European, Chinese Economic Data May Underscore Divergence From US, Could Weigh On Gold - Kitco News

European, Chinese Economic Data May Underscore Divergence From US, Could Weigh On Gold By Debbie Carlson of Kitco News Friday, November 7, 2014 2:04 PM

(Kitco News) - Next week brings more attention to eurozone and Chinese economic data, and the results may serve to underscore the monetary policy divergence between the U.S. and the rest of the world.

That could result in the U.S. dollar gaining further and putting pressure on gold, which could reverse some of the gains the yellow metal enjoyed Friday.

December gold futures rose Friday, settling at $1,169.80 an ounce on the Comex division of the New York Mercantile Exchange, down 0.09% on the week. December silver rose Friday, settling at $15.714 an ounce, down 2.28% on the week. 

Participants in the Kitco News Gold survey remain bearish. Out of 36 participants, 23 responded this week. Of those, six see higher prices, 14 see lower prices and three see prices trading sideways or are neutral.

Gold prices rallied off the four-and-one-half-year lows set overnight Friday around $1,130. Analysts said the combination of short covering after the U.S. nonfarm payrolls report, a weaker U.S. dollar and news of stepped-up military action in Ukraine pushed gold above technical-chart resistance around $1,160.

The U.S. Labor Department said Friday the U.S. economy created 214,000 jobs in October, with the unemployment rate lowered by 0.1 basis point to 5.8%. That figure was under the 230,000 jobs expected. Employment gains for September and August were revised up by a combined 31,000.

“Overall it was an OK jobs report. I don’t think it changes overall our positive outlook for the U.S. economy,” said Rob Haworth senior investment strategist, U.S. Bank Wealth Management.

What it does is give the Federal Reserve some room before it needs to raise interest rates, particularly since wage growth remains low, he said. “At this point the chance of a rate hike in March is low,” Haworth said.

The economic calendar in the U.S. will be light next week, so traders’ focus will be on data expected out of Europe and Asia, analysts said. And the reports will likely to reinforce the sluggishness seen in Europe and China.

Robin Bhar, head of metals research at Societe Generale, said if the economic data from Europe and China come in weak, they will underscore the prevailing view of the differences between the U.S. and those regions and support the dollar.

In Europe, several countries will release their first third-quarter gross domestic product data, and China will release reports on industrial production growth, producer price index and export data.

“The data in the U.S., including the jobs report, and (European Central Bank President Mario) Draghi being very dovish (on monetary policy) means the dollar continues to be bid up. That’s going to keep the pressure on gold,” Bhar said.

“Next week there will be more views on policy divergence with the Fed (Federal Reserve) needing to eventually tighten rates, and Japan, the eurozone and even China showing their economies are growing much slower and (they) need easy monetary policies,” he said.

Haworth agreed.

“Policy divergence is well entrenched at this point,” he said. “I’ll be most interested in China’s data. We’re focused on what is the real tenor of growth in China at this point. We expect it to not be 7.5% or 8% as it has been in past, but will it be under 7%? That has some ramification on big trading economies like Europe,” he said.

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Gold put in a solid rally on Friday, pushing through some initial technical-chart resistance points around $1,160. However, several gold-market watchers said the gains may be more of a selling opportunity than the start of a further move higher.

“I can’t get too excited about it. The best thing you can say is it produced an outside day up,” said Charlie Nedoss, senior market strategist at LaSalle Futures Group.

An outside day on a technical chart occurs when the current day’s prices exceed the high and the low of the previous day.

Nedoss said because gold prices fell so far, so fast, they remain under major moving averages. He said the 10-day moving average sits around $1,184.

“Until we get above there, I think people will use the rally as an opportunity to sell. The dollar is so strong, especially compared to the rest of the world,” Nedoss said.

Haworth said traders who were short gold this week likely sought to book profits. He also does not expect Friday’s gains will hold in the medium term.

“For us, as we look over the next couple of months, the dollar trend is still stronger, the U.S. economic trend is positive, the Fed ended QE (quantitative easing) and may raise rates, and geopolitical risk is not a major factor going into the year end. We’re not looking for any support until gold gets under $1,100,” he said.

