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Soapbox: All aboard for the recession express?

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Last Friday’s $50/ounce drop in the Dollar gold price was a nasty surprise; it seemed to come from nowhere. In fact, it was a blunt reminder of the power that the US central bank, the Federal Reserve, can indirectly exercise over the gold price.

It was a packed week but most of the big news events were widely anticipated. On Wednesday, the Fed put up its benchmark interest rate by 0.25% to a range of 4.5%-4.75% – as generally expected. On Thursday, the US Bureau of Labor published data showing that the economy added 517,000 jobs in January, double that recorded in December. This wrong-footed most economists, who had expected around 185,000 new job openings. The US unemployment rate fell to 3.4%, the lowest since 1969. Job openings also rose in January, to 11 million, and unemployment claims are at their lowest in nine months.

These figures proved a series of grenades in financial markets. They have blown off-course the route the Fed seemed to be following, an amble towards peak interest rates of some 5% by the end of 2023.

Some economists conclude that slower wage growth and lower unemployment is providing a “utopian scenario” in which consumer demand stays strong while inflation is quashed. But it’s just as likely that, amid the deep uncertainty that policymakers have as to what’s going on in the US economy, that they will make a misstep and land themselves with a dystopian scenario.

The temptation

The January jobs report suggests that the US economy is still firing on all cylinders despite the Fed making money and credit more expensive than for years. One of the tasks the Fed has is to bring about stable prices; to that end it has raised interest rates eight times since March 2022 in the fight against inflation that reached a four decade high of more than 9%; rates are now their highest since October 2007. Higher rates generally mean a stronger Dollar and a weaker gold price in Dollar terms; on Friday, the Dollar rose by almost 2%, while gold plunged. ‘Stable prices’ mean that inflation is tamed; the US consumer price index (CPI) in December was an annualized 6.5%, its lowest in a year but still way ahead of the Fed’s target of 2%.

The gold price reacted so badly to the jobs report not because gold needs greater unemployment, but because of a fear that the Fed will push interest rates higher than expected, making the Dollar even stronger, and leaving gold (which pays no interest) relatively unattractive. The temptation for the Fed is that it misinterprets the data, concludes that the economy is motoring and that inflation remains a threat, so hikes rates even higher. Fed policymakers seem split on this, some pushing for higher rates (to finally extinguish inflation) and some for an easing of rate increases (for fear of putting the economy into a serious recession with all the associated miseries). For some commentators it’s ‘high noon’ for central bankers – halt interest rate rises too late and deepen this year’s economic slowdown, or too soon, leaving inflation alive if not exactly kicking.

Stagflation for some

If the US path to monetary stability is unclear at least the Fed has a clear choice. The same isn’t true in the UK or the Eurozone.

The International Monetary Fund (IMF) came in for a tornado of criticism from some British politicians last week for its gloomy assessment of the British economy, which it said would shrink by 0.6% this year, placing the UK below both the G7 group of richer nations and, humiliatingly, Russia. The IMF said the UK economy would grow by 0.9% in 2024 but the Bank of England (BoE) forecast for that year a further decline, of 0.25%. The Eurozone’s gross domestic product (GDP), which managed a 0.1% increase in the final quarter of 2023, would grow 0.7% this year and 1.6% in 2024 said the IMF. Last week, the BoE pushed interest rates to 4%, a 14 year high, while the European Central Bank (ECB) also put rates up, to 2%. Raising interest rates in the face of a slowing economy is unusual, to say the least.

Forecasts for how economies will perform often turn out to be wrong; the further ahead they look, the more likely they will go astray. At this point the most any crystal-ball gazer (i.e. all economists) who cares about their reputation would be likely to say is that all the IMF forecasts are well within a margin of error.

The rocks ahead for the UK are huge. Public sector workers – teachers, health workers, fire personnel – are being joined by many others in strike action to demand wage increases that keep step with inflation. Trades unions lack the muscle they once had, but their strikes still cost at least £1.7 billion in eight months last year, according to the consultancy the Centre for Economics European gas storage levels and Business Research (CEBR). There are no signs that the government is prepared to budge on its (sub-inflation) wage offers. For Eurozone members the big fear early in 2022 – that energy costs would soar as a result of the Russia/Ukraine war – has so far not materialised, thanks to a mild winter so far. Energy costs are lower than expected, easing the cost-of-living fear.

