Tag Archives: QE

Inflation and Gold

Investors buy gold because they think that gold is a hedge against inflation. The value of the paper currency falls in terms of the goods and services that it can buy and inflation goes in the opposite direction; up.

Investors love gold when inflation is high and as you may know, gold has a direct relationship with inflation. So when inflation goes up so does the demand for gold. Imminent hyper inflation was expected during the QE program, but that is not the reality right now.

You can track inflation using the Consumer Price Index (CPI). This index measures how the price of a basket of consumer goods and services changes. CPI will give you a picture of the increase in the level of prices.

us cpi

This data is released by the U.S Bureau of Labor statistics on a monthly basis. U.S inflation rate is -0,09%, (released Feb 26, 2015), compared to 0,76% in December and 1,58% last year. This is lower than the long-term average of 3,32%. Down -111,8%.

Inflation fell in January for a third straight month as U.S consumers continued to spend less on gas, food prices flattened and as costs retreated for new vehicles,used cars and trucks, household furnishings and operations, airline fares, alcohol and tobacco. U.S inflation turned negative for the first time since 2009.

The CPI measures what American pays for everything from cloths, airline tickets, fruits and vegetables to cars. Declines were again led by energy as prices at the pump tumbled about 19%. Gasoline prices have plunged 35% over the past 12 months.

A slower pace of inflation means consumers can buy more with their money, but a sustained decline over and extended period (deflation), can wreak havoc on an economy. Falling energy prices are beginning to filter down into other areas.

Core US inflation advanced 1,6% over the last 12 months, and the core 12-month reading is the benchmark inflation figure monitored by the Federal Open Market Committee (FOMC) as it helps in deciding where to set the key interests rate.

«We think inflation is going to move lower before it moves higher. Declining oil prices have had a very major influence,» Fed Chairwoman Janet Yellen said in a testimony.

The current level remains below the Fed`s 2% annual inflation target. In written remarks read to Congress, Janet Yellen stated:

“The Committee expects inflation to decline further in the near term before rising gradually toward 2 percent over the medium term as the labor market improves further and the transitory effects of lower energy prices and other factors dissipate, but we will continue to monitor inflation developments closely.”

Consumer Price Index data for February inflation and the annual period is scheduled for release on March 24, 2015.

 


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Disclaimer: The views expressed in this article are those of the author and may not reflect those of Shiny bull. The author has made every effort to ensure accuracy of information provided; however, neither Shiny bull nor the author can guarantee such accuracy. This article is strictly for informational purposes only. It is not a solicitation to make any exchange in precious metal products, commodities, securities or other financial instruments. Shiny bull and the author of this article do not accept culpability for losses and/ or damages arising from the use of this publication.

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Filed under Commodities, Politics, Quantitative Easing

Who will win the currency war?

Let`s face it; there is a war out there. Not World War I or World War II, but a currency war that started five years ago. Who was the winner in WWI? And who was the winner in WWII? And who do you think will win the currency war that is going on now?

This currency war is also known as competitive devaluation. Countries compete against each other to achieve a relatively low exchange rate for their own currency. As the price to buy a particular currency falls so too does the real price of exports from the country. Imports become more expensive.

Stack of $100 bills

(Picture: U.S Dollar)

Employees in domestic industry will face a boost in demand for their products and services from both domestic and foreign markets, but the price will increase for imports and that can harm citizens` purchasing power, and that in turn can lead to a reduction in peoples standard of living.

The problem is when all the central banks are doing the same and this situation can lead to a general decline in international trade, which can harm all countries.

The world`s biggest financial center Singapore is the latest to take part of this currency war. The Singapore dollar tumbled to a four-year low against the US dollar after the Monetary Authority unexpectedly stymied currency appreciation.

Singapore is a compact financial center, uses exchange rates instead of lending rates to control its currency, as it is a very trade-oriented economy. The bank also reduced its inflation target, forecasting a negative 0,5 percent in consumer prices for 2015.

