The World Gold Council on
May 16 issued it summary report for the first quarter of 2013.
Central banks added 109.2 metric tons of gold to their reserves, the
ninth consecutive quarter of net purchases. Note that these
purchases occurred before the big drop in the gold price in mid
April. I would expect the second quarter report will show much
larger purchases by the central banks, due to bargain prices that
became available.
First quarter investments in
gold ETFs were down 177 tons—but bar and coin demand increased by
378 tons. (Three-fourths of the ETF losses occurred in the U.S.)
Jewelry demand accounted for 551 tons, an increase of 12 percent.
Supply was flat: mine production increased 4%, but recycling
decreased by the same amount.
India and China both showed
big increases in buying during the quarter. India bought 256t, for a
27% increase; jewelry was up 15%, and investment was up 52%. In
China, overall gold demand was up 20% with jewelry up 19%, and
investment up 22%.
The precipitous $200 drop in
the gold price in April was triggered by a single very large sell
order in the futures market on the Comex exchange. Despite claims by
some that this signaled the end of the bull market in gold, price
action said otherwise. Physical buyers turned out in droves. The
US Mint sold a record 63,500 ounces—a whopping 2 tonnes—of gold
on April 17 alone. It's total for the month was more than the two
previous months combined.
Reuters reported: “on
Tuesday [following the big price drop], buyers outnumbered sellers by
a wide margin. At Ginza Tanaka, the headquarters shop of Tanaka
Holdings, gold buyers waited for as long as three hours for a chance
to complete a transaction.”
Bullion traders reported
trading volumes doubled and the buy/sell ratio was 95 to 1. Two
precious metals refiners—who deal only in large trades—said they
had no sell orders; a third said they had one sell order out of 100
transactions. The World Gold Council reports central bank buying
shows no signs of abating.
Demand for gold
in India, the biggest consumer, was double the level for this time of
year, said Rajesh Mehta, chairman of Bangalore-based Rajesh Exports
Ltd (RJEX)., the nation's largest exporter of gold jewelry and a
retailer. UBS AG said on April 23 that physical-gold flows to India
approached the highest since 2008. India's Ministry of Commerce and
Industry reported gold bullion imports rose 138% in April from March.
Japanese
individual investors doubled gold
purchases yesterday [April
17] at Tokuriki Honten, the country’s
second-largest retailer of the precious metal. In Australia, “the
volume of business… is way in excess of double what we did last
week,… there’s been people running through the gate,” said
Nigel Moffatt, treasurer of Australia’s Perth Mint.
A jewelry
salesman in Mumbai’s Zavery Bazar was quoted in the Wall Street
Journal: “We have not seen such strong demand in many years. Our
order books are already 30%-40% more than last year’s festival day…
We don’t have enough staff to keep up with this kind of mad
demand.”
In the weeks
since the April drop, there has been strong demand for jewelry and
investment in China, India, and the Middle East. Coin purchases have
increased in Western markets, and some refineries are reporting
2-week waiting periods for delivery of their products.
MONETARY POLICY
In a previous
posting
we pointed out “quantitative easing”—printing money—has been
employed by the Fed, the European Central Bank, the Bank of England
and the central bank of Japan in efforts to stimulate national
economies. The economy of Japan has stagnated for two
decades—because of Keynesian policies—and has reached the point
where deflation is now more feared than inflation. Japan's monetary
policy had been aimed at creating inflation of one percent. The
recently elected government in Japan has stated it aims to improve
the economy with 2 percent inflation by doubling the money supply.
It said it will engage in “unlimited” or “open ended”
printing of money to achieve that goal. Thus Japan has now reached
its “Havenstein moment,” a moment already reached by the other
three central banks just mentioned. It is a moment when the person
in charge of the money supply decides that massive printing of money
is better than the alternative. Rudolf Havenstein was the head of
German Central Bank (Reichsbank) from 1908 to 1923 and presided over
the great hyperinflation in Germany.
Obviously
fearing the alternative would be worse, the Fed is currently printing
$85 billion per month—that's over a $1 trillion per year—to try
to improve the economy. And it has more than trebled its balance
sheet from $924 billion on Sept. 10, 2008 to $3.32 trillion now.
After 4 and 1/2 years of quantitative easing, the U.S. economy is
still weak, unemployment high and labor-force participation actually
down.
European
Central Bank president Mario Draghi has provided euros amounting to
$1.3 trillion to European banks and says he will do “whatever it
takes” in the way of future printing of money to save the euro.
But the euro-zone economy is still in trouble. The Bank of England
has engaged in quantitative easing amounting to $593 billion, with
disappointing results. Is it likely that larger doses of the
Keynesianism that failed to produce economic growth in Japan for two
decades will now produce a different result?
Back in 2009 when we were coming out of the crash, in
the first interview I had about the book with the BBC, they said,
“Are you proposing to take the patient off life support?”' And I
said, “That’s the wrong way to look at it. It’s not life
support, it’s just more alcohol for the alcoholic, or it’s more
heroin for the drug addict. Then of course, you need more and more of
that to keep an addict from being in withdrawal, but it doesn’t
help the problem, it just makes it worse, and that’s essentially
what has been going on.”...Not only has our government not changed,
but every government in the world is continuing to follow the same
Keynesian policies, and of course, they haven’t worked, they aren’t
working, but we just keep doing more of the same....