Yet none of these three are out of the woods. The growth forecasts from the IMF are chimerical. It takes months for higher interest rates to filter through to the ‘real’ economy, so the Fed could easily overstep the mark and squeeze interest rates so tightly that a recession will result in late 2023. The US also has the matter of its troublesome debt ceiling (of $31.4 trillion) to negotiate before June. As for Britain, the strikes are a troubling nuisance but one can sympathise with workers whose living standards have fallen far behind inflation. The Eurozone may have escaped high energy bills this year, but next may be another matter.

And then there’s Ukraine, an apparently bottomless pit into which money is being poured by the West, which now just a couple of steps away from a direct military confrontation with Russia. Tanks are headed for Ukraine. What next – fighter jets? Such a fight would not only be devastating in human terms; it would be ruinous of paper currencies. One can see from the example of Lebanon – which has just devalued its currency, the Lebanese Pound, by 90% – what social and political catastrophe can do to a fiat currency, and what human heartache results. Which is why our motto is Gold is security: Glint its key.

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: The tethered mustang

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Central banks of the Eurozone, the UK and the US all put up interest rates last week – the Federal Reserve by the (widely expected) 0.25%, taking the federal funds rate to 4.5%-4.75% – and the Bank of England (BoE) by 0.5%, putting the UK’s base interest rate to 4%. The European Central Bank (ECB) joined in on Thursday, putting the Eurozone’s base rate up by 0.50% to 2.5%.

They do this to drive down demand in the economy; the aim is to extinguish high inflation. Making borrowing money more expensive is a blunt instrument with time-lags measured in months of even years. The risk is that central banks raise rates too high and consequently don’t just slow demand but slash it so much that an economy moves into recession, with all the associated downsides, such as rising unemployment rates, more expensive mortgages and increased public unhappiness over the cost of living. It’s a perpetual tightrope act, made all the more tricky by these central banks aiming to achieve 2%/year inflation.

The leadership of all three banks showed a determination to quash inflation. Jerome Powell, chairman of the Federal Reserve in the US, where inflation in December was 6.5% (versus 7.1% the previous month and a four decade high in June of 9.1%) said “we are going to be cautious about declaring victory and sending signals that we think the game is won, because we’ve got a long way to go”. Andrew Bailey, governor of the BoE, said “we need to be absolutely sure that we really are turning the corner on inflation”. Inflation may be cooling in all three zones but only very slowly. The UK’s official rate (from December) is 10.5%, close to its highest in more than four decades.

Central banks are having a tough time figuring out the basic direction of their economy. With interest rates in the US at their highest level since September 2007 and even apparently well-paid Americans struggling – an end-December survey found that 51% of Americans earning above $100,000/year said they live from one pay cheque to the next – the signal to the Fed should be that interest rate rises have reached recession-point. But other data says the US labour market remains very tight – some 7% of jobs are unfilled while the unemployment level is 3.5% and recently was at an historic low. Moreover those in work are working on average 33 hours/year less than they did in 2019. In the UK, the story is similar; more than 20% of the working age population is “economically inactive” (neither employed nor looking for work).

Financial markets as usual immediately tried to guesstimate what the banks’ next moves might be. Opinion was divided as to whether interest rates will go even higher in the US, even though Powell said further tightening was on the cards. The ECB said it would “stay the course” on rate rises but the BoE’s rate setting body, the Monetary Policy Committee voted seven to two in favour of this latest rate rise, raising markets hopes that the peak rate for the UK is in sight.

There are signs that the US may escape a serious recession, although alarms are ringing about a “second wave” of inflation being imminent – medical costs are set to increase at the highest rate in 14 years. As for the Eurozone, Spanish inflation surprised many by going marginally higher in January. In the UK, a de facto general strike (500,000 people walked out) on 1 February spoke of deep anger among public sector workers at their wages being eroded by inflation – this is a problem without an easy solution.

Gold futures prices rose 1.3% (to $1,968.30) on Powell’s comments after the US rate rise, as the market detected a willingness to be less drastic with interest rate rises. Inflation appears to be calming, but appearances can be deceptive. Like a tethered mustang, gold seems to be champing at the bit – but it will have a while to wait.

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.

Soapbox: Turning the supertanker

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How do you turn a super-tanker? Starting early is a good idea.

