The World is Flat - at the Transitional Divide

The World is Flat - at the Transitional Divide

One of the side effects of the financial crisis was that growth cycles across the world that had converged leading up to 2008, became untethered in the ensuing aftermath. We recall listening to an economist in the summer of 2006 wax poetic about how the 66 largest economies in the world were enjoying a historic and synchronized expansion. Naturally, his takeaway was broadly bullish - implying a sturdy and broad foundation was extended beneath the markets. While that was exceedingly true at that time, his observation of the cycle resonated for us in a very different way. If everyone was expanding on the same growth wave, the inevitable contraction would be greatly magnified. We found the statement so poignant, it remained written across the top of a whiteboard in our office for several years.

These same wave principals are taught in your high school physics class as a phenomenon known as constructive interference. When two waves of identical wavelength are in phase, they form a new wave with an amplitude equal to the sum of their individual amplitudes. Conversely, when two waves of identical wavelength are out of phase, they cancel each other out completely. Often, it's a combination of varying degrees of both destructive and constructive interference that determines the composite structure of the new wave - or in this case, the aggregate cycle of the largest economies in the world that had become highly synchronized. Needless to say, our greatest fears in the market were realized just two years later as momentum was translated and magnified sharply lower during the financial crisis. 

Back in the spring of 2011, we created a video around this concept (see Here) - that also played on the interventive policies that the financial system were increasingly reliant on. For us, Constructive Interference took on new meaning - which was summed up with three progressive assumptions at the end of the video.

• The current financial system requires Constructive Interference by the worlds major central banks - the Federal Reserve acting as the principal director of policy and practice. 

• Consolidation within the financial sector (i.e. Too Big to Fail) in the last 30 years has enabled central banks with the infrastructure to administer reflationary policies efficiently and with greater efficacy during illiquid periods of contraction.

• The cumulative effects of Constructive Interference within the financial system has led to increased speculation, frequent financial bubbles and confidence within the monetary system to react (i.e. moral hazard).

It should be noted that from the cheap seats of the peanut gallery, we certainly would not have chosen or advocated the TBTF system and policy path that was taken over the past three decades. However, from a pragmatic perspective - it is the framework the system funneled towards and which greatly governs conditions in the markets today. Example being, while it's a step in the right direction requiring banks to significantlyexpand their capital cushions - for better and worse, we don't expect these enormous institutions to be dismantled any time soon. The dirty little secret: when it comes to administrating monetary policy - the bigger the better, i.e. easier. Subjugating that reality with counterfactual arguments has practically become a rite of passage for many journalists (e.g. Matt Taibbi) and pundits - and painful in the purse for those participants that have carried a strong bias with expectations of an even greater crisis in the future. Ever superior to ones opinion, it simply is what it is. 

While the crisis exposed the catastrophic dangers of the TBTF model, the massive pipes that were built through consolidation, did help quickly flood the system during and subsequent to the crisis. Would a dendritic banking system have been safer or failed with less collateral damages as the new paradigm? Certainly. Growth would have been constricted, more moderate, less synchronized - and therefore less amplified on both sides of this cycle. However, in many ways it's an anthropologic chicken-or-the-egg debate on markets and capitalism, that we suspect was as inevitable as it was predictable. Free will be damned, we cynically arrive at our collective and predetermined destination.

Although the TBTF system has only grown larger since the crisis, the varying policy responses by the four largest economies (US, Europe, China & Japan) has dispersed the correlation extreme in growth tracks that were present in 2006. Moreover, this has steadily eased the tight correlations across world markets that peaked in 2011. That said, for investors it's certainly no cornucopia - considering many economies now sit in the trough of their respective long-term yield/growth cycles. One way of looking at the bigger picture and where we may be headed, is that economies and markets became highly in phase leading into the composite yield/growth trough, which culminated with the financial crisis. Post crisis, varying policy responses have further dispersed growth tracks as the major global economies bounce in and along the yield trough with much greater destructive than constructive interference. Some might call it secular stagnation, or as the man who coined the phrase some 75 years before, aptly posited; 

"...passing, so to speak, over a divide which separates the great era of growth and expansion of the nineteenth century from an era which no man, unwilling to embark on pure conjecture, can yet characterize with clarity or precision." - Alvin Hansen,Economic Progress and Declining Population Growth, 1939

Works for us - and once again on this side of the cycle's trough, we can only speculate as to what the catalyst for the next era of growth will be and when to realistically expect it. Our best guesstimate, however, is that Hansen's transitional divide will extend much longer than most participants expect, as we bounce along the bottom of the trough. We speculated going into this year, the structure and performance extremes that were quickly translated at both the top (12/13') and bottom (7/12') in 10-year yields, might be implying a long-term range was being established as the great inertias of the secular trend in Treasuries entered the trough of the cycle.

