Today, on the day of the UK’s crucial general election – which effectively is a second referendum on whether or not the country should leave the European Union – it would be all too easy to forget that it’s also an important day in the life of the EU, the day when Christine Lagarde chairs her first meeting of the European Central Bank’s governing council.
Lagarde is preparing only the second strategic review in the ECB’s 20 year history. The last one was in 2003 – five years before the Great Crash. What Lagarde does, matters just as much as the UK election result. So far she has appeared to give greater priority to “climate change”, although the climate is not part of the ECB’s stated mission.
Why does it matter what Lagarde says or does?
Because the Eurozone area, 19 countries, is struggling with low growth of 1.8% in 2018, probably 1.1% in 2019, and forecast gross domestic product (GDP) growth of just 1.2% in 2020 and 2021. Meanwhile unemployment remains stubbornly high in the Eurozone and is officially forecast to be above 7% out to 2022. Unlike the US Federal Reserve, the ECB doesn’t have as part of its mission the achievement of maximising sustainable employment; but it is responsible for “maintaining price stability.” That stability is now looking fragile.
The ECB has tried to keep the Eurozone’s economy sputtering along by Quantitative Easing (QE), that wonderful euphemism for printing money. This money has been used mostly to buy government bonds. The QE programme has pumped around €3 trillion into the monetary system.
The ECB however has a limit to how much of a country’s bonds, currently 33%, it can buy. The ECB itself says: “The issuer limit of 33% is a means to safeguard market functioning and price formation as well as to mitigate the risk of the ECB becoming a dominant creditor of euro area governments. To this end, the 33% limit is applied to the universe of eligible assets in the 1 to 30-year range of residual maturity”. A further consideration is that the ECB has to buy government bonds in proportion to each Eurozone country’s contribution to the ECB’s capital. The Netherlands and Germany, the biggest contributor to the ECB, are very close to this 33% limit – the ECB has bought more than 30% of Germany’s bonds.
The ECB can of course make up its own rules, and the 33% bond-buying limit can be raised; it has already done that once, from 25% to 33% in September 2015.
The ECB has lowered interest rates to minus 0.5%, the lowest on record; it has swamped the Eurozone with €3 trillion (and is printing €42 million a month currently); it has used every monetary tool in its kit, and yet economic growth frankly is still weak.
What can Lagarde do different to kick-start the Eurozone’s economies? Not much, probably. According to a Reuters’ poll more than 90% of economists thought in November this year that she will continue her predecessor’s, Mario Draghi, “dovish policy stance”.
The worry about all this is very simple: how long can the ECB continue using tools that clearly haven’t worked? And what might the consequences be if the Eurozone slips into a recession, with little economic activity to repay all this debt?
Lagarde might try to persuade the 19 member states of the Eurozone to adopt fiscal expansionism, i.e. spending money directly in the economy, by building roads, improving rail infrastructure, more hospitals, more schools, and so on. This is unlikely to persuade Germany, for one; its policy for decades has been tight fiscal conservatism. Those opposed to fiscal splurging may well point to the example of Japan, where the government has announced a $121 billion fiscal stimulus to defeat the country’s chronically slow growth and deflation, with little hope of it working.
So, right at the moment that the UK may well send a symbolic signal that it will, after all this British turmoil, finally leave the EU in 2020 or later – it’s never been part of the Eurozone – the ECB, and its infant, the Euro, are starting to look bereft of new ways of fighting slow economic growth. Confidence in the ECB, in the Euro, could begin to ebb, as various member states think about going their own separate ways.
Question: Why does 12 December feel like Christmas day?
Answer: Because both seemed like they will never arrive – and then they come in a rush.
12 December may not be, to quote President Roosevelt on 7 December 1941, “a date that will live in infamy”, but for the UK’s 46 million general election voters it certainly feels like that. The politicians of all parties in this election have promised the earth. Sometimes it feels like they have been promising to deliver heaven-on-earth.
The turmoil is financial as well as political. This election result will certainly produce a lot of confusion for currencies, as forex traders try to figure out the implications for the UK’s economy.
Currency traders will be at their desks before dawn on 12 December for a 24-hour slog. They will be glued to their multi-screens, trying to track the Pound Sterling’s moves against the Euro, the US Dollar, and other paper currencies. Their aim is to make money for big corporations, fund managers, private banks and others, who could win or lose a fortune on how the election goes – and how the Pound performs.