Two super-tankers dominate the global economy – China and the US. If the economy of either catches cold, the rest of the world sneezes. The US is not yet out of the ‘recession woods’ while China looks to be in some difficulty. A combination of its shrinking and aging population, faltering external demand (as the world economy slows), and weakening domestic consumption tend to suggest China’s growth this year will be sluggish at best.

If we can credit the Chinese premier, Li Keqiang, China is going to try to make waves by changing the course of its super-tanker; the Chinese consumer is going to be prioritised. “Boosting consumption is a key step to expand domestic demand. We need to restore the structural role of consumption in the economy”, said Li at the weekend. This decision to make domestic consumption a key driving force of its economy could have global repercussions. Chinese consumers have not been big spenders by comparison with other nations. While consumer spending regularly accounts for around 70% of US gross domestic product (GDP), in China such spending made up just 38% of GDP in 2021.

This is not just a ‘China re-opens post-Covid’ story. If Li and his communist party associates are true to their word, China is about to embark on an entirely fresh route. Prices of key commodities – such as base metals, the essential ingredients for a host of consumer goods – have already climbed much higher on the re-opening of China’s economy. If consumerism is becoming the new CCP-led policy, price for basic commodities and finished products will rise even higher.

Yet the policy Li announced may run aground – the super-tanker may be too difficult to steer along a different course. After all, President Xi Jinping, the then new leader of the Chinese Communist Party (CCP), unveiled in 2013 a 60-point reform plan aimed at a similar target, that of easing the State’s grip on the economy in favour of encouraging consumer-led growth. Those promises ran into the sand.

Savers rather than spenders

The Chinese consumer “is the single most important thing in the world economy… The next 40 years of global growth might be about the Chinese consumer. It is very unlikely that any other country could step in to drive global consumption” said Jim O’Neill, a former Goldman Sachs chief economist in 2019 – before Covid-19 hit.

China’s anti-Covid-19 policies of the past three years encouraged saving rather than spending – many Chinese spent much of 2020 and 2021 locked away at home. Chinese households currently are sitting on “the biggest pool of new savings in history” according to the Financial Times, growing last year by the equivalent of some $2.6 trillion (a record), with the total now well above $15 trillion.

But the free-spending Chinese consumer has been a long time coming. Getting them to spend rather than save will not be a swift matter. Chinese people have been ‘encouraged’ to be savers rather than spenders by strict capital controls, which keep much of its vast household wealth within its borders. If consumption is going to get a boost, does this mean capital controls will be loosened? That would be a key step towards full international acceptance of China’s currency. Full convertibility of its currency seems a distant prospect right now – but if China really wants to challenge the Dollar, convertibility will be necessary.

The CCP has two obvious ambitions. The first is to remain in power, which translates into continued control over China’s population. The second is to achieve economic hegemony – dominance – in global affairs, and thus assert what it feels is its true destiny.

President Xi is often seen by Western observers as a dogmatic totalitarian head of state, but he may actually be capable of great flexibility. His pragmatic side was shown in the state’s response to the street-level protests against the continued Covid lockdowns – they quickly fizzled out when the zero-Covid policy was dropped, a volte-face that surprised the world.

But despite China’s size, its currency, the Yuan/Renminbi, is a pint-sized competitor on the international stage. China is the world’s biggest trader but its currency accounts for less than 2% of international settlements. That currency only constitutes about 2.25% of international reserves. The fact remains that the Yuan/Renminbi is not loved enough to become an international currency, even though the Chinese authorities have gradually, since 2004, embraced the offshore Renminbi, widely seen as the first step towards full liberalization of China’s capital account and exchange rates.

No hegemony without political change

In China the currency is a political tool, not merely a monetary device. That’s evident from China’s development of its own Central Bank Digital Currency (CBDC). The ultimate end for China is that the US Dollar is replaced by the Yuan/Renminbi. China certainly wills that end, but as yet it’s not willing the means to that end. The US has an open economy, enabling the free movement of money in and out of the country. China’s economy is closed; it imposes capital controls and money cannot move freely in and out of the country.

Moreover the rule of law is shaky in China. The CCP has shown itself willing and able to target individual entrepreneurs and their companies if they are considered to represent threats to the communist authorities. The 1993 Company Law requires all companies based in China, both foreign and domestic, to allow the establishment of units to “carry out the activities of the party” and to provide “necessary conditions” for these units to function. Many companies have ‘sleeping’ CCP officials in their boardrooms.