As conveyed in our last note, this point of view remains supported by our research of historical trends that implies yields are not headed materially higher anytime soon. Last week we came across an interesting chart posted by Michael McDonough of Bloomberg, that resonated with this perspective and the significant expectation gap that still exists in the market today. We inverted 

Michael's chart - which shows that the trends in 10-year yields and the number of months in the fed fund futures market to reach the implied rate of 0.5%, were quite correlated going into 2014. Similar to the trend gap that now exists between 5 and 10-year yields, the shorter more impressionable end of the market continues to err on the side of sooner rather than later, when it comes to rate hike expectations over the next year. As framed in the Bloomberg chart and illustrated in the roadmap of the last transitional divide (see Here), we believe long-term yields are pointing the way when it comes to rate hikes over the next several years. All things considered, we still like long-term Treasuries - especially relative to the US equity markets.

In the equity markets, we suspect it will increasingly becoming a market-pickers market between the four different food groups (US, Europe, China & Japan), with sub-varieties tangent to choice. As mentioned in previous notes, despite instigating the catalyst for the crisis, the US had a head start of working and digging the fire lines, that eventually brought the economic disaster under control first. Relative to what the balance of the worlds major central banks were willing and capable of extending - and with the Fed acting as the policy lead, the differential of capital flows has disproportionally supported our equity markets and the dollar since the crisis spread in the summer of 2008. Are the US markets in a bubble today? In our opinion it's a semantic debate, but one we do believe has greater contrast than comparison between the two previous equity bubbles and their respective downturns. 

Nevertheless, we still expect that with Europe, China and Japan now hitting the accelerator as the 

US coasts away from QE, the shear stresses that engendered a broad based positive skew in the US equity markets and dollar, should diminish over time. Although it's a short window to measure, from a relative performance perspective, we have already seen as much since QE wrapped up in the US last month. 

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Nov 28 Commentary: Australia, its economy and mining

Commentary: Australia, its economy and mining

You can expect a salary of A$150,000 or more as a truck driver at a remote iron ore project in Australia. The country has been one of the biggest beneficiaries of the economic boom in China, having grown continuously for more than two decades. During our site visit in the Pilbara area with Novo Resources, my companion’s bill of A$26 for a packet of cigarettes (which was at least five times more expensive than what he would have paid in Europe) and our bill of A$50 for a carton of small water bottles (which was about 25 times what it would have been in Singapore) shows how Australia — from a backpacker destination a decade ago — has become one of the most expensive places in the world, competing with Switzerland and Norway.

The domestic airports were filled with miners, truckers and all-and-sundry flying in and out for their weekly shifts to remote areas. They would report straight to work after disembarking. Lack of women, alcohol and the lifestyle are blamed for why companies must bear the costs for all this flying in and out. 

Australia’s gross domestic product (GDP) per capita on a nominal basis is US$61,137, and US$44,346 on a PPP basis. In other words, while to an Australian it is an average rich country, its currency is overvalued by around 30%. Part of reason why this happens can be attributed to the convoluted economic structure resulting from government interference. Australia’s economy has strong elements of redistribution, with high minimum wages, and control on immigration at the lower end of the skills spectrum, creating an unnatural shortage of workers. As a result of manpower shortage, it’s not only workers in remote mining areas that are overpaid — this seriously affects salaries all the way to cities. Add to that generous unemployment benefits. These policies strongly influence the transfer of earnings from what in a free market would have accrued to the capitalist, to instead flow to what would have otherwise been lower-salaried workers. 