The reserve Bank of India also decided to cut reserve rates by 25 basis points to lower the inflation, they may again lower its lending rate next week. India, Japan and Russia have all seen a drop in the value of their currencies. Nine countries eased policy in January alone.

What is their goal? Their goal is to weaken their currency and gain an economic edge.

Japan is still «printing» money and ECB announced a week ago a €1,14 trillion quantitative easing plan and that sent the euro down to an 11-year low. The Swiss National Bank took precautions a week before that by removing the peg between the Swiss franc and the euro, and that sent the currency soaring 15 percent in a few seconds.

A negative interest rate of 0,25% a year on deposits means putting Swiss francs in a bank account will cost you 0,25% more than keeping them under the mattress. The plunge in the Russian ruble this year is down about 50% against the U.S dollar.

Check out the Japanese yen, which is down 25% over the past two years. It`s down about 20% against the U.S dollar since the summer. It is cheaper to buy a new iPhone in Tokyo and have it shipped over than it is to buy one in the U.S.

A cheap renminbi was a cornerstone in the Chinese industrial revolution, but renminbi has increased about 20% in the past four years because of the plunge in the yen. A weaker yen is good for Japanese jobs and industry because it makes foreign imports more expensive in Japan, while making Japanese exports cheaper abroad.

They all want to make their own currency cheap to boost exports and inflation.

But how can someone win if everyone is weaken their own currency against everyone else?

If you are familiar with fx trading, you know that if you buy one currency, you sell another at the same time, for example EUR/USD. If euro goes down, USD goes up, but both can`t go up or down at the same time. Here is the point.

Everyone can`t win and some of them have to lose, but who?

The U.S dollar have so far been a safe heaven and is getting stronger every day. So far, a great winner. Yen and Euro have been big losers. The U.S dollar soared while others plunged. This is expensive for U.S exporters, and Fed will probably do something very soon to fight back. This is a zero-sum game.

For the first time in history, all the worlds central banks are «printing money» as all the countries have generally preferred to maintain a high value for their currency. Countries have generally allowed market forces to work, or have participated in systems of managed exchanges rates. An exception occurred when currency war broke out in the 1930`s. As countries abandoned the Gold standard during the Great Depression, they used currency devaluations to stimulate their economies.

Since this effectively pushes unemployment overseas, trading partners quickly retaliated with their own devaluations. The period is considering to have been an adverse situation for all concerned, as unpredictable changes in exchange rates reduced overall international trade.

According to economist Richard N. Cooper, a substantial devaluation is one of the most «traumatic» policies a government can adopt (1971). It almost always resulted in crises of outrage and calls for the government to be replaced. A strong currency was commonly seen as a mark of prestige, while devaluation was associated with weak governments.

President Barrack Obama has defended the QE program, saying it would help the U.S economy to grow, which is good for the rest of the world. ECB will start their new QE program in a few weeks and if the economy improves in order to avoid inflation, there may be a promise to destroy any newly created money.

A reason for preferring devaluation common among emerging economies is that maintaining a relatively low exchange rate helps them build up foreign exchange reserves, which can protect against future financial crises.

The battle goes on between the Fed and the rest of the world`s foreign central banks. It`s war.

 

Disclaimer: The views expressed in this article are those of the author and may not reflect those of Shiny bull. The author has made every effort to ensure accuracy of information provided; however, neither Shiny bull nor the author can guarantee such accuracy. This article is strictly for informational purposes only. It is not a solicitation to make any exchange in precious metal products, commodities, securities or other financial instruments. Shiny bull and the author of this article do not accept culpability for losses and/ or damages arising from the use of this publication.

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Mario`s Bazooka!

Europe is in trouble and the problem (one of them) is deflation. From December 2013 to December 2014 the inflation was -0,2%. ECB`s goal is like the FED`s; about 2%. The European Central Bank announced today that it will fight against deflation and recession by «printing more money».

Many people don`t know that the Central Banks are not printing money like they use to think; printing paper money. But others say «printing money» to make ordinary people understand what they are talking about.