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Nov 08 Close to the Bottom but Not There Yet TDG

Close to the Bottom but Not There Yet

11/07/2014 | Jordan Roy-Byrne, CMT | Featured

The selloff in precious metals intensified over the past week. GDXJ declined 25% in seven days while Gold plunged below $1180 to $1140 and Silver plunged below $16 and to as low as $15.20. Precious metals are becoming extremely oversold and the bear market is clearly in the 9th inning. Be on alert for a snapback rally to repair the extreme oversold conditions. Although we are likely very close to the bottom in the miners, Gold’s current position continues to leave me skeptical.

Below is the updated bear analog for Gold which uses weekly data. Gold has yet to suffer the extreme selling experienced by Silver and the mining stocks. It makes sense given that Gold peaked months after those assets. The chart illustrates how bear markets are a function of price and time. The most severe bears in price are the shortest in time while the longest bears in terms of time are the least severe in terms of price. This bear falls in between. Given that Gold went 10 years without a real bear market it makes sense that this bear could bottom very close to the 1983-1985 and 1975-1976 bears but will have lasted quite a bit longer.

With respect to Gold, another point to consider is the strong supports at $1080/oz (50% retracement of the bull market) as well as $1000/oz. These downside targets continue to align well with the history depicted in the bear analog chart. Moreover, the fact that Gold currently sits well above these support levels is reason to expect more downside.

Silver on the other hand figures not to have the same degree of downside. Silver’s bear began five months before Gold’s and the bear analog below makes a strong case that the current bear will end very soon. Other than the epic collapse from 1980-1982, the current bear is the worst ever for Silver in terms of price and is the third worst in terms of time.

Similar to Silver, the mining stocks which led the bear market are moving from very oversold to extremely oversold. The HUI Gold Bugs Index, shown below closed Wednesday at an 11-year low. As far as the HUI’s distance from its 50 and 200-day moving averages, it is inches from major extremes. Over the past 50 days the HUI has declined 36.4%. That is the second worst performance over the past 20 years. The picture is even worse for the junior mining sector. GDXJ has declined 43% over the past 50 days. It is trading at the lowest level relative to its 50-day moving average since the creation of the ETF.

The worst bear market ever for the gold stocks was the more than four and a half year decline following the junior bubble in 1996. That bear did have a 14 month long respite where the indices rallied as much as much as 70% and 80%. That rally was longer and much larger than the one experienced recently. During the 1996-2000 bear, the GDM index (forerunner to GDX) declined 77.5%. Through Wednesday it was down 76%. The XAU declined 72.5%. Through Wednesday the XAU was off 74.2%. The Barron’s Gold Mining Index declined 75% during the late 1990s bear. Through last week it was down 68%.

The mining stocks and Silver are obviously extremely oversold and very close to the bottom. It could happen any day or any week. However, I’m skeptical because Gold is currently trading so far above its potential bottom. Sure, Gold figures to be the last to bottom but my view is the window for a bottom in the stocks could come when Gold declines below $1080. That being said, we could definitely see a snapback rally of some sort. The mining stocks and Silver are extremely oversold and could pop higher in the short-term.

In any event, the bear market is very close to its end. The weeks and months ahead figure to be very enticing and exciting for precious metals traders and investors. Expect quite a bit of volatilty as we see some forced liquidation from longtime bulls and as the sector tries to carve out a major bottom. Opportunities are fast approaching so pay attention. Be patient but be disciplined. As winter beckons, we could be looking at a lifetime buying opportunity. I am working hard to prepare subscribers. Consider learning more about our premium service including a report on our top 5 stocks to buy at the coming bottom. 

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Nov 08 Is the US Dollar in a New Major Bull Market? GoldBroker

Dan Popescu  Gold & Silver Analyst / Member of the Goldbroker.com Editorial Team

Mr. Popescu is an independent investment analyst and studies the gold and silver market and their future role in the international monetary system. He has followed regularly since 1970 the gold, silver and foreign exchange markets. He has a bachelor degree in physics (1993) from Concordia University in Montreal, Canada and has completed the Canadian investment management certificate (1999) of the CSI. He is a member and was the president in 2004 of the CSTA and also was president in 2005 of the Montreal CFA Society. He is a member of the CFA Institute, the MTA, NYSSA, UKSIP, the CSTA and the Gold Standard Institute International.

Let me look, in this article, at the anti-gold, the US dollar. All of a sudden, with the illusion of the end of QE, there is a strong belief that things have changed for the best for the U.S. and, more specifically, for the US dollar. All of a sudden, the US debt is gone and the deficit problem is almost solved with shale oil.

