Page |1 Gold Forecaster 504 GOLDFORECASTER Julian D.W. Phillips & Peter Spina 1— speculators in the U.S. and London have tried to push the gold price down with the euro, which has fallen to new lows at $1.0595, but is now hovering at $1.0611. 3— Weekly Review & Forecast Technical Update o Gold ETFs 12— 7— U.S. Economy Global Perspective 4— India & China 15— Global Currencies Article 20— Gold & Silver Stock Update For online commentary go to http://goldforecaster.com/ (Consultation & Restructuring) Disclaimer Weekly Gold Review As we write this the gold price has recovered to $1,209.30. It has been a week where traders and There has been sizeable short covering on COMEX, which we expect to continue. If gold continues to hold at this level above support, we forecast more short covering and speculators turning to the long side of the market. The dollar index is now at 99.28 and ready to tackle the 100 level once more. The air of currency crises sits over currency markets, where the maths tells investors across the world including this corporate in the U.S. to borrow in euros and use in the U.S. We expect to see the euro fall further. But as we are seeing now, the gold price and the euro are walking in different directions now. The gold price is strong in the dollar, the strongest of the world’s currencies currently. The distance between interest rates in the Eurozone and Japan continue to be huge with U.S. 2-yr yields in the U.S. at 0.52% and 10-yr yields in Germany at 0.17% and at 0.36% in Japan. The upward pressure on the dollar exchange rate will persist, particularly as U.S. corporations want to borrow in euros and use in dollars. These interest rate differentials also point to market’s economic expectations for the developed world outside of the U.S. While the U.S. is in recovery, the latest numbers point to a fragile recovery, still. Outside of the U.S. use of the word recovery appear to be an exaggeration. So as gold rises in the dollar its rise in other currencies is that much greater. Greece It surprised most people to see that Greece did pay the I.M.F. its due money. But the huge bills coming at Greece in the next few weeks may be another story. We are puzzled at the almost blithe confidence on the Greek Prime and Finance Gold Forecaster 504 ministers faces when they appear in the media. They must know something we don’t? They remain convinced that they will be given a deal by the E.U. or are certain on the way forward. What will that deal do to the euro? Markets are betting it will rise, just as they believe that it will fall, if they don’t. We have a contrary view on that. India & China In under a fortnight an important gold buying festival of Akshaya Tritiya starts in India. In the run-up to this we expect Indian gold demand to be strong. In China yesterday it was a quiet day for gold, but this does not change the picture of ongoing and slowly rising demand for gold from there. Next Week’s Gold Forecast The moves in gold have been solid and have moved to a point where we should see a strong move either way. If we see a gold price at $1,230 it will be at overhead resistance. Higher and gold will then target over $1,300. We repeat our weekly caveat: Keep your ‘trailing protective stops’ in place to protect yourself from those surprising market moves. We emphasize ‘trailing’ as these move up as prices rise and pull you out when falls happen. You can thereby keep Page |2 hold of your profits and minimize your losses. Page |3 Gold Forecaster 504 Gold ETFs & Demand Long-Term: NY Gold ETF 50,000,000 40,000,000 30,000,000 20,000,000 10,000,000 0 2004 2006 2008 2010 2012 2014 Short-Term: NY Gold ETF 25,000,000 Short-Term: GLD (ETF NYSE) 24,500,000 China Gold Arbitrage The need in China is for an efficient arbitrage system where Chinese demand can quickly absorb sales in New York and London. The same can be said of India, but for some reason premiums on gold prices persist in both countries. In India, the government’s continued imposition of duties prevents this, as duties widen the spreads to the extent it is not feasible to arbitrage. In China where premiums today are low, we do expect to see in 2015/16 such arbitrage operations set up where the large gold banks use a pool of gold to prevent any delivery delay from the import process. This will eliminate the premiums and better reflect global demand and supply balances in daily gold prices. [In the next issue we will look at how the coming Shanghai “Fix” will help to eliminate the premiums we persistently see there.] 