry Summers, former US Treasury Secretary. He called the Truss policies “naïve” and “wishful thinking”. He could be wrong. Let’s hope so.

The instant judgements that journalism specialises in have been harshly negative about Kwarteng’s economic plan, arguing that trickle-down economics fail to improve economic growth and merely enrich the already wealthy. Special interest groups will inevitably protest about this social engineering. However, it may be argued that inequality is at the heart of our society and Kwarteng’s moves simply reinforces what we already live with. Taxation per se can be seen as rank unfairness, legitimised theft by the government to pay for services we deem socially necessary.

Yet the highly educated Kwarteng (Eton, Cambridge and Harvard universities) seems unaware of academic research that also condemns voodoo economics. In the Socio-Economic Review of April this year, a study of 18 countries between 1965 and 2015 belonging to the OECD found that tax cuts for the rich “do not have any significant effect on economic growth or unemployment. Our results therefore provide strong evidence against the influential political–economic idea that tax cuts for the rich ‘trickle down’ to boost the wider economy”.

A much more serious worry is that this gamble, experiment, whatever you want to call it, will fail. The sugar rush of these massive tax cuts are likely to push up the costs of government borrowing, will give a fresh boost to inflation, and drive the BoE to put rates even higher. Ruth Gregory, senior UK economist at Capital Economics, spoke for many economists: unless the gamble to boost the underlying growth rate works, “today’s fiscal package just means more inflation, higher interest rates and a higher debt ratio in the future”.

In such a context of government gambles, the likelihood of even higher inflation and a further sinking of the value of the Pound, the options for self-defence are few. Gold has lost value in Dollar terms this year, as the Dollar and Dollar-denominated assets have been relatively strong while all else has weakened. But in Pound Sterling terms the gold price has risen more than 8%. Since Anthony Barber tried his ‘trickle-down’ experiment the Pound has lost more than 90% of its purchasing power; this year alone it will have lost some 10% thanks to inflation. The pounding of the Pound will do UK plc no good; but it has already benefitted the gold price when measured in Pounds.

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: China’s subtle style

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Who has the deepest pockets in today’s world?

China…maybe.

Who has the biggest gold reserves?

China…probably.

It’s an interesting correlation.

Officially, China is only the sixth-biggest holder of gold reserves, but few believe that. Since 2000, China has produced more than 6,000 tonnes of gold; much of this has gone into its official reserves as well as local jewellery fabrication. The People’s Bank of China holds and manages the country’s official reserves and very secretive it is too; the most recent statement in May this year put China’s gold reserves at 1,775 tonnes, which probably considerably under-estimates the true figure.

As for China’s deep pockets, there’s plenty of evidence. There’s the almost $1 trillion in infrastructure loans China has made in the past decade for its Belt and Road initiative – making it a bigger development financier than the World Bank. Countries as diverse as Belarus and Argentina, Sri Lanka and Venezuela have received easy-term loans, without any onerous prescriptions attached. Thousands of loans to some 165 low and middle income countries have been made.

A little-known entity, the ‘Sino-Russian Financial Alliance’, which unites 35 Russian and Chinese banks and insurance companies, has existed since 2015 to promote “a favourable mechanism for the efficient development of Sino-Russian economic and trade exchanges, promote the comprehensive development of Sino-Russian financial cooperation, and promote the local currency settlement of economic entities in China and Russia”.

China is focused on disseminating its ‘soft’ power. This subtle approach, aimed ultimately at dislodging Western political and economic hegemony, is working in tandem with Russia’s more directly confrontational style.

The Dollar symbolises that Western hegemony and it is the Dollar – despite its current strength against a basket of other currencies – which is firmly in the sights of members of the Shanghai Cooperation Organization (SCO), including Russia and China, which met this month. Iran, which recently joined the SCO, has called on the organization to introduce a new single currency for the bloc.