Sorting out the direction China is moving in is extremely difficult. So far President Xi’s ambition to topple the Dollar seems to be via backdoor routes, such as via the Renminbi Liquidity Arrangement (RMBLA), which aims to provide liquidity support and can be used by participating central banks during future periods of market volatility. Under this, each participating central bank contributes a minimum of Renminbi 15 billion or US dollar equivalent, creating a reserve pool. The arrangement initially includes the central banks of Chile, China, Indonesia, Malaysia, the Hong Kong Monetary Authority, the Monetary Authority of Singapore. By acting the role of a central bank ‘leader’ China hopes it will come to be recognised as that leader, in a de facto way.

How does the Chinese consumer fit into this evolving picture? If the CCP can convince the world that the Chinese economy is becoming more like that of the West – a ‘quiet rise’ – then maybe the Party will not have to take measures it doesn’t want to, such as doing away with capital controls. Even that is unlikely to convince the world’s central banks to convert more of their reserves to Yuan/Renminbi; for them, trust is the most valuable asset. China has yet to prove itself worthy of trust. The ‘quiet rise’ may be more successful at undermining the Dollar than a direct confrontation – and the Chinese consumer is going to be encouraged to play its part by spending more.

Bullion Bulletin: Peak gold is a myth

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By now it’s no news that the world’s resources are finite. So, are we approaching ‘peak gold’, that point when gold production starts to decline? Or has it already happened?

Recently published scientific research purports to show that the world will run out of newly mined gold by 2050 – less than 30 years from now. For some that’s a horror story, for others a promise of future wealth as gold prices soar; much as we hate to spoil the party the ‘gold running out’ story is old and almost certainly inaccurate. Simple economics means there will always be gold around – at a price.

Furthermore, this is an old story. Aaron Regent, then president of the giant gold producer Barrick, said in 2009 that there was a “strong case to be made that we are already at ‘peak gold'”. Almost a decade ago the (former) president and CEO of Goldcorp, a Canadian gold miner since acquired by Newmont, was interviewed by Mining.com; the headline was “we have hit peak gold”. Peak gold has been around a while. World mined gold production has ‘peaked’ four times since 1900 – in 1912, 1940, 1971 and 2001, each peak higher than the previous.

There’s no doubt that getting gold out of the ground and refining it has become much more costly. One source estimates that the ‘all-sustaining costs’ (AISC) per ounce in 2000 was $300, and rose (in the first quarter of 2022) to $1,232.

But newly mined gold is not the only source of supply; recycled gold is a big component, and readily available. The biggest supplier of recycled gold is also a country with a huge appetite for gold – India. Households in India may collectively hold as much as 25,000 tonnes of gold, most in the form of heavy jewellery that is reserved for special occasions such as weddings. This gold plays two roles in India – ostentatious demonstration of wealth in decorative form, and as a means of saving that can be cashed in (recycled) when needed, when prices climb, or when fiat currency turmoil erupts.

The easy days of low-cost mining ended long ago – and new rich discoveries are becoming rare. Even when a new gold discovery happens (and exploration is constant) it takes around 20 years between discovery and producing an ounce of gold. Getting hold of new gold is more expensive, because more difficult, as old seams are depleted; what gold there is derives from more unstable countries, which pushes up the mining risk premiums. At the turn of the Millennium, Australia, Canada, South Africa and the US accounted for almost 50% of all gold mined; today they produce less than 25%, while China and Russia are the two biggest producers.

S&P Market Intelligence said in May last year that its “major gold discoveries identified 341 deposits discovered over the 1990-2021 period, containing 2.7 billion ounces of gold in reserves, resources and past production, up from our 2021 analysis of 329 deposits containing 2.58 billion ounces in 1990-2020”.

As newly mined gold becomes scarcer – an inevitability it seems – prices are likely to rise, simply on the basis of supply undershooting demand. But the cure for high prices is high prices – high prices will stimulate greater exploration efforts and more recycling. ‘Peak gold’ does not mean ‘no more gold’.

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

Helpful Hint: You are in control

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“All our agents are currently busy. You are number XX in the line. Please hold for the next available agent. Your custom is important to us”.