24,000,000 GoldForecaster.com 23,500,000 Feb-15 Mar-15 Apr-15 The WGC gold ETF’s, plus the Gold Trust holdings, stood at 1,234.717 tonnes on the 2nd April and at 1,233.924 on the 9th April 2015 down 0.793 tonnes over the last week. The week saw some selling at the beginning of the week then buying towards the end. It looks in the short-term that U.S. investors are more positive, but the amounts dealt appear to us to be covering an earlier sale. We do see more investor uncertainty on several fronts now. Is this boding well for gold? We have to wait and see. It does appear that more and more investors inside the U.S. believe that the dollar will stop rising, just as Bill Gross does. But we find it difficult to share this opinion in the light of the E.U.’s efforts to push the euro lower and the interest rate differentials we see. But gold is rising in the dollar, and technically looks good, at the moment. The “Peg” We have watched with fascination the “peg” of the Chinese Yuan against the U.S. dollar at 6.20 Yuan, when nearly all of the main global currencies have been weak against the dollar. By holding the ‘peg’ at this level the Yuan has been the strongest currency, in the world, alongside the dollar. While a weaker exchange rate would help boost exports and shore up the slumping economy, it would clash with the government’s objective of showing the Yuan is a stable, well-used currency, a necessary feature for it to qualify as a currency to be included in the basket that defines the Special Drawing Right of the I.M.F. China is targeting the Yuan becoming one of the top five global currencies to be used in global trade and in global central bank reserves. The inclusion in the IMF’s so-called Special Drawing Rights is the center piece of President Xi Jinping’s ambition to challenge the hegemony of the dollar. Whilst the developed world will not like this it is now an inexorable process as the Chinese economy is recognized as the world’s number two economy and in terms of volume, Page |4 Gold Forecaster 504 not price, may well be already the largest economy on this earth, already. Until it is adopted as such, we can expect to see the Yuan ‘peg’ hold at current levels against the dollar. Once the Yuan is adopted in this role, it will undoubtedly behave just as badly as the Yen and the euro. China is spending foreign exchange reserves to offset capital outflows and stabilize the Yuan. It is estimated that it has cost $33 billion so far this year to hold the Yuan at current levels that is apart from lost business due to a Yuan that is becoming expensive relative to the Jap. Since June of last year the cost to Chinese $4 trillion reserves has been $183 billion. The Chinese Yuan became the world’s fifth most-used in December 2014. The IMF will conduct the twice-a-decade review of the currency basket in October after an informal briefing in May. Once the Yuan finds its place in the coming multi-currency system we expect to see the Yuan weaken and reclaim its international competitiveness again. The head of the People’s Bank of China, Zhou pledged on March 29 to further ease capital controls, saying policy makers will revamp currency regulation “relatively radically” this year. We reiterate what we have said in earlier issues of the Gold Forecaster that China is concerting a plan to move to center stage of a multi-currency, global, monetary system. Signs are already there that the U.S. is unhappy about this, as seen in its refusal to join the Asian Infrastructural Investment Bank alongside Japan. This bank will be controlled by China. The next issue that will decide if the U.S. will or will not accept China into the global monetary system will be its position on the voting structure at the I.M.F. The U.S. currently has a voting power of 16.83% with a majority of 85% needed to pass any resolution. We do not believe China will be happy to see this continue. Asian Infrastructural Investment Bank Only now is the significance of the establishment of the Asian Infrastructure Investment Bank being realized in the financial circles in the U.S. It is painful for the developed world to see the global influence of the U.S. waning as China establishes an alternative financial system to that of the developed world, such as the World Bank/I.M.F. The next step in the well coordinated change in the monetary system is for the convertibility of the Yuan to be taken to a level where it is recognized as a “well-used currency” that qualifies it to become a global player included in global central bank reserves. It has one advantage over the dollar that is incontrovertible and that is, it has no presence now and can only grow. The U.S. dollar and the euro are omnipresent in global central bank reserves, so can only diminish. With 80% of global growth coming from Asia in the future there is a very long way to go in changing the global monetary system. Gold will have a significant presence in this change and will not be held back as it has been from 1971 in these roles. And it is scheduled to start later this year not in a decade or more! We have covered this in our newsletters and will be happy to let new subscribers have the relevant articles on this, should they wish. Article – This is the first part of a two part article first written in 2002 – The Weimar Republic Please note that we wrote this article originally in 2002, well ahead of the “Credit Gold Forecaster 504 Crunch” and the subsequent attempts to create a global recovery and well ahead of today’s growth of deflation and the attempts to create inflation to counter it. We ask now, “Is inflation creation the way to defeat deflation? As one of the world’s most dramatic hyperinflations the “Weimar Hyperinflation” remains the classic for economic study. But as it so with history it is usually written by people with an emphasis on aspects that seem distorted or highlighting points that make it irrelevant to today. Today’s Monetary scene Today we see a world