While Russia’s President Putin has explicitly turned his wrath on the West, China’s President Xi is more enigmatic. But both share the ambition of dislodging the (weaponized, as sanctions against Russia have demonstrated) Dollar from its international reserve status. Beijing wants to increase the use of the Yuan in China’s cross-border trade settlements and investment, reduce its dependence on the Dollar, minimize exchange risk and Dollar liquidity shortage, and maintain access to global markets during geopolitical crises.

While bigger Chinese banks immediately stopped processing transactions with Russian entities following the imposition of sanctions, small and medium scale banks in the Sino-Russian Financial Alliance could help Russian entities evade sanctions using alternative payment and settlement infrastructures such as the Cross-Border Interbank Payment System (CIPS) or cash.

China-Russian trade settlements using the Yuan rose from 3.1% in 2014 to 17.9% in 2021, an increase of 477%. This trend will only have increased since Russia invaded Ukraine.

What are the implications of all this for gold? The partners in the SCO are united by one thing – the yearning to replace the Dollar as the trade settlement currency. Yet confidence and trust in alternatives (the Yuan, the Ruble…) will remain low without credible and demonstrable evidence of some strong backing – such as gold. China is accumulating as much gold as possible.

 

Glint’s Helpful Hints: Glint’s Fees & Limits

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There’s nothing more annoying than wading through masses of paper or scrolling through wads of web trying to figure out how much something really costs.

That’s why at Glint we don’t bury our fees in acres of fine print. We want you to feel comfortable using the Glint card, so we are completely transparent about our fees – unlike some companies.

Our fees are very competitive. US clients can find a simple guide to applicable fees here, and UK clients or those in the rest of the world can see the fees that apply to them here. And you get instant in-app records of transactions to help you keep track of spending and stay safe from attempted fraud.

Buying and selling gold

Whenever you buy or sell gold using Glint, we use our simple and transparent pricing formula of rate + fee = total cost.

Fees

We charge a single, fixed fee for gold exchanges. This fee is 0.5%. We also apply an additional 0.5% fee at weekends.

Rate

The exchange rate we use for gold is set by us, and is a variable exchange rate (which means it is constantly changing). You can always see the current gold exchange rate in the Glint app. We stream the best available wholesale market rate for gold. We do not apply any mark-up on that rate unless the markets are closed (for example at the weekend) when we apply 0.5% mark-up on that rate, which is the rate you receive in the app.

There are no further fees or mark-ups applied. The price you pay is locked in at the time of exchange.

We will show you the rate and fee, and the total cost in the Glint app before you make any exchange.

Soapbox: Out of the frying pan, into a fire?

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It’s a momentous week, not just because the UK has said a final farewell to its longest-ever serving monarch. Tomorrow (Thursday) the Bank of England (BoE) is expected to announce what one newspaper calls “the biggest rise in borrowing costs for at least 25 years” in an effort to reduce inflation from its current 8.6%. Next day, the Chancellor of the Exchequer, Kwasi Kwarteng, is expected to give details of the new Conservative administration’s relaxed attitude toward government spending of money it will need to borrow. This borrowing could be as much as £200 billion ($230 billion), rivalling the more than £300 billion that government handed out during the Covid-19 pandemic.

This will push up the already high UK budget deficit; gross UK government debt is more than £2.3 trillion, very close to 100% of gross domestic product (GDP). Hopes of closing the deficit look slim, as the new Prime Minister, Liz Truss, has in her campaign to win the leadership of the governing Conservative Party pledged there will be “no new taxes”; indeed she also promised around £30 billion of tax cuts. Increasing spending and cutting revenues is a gamble “on a huge scale” which one leading commentator calls “frightening”.

On the other side of the Atlantic the Federal Reserve is widely expected today (Wednesday) to announce a third successive 0.75% interest rate increase, or perhaps even a full percentage point. Previous rate rises this year have done little to calm US inflation, which in August was an annualized 8.3%, against 8.5% the previous month. So-called ‘core’ inflation (inflation minus the contributions of food and energy costs, which are regarded as volatile) rose by 0.6% over the previous month.

