From the FT’s Jamie Chisholm on Thursday: Gold and the yen are surging to multimonth highs while stocks and the dollar are in sharp retreat after Federal Reserve chair Janet Yellen warned that global financial market turbulence could hurt US growth. Yes indeed. But it’s also an entirely absurd and inefficient market reaction. If you tell people you’re going to tax them just for the privilege of having them lend you their spare capital, those people are in turn supposed to treat you like an ungrateful entity and walk away to find more grateful recipients elsewhere or — at the very least — spend the tax differential on people or causes who might in the end benefit from the spending and show you some non-monetary gratitude even if they’re unlikely to ever pay the sum back directly.
There’s a funny fact (touted by gold enthusiasts) about the purchasing power of gold. For most of history — with few exceptions — an ounce of gold has been able to buy you pretty much the same sort of thing: a good quality pair of shoes, a belt and a suit. Somewhere in our psyche, the suggestion is, that’s how much we’d ever really forgo to obtain a little lump of gold: the combined value of what it costs to clothe ourselves properly (since clothes wear and tear over time and always need replacing). What it also suggests is that any time the gold price trades at more than the collective value of a good pair of shoes, a belt and a suit, chances are it’s massively overvalued. Eventually — bar some major technical innovation which finds a more pressing use for gold — the historical trend will reassert itself.
Compare, contrast and then draw your own conclusions about India’s newly born Gold Deposit scheme, its plan to lure gold out of temples, vaults and jewellery boxes with the promise of (hopefully but not apparently yet) lovely enough interest rates. First… from Reuters last last week on its rather stuttering start: A gold deposit scheme launched amid fanfare by Indian Prime Minister Narendra Modi two weeks ago has so far attracted only 400 grammes, an industry official said on Thursday, out of a national hoard estimated at 20,000 tonnes…
UBS looks at the fundamentals of India’s new gold monetisation schemes on Thursday and in the process comes up with one of the best summations we’ve ever seen on why gold investing in and of itself is stoopid — especially when done en masse by a relatively poor economy. Indians directly or indirectly hold an estimated 22,000 tonnes of gold worth USD 800bn or 39% of Indian GDP (banking system credit is c50% of GDP). Gold thus held is problematic to some because unlike most capital goods it derives its expected value not from its ability to produce (directly or indirectly) goods or services that will meet the material demands of consumers. Instead it derives its value from investors’ collective perception of what it is worth. Indeed.
Yes, as you can probably tell this is the news that India’s government wants to get the masses of idle gold lying dormant in vaults and households throughout the country out into the open. To put that in Zerohedge-ese it’s the The Start Of India’s Gold Confiscation. Or, to put it more simply… it’s a reasonable (if poorly executed) attempt to cut India’s crazy large (CA hurting) gold import bill by tapping into the estimated 22,000 MT of gold knocking around its temples etc.
Introducing Daniel M. Harrison. Journalist. Author. Publisher. Editor-in-chief. FactoryBanking inventor. Serial entrepreneur. Bitcoin 2.0 enthusiast. Blockchain evangelist. And… direct descendent of the The House of Harrison, the bloodline behind money-printing business Harrison & Sons, which FTSE-listed De La Rue acquired in 1997.
Picture the scene in the London borough of Hounslow on Tuesday lunchtime, as police moved in to arrest one Navinder Singh Sarao, holed up in a humble end-of-terrace post-war semi. There’ll have been prior discussion of the possible need for a special forces sniper overwatch. Someone will have remarked on the security implications of having a man like this, with a Muslim-sounding name, apparently living so close to one of the world’s major transportation hubs, airliners passing just a few hundred feet overhead every 90 seconds or so on their way to Heathrow. Because Sarao stands accused of declaring Jihad on the S&P Futures market, the Apple Pie of American finance.
As Paul Krugman always likes to recount, strange things happen at the zero bound. Macroeconomics gets weird. Liquidity traps prevail. And a whole slew of paradoxes come into being. And that’s largely because below the zero bound things get even stranger still. What you think should happen, doesn’t, and what you think definitely won’t happen, does. Furthermore, negative interest rates don’t just kill off the traditional point of banking, they encourage bad incentives and dubious market practices for all purveyors of capital.
Friday, November 28th. It’s the day after Thanksgiving in the US – possibly the lightest trading session of the year. And here, buried under the turkey leftovers, we find two statements (click to read) … That’s the CME handing out disciplinary action against Mr Igor Oystacher, one of the biggest individual fish in the deep Chicago derivatives pond. He’s been landed with a $150,000 fine and a one month trading ban. Happy Holidays Igor!
Switzerland’s “anyone can initiate a referendum if they’ve got enough signatures” society gets to vote on the “Save our Swiss gold” proposal this Sunday, which aims to make it compulsory for the Swiss Central Bank to hold at least 20 per cent of its assets in gold bullion and repatriate all Swiss gold that’s held abroad. The proposal also plans to make it illegal for the SNB to sell any of the gold it accumulates. Ever. What’s worth noting ahead of the poll, though, is how the naturally occurring phenomenon of “too many non-productive gold assets in our economy” has struck economies in the past.