swamped with newly printed money, vast amounts of debt yielding record low levels of interest. Stock markets are booming as a result of this money but at best the world is seeing ‘fragile’ recoveries and at worst ongoing and developing deflation, as the flow of wealth to Asia from the developed world continues. With ‘artificial intelligence further decimating employment at the poorer sections of society the prospects for the average consumer are not bright. With 80% of future global growth coming from Asia, extreme monetary conditions are very likely to re-appear morphed into different shapes but having the same ingredients. Even the [initially] deflationary effects of falling oil prices providing financial stimuli at consumer level, is being met by consumers as an opportunity to either save or pay down debt. So are we in a real deflationary environment where ‘cash is king’, despite asset prices rising, or are we on the brink of inflation taking off like a horse from the starting gate? Or can deflation work with inflation to produce an economic aliment that will be a new experience for us all? We can’t answer that as the times we live in are changing so much that no clear way forward is being seen, except by the hopeful. Behind the Hyperinflation So it is appropriate that we look at the Weimar Republic, not with our eyes solely on inflation but Page |5 look at the way it worked and the impact on German society. In the past the focus on the Weimar Republic was on its hyperinflation, the excessive money supply, but in reality there was a constant shortage of money! The critical role of the velocity of money is also not understood in these situations, or today. It is the speed with which money was moving in the monetary system that became critical. But that velocity needs a closer look because that velocity continually increased in a slowing economy. We shall call this monetary wheel spin. Monetary ‘wheel spin’ gives the impression that an economy is growing but the fact that forward momentum, at consumer levels, was being lost, showed that the economy was shrinking, despite rising asset prices. This was deflationary inflation! It was best seen recently in Zimbabwe where 90% of that economy has been destroyed. Consequently, our understanding of today’s environment is assisted by understanding the Weimar Republic’s hyperinflation and may well provide a critical lesson for Investors today. Government Debt in the U.S. and beyond Global government debt has grown to vast proportions since 1970, with a major acceleration coming from quantitative easing in the U.S., the Eurozone and Japan since 2008. It is still growing. Only now is the problem of ‘unwinding’ that debt being discussed. It seems it will take years after the initial interest rate hikes as imposed. Whether such rises kill growth and have to be reversed and more Q.E. imposed will become a matter for debate. Please note the changes to U.S. debt since 1970: -The largest deficit during the Nixon years was $ 23.4 billion; - Ford - $ 73.7 billion; - Reagan - $221.2 billion; - Bush - $290 billion; - Clinton - $350 billion and now? - The Outstanding Public Debt as of 08 Apr 2015 is $18.1555 trillion and increasing at Page |6 Gold Forecaster 504 the rate of $2.27 billion per day [since 30 September 2012. Now add to that Japan and the Eurozone, etc. The same ingredients were present in the Weimar Republic in Germany after the First World War. Is there a lesson to be learned from Weimar? The painful process of re-establishing monetary stability is now postponed indefinitely. It would be extremely naïve to think that governments ever intend to repay such debts. That’s why today we find ourselves in a global monetary crisis, one seemingly beyond the willingness or competence of the world’s monetary authorities to resolve. It will take Asia, establishing its own financial systems to bring a light to bear on the gravity of the state of the developed world’s monetary system. And that is scheduled to happen in 2015 and beyond. This year we expect to see ‘Dollar Hegemony’ being undermined by the arrival of the Yuan on the global monetary system! Solutions? The Right Hon. Viscount D’Abernon [with thanks to Euromoney], a commentator of the day, wrote: “The evils through which Germany had to pass might have been avoided had proper measures been taken in time. There was more ignorance than malevolence in their currency blunders, more recklessness than malicious intent. Had a full, accurate and impartial narrative existed of the currency adventures in France between 1790 and 1800, it is not impossible that both Germany and France would have avoided many of the mistakes that have caused them recent trouble.” Can we say the same today, when we look back at the bank promoted culture of spending in the developed world? Today, the same social ramifications seen in Germany then, are happening but at a slower rate than then [so far], such as the financial destruction of the middle and upper classes alongside the thrifty and prudent. Certainly, in the developed world that price has been by the U.S., European and Japanese middle classes today. As quantitative easing continues the devastation of savings will continue. Today, inflation as defined by government