US energy bills: source employamerica

Tighter monetary policy – pushing up interest rates, making borrowing more expensive – is the orthodox economic policy in the face of high inflation. Central bankers and governments however worry that too much ‘tightening’ could shift the balance too much in the opposite direction – and create conditions for a recession. The World Bank is only one institution to be alarmed about this.

From getting inflationary signals wrong in 2020 and 2021 (it wasn’t ‘transitory’ after all), central bankers may again be taking a wrong turning according to the World Bank and people such as Maurice Obstfeld, former chief economist at the International Monetary Fund (IMF). “Just as central banks, especially those of the richer countries, misread the factors driving inflation when it was rising in 2021, they may also be underestimating the speed with which inflation could fall as their economies slow”, he has said.

Central bankers, playing ‘catch-up’, may get out of the frying pan and jump straight into a fire.

Cheap money and zombies

In the UK, the government has signalled its readiness to borrow inordinate amounts to fend off supposedly unacceptable energy costs. Britain has had some 15 years of ultra-low interest rates and almost £1 trillion of quantitative easing since the Great Financial Crash of 2008. This ‘easy money’ has done very little for economic growth, which the Truss government says it will boost to 2.5%/year; it will be miraculous if that’s achieved given that annual average growth rates have roughly halved since the 1960s and productivity has hardly increased at all since 2008.

To be sure, low interest rates have helped many ‘zombie’ firms to survive. Zombie firms are businesses unable to cover their debt servicing costs from current profits. But although that has prevented many from becoming unemployed, it’s unhealthy for the economy as a whole, suggests the Bank for International Settlements (BiS). It says that “zombies weigh on economic performance because they are less productive and because their presence lowers investment in and employment at more productive firms” and that the numbers of zombies globally has grown “since the late 1980s”. In the US, as many as 20% of the largest 3,000 public companies are zombies, with debts of some $900 billion (£791 billion) according to one estimate; the figure is even higher in the European Union (EU).

As rates have started to move higher, firms exposed to unsustainable debt levels have started to feel the squeeze; in August, there were 35,355 bankruptcy filings in the US, 10% higher year-on-year according to the American Bankruptcy Institute (ABI). Amy Quackenboss, the ABI’s boss, says that debt problems are not just for firms but also financially “distressed households” who are “experiencing expanding debt loads amid rising interest rates, inflation and supply chain concerns”. 56% of Americans now say that price increases are causing financial hardship for their household according to a Gallup poll.

In the UK, household debt peaked in early 2008 at more than 150% of disposable income and in early 2022 was above 131%. According to one estimate average personal debt in the UK “equates to around 107% of average earnings per adult”.

Debt jubilees?

The levels of personal and national debt in the UK and the US will rise in the coming years. Rising and possibly unsustainable debt is becoming a social concern on both sides of the Atlantic. Total consumer debt in the US rose by $23.8 billion in July to a record $4.64 trillion, according to the Federal Reserve. The US national debt is almost $31 trillion (above £27 trillion) and rising fast.

At what point does this indebtedness become unsustainable? Might a ‘debt jubilee'(a round of forgiveness of debts) be proposed by governments? There’s already been an example of this in the US, where President Joe Biden has announced plans to forgive up to $20,000 in student loans for individuals earning less than $125,000. Credit card debt in the US is getting out of hand; inflation is exceeding wage gains so more households have relied on revolving debt. Consumers in their 20s and 30s and those in the lowest income brackets are more likely to carry a balance to cover daily expenses such as groceries, child care or utilities than older generations. According to one survey, 60% of credit-card debtors are now carrying debt for a year or more. Loading up the credit card will become more expensive as rates rise.

Central bankers pride themselves as being guardians of price stability but the only tool they have to combat inflation higher than they desire is putting interest rates up, to try to take the steam out of an economy. The Federal Reserve and the BoE ‘target’ inflation at an annual 2% – meaning they want inflation of 2% a year. 2% doesn’t sound much but after five years of 2% inflation the loss of purchasing power of fiat money is 9%; after 10 years that loss is 18%. If the current high inflation rate sticks around for a decade then the loss of purchasing power of the Dollar or Pound Sterling will be close to 60%.