From a short-term perspective an egalitarian would say this is utopian, but it pressures under-investment by driving down return on capital and makes manufacturing less competitive, which  is bad for the workforce long-term. Earning too much too quickly — and not so much based on an individual’s habits and traits, but because of access to natural resources and government’s policy of redistribution, and restrictions on immigration and enforcement of minimum wages — has created many cultural problems. Casinos, brothels and drunken rowdiness are some of the symptoms. A lot of this new-found money has gone into expensive yachts, overpriced condos and conspicuous consumption.

Mining drives the Australian economy, with iron ore and coal being its two biggest exports. Such benefits from natural resources — if not accepted as a windfall, and not sequestered either into a rainy day fund or back to the investment cycle — will come back to bite eventually.   

Irrespective of what happens to China’s growth rate, the Australian dollar is too expensive and its economic structure is convoluted, as a result of sudden increase in demand from China and Australia’s failure to bring in outsiders to work. Its salaries at the lower-end are too high. It is over-regulated and over-taxed, and the government gets away with this due to the high demand for resources. Among the locals this has created a culture of entitlements (through fixing minimum wages too high), a fear of foreigners (who would be happy to work for a lot lower than what residents get paid), a consumption-based economy (with the service sector representing 70% of GDP) and a stagnating manufacturing sector.

So what does all this mean for the future of Australia’s mining? 

Capital has no nationality. Trying to look for a better deal, it will directly or indirectly force reduction of regulatory burden and salaries, once the benefit from the sudden spurt of demand from China is over. Failure to reduce these burdens will only mean a continual, strong pressure to devalue the Australian dollar. If Australia chooses the former, it will make itself lean and competitive, without becoming less rich as a nation. The latter will raise the competitiveness in what it exports by making the country less rich. Whichever path Australia takes, these pressures will improve relative competitiveness and return on investment of companies with value addition in Australia, with mining being one of the biggest beneficiaries. 

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French Political Leader Wants Gold Back In France

France could be next on the list of countries that wants to take its gold back, if the leader of a far-right political party has her way.

Tuesday, Marine Le Pen, leader of the Front National party of France, who is also the front runner to potentially be France’s new president, penned an open letter, in French, to Christian Noyer, governor of the Bank of France, requesting that the country’s gold holdings be repatriated back to France.

“L’institution monétaire que vous dirigez a pour mission historique d’être la banque centrale dépositaire des réserves monétaires nationales et notamment des réserves d’or. Selon notre vision stratégique et souveraine, celles-ci n’appartiennent ni à l’Etat, ni à la Banque de France mais bien au peuple français et de surcroît servent de garantie ultime à la dette publique et à notre monnaie, [The monetary institution that you lead has historically served as the reserve central bank for France’s monetary and gold reserves. In our strategic and sovereign vision, these do not belong to the state, nor the Bank of France, but to the French people, which serve as the ultimate guarantee of public debt and our money],” she wrote.

Image courtesy of www.marinelepen.fr: Political leader Marine Le Pen, wrote to the governor of the Bank of France Christian Noyer requesting that the central bank repatriate its gold reserves back to France.

Not only does Le Pen want to see the gold back in France but she also recommended that the central bank take advantage of the recent price drop and buy more gold, boosting reserves by another 20%. She also recommends that the central bank never sell its gold reserves.

Finally, Le Pen also asked that an independent body be allowed to audit the country’s current holdings of 2,435 metric tons.

“Aussi, en fonction de la situation que nous découvrirons, je vous exhorte à procéder :
– Au rapatriement urgent sur le sol français de la totalité de nos réserves d’or se trouvant à l’étranger.
– A l’interruption immédiate de tout programme de cession d’or.
– A l’inverse, à une réallocation progressive d’une partie significative des réserves de devises au bilan de la Banque de France par l’achat d’or, lors de chaque baisse significative du cours de l’once (recommandation 20%) [Also, depending on our findings, I would advise you to;
– Urgently repatriate all our gold reserves that are located abroad.
– Cease all gold sales programs
– Inversely, progressively reallocate foreign exchange reserves  to the Bank of France by purchasing gold during substantial price drops per ounce (20% recommendation)], she wrote.