Their task has got more difficult thanks to social media. According to one, Jordan Rochester, “It used to be quite simple, you’d look at your Bloomberg and there’d be a headline up there saying Mark Carney said this or UK data says that. Now you refresh Twitter and it turns out there’s been some poll you didn’t expect to see.”
If this is a complex nightmare for big players, what’s it like for individuals trying to protect their savings? The currency moves will be fairly dramatic, no matter what. Christmas gifts could turn out to be cheaper if you paid for them in Euros – or they might cost you more.
Let’s imagine the Conservative Party wins a majority. Expectations of this are strong, and the Pound has risen against the US Dollar by more than 2% in the last two weeks, precisely on those expectations. The Pound will strengthen if they win a strong majority.
If on the other hand Labour wins a majority, currency traders expect the Pound to fall against the US Dollar.
No-one expects the Liberal-Democrats to win a majority but the vote might produce a hung Parliament – in which case the Lib-Dems could become a significant potential coalition partner.
This election is, objectively, another referendum on whether the UK should leave the European Union. That further complicates the outlook, for if the Conservatives win by just a small majority then the Brexit debate might drag on well into 2020.
The electioneering by all parties has verged on the hysterical. Whatever the result, don’t expect an old-fashioned gentlemanly shaking of hands and an acceptance that the best team won. The kind of rancorousness that has plagued the campaign will continue. Forex traders will need to sit at their desks long into nights to come.
Where is gold in this mix? Currency traders don’t look at gold. They ignore it. If you want to dip out of the frenzy and put your savings into real money; if you want to protect yourself against the ups and downs of currency movements, then try Glint. Not only can you buy things on your Glint card using Pounds, Euros and US Dollars. You can also buy Gold – and sit out the hairy ride ahead.
Welcome to the Bonehead era.
In South Korea, opposition politicians are shaving their heads. They’re doing this as a political protest. That’s one, literal, form of boneheadism.
We should be far more concerned by a spate of metaphorical boneheaded-ness among central bankers right now, including those of South Korea. The South Koreans are planning for 2020 a record-busting government budget, in an effort to stimulate the economy.
South Korea has operated a conservative, tight fiscal discipline for more than two decades, so the kind of fiscal largesse planned for next year is highly unusual, particularly given the country’s enviable economic performance. The South Korean finance ministry forecast economic growth of 2.6% for 2020, a projection made prior to the announced budget splurge for next year.
In Europe, economic growth of 2.6%/year can only be dreamt of. Never mind, lots of lovely Won will soon be sloshing around one of Asia’s previously best-managed economies.
South Korea is a straw in the wind.
For many economists South Korea’s kind of fiscal stimulus, or public spending of money that governments may/may not have, is a much-needed measure in Europe, where the only tool being used is Quantitative Easing (QE), whereby the European Central Bank (ECB) prints money to buy government securities, and hope that this encourages lending and investment.
Despite QE being tried during 2015 to 2018, during which time the ECB spent €1.3 billion a minute, this policy failed to boost the Eurozone’s economy. Nevertheless the ECB has taken further leave of its senses and announced the resumption of QE. Mario Draghi, the ECB’s president for a few more weeks, also announced a cut to the ECB’s main interest rate to minus 0.5%, which is a bit like throwing petrol on a bonfire to put it out.
Negative interest rates first made their appearance in the Eurozone in June 2014, with the aim of putting some pep into the comatose economy. This is getting dire; the ECB has no more weapons to fire. As JP Morgan Asset Management has predicted, a global recession is now almost inescapable, and Europe will have another eight years of negative interest rates. As one observer has commented, “When this misadventure in monetary policy ends, as both math and history says it must, it will be messy, uncontrolled, and very painful for holders of just about every sort of financial instrument out there (stocks, bonds, derivatives, etc.).”
As for USA, where government-by-shouting is the order of the day, President Trump gave his opinion on 11 September, using his favoured capital letters. He tweeted that the “Federal Reserve should get our interest rates down to ZERO, or less, and we should then start to refinance our debt. INTEREST COST COULD BE BROUGHT WAY DOWN, while at the same time substantially lengthening the term…A once in a lifetime opportunity that we are missing because of ‘Boneheads’”. The expectation is that the US Federal Reserve will indeed cut rates – but not put them into negative territory, thus angering the President even further.