ECB

Central banks have a tool to control growth and that is lowering or raising the interest rate. When the interest rate is low, people will spend more money which is good for the economy. Spending is also better than saving.

When interest rate is as low as it right now, the central banks need to do something. The tools they use is to «print more money», and that is quantitative easing QE. But does it help the economy? According to Obama in a speech yesterday; it does.

The banks use this money to buy bonds from investors such as pension funds and private investors that will use this «new» money. This again will increase the amount of money in the financial system, which is encouraging financial institutions to lend more to businesses and individuals. The goal is to allow them to invest and spend more and that will hopefully increase the growth.

QE makes the prices of government bonds to go up and reduces the yield paid out to investors, which means investors have to pay more to get the same income. This is why some pension scheme deficits have increased sharply in resent years.

It is Greek elections on Sunday, and ECB bond-buying could support confidence in troubled Euro zone members and prevent any fallout from Greek politics affecting other countries. Some said the Greeks are poised to reject the EU-imposed cost-cutting and vote for Syriza, which rejects the fiscal crackdown. The ECB will buy bonds from Italy and Germany and that will prevent them from selling their bonds if the economic situation in Greece worsens. Draghi said today that they can continue to print money the next 30 years. No one knows that this program will work.

QE was first used by the Bank of Japan (BOJ) to fight domestic deflation. BOJ had for many years claimed that QE is not effective and rejected its use for monetary policy. BOJ hade maintained short-term interest rates at close to zero since 1999.

During their QE, the BOJ flooded commercial banks with excess liquidity to promote private lending, leaving them with large stocks of excess reserves and therefore little risk of a liquidity shortage. The BOJ accomplished this by buying more government bonds than would be required to set the interest rate to zero. It later also bought asset-backet securities and equities and extended the terms of its commercial paper-purchasing operation.

Since the financial crises of 2007-2008, similar policies have been used by the United States, the United Kingdom and the Euro zone. QE was used by these countries because their risk-free short-term nominal interest rate were either at or close to zero.

ECB will start their € 1,1 trillion QE program in march. They will start buying 60bn euros of chiefly government debt each month. That includes rebundled private debt, asset-backet (public and privaate) securities and covered bonds worth about 10 billion euros on top of the roughly 50 billion euros in state bonds.

They will spend (as they signalled in 2009) € 60bn euroes each month until September next year. The Euro dropped down to an 11 year low against the strong dollar. The pair is now trading at $1,14.

Mario Draghi has delivered a bigger bazooka than investors were expecting, and the stock market in Europe, Asia and U.S skyrocketed today. Bull!

By the way; Denmark`s Central Bank followed the ECB today by cutting its main deposit rate again. This time to negative -0,35%. They had already lowered that rate to negative -0,2% from negative -0,05% on Monday this week.

 

Disclaimer: The views expressed in this article are those of the author and may not reflect those of Shiny bull. The author has made every effort to ensure accuracy of information provided; however, neither Shiny bull nor the author can guarantee such accuracy. This article is strictly for informational purposes only. It is not a solicitation to make any exchange in precious metal products, commodities, securities or other financial instruments. Shiny bull and the author of this article do not accept culpability for losses and/ or damages arising from the use of this publication.

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Cautious Stock Market Investors

U.S markets will be closed today in observance of the Martin Luther King Jr holiday. Some markets will be open like futures, but I will stay away from the market today because of the lack of volume and liquidity.

I will follow oil and gold prices and all the commodity traders should keep in mind that Crude Oil inventories will be released on Thursday at 11:00am, instead of the normal Wednesday 10:30 am release due to Monday`s holiday.

Gold is on the move and can go up about 25%, and the precious metal is the best performing asset class so far this year. It`s golden days for day traders. Take a look at the oil price. It`s like roller coaster, jumping up and down, and oil had the biggest gain in 2 1/2 years, ending the trading session of friday 5,82% higher.