I have to admit that momentum has, all of a sudden, changed in favor of the US dollar. From a geopolitical point of view, I think the downing of the Indonesian airliner in Ukraine changed drastically, at least in the short term, the momentum in favor of the U.S. Before the incident, Europe was getting closer to Russia as the spying and other blunders by the American administration brought European leaders closer to it. All that changed after the Indonesian airliner incident in Ukraine. It was an unexpected gift to the U.S. and a major setback to Vladimir Putin’s strategy to split Europe from the U.S. However, president Putin has restrained himself in his comments to antagonize European leaders focusing his attacks on the U.S. and continuing negotiations with Europe. It is evident that he is looking for a split in the NATO alliance. Don’t count Russia and Vladimir Putin out yet, and China seems to be closer to Russia than to the U.S.

Is this the beginning of a new secular bull market in the US dollar? Some see a resemblance to the bull market started in 1980 when Ronald Reagan and the Republicans were voted in. I remember the mood in the U.S. in the last years of the Carter administration. Many of my American friends were extremely bearish on America. I remember speaking with an American couple in Montreal at the 737 Restaurant, on top of the Place Ville-Marie building, from where you can almost see the U.S. border. They were so depressed and disillusioned with their country. Americans were running away from the United States like rats from a sinking ship. It was for me a very contrarian bullish signal on the U.S., but I could not convince my American friends. We know what happened afterward. Can this be a repeat of that cycle? Some think so. I don’t. There was an illusion then that the U.S. would deal with the debt and deficit but we found out fast that the only thing changed was the type of waste. Rather than spend on civilian bureaucracy waste, Ronal Reagan and the Republicans chose military bureaucracy waste. The result was the same. The extra time gained to solve the debt/deficit problem was wasted and the U.S. finds itself today in a much worse position than in 1980.

Look carefully at this major triangle formation in the chart below. You can easily observe lower lows at each bottom and lower highs at each top. I expect this trend to continue.

Chart #1: US Dollar Index

Besides, what we are witnessing now is a collapse of the fiat (paper) monetary system that has started 100 years ago, not just in 1971 with the end of the Bretton Woods gold exchange standard. Looking at a short-term chart of a seasonal storm and ignoring the possibility of a tsunami that happens every one hundred years or more is a big mistake. The US dollar is facing a tsunami, not a seasonal storm. The dismantling of the petrodollar is in progress and both China and Russia are advancing slowly but surely to replace the dollar as much as possible in international trade. A picture of only 40 years gives an incomplete and distorted image.

Two major events in the immediate future promise to shake the US dollar, gold and the international monetary system: One is theSwiss referendum on gold reserves, but only if it is a YES vote, and the other one is an announcement by China of their actual gold reserves. The last time they did it, it was in 2009. I think the announcement is linked to the inclusion of the Yuan in the IMF’s basket of currencies called the SDR. I do not expect an announcement this year, but next year is a very strong possibility. I would not be surprised if, immediately after, Saudi Arabia also announces, as they did in 2009, an increase in their gold reserves.

Chart #2: Inverse US Dollar Index vs Gold since 1971

In addition, I have to caution you that since the euro introduction in 2001, the US dollar index has lost its significance, since it has become highly dominated by the euro. As you can see in the chart below, the euro represents now 57.6% and if we add the other closely related European currencies like the Swiss franc and the British pound, we get 77.3%.

Chart #3: US Dollar Index Components

This is confirmed by observing, in the chart below, the almost perfect correlation between the US dollar index and the euro/US dollar exchange since 2002.

Chart #4: Euro vs Gold vs Inverse US Dollar Index

A better image would be to look at the US Dollar Trade Weighted Broad Index. It includes major US trade partners and, especially, the BRIC countries. The Broad Currency Index includes the Euro Area, Canada, Japan, Mexico, China, the United Kingdom, Taiwan, Korea, Singapore, Hong Kong, Malaysia, Brazil, Switzerland, Thailand, Philippines, Australia, Indonesia, India, Israel, Saudi Arabia, Russia, Sweden, Argentina, Venezuela, Chile and Colombia.