is extremely low and so far not responding to the increase in the money supplies of the developed world. It is hoped it will take off and be controllable. But this control can only be exercised without reducing growth rates, for this would plunge nations back into deflation that may well not be controllable at all. Weimar inflation The climax of the inflation was reached in the Autumn of 1923, when the German exchange had fallen to one billionth [i.e. the British billion – one million-millionth] of its original value, and the German Mark was no longer accepted in payment by the population, when grave political trouble and the rapid process of dismemberment of the Reich threatened. We would contend that whilst the consequences of an ill-regulated issue of bank notes [today money is created instantly electronically] was inadequately appreciated, once realized, it was allowed to continue, as the “greater” political objective was appreciated. The same has been true of the last few decades, before 2007, as “prosperity” was achieved in the developed world. Today, are the controlling monetary authorities capable of co-coordinating control to the extent now needed, in the global economy we live in now? Do they really have effective mechanisms to control the mercurial money supply in a deflationary climate via the use of inflation to counter it, without the dreadful collateral damaged suffered then? The signs were around in the early years of this millennium, when Gold Forecaster first Page |7 Gold Forecaster 504 wrote this article. They have now matured into a visible reality now taken as the ‘new normal’, lowering expectations of future economic growth. We are not convinced! became a “Cash on Delivery” one, the only basis which allowed a permanent flow of profits and cash. In Germany in 1923, the normal resources of taxation, having been found insufficient, one Illusions of Normality Dr Havenstein, then The Rising Circulation Table 1 President of the Reichbank, [Reischbank notes issued and equivalent sterling values] speaking before the Reichsrat on August 7th 1923 [the pound sterling then stood at 15 million Date Paper Marks Rate of Exch. Sterling Value of paper marks.] said: “The [Billion] [Marks for Pounds] notes in circulation Reichsbank today issues 20 thousand milliards of [Million Pounds] new money daily. The Dec 31 1919 35.7 184.80 193.2 note issue at present amounts to 63, 000 Dec 31 1920 68.8 258.00 255.5 milliards: in a few days, therefore, we shall be Dec 31 1921 113.6 771.00 147.3 able to issue in one day Dec 31 1922 1,280.10 34,000.00 34.4 two thirds of the total Jan 31 1922 1,984.50 227,500.00 8.7 circulation.” This declaration elicited no Feb 28 1923 3,512.80 106, 750.00 33.0 protest and excited no Mar 29 1923 5,517.90 98,500.00 56.0 public disapproval. Such May 31 1923 8,563.70 320,000.00 26.8 formality has given way today to comments such as Jun 30 1923 17,291.10 710,000.00 24.3 “…throwing money from July 7 1923 20,341.80 800,000.00 25.4 helicopters”. Likewise administration after another was compelled to today there is to date no public outcry, merely a 25,491.70resort to abnormal 900,000.00 28.3 [or indeed illegitimate] hope that the massive issue of money will July 14 1923 resources, i.e. each attempted to meet current counter the capital and economic contraction we 31,824.80 July 23 1923 1,600,000.00 20.0 necessities via the printing press! are seeing now, across the world. July 31 1923 43,594.70 5,000,000.00 8.7 The general public did not appreciate the It is of significance to note that Aug the7principal 1923 62,326.70 4.1 extravagance15,000,000.00 of the Havenstein statement above, feature of Germany in 1923 [the climactic year of did the German financial and Aug 23the 1923illusion of 273,905.40nor apparently 23,000,000.00 11.9 inflation] was that industry enjoyed industrial leaders. However, we would argue fortune, while living in a state whose finance and Nov 15 1923 92,844,720,743.00that the11,000,000,000,000.00 8.4 benefits to the nation of the monetary currency were completely disorganized. debasement was the easing of Reparations [Germany was forced to pay the bill for the First The driving force behind central bank money World War]. This was sufficiently overwhelming printing moves today, are that growth will be as to make the negative impacts tolerable revitalized and profits continue to flow in. In the [except to those who suffered directly]. post war years in Germany, the ledgers of German industry showed enormous paper-mark Indeed, the ignorance bred of myopia and in profits, but in the end it was realized that the accord with the principles of economic thought paper it had gained was worthless! Their world Page |8 Gold Forecaster 504 prevailing at the time, the amount of internal currency in circulation had little influence on its external value. The latter was determined, so they wondrously contended, mainly by the passivity or activity of the trade balance. Today, the U.S. follows a “strong $ policy”? became. Quality, or value in the world market, decreased more rapidly than quantity could be increase; and this, although every effort was made to stimulate note output. France underwent a similar, albeit more moderate development [see Table 2] With