“Tout comme vos héroïques prédécesseurs de la Banque de France en 1939 et 1940 avaient organisé l’évacuation de l’or français, vous vous devez d’entreprendre cette vaste opération de sécurisation du trésor national, acte patriotique qui sera reconnu le moment venu par l’opinion publique [Like your heroic predecessors from the Bank of France in 1939 and 1940 who organized the evacuation of French gold, you should undertake the vast security operation of securing our national treasure, a patriotic act which would immediately recognized by the general public],” she wrote.

According to data from the International Monetary Fund, France has the fifth largest gold reserves in the world, making up 65.3% of its total foreign reserves.

A September poll, conducted by Ifop, showed strong support for Le Pen as a potential presidential candidate and could beat current president Francois Hollande in a “hypothetical” second-round runoff. Of course, France’s next presidential election won’t be held until 2017.

Le Pen’s request comes only a few days after Holland announced that it repatriated 122.5 metric tons of gold, worth about $5 billion dollars back to Amsterdam from the U.S.

The Netherlands currently holds 612.5 metric tons of gold, presenting about 54.1% of its total foreign reserves.

According to the central bank, 31% of its reserves are now held in Amsterdam and it maintains some gold reserves outside of the country with about 31% still in New York with the Federal Reserve;20% is with the Bank of Canada and 18% is with the Bank of England.

"In addition to a more balanced division of the gold reserves...this may also contribute to a positive confidence effect with the public,” the Dutch central bank said in a statement.

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Nov 26 FYI US Thanksgiving Holiday Schedule

US Thanksgiving Holiday Schedule

Dear PennTrader,

Here is the Thanksgiving holiday schedule for US and Canadian markets.

US markets:

- closed on Thursday
- open as usual Friday morning, but closing early for the day... at 1 pm EST (10 am PST)

Canadian markets:

- normal hours on both Thursday and Friday

PennTrade:

- open on Thursday for Canadian online trading, but the phone desk is closed so please use email for questions
- open during market hours on Friday, but the phone desk is closed so please use email for questions

During this time of thanks, we are especially grateful to have you with us at PennTrade.

We wish you and yours a Happy Thanksgiving.

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Gold Ends Steady-Weak in More Lackluster, Pre-Holiday Trading

P.M. Kitco Metals Roundup: Gold Ends Steady-Weak in More Lackluster, Pre-Holiday Trading

Gold prices ended the U.S. day session steady to slightly lower in quiet, pre-holiday trading Wednesday. A dearth of bullish fundamental news recently and a bearish chart posture are keeping gold prices on the defensive. Some chart consolidation is also evident this week. February Comex gold was last up $0.40 at $1,198.20 an ounce. Spot gold was last down $3.10 at $1,198.50. March Comex silver last traded down $0.016 at $16.595 an ounce.

U.S. trading activity wound down as the day progressed Wednesday, ahead of the Thanksgiving holiday on Thursday. Typically, Friday finds one of the lightest-volume trading days of the year for U.S. markets.

A fairly heavy slate of U.S. economic data released Wednesday did not move the markets much, as U.S. traders had their minds on a Thanksgiving feast Thursday.

In overnight news, a European Central Bank official hinted the ECB could begin buying government bonds (quantitative easing) early in 2015.  The ECB vice president’s remarks were a bit disappointing to those market watchers who thought the ECB might make the move at its meeting on Dec. 4.

A German government 10-year bond auction Wednesday fetched a record low yield that averaged 0.74%. This underscores investors in Europe continue to be skittish about the European Union economy and are content to be safe with low-yielding German bonds.

The market place is looking ahead to Thursday’s OPEC meeting. Some believe the beleaguered oil cartel could reduce its overall daily oil production quota, or at least call for strict adherence to existing quotas, most of which are ignored by OPEC nations. Nymex crude oil futures are trading not far above the recent three-year low. This could be a “make-or-break meeting for OPEC—or at least its most important meeting in years. Saudi Arabia and Iran will be the key players at the OPEC meeting.

There was another report out Wednesday that said demand for physical gold in China and India continues to increase, most likely due to bargain hunters snapping up gold due to the recent price slide.

The London P.M. gold fix was $1,197.50 versus the previous London A.M. fixing of $1,195.75.