There’s nothing more frustrating than such an automated message when you need urgent help with your debit card. That’s why we do our best to make sure you can control it, even in distressing situations. We want to reduce the risks of fraud, increase security, and thereby help you to trust us and your Glint account.

So remember:
• No one at Glint will ever ask you for your PIN. You should keep your PIN a secret. If someone does ask you for the number, be suspicious and immediately contact and inform us.

• You can freeze your card at any time through the Glint app. This function will be useful if you lose or mislay your card.

• To freeze your card (and prevent anyone else from using it) go to your Glint profile in the app. Select ‘Card’ and then click ‘Temporary Freeze Card’. Unfreezing your card is simple, just click on ‘unfreeze card’. Freezing your card suspends your account.

• If you want to block your account entirely you will need to call us. If you block your account, you will also block your card. So please do not take this step unless you are certain it’s what you want.

• Tell us immediately if you sense any suspicious activity relating to your account. Be vigilant!

Soapbox: Back from the dead

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There’s never a dull moment in the cryptocurrency world. Hardly a week goes by without a cryptocurrency, broker or trading platform’s sensational crash or the saga of a multi-million fraud. The latest toppled tumbling domino in the cryptosphere is Genesis, whose fall leaves some 100,000 creditors high and dry.

Last year was dismal for crypto fans – the overall market saw $2 trillion wiped out (taking its overall market value to $1 trillion) and popular tokens lost considerable value, Bitcoin more than 60%. According to one survey, the percentage of Americans who think putting money into digital currencies is “highly risky” rose 15% in 2022, year-on-year, to 60%.

One US citizen who saw the light was Peter Thiel, the billionaire co-founder of PayPal. Despite saying last year “we’re at the end of the fiat money regime” and forecasting that Bitcoin’s price (then around $44,000) could increase by a factor of 100, Thiel’s venture capital firm, Founders Fund, which made its first investment in Bitcoin in 2014, sold almost all its stake in cryptocurrency by the end of March 2022. That wasn’t exactly a ringing endorsement of the ‘currency’ bit of cryptocurrency. Thiel got out before the crash; Bitcoin’s price rose from under $100 in 2013 to an all-time high of more than $65,000 by November 2021. Many others did not; that $2 trillion loss was shouldered by someone.

Sam was not alone

Sam Bankman-Fried, co-founder of the cryptocurrency exchange FTX, which collapsed last November owing creditors more than $3 billion, has come to personify all the things about cryptocurrency that some resent and distrust. His dishevelled appearance, his cavalier attitude, his apparently weak grasp on the truth, all confirm for many what they regard as the innate nature of cryptocurrency – it’s a scam run by flaky people.

Yet last year’s crypto rot didn’t start with FTX. Several crypto companies – Celsius, Voyager Digital and Three Arrows Capital – all went into bankruptcy before FTX. The LUNA digital token, once a top 10 cryptocurrency by market capitalization, lost virtually all its value in just one week in early 2022, and the collapse of the network behind it cost investors more than $60 billion.

One of the biggest problems for the cryptocurrency sector is the volume of cross-lending at its heart. Genesis collapsed owing more than $3 billion; Genesis is the biggest unsecured creditor of FTX. When FTX fell apart Genesis was living on borrowed time; it halted customer withdrawals, and it owes some $3.6 billion to its top 50 creditors.

Once upon a time to be a bankrupt was to be covered in shame. No longer. The founders of Three Arrows Capital, the crypto hedge fund that collapsed last year after being blown up by margin calls, are up and running again. Zombie-like, they are aiming to raise $25 million (by the end of February) to start a new crypto exchange to be called GTX. The pitchbook for GTX brazenly tells potential investors that its purpose is to get holders of claims against FTX to transfer those claims to GTX “and receive immediate credit in a [newly created] token called USDG”. Critics of cryptocurrencies sometimes accuse them of being Ponzi schemes; actually the crypto world is more like a financial Alice in Wonderland.

Hope springs eternal

The hopes of Satoshi Nakamoto (whoever that may be), the supposed creator of Bitcoin, that his model for electronic cash (cryptocurrency) would avoid the “inherent weaknesses of the trust based” version has clearly gone awry. Bankman-Fried’s biggest ‘crime’ is that he has chipped a bit more off that social pillar called trust. Trust is as necessary (at some level) for cryptocurrencies as for fiat money or indeed any means of exchange.