Chart #5: Trade Weighted US Dollar Broad Index

I think the recent US dollar bull market is a short move and that dollar bulls will have a very rude awakening. There is also euphoria about the U.S. stock market that has been pumped up by the Fed through QEs. It looks as we are seeing the formation of a top in the stock market and it will coincide with a collapse of the dollar and a quantum leap in gold. I hear statements in the financial industry that I used to hear just before the collapse of the 2000 stock market bubble. Then it was a “new economy” and the end of cycles and today it is that the Fed will not let the stock market fall.

There is also a belief that gold and the euro/dollar exchange have to move together. This is wrong. In recent years, gold has increased with respect to all fiat currencies or more correctly, I should say has maintained its value while fiat currencies have been devalued competing to arrive first to their target, zero. It is possible to have the US dollar appreciate against the euro while at the same time fall against gold. The U.S. has also made it clear it does not want to see a stronger dollar and will intervene in the foreign exchange markets to ensure that. However, at the same time, the ECB has made it clear it wants a weaker euro. As you can see, currency wars are alive and I expect them to grow, irrespective of the G20 agreement not to follow such policies.The currency wars will end badly with the collapse of the US dollar-based international monetary system and gold taking front stage in any new system.

Gold will not move this time as it did between 2000 and 2009, slowly and progressively, but with a quantum leap. When all the petrodollars have no oil to buy, they will come home to roost, and all at once.

Short term, however, the US dollar still has the bullish momentum and gold the negative one, but don’t be blinded by the short term. Gold is closer to a bottom and the dollar is closer to a top.

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Nov 08 Capitulation or Nasty Sell-off in Gold? Sprott

Sprott's Thoughts

Thursday, November 6, 2014

Henry Bonner

Capitulation or Nasty Sell-off in Gold?

Have we just experienced ‘capitulation’ in gold stocks, or just a particularly nasty sell-off?

Rick often mentions that ‘capitulation’ is a looming threat in a bear market. When it looks like stocks are already ‘down and out’, investors get driven over the edge and decide to sell at any price they can get. Investors want out. People who work in mineral exploration and development also give up and look at other career options.

Back in March, Rick said gold could fall back to around $1,150 this year. In mid-October, Rickmade a stronger prediction – October could be the month that we see capitulation in the junior market. “October is a month full of emotion” he said, and it’s easy for a weak emotional market to be driven over the edge by short-term volatility and a natural decline in prices due to tax-loss selling. “The market is cheap but it will get dirt cheap in a capitulation. I think there is a 50 percent chance for a terrifying capitulation sell-off within the next two weeks.”

In a complete capitulation, stocks melt down dramatically and some stocks just go ‘no bid.’ That hasn’t happened yet, which means that we may be witnessing a very nasty sell-off, but not complete capitulation.

“For those of you fond of surf,” Rick explained at our San Diego office, “capitulation is sort of like getting caught under a particularly big wave. You get pummeled and tumbled around under water. Capitulation in 2000 only lasted for about two weeks. Just like when you’re stuck underwater and struggling to come back up, a short amount of time can seem like an eternity.”

The most important thing to do now? Prepare yourself psychologically.

“Abandon your ‘hope stocks’ – the ones where there is no catalyst, asset, or enough cash to do anything important. Get rid of the stocks you own that have no reason to go up, and get into ones that do,” Rick advises. In a complete sell-off, you may find that just a few investors will make the difference as to whether a particular stock survives, which means you must be willing to be one of those investors if the market gets much worse.

This ‘psychological preparation’ made all the difference in the summer of 2000, the last time that we saw capitulation in junior mining stocks. “The capitulation in 2000 was the single most beneficial event of my career, as a consequence of my psychological preparation to face the sell-off,” said Rick.

Capitulation or not, why the sudden leg down?

“It’s an emotional market. An example of irrational behavior is that investors are more willing than ever to put money into bonds at levels that guarantee a loss in purchasing power. The Treasury rate is now lower than prior lows, at around 3.1 percent for 30-year bonds.¹

“In addition, benchmarks in platinum and other metals suggest a weakening economic outlook,” Rick explained. This, he says, is also the real reason that oil prices are much lower. The economy is simply a lot weaker in the US and globally than commonly believed. This has weakened all equities, not just precious metals. Just as the 2000 low came around the time that the tech boom imploded, a capitulation today could coincide with a sell-off in stocks across the board.