such a paucity of theoretical advice, sufficient to fool all of the people at the critical time, the German Government acted on the principle that, as there was an admitted monetary scarcity, the only way to cure it was to increase the circulation. The results were remarkably (see Table 1) swift when the size of the reparation debt was considered. The elimination of an intolerable internationally enforced debt, within four years, was a feat of illconsidered genius. Today we are not talking about two countries in Europe, but the entire developed world embarking on quantitative easing! In resorting to the printing press, the German government diminished the value of, not only each individual unit but of the aggregate total circulation. It was generally realized only later that the sole way to increase the value of the circulating medium was to raise the value of the How France did it Table 2 Notes in circulation Exch. Rates Paper Francs [Billion] Gold Francs [Billion] Av. 1923 37,152.1 11,679.4 Av. 1924 39,954.8 10,819.0 Av. 1925 44,296.3 10,894.2 Jan 1925 50,617.9 9,885.7 Feb 1926 50,991.8 9,698.5 units by the strict limitation of output and by Mar 1926 51,491.8 subjecting the issues to clearly specified9,551.7 conditions. 52,208.2 Apr 1926 9,140.7 May 1926 53, 735.0 Business as Usual How did Germany carry on business under such extraordinary conditions? The theory was twofold: The velocity of circulation of the currency increased enormously. The currency gap was filled by tokens (Notegeld) issued by various public administrations and by private persons, alongside the limited use of foreign banknotes. The velocity of notes played an important part. We have titled this as “Monetary Wheel Spin” True the population of Germany had diminished by 10 million; territories had been taken away, while business had contracted. On the other hand, payment by check had ceased to exist and there was a flight from the Mark. Notes were held no longer than could be helped as they were turned into goods or exchanged against foreign currency. In practice the degeneration of the Mark had a dramatic impact: Workers had to be paid once or twice daily. Scenes of workers running to the gates of the factory, giving their pay to spouses, who put it in prams then ran to the shops to spend it, as fast as possible, on, literally anything. One man went into a restaurant, next to a bank [who kept in touch with the exchange rate], bought a cup of coffee, which by the time he had finished it had doubled in price. 8,606.4 The pre-war circulation in Germany was Jun 1926 53,073.2 approximately equal to 300 million7,282.8 pounds sterling, whereas from August 1923, until the period of stabilization the whole Reichsbank and authorized government issues could have been bought up, on the basis of GOLD for a figure of 10 million pounds! The more notes the Reichsbank issued, the less the aggregate exchange value of the notes in circulation Gold Forecaster 504 One woman went to the shop, and for some reason put down her bag, full of money, outside the shop. When she returned she found the money on the pavement but the bag gone. On July 17th 1922 a law was passed [amended on October the 26th 1923, permission to issue emergency tokens was granted by the Minister of Finance – if a real emergency was recognized to exist, e.g. if the Reichsbank was unable to satisfy the demands of industry for the payment of wages. As a condition of such issues it was stipulated that an asset had to be deposited in the Reichskreditgesellschaft [a semi-official Reich banking institution] in favor of the Minister of Finance; if and when the tokens were called in, this deposit was released. But over and above these authorized issues, the whole country was inundated with unauthorized Notegeld, without any pretence of cover at all, whose amount in January 1924 was estimated at 159.6 million Gold Marks. U.S.A. There appears to be discord at the Fed as to when interest rate hikes will begin. Several Federal Reserve officials thought that the U.S. central bank would be able to raise interest rates for the first time in June, according to minutes from the March meeting released last week. At the same time, others thought a rate hike would not be warranted until later in the year as low oil prices and the strong dollar would likely hold inflation down. The minutes of the March 17-18 meeting might not reflect the current thinking of U.S. central bank officials in light of the weak March job data released two weeks later. During their discussions, Fed officials set a low bar for lift-off, saying they didn't need to see an increase in core price inflation or wage inflation before hiking rates. Further improvement in the labor markets, stabilization of energy prices or a leveling out of the value of the dollar might be Page |9 enough to move, officials said. We note how the dollar exchange rate is being treated as an important element in this decision. We believe that the dollar will continue to rise unless the Treasury intervenes through the use of swap arrangements to hold it down. The distance between interest rates in the Eurozone and Japan continue to be huge with U.S. 2-yr yields in the U.S. at 0.52% and 10-yr yields in Germany at 0.17% and at 0.36% in