Yet although trust seems to have fled the cryptocurrency world the leading digital tokens have recovered some of 2022’s lost ground. Bitcoin has risen more than 30% year-to-date, briefly climbing above $23,000. In one week this month $40 billion went into Bitcoin. Cryptocurrencies keep mushrooming, with almost 22,000 different ones now being available.

It’s clear that the cryptocurrency world is in the midst of a bifurcation. It is splitting into two; the leading tokens such as Bitcoin and Ethereum will survive like cockroaches because they serve a purpose, whereas all the others will disappear like froth on a glass of beer, because they do not serve a purpose. The purpose of Bitcoin (apart from those who see it merely as a get-rich-quick scheme) is to provide a home for those who don’t want to be part of a financial system which in 2007/2008 demonstrated little regard for trust or public welfare.

There is no point in getting angry about the likes of FTX or GTX; the technology which makes cryptocurrencies possible cannot be disinvented, and the fundamental prompt for people shifting to cryptocurrencies – distrust of government control over money – is perfectly understandable. More alarming for society however is not the occasional fraud/incompetence wrought by private cryptocurrencies, but the relentless march of governments to co-opt the cryptocurrency technology, and roll out Central Bank Digital Currencies (CBDCs).

Gold provides the kind of defence against government control over money that cryptocurrencies attempt – plus the advantage (with Glint) that gold can now be used as money. Gold has its own ‘whales’ – buyers and sellers who take huge positions, mostly the central banks – but, unlike the majority of cryptocurrencies the international gold market is so big and so liquid that it is difficult to have a price-distorting effect, and large-scale positions generally cannot be kept a secret; the information leaks out. The workings of the gold market are often difficult to interpret – but they are not completely opaque, like those of crypto. Gold is security; Glint its key. And investors in gold are unlikely to see their holding disappear overnight.

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: IMF gold gets eyed up again

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As more and more countries struggle with their accumulated vast foreign debts, it’s no wonder that one of the world’s biggest holders of gold – the International Monetary Fund (IMF) is once again coming under pressure to offload some of its gold, valued at more than $4 billion, to fund debt relief.

Lebanon, Russia, Suriname and Zambia are already in default, Belarus is on the brink. Last year, Sri Lanka defaulted on repayments of its $50 billion foreign debt; Ghana suspended payments on most of its $28.4 billion external debt last December. Pakistan’s external debt is now more than $138 billion and servicing that debt costs more than $15 billion a year. It’s estimated that as much as $400 billion of debt owed by countries to foreign creditors is in play, and more than 40 nations are at risk of default.

Carmen Reinhart, former chief economist with the World Bank, said last June that there are “more Sri Lankas on the way… There are a lot of countries in precarious situations… I do think things will get worse before they get better… My sense is that we will see more difficult times before we turn the corner”.

How did the world get into this position? Like so many simmering crises we have to go back to the Great Financial Crash of 2007 and its aftermath. Governments responded to that crisis by slashing interest rates, making it cheap for everyone – including sovereign states – to load up on debt. The recent high inflation around the world has forced central banks to start putting up interest rates, and countries (already burdened by high costs for energy and food) are now in debt distress – trying to restructure their debts or falling behind on interest payments.

This high indebtedness is prompting a number of responses, including a call for the IMF to conduct “modest” gold sales to “benefit Africa and LICs”. But it’s obvious that even if the IMF sold all 90.5 million ounces (valued at somewhere around $4 billion ) of its gold, that would barely touch the sides of the current emerging markets’ ticking debt bomb.

In the past, the IMF has sold gold for debt relief; in 2009-10 the IMF sold an eighth of its gold, some 403 tonnes, for about $15 billion. The proceeds were channelled through the IMF’s Poverty Reduction and Growth Trust (PRGT), which aims to provide support for low-income countries (LICs). Under the IMF’s Articles of Agreement it can only conduct gold sales with 85% support from its Executive Board – and getting that kind of support now, with a war raging in Europe making everyone nervous, would not be easy.