None of the Keynesian economists who were propounding, “Let’s have more stimulus,” are providing any justification for it, on a theoretical basis, or an evidence basis....because the truth is, there is no logic and there is no evidence for it.
When
you have high unemployment, that tells you that there is something
wrong with the price system, that there are prices that are not in
the right relationship to each other, and yet, the government keeps
messing up the biggest, most important prices of all, one of which is
interest rates. The system really can’t function if the information
that the market is providing in the form of the interest rate, is not
available.
And of course, it
makes no sense at all, as Keynes advocated, to keep driving interest
rates down to zero and hold them there.
Lewis stated
Keynes' policies were “ideologically driven,” or, as interviewer
David McAlvany put it, “Keynesian economic theories were simply a
justification for his own personal choices and ethical leanings.”
One of these was his advocacy of progressive taxation, taking more
money from the wealthy and redistributing it. Lacking economic
justification for this, Keynes invented an uneconomic one. Lewis
explained that Keynes
suggested that the
government could print new money. That money would flow into the
economy in the form of debt, and that would take the place of
savings, but there is just no evidence for that at all, there is no
logic behind that. In fact, if you want a good economy, what you need
is savings, and you need then to invest those savings, and you need
to invest those savings in a wise way...Of course, Keynes completely
ignores the issue of how you are investing. For him, not only is any
investment equivalent to any other investment, but spending is
equivalent to investment. It just doesn’t make any sense at all.
Keynes believed progressive taxation
would promote increased spending, which he favored. He even endorsed
printing money with expiration dates so people would be forced to
spend it. Of course, that would eliminate not only saving but the
essential function of money as a store of value. But for Keynes,
spending was what really mattered to the economy. Naturally that
idea was very appealing to politicians anxious to spend for causes
they favored, including their own elections.
OUTLOOK
In the U.S. the
recent modest upturn in housing construction and home prices and new
highs in the stock market have been trumpeted as signs of economic
recovery. But improvements in those areas are exactly what one would
expect from the Fed's policies.
Of the $85 billion
the Fed prints every month, $40 billion is for mortgage securities,
which favors the housing industry. Throw in the Fed policy of
maintaining ultra-low interest rates—meaning low-cost mortgages—and
it is not surprising to see a plus effect on this market despite a
still large oversupply of homes. Furthermore, despite recent
increases in home prices, more than 14 million homeowners
nationwide—one in four people with a mortgage—are still making
payments on debts that exceed the value of their homes by more than
$1 trillion. “Negative equity will remain a major factor in the
market for the foreseeable future,” says Zillow's chief economist,
Stan
Humphries.
As for the highs
in the stock market, the Fed policy of depressing interest rates has
led to a loss of income from CDs and other safe investments. This
has resulted in people trying to obtain higher yields by switching to
riskier investments, such as the stock market. The inflow of funds
to the stock market has led to stock valuations outrunning the
performance of the companies. A future rise in interest rates will
be a further risk to the stock market as money will flow out of it
and back into safer investments with higher yields.
U.S. unemployment
is now officially at 7.5%, compared to 7.2 % in December 2007, before
Obama's stimulus program. The real current rate is actually
twice as high as the official rate if involuntary temporary and
part-time employment and those who have stopped looking for work are
included. Most people who obtain new jobs are taking significant pay
cuts, and 11.7 million are still unemployed.
European economic
problems are no longer much in the news, but the crisis is not over.
In fact, it has worsened. The euro-zone economy shrank in the first
quarter 2013, for a record six consecutive quarters. The
Organization for Economic Cooperation and Development this week
predicted the euro-zone will contract 0.6% in 2013, compared to its
November estimate of 0.1% contraction. On May 31, the euro-zone
unemployed rate reached 12.2%, a new record.
Unemployment in
Spain rose to 27.2% from 26%, and 240,000 jobs were lost in the first
quarter. Unemployment in Greece was also 27.2%. On May 28 the
Greek central bank said the recession will likely get worse this
year, with the economy likely to contract 4.6% and unemployment
reaching 28%, both numbers worse than previously predicted. The
Organization for Economic Cooperation and Development predicts Greece
will remain in recession in 2014, unemployment will remain at
28.4%—and the country may require another bailout.
While other
European countries were cutting minimum wage rates and raising
retirement ages to improve employment numbers and slash government
costs, France's socialist President Hollande did just the opposite.
He increased the minimum wage and lowered the minimum retirement age
from 62 to 60, reversing the raise by former president Nicolas
Sarkozy. France fell into recession in the first quarter, and
unemployment, now above 10%, increased for the 23rd month
in a row. France's debt to GDP ratio, now over 90, is the highest of
any European country not receiving a bailout.