Rick’s market call, which was recorded for our clients on October 16th, looks prescient in hindsight. We’ve indeed seen a nasty sell-off, but I don’t think it’s quite a capitulation.

For one thing, Rick explained, when a capitulation occurs, the issuers also ‘give up.’ Right now, we’re still in a game of chicken that we’ve been playing with junior miners for the last two years or so. They believe they can wait out the bear market to raise money. If they’re right, they might not have to submit to terms that Rick would call ‘fair.’ If they’re wrong, they’ll end up having to raise cash at terms that are much more favorable to financiers like Rick.

The idea now is to prepare for this possibility, and decide which stocks we own are worth saving if the market truly goes ‘no bid,’ as we might have to put up more capital to keep them solvent. The rest we probably shouldn’t own at any price.

P.S.: Not yet subscribed to Sprott’s Thoughts? Sign up here to stay informed with the latest opinions on precious metals and natural resources.

¹ U.S. Department of the Treasury website

[http://www.treasury.gov/resource-center/data-chart-center/interest-rates/Pages/Historic-LongTerm-Rate-Data-Visualization.aspx]

This information is for information purposes only and is not intended to be an offer or solicitation for the sale of any financial product or service or a recommendation or determination by Sprott Global Resource Investments Ltd. that any investment strategy is suitable for a specific investor. Investors should seek financial advice regarding the suitability of any investment strategy based on the objectives of the investor, financial situation, investment horizon, and their particular needs. This information is not intended to provide financial, tax, legal, accounting or other professional advice since such advice always requires consideration of individual circumstances. The products discussed herein are not insured by the FDIC or any other governmental agency, are subject to risks, including a possible loss of the principal amount invested.

Generally, natural resources investments are more volatile on a daily basis and have higher headline risk than other sectors as they tend to be more sensitive to economic data, political and regulatory events as well as underlying commodity prices. Natural resource investments are influenced by the price of underlying commodities like oil, gas, metals, coal, etc.; several of which trade on various exchanges and have price fluctuations based on short-term dynamics partly driven by demand/supply and nowadays also by investment flows. Natural resource investments tend to react more sensitively to global events and economic data than other sectors, whether it is a natural disaster like an earthquake, political upheaval in the Middle East or release of employment data in the U.S. Low priced securities can be very risky and may result in the loss of part or all of your investment.  Because of significant volatility,  large dealer spreads and very limited market liquidity, typically you will  not be able to sell a low priced security immediately back to the dealer at the same price it sold the stock to you. In some cases, the stock may fall quickly in value. Investing in foreign markets may entail greater risks than those normally  associated with  domestic markets, such as political,  currency, economic and market risks. You should carefully consider whether trading in low priced and international securities is suitable for you in light of your circumstances and financial resources. Past performance is no guarantee of future returns. Sprott Global, entities that it controls, family, friends, employees, associates, and others may hold positions in the securities it recommends to clients, and may sell the same at any time.

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Nov 06 Are COMMODITIES at a Major Turning Point? SafeHaven

Are Commodities at a Major Turning Point?

As most of you probably know, I have been expecting the CRB to form a major three year cycle low sometime next summer. However, I'm now starting to see some things that might indicate a major cycle bottom is going to occur earlier than I expected.

Since oil is the main driver of the CRB, and most COMMODITIES will follow its lead, I'm going to focus on the action in oil. Notice in the next chart that oil has now reached oversold levels similar to, if not more extreme than, the previous two 3 year cycle lows.

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Sentiment in the COMMODITY complex is also at levels last seen at the previous multi-year cycle turning points.

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After breaking through support at $1180 GOLD has now dropped far enough to test the 61% Fibonacci retracement of the previous C-wave rally. Yes, I have been expecting a move all the way back down to $1050, but it's entirely possible that the drop may come up $100 short and bottom at $1150 if the CRB is putting in a three year cycle low right here and now.

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I believe oil is the key. When it finds its intermediate and yearly cycle bottom the rest of the COMMODITY complex is going to turn back up. And in Elliot wave terms oil has started its fifth wave down.

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We're only days away from a bottom, and it's even possible the bottom will form exactly on Election Day as it did in 2012.

The movements in the currency MARKETS are also connected very strongly with the commodity cycles. Notice in the next chart that the euro is within a whisker of testing its 200 month moving average where it has bottomed twice in the past. Once the euro finds a major cycle bottom the dollar is going to put in a larger degree top.