But even if the IMF voted a new round of gold sales, in the current geo-political context that’s unlikely to dent the price by much or for very long. Central banks have been buying gold in record volumes – 400 tonnes in one quarter last year, the same as they would normally buy in a whole year. As one Bloomberg commentator put it in November: “In a world where you can trust no one, it makes sense to bulletproof yourself with metal”. When the IMF made its 2009-10 sales the Indian central bank snapped up 200 tonnes and other central banks – including that of Sri Lanka – took the rest. The gold price averaged some $972 in 2009; last year it averaged more than twice that.

So if the IMF doesn’t have enough gold to solve the record $300 trillion global debt, what will happen? Some argue that the only solution will be a ‘great reset’ in which policymakers come together to orchestrate some form of debt write-offs. If that doesn’t happen then we will watch the dominoes topple this year – and gold is likely to become more important as a defensive asset.

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.

Helpful Hint: Celebrate China’s New Year holiday!

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More than two billion passenger trips are likely to be made in China between 7 January and 15 February, as people celebrate being able to travel free from the past three years of Covid lockdowns and restrictions. Chun Yun, as it’s known, refers to the period of 40 days when the world’s biggest annual migration takes place, as people criss-cross the country to be with family and friends to mark the New Year. It’s also a time for giving and receiving gifts.

You don’t need to be Chinese to celebrate China’s New Year. And Glint customers don’t need to shop either in-person or on-line. If you have a Glint account gift-giving is simplicity itself, no matter how far you might be from your loved ones. You can use your account to give something that everyone loves – gold (outside the US) or currency (within the US). Send gold or currency instantly, to another Glint account holder, directly from your mobile phone, and free of charge!

It’s very easy. Open the app and click on the Glint it! button in the menu bar at the top. You can add a message too and review your transaction before sending gold or currency. So no more taking back presents or fussing about what to give – let them decide what to get with your gift!

Soapbox: The Debt Ceiling Charade

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It’s that time again – ‘squabbling over the US debt ceiling’ time. If it slipped our notice then Janet Yellen, the US Treasury Secretary, is there to remind us. On 19 January, the US will surpass its current borrowing limit of $31.4 trillion according to Yellen. The US debt ceiling is the legislative limit on the amount of national debt that the US Treasury can run up. The debt ceiling was created in 1917 to help finance spending on the First World War. It’s a way in which the government can borrow money to cover the fiscal gap – the gap between the amount the government takes in tax revenues and what it spends. Today, raising the debt limit has become an excuse for a brawl between the Democrat and Republican parties in Congress. A reprieve can be gained but this year it’s likely to last no longer than the end of May. Between now and then we can expect a Democrat vs Republican squabble over what to fight for and what can be sacrificed. If the ceiling looks like being breached the US government grinds to a halt and global financial stability will be threatened.

$31.5 trillion and rising

Wow! $31.5 trillion! That’s the current size of the US federal debt. Putting it another way, it’s more than $94,000 per US citizen. Or, another way, it’s the same as the combined economies of China, Germany, Japan and the UK, according to the US Peterson Foundation. The foundation helpfully adds that if every US household paid $1,000 a month it would take more than 19 years to eliminate the debt. Interest payments on this debt cost more than $1 billion a day.

America is running on fumes – the only significant question is how long before the engine stutters and packs up. Certainly, not all debt is bad, either individually or nationally. Taking on debt to buy a home, to get education, to grow a business, can all be sensible decisions and can help grow the national economy. But borrowing to buy assets that lose value over time, such as a car, is not such a great idea, unless you can get a no or very low interest rate.

Getting over the debt ceiling crisis has become a regular feature of US politics in recent years. Usually some kind of deal is cooked up but this year may be different, now that the Republican Party has a narrow majority in the House of Representatives. Eric Winograd, chief US economist at the asset management company AllianceBernstein told Reuters on 11 January that in his view “this is going to be the most contentious debt ceiling debate in memory”. Last time Congress sailed close to the wind over raising the debt ceiling was in 2011; Standard & Poor’s downgraded the US credit rating for the first time, and financial markets started to panic. So this year may be no charade after all.