As those who regularly read this newsletter will know, we have a vested interest in the message “buy gold”. We recommend obtaining a Glint Mastercard, and investing some of your wealth in gold on the card, which is the cheapest way there is of obtaining physically allocated (i.e. it’s yours and yours alone) gold. But beyond that vested interest we are becoming increasingly concerned about the economic and financial boneheaded-ness that surrounds us right now. It seems to us that that the solutions being suggested to bring about economic growth greater than close-to-zero are, frankly, likely to make matters much worse over the longer term. With a world that is today carrying an estimated 50% more government, personal and corporate debt than in 2008, the risks are concomitantly greater of a serious recession. We would be doing readers a disservice if we said anything other than – don’t be a bonehead; buy gold now, for goodness’ sake.
Trade wars quickly spill over into currency wars, as evidenced in what’s happening to the Chinese currency right now. Last week President Donald Trump announced he will from September impose 10% tariffs on the remaining $300 billion of Chinese imports, on top of the 25% tariffs already imposed on $250 billion of Chinese goods. Then on Monday 5 August China retaliated by allowing the Renminbi – China’s currency – to slip below 7 to 1 US dollar for the first time since May 2008. The Renminbi is allowed to traded 2% either side of a fixed point set by the People’s Bank of China (PBoC); on 5 August the PBoC set that point at 6.9225, the lowest since last December.
Immediately global equity markets plunged and there were forecasts of the depreciation spreading among other Asian currencies, like a stone rippling in a pond – or “like a tsunami”. China’s economy is already growing at its slowest since 1992 and the effective ban by the USA of Chinese imports – and the retaliatory measures, such as China’s ban on some US grain imports, and now the devaluation of its currency – are indications of how desperately China is trying to fight the US President’s tariffs. The drop in the Renminbi will give China’s exports a short-term boost but capital is flowing out of China – and the country’s citizens will face higher inflation. We need to hope that the aphorism by the 19th century French economist Frédéric Bastiat does not come to pass: “When goods do not cross frontiers, armies will.” Will the US Treasury’s largely symbolic declaration of China as being a “currency manipulator” retrospectively be seen as a first shot moment?
Many key central banks are applying more aggressive monetary action and talk in the markets is all about when – not if – the next global recession will arrive. The US Federal Reserve has cut interest rates by 25 basis points and it is running out of bullets to fire against the threat of a slowdown. Many of the tools that have been used are failing, and with interest rates now close to an effective bottom it is a dangerous position to be in, where we could see interest rates turn negative, as in Europe. Given the monetary policy shift, one could see central banks across the world running on empty very soon. Investors around the world are far too concentrated in highly inflated asset classes and should be shifting into gold, which has stability and certainty during times of tumult. Highly inflated asset classes are unlikely to be good real returning investments and those that will most likely do well are those that perform when the value of money is being depreciated, while domestic and international conflicts are significant. This points to gold and makes it a significantly viable investment. It is now easier than at any time in previous history to inject some stability into your personal portfolio, through a Glint Mastercard.
The Washington Agreement (WA) on gold came into the world with an almighty bang on 26 September 1999. On 26 September 2019 the agreement will finally end, with barely a whimper. This week the European Central Bank confirmed that it will allow the WA to lapse because, in its words, the gold market has settled down “in terms of maturity, liquidity, and investor base.” In other words – no central bank is interested in selling gold anymore. And that news isn’t a whimper but a very loud bang as far as gold investors are concerned.
In the last two decades the world has altered in unimaginable ways. The internet – little more than a promising experiment in 1999 – has revolutionised everything, including finance; it has, for example, made Glint possible. These two decades have seen President Putin put Russia’s territorial expansion back on the agenda; China is flexing its muscles and the West is alarmed about Beijing’s global ambitions; the prospects of a cross Iran getting a nuclear weapon are very real; the UK is deeply split over trying to leave the European Union, and the EU is struggling with economic stagnation; and the USA has a maverick, erratic President. Whatever happened to Francis Fukuyama’s book The End of History (published 1992)? Answer: it’s been postponed.
All of which helps to explain the rise of the gold price from a 20-year low of $257.80/ounce in July 1999 to more than $1,429/ounce today. The era when some central banks tried to chuck gold into history’s dustbin is over. The world now is a darker place, with uncertainties everywhere.