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In the next chart of the dollar notice that it is approaching a level where the Fed has cried uncle in the past and acted to turn the CURRENCY back down. Also, on a purely cyclical basis, the bottom in May of this year just does not have the DNA markers of a true three year cycle low. I know I'm the only cycles analyst saying this, but I think the three year cycle in the dollar is stretching and we are in the process of putting in a major multi-year top right now with a very stretched three year cycle low to be achieved sometime in the next one or two years.

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So for now we wait and watch the energy MARKETS as they are the key. When oil finds its intermediate and yearly cycle bottom look for the rest of the commodity markets to turn and follow it higher, and all this nonsense about now being the time to buy a gas guzzling SUV will soon be long forgotten.

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Nov 06 Japan's kaput?! MERK

Japan’s economy is down but not yet out. The world’s third largest economy won’t go quietly. Both these statements are merely my opinion, but if you believe there’s a risk that I’m right, you may want to pay attention to what the
 implications may be.

In determining whether a country is willing and able to pay its bills, three key dimensions to consider are:

• Can the government pay the interest on outstanding debt?
• Can the government roll over maturing debt?
• Can the government balance its books without servicing its debt

Let’s the take last item first: when you have lots of debt, do you want to beg for another loan or should you default? The reason Greece agreed to harsh terms imposed by the International Monetary FUND (IMF) was that they couldn’t self-fund themselves. The budget before servicing debt is referred to as the primary budget balance. A country considering a default needs to be aware that the day after they default it might be difficult to get a fresh loan at palatable terms. As such, a country with a primary budget deficit has an incentive to service its debt because it will need further loans. In contrast, a highly indebted country with a primary budget surplus has an incentive to default on its debt. In Greece’s case, they now have a primary surplus; Greece is in the driver’s seat when it comes to negotiating terms on its debt loans, as they could walk away. One caveat to this is that domestic banks might collapse if they hold lots of debt of their own government.

Japan has a primary budget deficit, i.e. needs to pile on to its debt burden no matter what interest rates are. A goal set last year to eliminate the primary deficit by 2020 appears elusive now. To balance its budget before paying interest expense, Japan – quite simply – needs to either raise revenue or cut expenses. In April, Japan’s value added tax (VAT) rose from 5% to 8%; whether another rise to 10% scheduled for October 2015 will be implemented is an open question. As Europeans have learned, VAT is a powerful way to raise revenue. Except that the higher rates have also caused significant headwinds on consumption. As long as Japan has a primary deficit, it may be at the mercy of the MARKETS.

This ‘mercy’ can be expressed in the interest rate a government has to pay. Japan’s 10-year bonds (JGBs) currently yield 0.4% per annum. Differently said, the market does not appear to be concerned about Japan’s ability to meet its future obligations – at least not according to this measure. But even as we consider dire scenarios, the biggest threat Japan may be facing is that Prime Minister Abe’s policies actually work. That’s because should growth materialize, odds are that JGB’s would sell off, increasing the cost of borrowing. That’s not a problem immediately, as not all debt matures at once. However, should much of the debt burden have to be FINANCEDat a higher rate, it may make it all but impossible to finance the deficit.

In practice, as the European debt crisis has shown, it’s not about the average cost of borrowing, but the rolling of debt. Spain, with an average maturity of about seven years for government debt, was considered very prudent in its debt management. However, during the peak of the Eurozone debt crisis, there were concerns that Spain might face trouble refinancing its debt. It didn’t matter that only a comparatively small portion of Spain’s debt needed to be refinanced. Governments – just like corporations or individuals – can face a cash squeeze.

But fear not, because Japan has a few tricks up its sleeve. The best known one is the Bank of Japan (BoJ). While the BoJ denies it is FINANCING government deficits, it’s gobbling up an enormous number of JGBs, thereby keeping yields low. It does have the side effect that this formerly highly liquid market is experiencing a drought. But why bother, what could possibly go wrong?