Technically, February gold futures prices closed near mid-range again today in quiet trading. Bears still have the overall near-term technical advantage. Prices are in a 4.5-month-old downtrend on the daily bar chart. However, the bulls are working on establishing a near-term uptrend from the November low. The gold bulls’ next upside near-term price breakout objective is to produce a close above solid technical resistance at $1,225.00. Bears' next near-term downside breakout price objective is closing prices below solid technical support at last week’s low of $1,174.70. First resistance is seen at this week’s high of $1,204.50 and then at last week’s high of $1,208.20. First support is seen at this week’s low of $1,190.00 and then at $1,186.70. Wyckoff’s Market Rating: 3.0

March silver futures prices closed nearer the session low in quiet trading. The silver bears still have the overall near-term technical advantage. Prices are in a four-month-old downtrend on the daily bar chart. However, the bulls are working on establishing a near-term price uptrend from the November low. Silver bulls’ next upside price breakout objective is closing prices above solid technical resistance at $17.00 an ounce. The next downside price breakout objective for the bears is closing prices below solid support at last week’s low of $15.93. First resistance is seen at this week’s high of $16.755 and then at $17.00. Next support is seen at this week’s low of $16.305 and then at $16.16. Wyckoff's Market Rating: 3.0.

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The 6 P.M. Recap With Gary Wagner: On To Thanksgiving

On To Thanksgiving

Two currents were pushing gold prices around today.

The first, and most important for us in the long term is that a raft of data from the U.S. economy came in shaky at best. Consumer sentiment, housing and manufacturing declines sent red flags flying, raising concerns that the world's biggest economy is losing momentum in the final few months of 2014.

We will see soon how this translates to the early December numbers, which will include employment stats.

The second current we contended with today was the four-day Thanksgiving weekend in the United States (which includes New York!)

Traders and investors with any degree of seniority or security were headed for the airports, trains stations and highways by noon. Those types will not be back in their cockpits until Monday. Yes, there will be trading Friday, an abbreviated session on tap. But don’t expect any big moves unless one of those mysterious Asian trades pops up.

We look for the dollar to recover some strength next week. If the U.S. is just experiencing a speed bump, the dollar will re-start its assent.

During this holiday, in which the lucky and the diligent celebrate their bounty, let’s not forget those who need help.

Onward.

Happy Thanksgiving and …

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Gold Ends Near Steady In Lackluster, Pre-Holiday Trading

Gold prices ended the U.S. day session near unchanged Tuesday. Chart consolidation was a featured in a ho-hum trading session as it appears U.S. traders are focused upon the upcoming Thanksgiving holiday Thursday. The U.S. dollar index hovering near a four-year high continues to provide a bearish anchor for the precious metals. February Comex gold was last up $1.10 at $1,197.70 an ounce. Spot gold was last down $0.80 at $1,198.00. March Comex silver last traded up $0.175 at $16.61 an ounce.

There was a heavier slate of U.S. economic data released Tuesday, highlighted by the second-quarter report on gross domestic product. The GDP report came in at up 3.9%, on an annual basis, which was well above market expectations for a rise of 3.3%. Gold saw an initial dip on the GDP figure, but then quickly rebounded on short covering and bargain hunting on the dip.

Other U.S. data released Tuesday included the U.S. house price indexes, the Richmond Fed business survey, and the S&P/Case-Shiller home price index. The Richmand Fed survey came in on the weak side of expectations, which on this day somewhat offset the stronger GDP report.

U.S. markets activity is likely to start to wind down Wednesday, ahead of the Thanksgiving holiday on Thursday. Typically, Friday finds one of the lightest-volume trading days of the year for U.S. markets.

In overnight news the OECD again warned that economic stagnation in the European Union is problematic for the entire global economic system. The OECD urged the European Central Bank to enact still more monetary policy stimulus measures.

The market place is looking ahead to Thursday’s OPEC meeting. Some believe the beleaguered oil cartel could reduce its overall daily oil production quota, or at least call for strict adherence to existing quotas, most of which are ignored by OPEC nations. Nymex crude oil futures are trading not far above the recent three-year low. This could be a “make-or-break meeting for OPEC—or at least its most important meeting in years. Saudi Arabia and Iran will be the key players at the OPEC meeting.

The London P.M. gold fix was $1,199.00 versus the previous London A.M. fixing of $1,202.25.