Yet while this pushing up interest rates may work in the US, where inflation is largely a factor of a rapid (Covid-19-induced) contraction followed by a swift expansion, it may be less successful in the UK or EU, where on top of the exit from Covid-19 consumers face high energy prices as a result of the Russo-Ukraine war. Being more self-reliant in energy the US is less subject to international energy price rises.

Central bankers face a difficult dilemma. If they push up interest rates only mildly this will fail to stifle inflation. If they move aggressively that could kick off a recession, stock market collapses, and a shrinking economy. They are also facing (as always) a changing macro-economic environment, in which food prices, which have been rising fast due to a variety of factors (including record fertilizer prices) appear to be cooling: the UN’s Food and Agriculture Organization’s price index, which tracks the most globally traded food commodities, fell in August for the fifth successive month, although was still almost 8% higher year-on-year.

A year ago, this newsletter said a major worry was the possibility that the world might drift into stagflation – a combination of a stagnating economy and high price rises. So far this year around 90 central banks have raised their interest rates, and about half by at least 0.75%, the broadest tightening of monetary policy for 15 years. 2008 ushered in an era of cheap money, cheap credit; 2022 will be remembered for laying the ground for global stagflation. The irony is that as US interest rates rise, the Dollar strengthens, other currencies weakens, and thus imported inflation increases for those countries whose currencies have slid against the Dollar. It begins to feel like a vicious spiral, in which everyone needs to put up interest rates as a defensive measure – and debt interest payments go up for all.

Bullion Bulletin: Inflation – still red hot

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Hopes that inflation is being brought under control were dashed last week on the news that in the US in August the consumer price index (CPI) on an annualized basis was still at its highest in almost 40 years. Prices from a year earlier climbed 8.3%, higher than consensus expectations. July’s figure was 8.5%. August’s small decline was largely because of a substantial drop in gasoline prices, which fell by nearly 11% in August.

In the UK, the CPI for August was 9.9% higher year-on-year, a negligible drop from July’s 10.1%. As in the US, the drop in the CPI was attributed to lower retail petrol and diesel prices.

Some important questions arise from these declines in headline inflation.

Has the inflation peak been reached and are we now on the downward slope? Are we closer to fully understanding why inflation has been (and still is) so hot? What happens to the gold price in the weeks and months ahead?

• It’s premature to think that the inflation peak has been reached. One Bloomberg report asserts that in the US “from the point of view of the Fed, this report could scarcely be worse, and that means it’s bad for everyone”. The decline in energy prices was expected and is being offset by a rise of inflation in services. The US since 2019 has become a net exporter of crude oil and petroleum products and with its rise in natural gas output and renewable electricity generation the US consumer is largely cushioned against the rocketing rise in energy prices as a result of the Russo-Ukrain war. In the UK, too, a pullback in retail oil products’ prices (meaning the annualized inflation rate in that category fell to 32.1% in August against 43.7% in July) was counterbalanced by continued price rises in food (13.4% higher versus July’s 12.8%) and services (up 5.9% in August versus 5.7% in July).

• As to the root cause of this inflationary burst one of the real villains is the massive expansion of cash in the system. In the US, for example bank deposits were $1 trillion in 1980 but grew to $3.5 trillion in January 2020; by August 2022, they were an astonishing $18 trillion – a 414% jump in around two years, thanks to the overly-generous Covid-19 support handouts by the federal government. Governments in the US, the UK and the European Union (EU) have been pumping money into our financial system for years, in what was called Quantitative Easing, itself a legacy of the Great Financial Crash of 2008. Trillions of Dollars, Euros, Pounds have been unevenly distributed and have contributed to today’s inflation – and the recent droughts, floods, wars, have only added to the inflationary woes.