Japan. The upward pressure on the dollar exchange rate will persist, particularly as U.S. corporations want to borrow in euros and use in dollars. These interest rate differentials also point to market’s economic expectations for the developed world outside of the U.S. While the U.S. is in recovery, the latest numbers point to a fragile recovery, still. Outside of the U.S. use of the word recovery appear to be an exaggeration. So as gold rises in the dollar its rise in other currencies is that much greater. In their discussions of the exit strategy, Fed officials for the first time floated the idea of selling very short-term Treasury securities from their massive balance sheet as a potential tool although some officials were cool to the idea because it might cause "an outsized market reaction." We couldn’t agree more! With yields so low and equity markets seeing investors ride a yield-seeking wave, as dividends are a key criteria for investors, the ‘bubble’ facets of markets are dominant. The Fed risks popping the bubbles as investors try to sell at the top. A generation ago fund managers carefully watched the relationship between dividend/earnings yields and the yields on fixed interest securities to maximize returns. Any change in government issued loan stock [e.g. Treasuries] yields to a higher level warranted selling those shares that were not earning their keep. We foresee market analysts returning to such value measurements guiding them to select what to keep and what to sell once rates start to rise. This will happen across the entire world as even a P a g e | 10 Gold Forecaster 504 small rate hike becomes a game-changer for fund managers and investors. Treasuries overhang in the market Less than a year from now, the Fed must decide whether to reinvest $216 billion of proceeds from Treasury debt maturing in 2016, or shrink its balance sheet by allowing it to expire. By not reinvesting, the Fed would increase the supply of securities available to investors and put upward pressure on yields. Shrinking the $4.2 trillion portfolio will add to the monetary tightening from increases in the benchmark interest rate officials envision for this year. That would mark a reversal of the easing the Fed achieved when it bought bonds to speed a recovery from the worst recession since the 1930s. The timing will be tricky. Fed Chair Janet Yellen, concerned the economy remains fragile, has said the pace of rate increases is likely to be gradual and cautious. A decision to start unwinding the Fed’s bond portfolio could give her more reason to proceed slowly or even stop raising rates for a time. Closing down Q.E. reinvestments and allowing the portfolio to run off over time as securities mature, according to their statement in September. By doing this they will have to repay themselves, so it will be a simple writing off of the debt. When the FOMC chooses to cease reinvestments, the balance sheet will naturally contract. “This runoff of their securities holdings will also gradually remove accommodation, an effect that we will need to take into account in setting the stance of policy,” the Fed said. This will leave the banking system as liquid as it is now. Their problem, according to Citi is now the overburdening of regulations that are hampering their operations, but were put in place to prevent a repeat of the 2008 ‘credit crunch’. This has led to the U.S. economy, overall, not enjoying the The Fed started bond purchases to reduce longer-term borrowing costs after cutting the benchmark federal funds rate almost to zero in December 2008. In so doing they protected the banking system, which had nearly collapsed then. The banking system is the heart of the financial system that now reaches into every single transaction we as individuals make. Without these actions certainly the global financial banking system would have received a mortal blow bringing a depression worldwide. The central bank bought Treasuries and mortgage debt in three waves of quantitative easing that ended in October 2014. They are now left with a mountain of debt and a banking system flooded with funds [largely parked with the Fed] to the extent that if they were to pull these funds back by selling all this debt the liquidity shortage would cripple the financial system. They must now decide how best to get rid of their debt holdings. Officials have said they will probably never sell mortgage debt outright, and they haven’t decided whether to sell Treasuries. There is talk that they will begin by selling the very shortest term Treasuries. Their intention will be to allow their portfolio to shrink “in a gradual and predictable manner,” mainly by ceasing easy money, which could have driven growth much faster than it has since then. Overnight Loans The Fed has good reasons to shrink its balance sheet. Buying securities pumped trillions of dollars of excess reserves into the banking system, making it harder to control the fed funds rate, which represents the cost of overnight loans among banks. As we said above, the bulk of these funds did not find their way into the broad economy. With the rate near zero, that hasn’t been an issue. Now that the Fed expects to raise the rate, it will have to deploy new tools to soak up