Why was the WA signed in 1999?
The global gold market was a shambles back in the 1990s. Belgium and the Netherlands were selling gold from their official reserves. Then in October 1997 the Swiss Finance ministry recommended that the Swiss National Bank sell 1,400 tonnes of its 2,590 tonnes of gold reserves. In April 1999 the Swiss held a referendum to cancel the Swiss Franc’s gold-backing, and so enabled the sale of 1,200 tonnes. In 1999 the UK’s Chancellor, Gordon Brown, of the Labour Party, under the influence of a young advisor and former Financial Times journalist called Ed Balls, called for the International Monetary Fund (IMF) to sell gold from its holdings. Brown also decided to sell 395 tonnes of the UK’s 715 tonnes. The UK’s gold sales ended in 2002 and achieved an average price of $275/oz; since then the gold price has averaged almost $1,000/oz. The Financial Times has always been anti gold – even when the gold price soared after the UK sales, and Brown had effectively lost the UK £16 billion, the newspaper was still rubbishing gold as a reserve asset.
Amid 1999’s turmoil, 15 leading European central banks and the European Central Bank signed the WA, which was monitored by the Bank for International Settlements. Notably, the USA, which had and has more than 8,000 tonnes in its reserves (75% of its foreign reserves) didn’t sign the WA. Nor did Germany, a country where the hyperinflation of Weimar days is burned into the national memory. For those two countries at least, gold was and remains a valued defensive and/or protective asset.
A five-year agreement, which was to be renewed every five years (it was four times), the WA committed the central banks to coordinate their sales of gold from their official reserves; annual sales by the signatories would not exceed 400 tonnes (2,000 tonnes over five years); they agreed not to expand their gold leasing and their use of gold futures and options; and acknowledged that gold would remain “an important element of global monetary reserves”. Sales from the signatories of the WA reached 500 tonnes in 2005 but dropped off soon afterwards (see the chart below, from Bloomberg). The central banks evidently signed in haste and repented at leisure; the new generation of younger central bankers had forgotten why they had gold reserves in the first place. As the world turned darker they quickly remembered. In 2018 central banks bought 651.5 tonnes of gold, 74% up on the previous year, according to the World Gold Council.
Clearly, central bank gold buying helps the price to rise. A major question for the individual holder of gold is – will central banks stop buying? Well, they may do, but the signs are that they still have a healthy appetite and they want to diversify from the US dollar – Russia and China are strong examples of this. The next question for anyone is, should I be following the central banks’ lead and getting some gold? That’s a rhetorical question: get a Glint Mastercard, download the Glint app – and do not make the same mistake as Gordon Brown.
Facebook’s new ‘currency’ gets roundly savaged.
Libra is the name that Facebook has chosen for its new digital currency. In Latin ‘libra’ means ‘balance’; in ancient Rome a libra was a measurement of weight, equivalent to 12 ounces. Hence libra also came to mean ‘pound’. But if Facebook was hoping for a balanced response to the announcement of Libra, it will have been disappointed. From regulatory authorities to techie nerds, Libra has come in for a bashing.
From The Atlantic came this, by Eric Posner, professor at the law faculty at the University of Chicago: “The technological innovation that is supposed to liberate us from government ends up subjugating us to a handful of corporations.” Overtones of a private sector Big Brother litter Posner’s warnings about Libra, such as this: “Money is information: When I send money to you, I’m telling the financial system that wealth holdings assigned to me should now be recorded as assigned to you.”
Randal Quarles, chairman of the Financial Stability Board, has sent a letter to G20 national leaders, prior to their meeting in Osaka, Japan, in which he says (prompted no doubt by Libra) that “a wider use of new types of crypto-assets for retail payment purposes would warrant close scrutiny by authorities to ensure that they are subject to high standards of regulation.” Mark Carney, governor of the Bank of England, says that the Bank “approaches Libra with an open mind but not an open door”, which is governor-speak for ‘we need to keep a very close eye on this threat’.
And on techcrunch Josh Constine is worried about privacy, control and security: “Apparently Facebook has already forgotten how allowing anyone to build on the Facebook app platform and its low barriers to ‘innovation’ are exactly what opened the door for Cambridge Analytica to hijack 87 million people’s personal data and use it for political ad targeting.” Sherrod Brown, a US Democrat Senator, was blunt in his tweet: “We cannot allow Facebook to run a risky new cryptocurrency out of a Swiss bank account without oversight.”