• The gold price: the universal reference price for gold is the US Dollar; as the Dollar has recently strengthened versus a basket of other currencies the Dollar gold price has weakened. A strong Dollar means that gold is more expensive for investors to buy and thus the gold price tends to drop. This is partly linked to inflation – the only tool the US central bank (the Federal Reserve) has to tackle inflation is interest rates. The Fed is currently embarked on a round of pushing base interest rates higher, to try to curtail consumer spending, and thus bring into line supply and demand (inflation essentially being too much money chasing too few goods/services). But as interest rates go higher, the Dollar and US bonds (Treasuries) become more attractive to investors, and gold less so. After the August CPI data became known for example the yield on the 2-year Treasury bond jumped to 3.78%.

• Given that the US Federal Reserve and the Bank of England (BoE) are still far from achieving their target of an annual rate of inflation of 2%, economic orthodoxy dictates that they will continue to raise interest rates – which will continue to strengthen the US Dollar and hence keep Dollar-denominated gold prices under pressure.

• Investment bank analysts are regularly scaling back their forecasts for the Dollar gold price. Société Générale analysts are now forecasting the Dollar gold price dropping to $1,550/ounce by the third quarter of 2023, on the basis that the Fed will need to keep relatively high interest rates for much of next year. They add that by the end of next year, gold prices will rise to $1,650 and push back to $1,900 by the end of 2024. If the US fell into a deep recession in 2024 then that “may force central banks to loosen policy again, which would weigh on the dollar… Moreover, a decline in economic conditions would affect corporate earnings, and the stock market could witness further corrections over the next 12 months, boosting gold prices”.

Glint’s Helpful Hints: Inflation, globally

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Inflation has become a global problem. What with Covid-19 lockdowns creating clogs in many different supply chains, adverse weather conditions inciting food shortages, higher fertilizer prices cutting agricultural production, and now the Russo-Ukraine war lighting a fire under energy costs, inflation is everywhere.

This week the latest consumer price index (CPI) data for the US showed that prices rose by 8.3% in August, against consensus opinion that it would fall to 8.1%. The CPI in July was 8.5%.

In the UK August’s CPI, also published this week, was 9.9%, against July’s 10.1%. In the Eurozone the August average inflation level for the 19 countries using the Euro are published today (16 September) – the expectation is that it will be above 9%.

“Inflation is not just in the US or in Europe… it’s almost everywhere”, according to Hamid Rashid, head of the global economic monitoring branch of the United Nations Department of Economic and Social Affairs.

Most countries operate the same system, i.e. calculate their inflation level on the basis of comparing price movements of a set and stable basket of goods, which makes it possible to talk of a consumer price ‘index’. This basket is updated to account for changed spending behaviour – while a cathode-ray black & white TV set might have been included in a CPI in the 1960s, today it wouldn’t – a flat screen colour TV would replace it.

Apart from Australia and New Zealand, who publish their CPI on a quarterly basis, countries update their CPI monthly and release the figures at different times of the month.

In the United States, the Bureau of Labor Statistics is responsible for gathering price data for about 80,000 items a month across more than 200 categories.

Orthodox economic thinking suggests that when inflation rises above a pre-determined acceptable level – the central banks of the US, UK and the European Central Bank aim to maintain inflation at or close to 2% a year – then central banks should step in and raise the basic interest rate, and thus (hopefully) cut demand. Not all central banks follow this policy however; Turkey officially has inflation above 80% but its central bank cut its policy rate by a full 1%, to 13%, on 18 August.

 

Soapbox: Constancy and Change

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Soapbox China Russia

As Britain comes to terms with the death of Queen Elizabeth II after 70 years on the throne, the BBC’s radio and TV channels have been packed with predictably reverential homages and something more unexpected – fulsome coverage of Charles III and assertions of his rightful ascendancy to the throne, with many ceremonies asserting Charles as king. It’s almost as if the nation might have doubted – challenged even – his claim to be the new monarch. But Britain doesn’t do revolutions, at least it hasn’t for centuries – Charles is the new king. Revolutions are for elsewhere, other sectors.