Murky manoeuvres

US politics being what it is – very murky – will the Republican Party be able to maintain its current stiff stance about debt ceiling negotiations this year? The House Speaker, the Republican Party member Kevin McCarthy, has reportedly told President Biden that the price for a deal is the imposition of a spending cap on the government. But according to his press spokespeople Biden “will not be doing any negotiation over the debt ceiling… there’s going to be no negotiation over it”. A small number of die-hard conservative Republicans opposed McCarthy’s attempt to become Speaker; notoriously it took the largest number of voting rounds since 1856 to squeeze him in. The New Yorker says the “good news for Democrats is that the Republican leadership is this weak – except that weak Republican leadership is what paved the way for [Donald] Trump in the first place”. It’s in everyone’s interest – in America’s interest – that the debt ceiling debate should be settled, and fast. In 2011 it wasn’t only the financial markets that took a beating from the debt ceiling fiasco – consumer confidence also dropped as did confidence in all US politicians. No negotiations, says the President. He may have to eat those words.

Different this time?

The world has changed as a result of Russia’s war in Ukraine. It’s not simply that the US in 2022 directed a vast sum to support Ukraine, more than $52 billion according to the Kiel Institute for the World Economy. The war is nearly a year old and shows no signs of ending; worryingly Ukraine’s defence minister, Oleksii Reznikov, claimed recently that Ukraine is now a de facto member of the NATO alliance, a red rag to President Putin. This kind of stealthily obtaining something that has been denied is not an attractive feature, even if (with the delivery of tanks from the UK, a NATO member) it may be true.

The war has also hastened the almost imperceptible creep of countries to reduce their exposure to Dollar-denominated debt. China’s holdings of US Treasury bonds fell by $100 billion, almost 10%, in the first half of 2022. China’s decision to lower the amount of US debt it owns is probably related to the US decision to weaponize its currency, by freezing the Dollar assets of Russia’s central bank.

Russia can’t use the Dollar; China doesn’t want to rely on the Dollar; both stepped up their purchases of gold last year. So the US may indeed carry on issuing ever-greater amounts of debt; but will it have as many eager buyers as in the past?

Bullion Bulletin: China’s gold buying

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China is buying a lot of gold. 32 tonnes last November, 30 tonnes in December – officially its total reserves are now 2,010 tonnes although many suspect the total is several times higher than that and could be as much as 30,000 tonnes. Officially gold represents just 3.5% of China’s reserves but as the world’s biggest gold producer, which for years now has churned out hundreds of tonnes a year and exports none of it, that’s clearly inaccurate.

The composition of foreign exchange reserves in China is a state secret. State secrets under Chinese law are defined as “matters that concern state security and national interests and… are known by people within a certain scope for a given period of time”. This woolly definition is appropriate given that what a state secret might be covers not just matters of national defence and foreign affairs but anything at all that the ruling communist party doesn’t want to talk about, including how much gold China has. The state secrecy of gold is not unusual in China. Data on all kinds of items – such as stocks of grain, cotton and other major crop – are state secrets.

The amount of gold is a secret and so too is the purpose of such accumulation. China is not likely to adopt a gold standard (i.e. pin its fiat currency to gold) but its gold accumulation will certainly give potential investors in the country much greater confidence and thereby strengthen its move into a Central Bank Digital Currency (CBDC), which (along with displacing the Dollar as the international reserve currency) is its long-term aim.

It’s obvious why China wants its money to gain international reserve status and knock the US Dollar from its perch – apart from the sheer delight in being the monetary ‘top dog’ – it would make life cheaper for its exporters, who would have lower borrowing costs, and with more contracts priced in Yuan China would be more impervious to the Dollar’s value.

As a paper published by the US National Bureau of Economic Research (NBER) last August (and revised this month) says: “While the Renminbi has a long way to go to rival the U.S. Dollar as an international currency, China’s real economic size and the size of its capital market could make the integration of its capital market into global financial markets a major shift in the international monetary system”. Untangling the academic language, China is approaching the point where its currency might challenge the Dollar’s reserve status. There have already been steps in this direction – in 2015 the International Monetary Fund (IMF) awarded the Yuan reserve currency status, giving it a 10.92% allocation in the IMF’s Special Drawing Rights (SDR, the IMF’s foreign exchange reserve assets) since when it has been raised to 12.28%.

Last October, Dong Dengxin, director of the Finance and Securities Institute of China’s Wuhan University of Science and Technology said the two-way deregulation of China’s capital market paves the way for the greater use of the Yuan in cross-border settlement and investment and for the Yuan to be increasingly adopted as a global reserve currency. The amount of gold might be a state secret but the aim of toppling the Dollar isn’t.