The reason why the stock market didn`t follow the oil price on friday can be the disappointing retail sales report in early trading on friday. Retail sales dropped 0,9% vs a 2% forecast. The S&P ended Friday with a 27 point gain, and ended the week 25 points lower. That`s down 1,24% for the week.

The Dow saw triple digit profits on Friday with a 191 point gain, and it closed at 17511,57, wrapping up the week with a 226 point loss. Friday`s Preliminary Consumer Confidence report was a beacon of hope for the bulls. The report not only beat expectations. That`s the highest level in 11 years!

A number of questions marks seem to have investors leaning back on their heals this year. This is; plummeting oil prices, geopolitical turmoil and continued divergence between the world`s major economies like Japan, China, U.S and the Euro zone.

All the investors eyes are on the world`s central banks. The Davos meeting later on this week will be interesting, and the ECB is expected to deliver a stimulus package later this month. Investors will wait for definitive word from the ECB regarding its widely anticipated stimulus plan.

Bond market rose across the board as interest rates dropped lower, with the 10-year Treasury rate falling below 2%. The downtrend in rates is not good, and is a symptom of deflationary pressures which is worse than inflation. Plummeting energy prices are adding fuel to the fire.

The U.S dollar continued its bullish climb last week, putting downward pressure on the commodity sector as a whole. This trend can last awhile longer.

Investors are cautions and it seems everyone is a bit hesitant to commit to new, bullish positions until some questions are resolved. I will wait for a clearer trend to emerge and 1,200 in small-cap stocks need to break before I call the bullish trend in equities alive.

 

Disclaimer: The views expressed in this article are those of the author and may not reflect those of Shiny bull. The author has made every effort to ensure accuracy of information provided; however, neither Shiny bull nor the author can guarantee such accuracy. This article is strictly for informational purposes only. It is not a solicitation to make any exchange in precious metal products, commodities, securities or other financial instruments. Shiny bull and the author of this article do not accept culpability for losses and/ or damages arising from the use of this publication.

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Understanding Gold

Gold and silver are complicated assets to price, because prices depend on the valuation of other assets and on differences between U.S data and the rest of the world. Stocks and currencies depend on fundamental data, but for gold and silver it is more complicated. The gold and silver prices express the strength of the global economy vs the expectations of real interest rates in the U.S.

Gold

Understanding the gold and silver prices is the key to unlocking the mystery of fiat money. Do you remember the collapse in Russia in 1999, South East Asia in 1997, and Brazilian and other South American currency crises from 1992 to 1994? Many lost all their savings, because of the collapse of their governments currencies.

Gold cannot suffer such a collapse in value because gold cannot be created by any government at will. That`s why the governments would like to convince the populace that it should disregard gold as a monetary asset and embrace its fiat currencies.

All previous experiments with fiat currencies ended in disaster. Our history books are littered with examples of empires that were built on hard work and destroyed by a devaluation of their currency. But this time is different. Central banks are doing the same thing at the same time; printing money. So, you have to look at the dollar compared to other currencies.

Understanding the gold and silver prices is the key to unlocking the mystery of fiat money. Compared to the prices in the past, the gold price should be $2,500, $4,000, $7,000 or even $14,000, but it isn`t. It is declining.

Fed successor Janet Yellen said (November 2013); «I don`t think anybody has a very good model of what makes gold prices go up and down.» Fed Chairman Ben Bernanke told (July 2013) Congress he doesn`t pretend to understand gold prices. Nobody does.

Gold and Silver are correlated to copper, oil price, Chinese investments and to global money supply and inflation. Higher supply of U.S oil and slower growth weakened the oil price and also the gold and silver price. Copper and oil got under pressure by the slowing Chinese real estate investments.

Chinese law to disallows to buy a second home, helped to calm these investments along with high interest rates.

The main driver for high gold prices in the «gold bubble» during the end of 1970`s was driven by U.S inflation, but what now as the emerging markets achieve half of global GDP? It will be difficult to view the gold price related to U.S inflation now. Falling food and energy prices in Europe are an indicator of weak EM.