Technically, February gold futures prices closed near mid-range again today. Bears still have the overall near-term technical advantage. Prices are in a 4.5-month-old downtrend on the daily bar chart. However, the bulls are working on establishing a near-term uptrend from the November low. The gold bulls’ next upside near-term price breakout objective is to produce a close above solid technical resistance at $1,225.00. Bears' next near-term downside breakout price objective is closing prices below solid technical support at last week’s low of $1,174.70. First resistance is seen at Monday’s high of $1,204.50 and then at last week’s high of $1,208.20. First support is seen at today’s low of $1,190.00 and then at $1,186.70. Wyckoff’s Market Rating: 3.0

March silver futures prices closed nearer the session low but did hit a four-week high early on today. The silver bears still have the overall near-term technical advantage. Prices are in a four-month-old downtrend on the daily bar chart. However, the bulls are working on establishing a near-term price uptrend from the November low. Silver bulls’ next upside price breakout objective is closing prices above solid technical resistance at $17.00 an ounce. The next downside price breakout objective for the bears is closing prices below solid support at last week’s low of $15.93. First resistance is seen at today’s high of $16.755 and then at $17.00. Next support is seen at Monday’s low of $16.305 and then at $16.16. Wyckoff's Market Rating: 3.0.

March N.Y. copper closed down 380 points at 296.80 cents today. Prices closed near the session low and closed at an eight-month low close today. The bears have the solid near-term technical advantage and gained more power today. Copper bulls' next upside breakout objective is pushing and closing prices above solid technical resistance at last week’s high of 307.20 cents. The next downside price breakout objective for the bears is closing prices below solid technical support at the October low of 295.00 cents. First resistance is seen at 300.00 cents and then at today’s high of 302.45 cents. First support is seen at the November low of 296.30 cents and then at 295.00 cents. Wyckoff's Market Rating: 2.0.

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The 6 PM Recap With Gary Wagner: Having It Both Ways (Not!)

Having It Both Ways (Not!)

Third quarter U.S. GDP was revised upward to show that the economy expanded by 3.9%. Consumer sentiment, however, fell during November. These two data points seems to be contradictory, when in fact, behind the consumer’s thinking lies an unfortunate reality.

Wages are stagnant. That will cast a damper on anyone’s view of his or her personal economy. Worse, it means that there is more borrowing pressure on struggling families. Even worse than that, the subtext is that more and more wealth is being concentrated in the hands of the few. That does not bode well for a consumer society – and we say this not from an ideological but rather practical viewpoint.

The dollar fell on that news in part, but also on the foot dragging by the E.U. on their stimulus program. The dollar was also dinged by an upbeat report from the Bank of Japan about their country’s generally more positive prospects.

More news is due out tomorrow on the U.S. economy, although given the truncated trading day we’re not sure how much that will mean to market movement.

Weekly jobless claims, durable goods, personal income, the Chicago Purchasing Managers’ Index, new home sales and pending home sales are all on deck.

Also on the minds of traders are the OPEC meetings that are scheduled to start Thursday. West Texas Intermediate crude is threatening to settle below $74 per barrel. And that’s with no push from a higher dollar, which makes oil cheaper. Brent oil is going to close below $79, a figure once thought inviolable.

If OPEC somehow corrals its members into cutting production, prices could temporarily go back up. If constituent members of the struggling cartel go their own way and keep producing however much oil they want, prices will continue to drop. If prices do go back up, they won’t stay there long. The big-dog in just about everything else, the United States, is expanding its output steadily and grandly.

So, we have the equities mostly up on the day. Oil and the bond yield are down. The dollar is down. Gold is barely up, and has struggled to find direction. All the other outside influences tell us gold ought to be lower. But it isn’t.

End-of-the-month position squaring is at work, as well the peace-of-mind factor. Who wants to be worried while sitting with their bellies stuffed and your least favorite uncle who lost everything in ’08, give you advice on trading?

Very few people on the New York desks believe us.