We could go on but you get the picture – lots of worries and no-one has even got their hands on a Libra as yet.
Here at Glint we need no such warnings about the shift of control of paper money from central banks, to control over digital money by massive global private sector corporations. We are well aware of the rapidity of change that is superseding money markets. That’s why we espouse gold as the only true currency, which is beyond the control of either governments or corporations. Gold transcends that fight for ownership and control – which makes it unique.
This swiftly-moving and global context for finance will inevitably mean some winners and losers. At the Bank of England an unnecessarily lengthy (148 pages) paper on the “Future of Finance” tries to second guess what the technological, demographic and environmental changes happening in the UK (and elsewhere) will mean for the Bank’s supervision and control of the economy. Bureaucracies such as the Bank of England are likely to be losers in this revolution; much richer and agile private sector giants like Facebook will always stride ahead faster. The Bank is always playing catch-up. It seems paralysed in the face of a crashing collapse in the availability of ATMs in the UK, for example: some reports suggest that the UK lost 460 such machines each month in 2018.
It’s a volatile place right now, the financial world, as geo-political tensions coincide with technological innovations. How to gain stability amid turmoil? Download the Glint App now, or visit Glint’s website, to see how gold can bring you certainty.
Recent headlines regarding the situation in the Middle East can hardly be viewed positively. Since the US pulled out of the agreed nuclear disarmament with Iran last year, tensions have been steadily rising. Now, we have alleged Iranian attacks on oil tankers and more US firepower arriving by the day. Iran has the second largest population in the Middle East, at 83 million, is the 6th largest oil producer and holds the 2nd largest reserves of natural gas and seemingly on its way ‘once again’ threatening to become a nuclear weapon state.
Throughout history, we have seen tension in the Middle East creating oil supply concerns, pushing up prices. Often, these accompanied economic growth worries, amid rising inflation and interest rates. But, in today’s markets, no-one seems to worry about anything. Stock prices remain elevated, maybe it’s the permanent high plateau that Irving Fisher talked about in 1929! The oil price has hardly budged and inflation expectations and interest rates are falling, not rising. Que raro!
Since 2nd May, Trump’s administration has imposed a policy of zero imports of Iranian oil due to Iran’s unwillingness to consider negotiations over the JCPOA. In addition to this, Trump is looking to block import waivers from all of Iran’s major export countries such as China and India, in order to put extra pressure on Iran with the threat of a serious economic situation. As a result, sanctions could remove another 500,000 barrels per day from the market.
In response, Iran has threatened to stop the flow of oil production from other big suppliers via the Strait of Hormuz. However, the Strait of Hormuz is around 20 miles wide and would be very difficult for them to block it for a long period of time. Furthermore, Saudi Arabia and the UAE have alternative pipeline routes that could avoid the Strait of Hormuz, with Saudi able to send around 6.5 million barrels per day around the Persian Gulf.
Although these sanctions seem to present a serious problem for Iran, China said that Iran’s oil was too cheap to pass up, and it has been increasing its purchases of Iranian crude oil in 2019, up to 700,000 barrels per day in April. It is likely that China will try to bypass these sanctions which will significantly reduce the threat to Iran’s exporting revenue. How the US will react to this, is up for discussion but it certainly doesn’t help ongoing tariff and trade war talk.
The market appears to be pricing in zero % probability of anything escalating, but we believe it is just another example of declining volatility, in all asset classes and would be very wary of complacency at this time. A neutral observer could be forgiven for thinking that the current status is only one spark away from an outright outbreak of hostilities in the region. What then? While the long-term gold/oil ratio at 24 is at its average for the last decade and high compared to the noughties, any war and an oil spike could well see gold rise significantly as well.
Of course, no one cares until they do. Donald Trump and the market-place are far more focussed on the Federal Reserve’s projected path of interest rates of 2019, a complete U-turn from the 2018 with gradually rising rates. With record unemployment at 3.6% in May, wage inflation rising and bullet-proof stocks, who in their wildest economic dreams could imagine that we would need to price in three Fed interest rate cuts, back down to the zero-bound. Maybe, this is ominous in its own right, and a Middle-East war is a mere side-show.
Protect your assets and be able to spend in a reliable currency through buying gold using the Glint.