The Russia-Ukraine war started with gunfire but swiftly turned economic, as the US used the only weapon it felt able to deploy – its currency. This is bringing about a revolution in the global energy trade, albeit one that will happen across years rather than days or weeks. This war of tanks and missiles has spilled into heating and cooking, and will further spill over into what the world regards as and uses as a reserve currency. For now, the US Dollar is top dog, close to its highest in two decades against a basket of other currencies . As the Financial Times says, “the currency still has an outsized influence on the global economy given its dominant role in global trade and finance”.

We have a sovereign debt burden that is a catastrophe waiting to happen; emerging markets are burdened by huge Dollar-denominated debts which are just getting bigger as the US pushes interest rates higher to stifle inflation. The International Monetary Fund says that some 20 countries have debt that is trading at distressed levels. Heavily-indebted Sri Lanka has already gone bust amid considerable social mayhem; Pakistan is looking vulnerable.

Another developing chaos concerns Europe’s energy supply as it enters the northern hemisphere’s winter. From a dependency on Russia for 40% of its gas needs, Europe will need to revolutionise its energy sources if it is to achieve its declared aim of cutting gas imports from Russia by two-thirds within a year. How will it do that? By a combination of (it hopes) in the short-term finding new suppliers of liquefied natural gas (LNG), while over the longer term it will return to some fossil fuel use from its own resources (coal especially), more nuclear, and building more renewable sources (wind and solar). Meanwhile heads of European States are wrangling about imposing a price ‘cap’ on Russian gas exports, which would be difficult to police, and to which President Putin has said he would then halt all energy supplies to the European Union (EU). Despite sanctions, EU member states have spent more than €91 billion ($92 billion) on Russian fossil fuels since the war started on 24 February.

The smooth transition of the monarch in the UK implies constancy, but change is more familiar in today’s world.

Putin’s Pyrrhic Victory?

Despite excitable Western media reports of Ukraine’s retaking about 3,000 square kilometres of territory seized by Russia, the military odds remain stacked in Russia’s favour. At the start of the conflict Russia had four times Ukraine’s standing military personnel, more than six times the armoured vehicles and nine times the aircraft. The determination and willingness to fight seems to favour Ukraine, but we only see pro-Ukrainian sources; any Russian deserter or captive is readily displayed on Western media. We do not know what President Putin’s war aims are, but he has staked everything on being able to declare some kind of victory. Equally, Ukraine’s President Zelenskyy has vowed that only a full restitution of all territory taken by Russia (including Crimea, annexed in 2014) would be enough to gain a ceasefire. This war will drag on through 2023, with both sides gaining and losing territory in a messy slugging match.

But even if he succeeds on the battlefield, President Putin’s larger ambition – toppling US global economic hegemony – will remain unfulfilled. For him, Ukraine is not enough. President Putin is gambling – not only for domination of Ukraine, but that he can pivot his country’s most valuable resources away from the West and towards the East. Russia might secure a short-term victory but it could turn out to be pyrrhic – won at too great a cost to be worth it – over the long term. According to Elina Ribakova, deputy chief economist at the Institute for International Finance, “Russia’s authorities might be laughing now, but they will become excessively dependent on China and India for energy exports as Europe pivots away from Russian gas in the coming one to two years. This is why Russia is using its leverage now, as it knows soon it will no longer be as effective in the energy wars”.

Cuddling up to China

It’s conceivable that Ukraine is not the real target for President Putin. His ambition is much bigger – the true enemy is the Dollar. For that, tanks and missiles will not be enough. He needs allies, more diplomatic muscle.

Who better than someone who shares his ultimate ambition?

President Putin has spent much of what spare time he has in recent months forging closer relations with China, discussing the formation of an alternative international reserve currency with other members of the BRICS group, and proposing to launch Russia’s own version of the London Bullion Market Association’s ‘good delivery’ gold bar. Such challenges to the West have nothing to do with Ukraine but they are just as deliberate, just as strategically threatening as if Russia had attacked a NATO member.

So we should pay attention to what little news we get from Uzbekistan later this week. Chinese President Xi Jinping and Russian President Vladimir Putin are expected to meet in Samarkand, Uzbekistan, at the Shanghai Cooperation Organisation (SCO) summit taking place September 15-16. Undoubtedly Ukraine (and progress towards the Dollar’s demise) will be on the agenda.