One of the problems with ECB QE, as we all know, is the lack of a collective eurobond or sovereign-neutral asset to target, which would make asset purchasing less, you know, subjective vis-a-vis the assets you choose to support and those you don’t. It is for this reason that analysts are divided about the type of assets Draghi may or may not be inclined to target. There is, after all, a delicate balance between targeting ETFs or real-estate trusts neutrally and buying corporate stock or housing, which can evoke the start of quasi nationalisation of the economic system, if not government favouritsation of specific sectors, corporations or industries. One way around this problem is to target all bonds in equal measure, but this runs into the problem of over-targeting assets such as German bunds which are already in short supply vis-a-vis other European bonds in the market, opening the door to liquidity problems and all sorts of unintended side-effect. Hence why talk is suddenly turning to the purchase of more neutral (domain unspecific) assets like gold.
This Reuters story about China having up to 1,000 tonnes of gold tied up in financing deals is doing the rounds, courtesy of information out of the WGC. But it’s hardly a revelation. We’ve known that China has been using gold (and almost everything else under the sun) for financing purposes for ages. Goldman even blessed us with a more recent update about the shenanigans in March:
China’s central bank has drained Rmb48bn ($7.9bn) from money markets || BoJ maintains expansionary monetary policy || Banks review rules on forex traders betting own money || Barclays bankers face Libor charges || Head of Vitol calls for reform of Brent || Iran’s Bank Mellat sues UK Treasury in $3.9bn lawsuit || BHP Billiton posted a 31 per increase in profits in the first half || Alcoa to cut smelting capacity || Temasek seeks to sell $3.1bn Shin Corp stake ||
It’s not an easy concept for some gold lovers to grasp, but… a nation importing huge amounts of gold into its economy doesn’t necessarily reflect prosperity on its part. In fact, it can imply economic weakness around the corner. Prosperous countries, after all, don’t need gold (or huge amounts of foreign reserves for that matter either) to back their fiat currency. They don’t need them because they are so mighty, productive, knowledgable, powerful and desirable to live in that they have seigniorage power all of their own accord. You know. Like Bitcoin. But not because they are artificially scarce, but because they are managed well. Also, even if you go with the goldbug logic that fiat ‘money printing’ equals debasement, it must then also imply that mass gold importation equals the opposite: purposeful rebasement. Someone is trying to bolster what would otherwise be a naturally weak currency.
Cardiff made a nice point on Tuesday that financial innovation, much like evolution, always finds a way. We have stressed before that that’s because risky lending — i.e. lending to the most distressed who are prepared to pay for it the most — also always finds a way. So, in what form did the most recent spell of risky lending take place in?
Vodafone boosts spending plans to £7bn || IEA warns of future oil supply crunch || ETF demand sends platinum to big deficit || China leaders approve reform agenda || Swiss referendum on wages of high earners stirs debate || Shadow banks reap Fed rate reward || Brazilian shipbuilder OSX Brasil SA filed for bankruptcy || America’s jobs recovery is proceeding on two separate tracks ||
Fed holds the line on bond buying || JP Morgan braced for action over ‘whale’; $900m+ fine mentioned || CBI says UK business gets Carney guidance || India’s Palaniappan Chidambaram stands firm on tax reforms || Indian rupee jumps || Mexico hedges oil at highest price ever || BlackBerry to slash workforce by up to 40% || SNB says franc ceiling ‘essential’ to protect economy || FX firm Ordered to pay restitution, fines || Sharp to raise up to $1.67bn || Markets
From a SocGen note earlier last week: ETF disinvestment more than accounted for the net change in jewellery+investment demand. When all the elements of supply and demand are taken together, the gold market registered a surplus of 217 tonnes in H1 2013 against a small surplus of just 37 tonnes in H1 2012.
The classic car market is bubbling, which has got FT Alphaville wondering about what really goes into determining the value of rare objects. More specifically why certain objects, despite their ability to be cheaply reproduced, retain value regardless. In this post, we consider the roles of narrative and myth in value creation. We’ll start with the argument that a powerful enough narrative or myth can turn even abundant commodities into stores of value in their own right.
FT Alphaville readers are well versed on the potential downsides of collateral scarcity in western markets. But consider how a collateral scarcity problem might unfold in an emerging market in which the most valued form of collateral isn’t national debt denominated in your own debt but rather a commodity like gold, whose supply is dictated by externalities outside of a government’s control?
The Indian rupee’s plunge continues. As the FT reported on Wednesday, consensus opinion is that the weakness is connected to India’s growing current account deficit and unimpressive attempts thus far to bring it back to reasonable levels. But Bloomberg on Wednesday alluded to another interesting connection: India’s attempts to suppress gold consumption.
Nicholas Colas at Convergex offers some interesting insights on diamond deflation in his Wednesday note. First, he points out that the Cannes diamond heist was not necessarily the most cunning economic crime of all time, since diamond prices are under pressure at the moment — mainly due to a fall in Chinese and Indian demand. Moreover, diamond prices have a lot in common with their base metal counterparts (his emphasis):