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Nov 25 The Clock is Ticking in Switzerland Peter Schiff

The Clock is Ticking in Switzerland

Peter Schiff

For most of my career in international investing, I had always placed a great deal of faith in Switzerland's financial markets. In recent years, however, as the Swiss government has sought to hitch its wagon to the flailing euro currency and kowtow increasingly to U.S.-based financial requirements, this faith has been shaken. But this week (November 30th) a referendum in Switzerland on whether its central bank will be required to hold at least 20% of its reserves in gold, will offer ordinary Swiss citizens a rare opportunity to reclaim their country's strong economic heritage. It's a vote that few outside Switzerland are following, but the outcome could make an enormous impact on the global economy.
Traditionally, the Swiss franc had always attracted international investors looking for a long-term store of value. That's because the Swiss government had always kept sacred the idea of conservative central banking and fiscal balance. When the idea of the European common currency was first proposed, the Swiss were wise to stay out. They did not want to exchange the franc for an unknown and untried pan-national currency. The creators of the euro had suggested that it would become the heir to the strong Deutsche mark. Instead, it has become the step-child of the troubled Italian lira and the Greek drachma. In retrospect, the Swiss were wise to take no part in the experiment.
But the decision of the Swiss government in 2011 to peg the franc to the euro, in order to prevent the franc from rising, has meant that the nation has adopted the euro de facto. In order to effect this peg, the Swiss government has had to intervene massively in the currency exchange market to buy and stockpile euros, thereby weakening the franc. The raw numbers are so staggering that rank and file Swiss have taken notice. Over the last few years the Swiss economy has stagnated along with the rest of Europe, and Swiss citizens have come to understand that the current policy will require an open-ended commitment to keep doing more of the same. This frustration has given birth to the referendum movement.
In 1999, Switzerland became the last industrial nation to go off the gold standard, a system that had served the world well for centuries. At that time, the Swiss National Bank held about 2,600 tons of gold, representing about 41% of its total currency reserves. By the end of 2008 its gold holdings had dwindled to just 21% of reserves. And as of August this year, they had fallen to just 7.9%. The raw tonnage has fallen over that time to just 1,040 tons, a 60% decline from 1999.
But the real action can be seen in the Swiss National Bank's holding of foreign currencies, mostly the euro, which now sits at a whopping 453 billion francs' ($495 billion). That's about 56,000 francs ($61,000) per man, woman and child in the country, almost 90% of which have been accumulated in just the past six years. The stated aim of all these purchases is to depress the value of the franc against the euro. Currency valuation directly translates into purchasing power, which means that the Swiss are poorer for these efforts. For a family of four that means the Swiss government has diverted almost $33,000 worth of purchasing power every year for the past six years to citizens of other European countries who had mistakenly adopted the euro. That's a lot of money, even for a rich country.
Swiss politicians have said that purchases have been needed to protect the citizenry from falling prices and from the diminished exports that would result from a rising currency (In my latest newsletter, read how this central bank concern about deflation is strictly a 21st century paranoia). Putting aside the evidence to suggest that the Swiss economy has prospered under a rising currency, this idea assumes that exports are a means, rather than an end. The purpose of exports is to pay for the stuff that you import and consume. There are many things that the Swiss people want that they don't make. To get those things, they export the things that they do make (i.e. watches, chocolate, cheese, etc.). The beauty of a strong currency means that you don't need to export as much of the stuff you make to get the stuff you want. In other words, you don't have to work as hard to enjoy greater consumption. Swiss living standards could have been much higher today if Swiss bankers and politicians had not tethered the franc to the euro.
A 20% gold reserve requirement would severely limit the ability of the Swiss government to continue its pegging policy. In order to reach the new target reserve levels, the Bank would either have to sell hundreds of billions of currency reserves or buy thousands of tons of gold on the open market. Critics contend that this would be a disaster for Switzerland. But the large amount of gold reserves before 1999 did not weigh on the Swiss economy. In fact, before that time, it was the envy of the world. While other countries were undermined by the promises politicians made with a printing press, the Swiss economy prospered thanks to the discipline provided by gold. Economists and politicians who are urging the Swiss to reject the proposal make the case that inflation is a prerequisite for growth, but many Swiss know that that is a lie.
While the pundits see little chance of success for the gold vote, I am encouraged by the recent results of another recent Swiss referendum that rejected the imposition of what would have been the highest minimum wage in the world. Swiss voters were smart enough to understand that an arbitrarily high wage costs would simply destroy employment opportunities without offering any tangible benefits in return. Perhaps they will be equally wise about the usefulness of sound and stable currency.
As an American, I envy the choice that the Swiss have given themselves. If successful, the vote could be seen as the first major counterattack against the forces of fiat currencies and unlimited global QE. A successful outcome may also mean the requirement for the Swiss government to buy gold would add significant demand in the gold market and should thereby help put the metal back on track.