Russia and China declared a “no limits” friendship before the start of this year’s Winter Olympics; what that means is being proved. Russia’s energy giant Gazprom has just signed an agreement with China to settle payments for its gas exports in Yuan and Roubles instead of US Dollars. This is a remarkable event; crude oil has been priced in Dollar terms since 1973, when the US agreed to offer armed protection to Saudi Arabia. India too is buying lots of heavily discounted Russian oil; its imports of Russian fossil fuels have risen by more than €64 million a day since March. Only the US, Australia and Canada currently have a complete embargo on Russian fossil fuels – but then, they have plentiful supplies of their own. Bloomberg’s Javier Blas has written that for “now, at least, energy sanctions aren’t working”. On several fronts Russia seems to be winning the battle for strategic partners, whether or not its troops are suffering a (probably only temporary) setback.

Keeping the lights on

On 3 August 1914, one day before Britain declared war on Germany, the British foreign minister, Sir Edward Grey, said the “lamps are going out all over Europe, we shall not see them lit again in our lifetime”. In Berlin, the lamps are already darkening; at least 200 monuments and public buildings are no longer illuminated at night. As the temperatures drop the fragile unity of the West’s opposition to Russia and its allies (more than a dozen of whom have joined this week’s Russia-led Vostok military exercises in the Far East) will be tested to the extreme. Europeans can live with dark streets; cold homes will be trickier.

Russia’ s war against Ukraine is offensive to Western liberal values of toleration, self-determination, negotiation rather than conflict. But there is no end in sight that might satisfy those values. Rather it is merely the precursor to a much bigger battle – with the US Dollar the central target.

Bullion Bulletin: New leader, old problems

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In the UK, Prime Minister Liz Truss takes office “with the economy in as dire a state as it’s been since the 1970s” says Bloomberg.

Inflation is at 10.1%; next year it might breach 20%, for the first time since 1974. Interest rates might rise to almost 5% by May next year. Energy bills (now capped at huge cost) were looking like pushing many as 14 million households into fuel poverty. The Bank of England (BoE) expects a recession by the end of this year. Trade unions are talking of a national general strike, which would be the first since 1926. The Pound Sterling is at its lowest in almost 40 years; investors might be starting to think the UK’s economy is in trouble – which it is. The UK’s trade deficit (the difference between the value of its exports and the cost of its imports) was £27.9 billion in the second quarter of this year, the largest quarterly deficit since 1997.

What can Truss do to tackle these problems, any one of which would cause an almighty migraine for a Prime Minister? She gets full marks for bullishness, proclaiming “we will deliver, we will deliver, we will deliver” as she was declared the winner of the contest to be the Conservative Party’s new leader (and thus, de facto, Prime Minister). But what will she deliver?

Early in her campaign to be selected by the 172,000 or so members of the Conservative Party she pledged massive tax cuts – which might stimulate economic growth but only in the long term. Truss said her tax cuts will cost £30 billion a year, but others put the cost at almost double that. All the UK’s problems need responses now.

Prime Minister Truss has chosen a short-term option to tackle the rising tide of household and business energy costs, giving an “energy price guarantee” (effectively a retail price freeze, no matter what wholesale prices do) to households or two years and six months to businesses. She obviously hopes this will give her Conservatives a chance of winning the next general election, which might not be until 2024. Government officials have not said what the gross cost of this price freeze will be, but estimates have put it at about £150 billion; it could be much higher, with the taxpayer massively exposed to possibly rising wholesale gas prices. The risk is that kind of mammoth handout – far more than made during Covid-19 – will vastly increase government borrowing. Simply servicing the UK’s existing national debt will cost around £100 billion this year.

Debt interest spending was forecast to reach £83 billion next year (2022-3), the highest nominal spending ever and the highest relative to GDP in more than two decades. It’s nearly four times the amount spent on debt interest in 2020/21 and exceeds the budgets for day-to-day departmental spending on schools, the Home Office and the Ministry of Justice combined.