As the economies
in various euro-zone countries have worsened, it became obvious that
they could not meet their fiscal targets. On May 30 the European
Commission, the executive arm of the European Union, agreed to allow
more time for seven countries to bring their budget deficits in line.
France, Spain, Poland and Slovenia were given an extra two years to
limit their budget deficits to the EU standard of 3% of GDP. The
Netherlands and Portugal were given one year extensions.
This was the third
extension for Spain. Given the difficulties of Spain and other
countries in meeting current fiscal targets, as well as previous
ones, will they also need further extensions when the ones just
issued expire? This becomes an interesting question because, as I
explain in my new book, the
ECB loaned almost a half trillion euros to 523(!) European banks in
December 2011 and an even larger amount to 800(!) banks in February
2012. Together, these two loan programs amounted to over $1.3
trillion. The loans were made for three years, three times longer
than any loans ever made by the ECB. They will start coming due
about the time the newly announced budget extensions for the troubled
countries expire. In addition, Spain and Italy have almost a
trillion dollars worth of government securities coming due in the
next two years. Now, if those loans cannot be repaid or government
securities cannot be rolled over, can anyone believe that there will
not be a colossal creation of new money and credit to prevent the
collapse of the whole system? Just as with Havenstein, creating more
money will seem better than the alternative.
But even before
that would occur, the entire monetary structure is already so fragile
it could be toppled by a major adverse economic event. This might be
a crash in the U.S. stock market, fallout over raising the U.S. debt
ceiling, a continued worsening in certain euro-zone economies,
including perhaps more bailouts—maybe even the collapse of the
euro. It might also be a far more widespread flight to gold than we
have just seen, which would indicate massive distrust of the monetary
system that in itself would cause the price of gold to skyrocket and
accelerate the collapse of the monetary system even before the
unlimited printing of money would bring about its end.
Bernanke said he
believes when the time is appropriate he can manipulate the Fed
policies to avoid runaway inflation. Good luck with that. It's
never been done before. The great economist Henry Hazlitt said, “If
a government resorts to inflation, that is, creates money in order to
cover its budget deficits or expands credit in order to stimulate
business, then no power on earth, no gimmick, device, trick or even
indexation can prevent its economic consequences.” I think Hazlitt
is far more likely to prove right than Bernanke.
There is a final
issue that will accelerate monetary revolution and the restoration of
gold in the monetary system: changing the rules of the game.
International banking rules, known as the Basel Accords, are produced
by the Basel Committee on Banking Supervision, which is part of the
Bank for International Settlements. The committee is composed of
regulators from 27 nations, including the U.S., U.K., and China. The
Bank for International Settlements includes 58 major central banks.
As I pointed out
in my book, the new Basel III
Accords will henceforth classify gold as a Tier 1 capital asset
instead of its present Tier 3 classification. The significance of
this is that a Tier 3 asset has a risk weight of 50 percent while a
Tier 1 asset has a risk weight of zero--meaning gold will have an asset value of 100 percent, the same as cash or U.S. treasuries.
Currently, if a bank has an ounce of gold valued at $1,700, it can
only include $850 as part of the bank's Tier 1 capital; if the bank
sells that ounce of gold, it can count the $1,700 it receives.
Obviously a bank is more likely to hold gold as part of it capital if
it can be counted for full value the same as cash. And the current Tier 1
requirement of banks for 4.5% capital will be raised to 5.5% in 2014
and 6% in 2015. Gold is likely to be more attractive as a Tier 1
asset to banks at all levels, not just the central banks—which are
already loading up on gold—as quantitative easing takes it toll on
the value of U.S. dollars and the Tier 1 requirement is raised.
In April 2013, the
Bank for International Settlements issued a report
stating:
Basel
Committee members agreed to begin implementation of Basel III’s
capital standards from 1
January 2013, requiring that they translate the Basel III standards
into national laws and regulations before this date. Since the Basel
Committee’s October 2012 report, eight more member jurisdictions
have issued final Basel III-based capital regulations, bringing the
total to 14. Eleven Basel Committee member jurisdictions now have
final Basel III capital rules in force: Australia, Canada, China,
Hong Kong SAR, India, Japan, Mexico, Saudi Arabia, Singapore, South
Africa and Switzerland.... Argentina, Brazil and Russia have issued
final rules and will bring them into force by end 2013. The other 13
member countries that missed the 1 January 2013 deadline for issuing
final regulations have published their draft regulations [The report
names the U.S. as one of them]....The Basel Committee is urging those
jurisdictions to issue final versions of their regulations as soon as
possible and to align their implementation with the internationally
agreed transition period deadlines.
Not surprisingly, the U.S.
is not among those nations that have already put the new Basel rules
into force, but it is clearly on a track to do so. It is a member of
the Basel Committee that formulated the new rules and has agreed to
them. The U.S. cannot backtrack now and fail to adopt those rules.
The value of the dollar would plummet, as would U.S. exports and
world trade generally. No, that won't happen. The U.S. will comply
with the new rules, and that will be the end of the global financial
bubble the U.S. has been inflating since it severed the last link of
the dollar to gold in 1971.