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Nov 25 Can Gold Extend Its Rally? Stewart Thomson

Can Gold Extend Its Rally?

Stewart Thomson

1. While it hasn’t affected gold significantly, the price of oil has fallen quite dramatically over the past couple of months, and that’s bad news for oil companies. Profit margins are shrinking and layoffs could be coming, if the situation doesn’t improve.
   
2. If oil continues to decline, the shale oil producers could get into serious trouble, and that could send America back into recession.
   
3. Mainstream media promotes the idea that lower oil prices are good for consumers, but most consumers are deeply in debt, and it’s questionable whether lower oil prices are going to lead to any increase in consumer spending.
   
4. All investor eyes should be focused on the upcoming OPEC meeting in Austria. It takes place on Thursday, which is Thanksgiving Day for Americans.
   
5. Please click here now. That’s an oil options chart from Goldman Sachs. It suggests that the price of oil will move up or down by about $3.60 a barrel, as the OPEC production decision is announced.
   
6. Please click here now. This chart shows US oil production reaching nine million barrels a day.
   
7. High prices are needed to keep that production growth in a rising trend.
   
8. Even if OPEC were to announce a major cut in production, that would only create a further rise in US oil production, putting renewed pressure on OPEC to cut production again.
   
9. It’s a self-defeating exercise for OPEC to keep cutting production, while America increases production. Thus, I expect only token action to be taken by OPEC this week.
   
10. How would a failure by OPEC to cut production affect the price of gold? 
    
11. For the possible answer, please click here now. That’s the daily gold chart. Note the position of the 14,7,7 Stochastics oscillator. The lead line is near 80, suggesting the gold rally from the $1130 area lows is “long in the tooth”.
    
12. If OPEC disappoints commodity bulls, I think gold could decline, but only modestly, to the $1170 - $1180 area, and it might do so in anticipation of the OPEC decision.
    
13. For any market to continue to rally in a technically overbought situation like gold is entering into now, it needs a catalyst to do so. Is there such a catalyst on the horizon?
    
14. Well, please click here now. That’s the daily chart of the US dollar versus the Japanese yen. There’s a 14,7,7 Stochastics sell signal in play, and the dollar has definitely lost upside momentum over the past week.
    
15. In the big picture, gold has performed admirably, while both the yen and oil have collapsed. 
    
16. If the yen can begin to rally, gold could gallop higher, to the $1250 - $1255 area, even while being technically overbought.
    
17. It’s important for Western investors not to get overly-obsessed with the fear trade for gold, and ignore the love trade. Please click here now.
    
18. The city of Dubai has long been recognized as the “city of gold”, and rightfully so. Five hundred jewellers are now in forces to build the world’s longest piece of gold jewellery, to promote the industry.
    
19. The love trade (gold jewellery) has always been the biggest and most consistent driver of the gold price. I don’t expect that to change,regardless of what happens in America.
    
20.  The good news is that jewellers in China, India, and Dubai are inexpansion mode, and it’s clear that Western mining stock shareholders stand to reap substantial reward from the relentless growth in gold jewellery demand.
    
21. Please click here now. That’s the daily chart for GDX. It’s performing “according to plan”. There’s clear sell-side HSR (horizontal support and resistance) in play in the $20 area, and the rally has stopped there.
    
22. Simply put, the traffic light has turned red, and the gold stocks sports car has stopped. After a brief rest, I expect higher prices. There’s nothing I see here that is fundamentally negative for gold stocks. Nothing.
    
23. Gold stocks are well supported by the enormous expansion in the global gold jewellery business, and so is silver. To view the daily chart, please click here now.
    
24. Silver tends to substantially outperform gold in the later stages of a rally, regardless of whether that rally is short term or long term. A move above the black downtrend line should attract lots of hedge fund buying, and extend the rally. A two day close above $16.75, should get that job done!

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