Populism – the need to win votes – struggles against economic reality. The UK government’s gross debt has risen astonishingly rapidly in just six years, from £1.731 trillion in 2016, to £2.382.8 trillion in 2021. As a proportion of debt to gross domestic product (GDP, what the UK produces) it has risen from 85.8% in 2016 to 102.8 last year. There’s no simple guidance as to what the GDP/debt ratio should be – Japan’s for instance is 260% but investors consider the likelihood of a Japanese sovereign default remote. The key is credibility – are the important institutions, such as the central bank, robust and independent? – and the relative strength of the economy. On that score the UK is weak. The National Institute of Economic and Social Research said in June this year: “In the three decades since the Second World War, the average annual productivity growth rate (output per hour worked) was around 3.6%. The following three decades saw this fall to around 2.1%. From the start of the financial crisis in 2007 to 2019, this declined even further to 0.2%…if productivity had continued to grow at two per cent per year in the last decade, it would have meant an extra £5,000 per worker per year on average”. Truss has said she is a “great believer” in the independence of the Bank of England, but she has also said she will “review” the bank’s mandate.

In 1976, a previous Prime Minister, the Labour Party’s James Callaghan, told his party’s annual conference: “We used to think you could spend your way out of a recession and increase employment by cutting taxes and boosting government spending. I tell you in all candour, that option no longer exists”. That year the government, struggling against a variety of internal (a stagnant economy) and external shocks (including rapidly rising energy costs: sounds familiar?) was forced to borrow £3.9 trillion from the International Monetary Fund (IMF).

The road ahead for the UK economy is thus littered with risks. Former Chancellor of the Exchequer Philip Hammond says “I’m sceptical about whether we’ve got room for big increases in spending and tax cuts…The UK economy is perhaps more fragile than many UK citizens understand”.

Where does this leave gold? Because gold is priced in US Dollars, when the Pound Sterling falls against the Dollar then gold costs more in Sterling terms. But this works both ways – as the stronger Dollar has made gold more expensive for buyers in other currencies, gold in currencies other than Dollars has done remarkably well in 2022; in Pounds Sterling for example the gold price has gained more than 9% this year, despite ups and downs.

The risks for the UK economy may defeat Liz Truss. One of those risks is baked in, which is that the Pound is set to lose at least 10% and maybe 20% of its purchasing power. Perhaps the biggest risk for individuals is failing to try to hedge, to take safeguards, against what is likely to be a stony road. Gold remains one of those safeguards.

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.

Investment: A new chance to invest in Glint!

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Glint has delivered to its existing investors a remarkably rapid and sustainable growth rate – and we want more of you to join in our fantastic journey!

So Glint has kicked off a new funding round, initially working with the London-based investment bank WH Ireland’s Investor Forum. High Net Worth investors, family offices, private wealth managers and fund managers now have the opportunity to invest in Glint. The proceeds from our funding will help accelerate the growth we are currently enjoying and add improvements to our products and services to make Glint even better.

Our intention is to open up this new funding round to crowdfunding very soon, in the UK via Seedrs. More information will be coming shortly for accredited investors that are US residents looking to invest in Glint – your favourite regulated, Gold and multi-currency savings and payments platform. Details of how to invest with both Seedrs and WH Ireland will be available to UK and ROW residents soon.

Glint’s Helpful Hints: Is my gold safe? Am I getting the best rate when I buy gold with Glint?

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Once a customer has placed an order for gold though the Glint app, and that purchase process is completed, the customer then owns the gold rather than Glint (or any other party). The gold continues to be held in a secure, insured and independent Brinks’ vault in Switzerland and this arrangement remains in place.

Glint provides its clients the most competitive spot price of gold. There are no hidden mark-ups with Glint and all exchange rates are updated real-time so you can be sure you’re getting the very best available market rate. When you carry out a gold or foreign exchange transaction, the exchange rate and any associated fees will be shown before you confirm the transaction.