The other trick Japan has up its sleeve is its $1.2 trillion Japanese government pension FUND. The fund announced it would lower its allocation of domestic bonds from 60% to 35%, while doubling its domestic and international equity INVESTMENTS:

In the aftermath of the announcement, the yen fell sharply, while both domestic and international equity MARKETS jumped higher. Japan wants to boost the returns on its pension fund, but may achieve quite the opposite. In the short-term, yes, both domestic and international equity prices soared. But the new allocation has only been announced, not implemented. As such, the pension fund will buy assets at elevated prices. And because Japan’s population is ageing, odds are that they will be net sellers rather than buyers over time. During the roaring markets in the U.S. in the 1990s, prevailing cooler heads cautioned that the government investing in THE STOCK MARKET makes little sense, as while it may boost short-term returns, future returns would likely be lower. There is no free lunch.

We consider Japan’s recent moves deeply troubling acts of desperation: In our assessment, Japan signals it wants to move its pension assets offshore as it prepares for a default:

• Japanese pension fund dramatically lowers its allocation to government bonds. The markets don’t panic because the BoJ simultaneously steps in to buy about $60 billion worth of bonds each month (keep in mind that the U.S. economy is about 3 ½ times larger than the Japanse economy)
• By buying foreign assets, Japan is ready to debase the value of the yen further, while trying to preserve the purchasing power of those assets.
• In the run-up to Zimbabwe’s default, the country’s STOCK MARKET soared; simultaneously the value of the now defunct Zimbabwe dollar imploded. It appears only logical that Japan would invest its nest egg in stocks, with an emphasis on foreign stocks. It’s logical if and only if Japan intends to debase the value of its debt.

There’s more than one way to default. The honest way is to restructure debt. The painful way is through inflation. Pundits may wonder what inflation can there possibly be when JGBs don't show inflation? We would counter with questioning what good an inflation indicator JGBs can possibly be given the Bank of Japan owns an ever-increasing amount. Something has to give. What is an investor to do? With the caveat that the following is not INVESTMENT advice:

• Some opt to short JGBs. Critics have labeled this the widow-maker TRADE, as JGB’s have held up; indeed, when shorting bonds, one has to constantly pay (rather than receive) interest. There are some that short bonds using options. When properly executed, that strategy may yield steady losses, then possibly a major gain at some point. We don’t pursue this strategy and caution anyone to be aware of numerous risks this strategy entails, ranging from the fact that one is fighting a central bank through the use of derivatives.
• Short the yen. As we have indicated in the past, we don’t see how the yen can survive this. But be aware that foreign exchange analysts are rather frustrated with our take on this. That’s because a price target of ‘infinity’ (an infinite number of yen per dollar) is difficult to fit into any model or short- to medium- term forecasts. And clearly, the yen’s demise is unlikely to happen in a straight line. In fact, whenever the yen rallies, I get lambasted by so-called experts that the yen is still a ‘safe haven’ CURRENCY. My take is that the yen’s ability to benefit from a “flight to safety” has been directly correlated to the market’s perception of how effective Abenomics is. As policy makers double down on Mr. Abe’s policies, the yen’s safe haven characteristics may well erode further.
• Buy Japanese stocks. Printing money to BUY STOCKS has been a boon for the Japanese market. And as Zimbabwe’s experience has shown, stocks can perform well in this environment. But Zimbabwe’s experience didn’t end well. Neither do I believe will Japan’s. Given the much higher volatility of stocks versus the currency (assuming no leverage is employed), it’s a much higher risk way of protecting from government failure. Also keep in mind that should a default become reality, it may have profound implications for Japan’s banking system, as well as Japan’s economy as a whole. No country in history has managed to keep its citizens wealthy while defaulting on its debt.
• Gold. Ironically, in the hours after the announcement of the recent initiatives by the Bank of Japan to increase its quantitative easing, as well as the change in Japan’s pension fund strategy, gold fell – not just in U.S. dollars, but also when priced in yen. A little later, gold was priced higher in yen, but still down when priced in U.S. dollar. Gold has not fared very well of late, but it may serve as a good diversifier as Japan’s economic gamble plays out.

As we have a dire view on Japan, we should add that we don’t think Japan’s problems are all that unique. There is too much debt in the U.S. and Europe. The one country where citizens are fed up with deploying central banks to cure all problems is Switzerland. We will have an in-depth discussion of Switzerland’s vote to force the Swiss National Bank to hold a minimum of 20% of its reserves in gold in an upcoming Merk Insight (to ensure you don’t miss it, sign-up to receive our free newsletters). On that note, please register for our upcoming Webinar on November 20, 2014, where we will discuss how investors can build their personal gold standard.

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