Central banks in EM reduced their dollar share and bought gold between 2010 and 2012. India holds 10% of reserves in gold, while China holds 1,7% and Brazil only 0,5%. Countries with current account deficit (India: 10% Central bank gold holdings), Belarus (30%) and Egypt (25%), prefer gold to stabilize their currency.

Western central banks still stick with the former IMF rule not to buy gold any more.

The gold share is very high for many European countries, while it is still low in EM central banks. Central banks of Germany, Italy and France are all three with 70% gold holdings, and they could all build up their reserves during the Bretton Woods era.

All other countries fixed their N currencies against 1 currency, the U.S dollar, in the Bretton Woods system. The Fed was obliged to exchange on ounce of gold into $35 U.S dollar. (N:1 currency system). President Nixon closed this cheap gold at $35 window in 1971.

Gold lost its status with flexible exchange rates, and the IMF demonization of gold policy even urged central banks to sell their gold. Central banks in Switzerland and the UK followed these calls, and the Fed is still the leasing central bank in an implicit N:1 system of central banks (Bretton Woods II).

Quantitative easing makes the gold rise and the dollar to weakens, because private investors and some central banks move out of the dollar and into gold. If the U.S employment falls, then the dollar appreciates which is about to happened now. EM will be more expensive and with lower oil prices the U.S trade deficits diminishes.

U.S funds will find treasuries more attractive relative to gold and silver and normally when the real interest rates is high, the gold price is weak and vice verse. When the U.S economy improves the gold price falls, and the chances of a Fed Funds rate hike increase, but that`s far in the future.

The gold price moved upward together with oil prices and wages during the 1970`s inflation expectations. Wages is playing a role as an underlying factor for interest rates and the gold price. At that time, Fed Chairman Volcker hiked interest rates so that unions stopped higher wage demands, new supply (North-sea oil) suppressed the oil price and the incomes of EM, while the global growth was sluggish.

Fed Chairman Volcker destroyed the gold price by keeping inflation (and company margins) under control and the stock price rose again. Now wages is declining (wage share of GDP) and the company margins are increasing. The gold price have dropped sharply in a few days and are trading below its 1,200 support level. It can go down to 1,000 and below.

A report published by the World Gold Council «China`s gold market: progress and prospects» suggests that the demand for gold will increase by 20%, from 1,132 tonnes per year to at least 1,350 tonnes by 2017. It was a record level of Chinese demand for gold in 2013, and 2014 is suggested to see consolidation, the succeeding years are likely to see sustained growth.

The market began liberalising in the late 1990s, and China is the number one producer and consumer of gold. It is expected to see the market to continue to expand, irrespective of short-term blips in the economy.

Mr. Greenspan said gold is a good place to put money these days given its value as a currency outside of the policies conducted by government. Gold is down 1/3 since it’s all time high of $1,921,50 in September 6, 2011. On October 29, he told the Council of Foreign Relations that the Fed`s $4 trillion balance sheet is a «pile of tinder, but hasn`t been lit.» Once the central banks stop «sitting on» their reserves, said tinder will ignite «inflation will eventually have to rise,» and in turn, «gold will move higher, measurably so.» (Fxsteet.com).

Gold is a hedge against inflation, and not against times of crises. Right now, the problem is not inflation, but the opposite; something worse called; deflation. Gold can go down while inflation increases, as they did from 1980 to 2000. It`s difficult to understand the setting of the gold price, so I will continue to look at the technical analysis. Gold is still  in a bearish market.

 

Disclaimer: The views expressed in this article are those of the author and may not reflect those of Shiny bull. The author has made every effort to ensure accuracy of information provided; however, neither Shiny bull nor the author can guarantee such accuracy. This article is strictly for informational purposes only. It is not a solicitation to make any exchange in precious metal products, commodities, securities or other financial instruments. Shiny bull and the author of this article do not accept culpability for losses and/ or damages arising from the use of this publication.

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