the excess reserves, increasing the Fed’s role in P a g e | 11 Gold Forecaster 504 money markets. Fed officials want to minimize their influence in those markets, while also restoring the effectiveness of the funds rate. That’s a tall order and one that could, if mishandled, cause new problems in the economy. Consequently we don’t expect this unwinding to be a quick process. The Fed will, we believe phasing out re-investments slowly and over a very long time. In the longer run, the Fed plans to hold no more securities than necessary to implement monetary policy efficiently and effectively. The poorer the performance of the economy the longer it will take. We believe the biggest danger will come from market reactions. Raising rates itself could stampede the market, let alone the soaking up of excess liquidity. The banking system itself has been braced for a long time already. They are all on the starting line waiting for the gun to set them off. The financial system has placed its bets on a much shorter time period than we have. Only when rate rises have shown not to have disrupted the economy, will they embark on reducing the liquidity in the system. We are talking 2017 and beyond. In our experience the markets will act precipitously in discounting the Fed’s future moves. And that’s where the problem lies. If the banks do this vigorously, they will stumble the economy and its recovery. Bankers worry that one of the ripples of this change of direction may well cause the clearing houses to come under unbearable pressure from the derivatives market [Warren Buffet described these as ‘weapons of mass destruction’ in the financial markets]. These points of vulnerability could lead to more financial tsunamis in the future. The bond markets as well as the equity markets are also extremely vulnerable to both rate rises and to a soaking up of liquidity. In addition, the disparity between U.S. interest rates and the Eurozone continues to drive the dollar higher. Other nations where interest rates are higher than those of the U.S. are riskier, so take out that risk and you see most nations have ‘lower’ real rates of interest than the U.S. It certainly is not in the interests of the U.S. to see the dollar rising like this. Until the disparity narrows considerably, the ‘carry trade’ will continue to borrow in the ‘cheap’ currencies and invest in the dollar. Impact on Gold Previously many believe that the earning power [yield] of the dollar would defeat the gold price. But the current market price of gold in holding around $1,200 while the dollar climbs, shows that it is not the U.S. market that drives the gold price. Yes, the well developed markets of the West can move gold prices around at will [until through either more efficient global gold markets or simple rising Asian demand overwhelms the developed gold markets] but the underlying strength of demand for gold in the world will win through over local U.S. issues. Investors the world over are not simply weighing numbers in the way they would in a stable, crisisfree world. They are keenly aware that we live in an abnormal, changing, financial world where risks are higher than they have ever been and prone to the eruption on any day in the future. The financial worlds are so developed and bloated that reactions to these dangers can be like stampedes. In such a world, gold is a ‘safe haven’ and more than that something that does bring stability. We are still in ‘extreme conditions’ which brings gold into its own as dangers grow. With gold still close to its bottom at $1,200 the upside potential is as great as it was in the seventies. E.U. U.S. borrowing in €s The European Central Bank president has made borrowing so cheap in the region that foreign corporations are selling record amounts of debt. Forget the deeper, bigger U.S. corporate-bond market. Borrowing in euros is all the rage these P a g e | 12 Gold Forecaster 504 days because it’s about 2% less expensive to do so. About 65% of the record €60 billion of investment-grade bonds sold in March came from overseas companies. And a lot of those sellers are based in the U.S. Such appeal is likely to continue throughout 2015. It is expected that non-European issuers will sell twice as much €denominated debt this year than they did in 2014. The trend comes down to basic math. Yields on investment-grade bonds in Europe have fallen to 0.99%, compared with 2.9% on those in the U.S. Debt is so cheap in Europe that U.S. companies are saving money even if they buy currency hedges that have become expensive as the dollar’s leaped against the €. Even speculative-grade borrowers including Huntsman Corp. and IMS Health Holdings Inc. have also headed to Europe to raise cash. Riskier credits also achieve a larger discount than stronger names, and this is likely to boost the U.S. high-yield footprint in Europe according to Fitch. Stimulus-driven search for yield is pushing European investors into embracing a wider range of credits too. Yields of 4.3% on €-denominated high-yield bonds are about 2.2% points lower than those on $-denominated notes. Such a process is inevitable and indirectly adds to the currency crises we expect to see worsen this year. Only a strengthening € which we see following an exit of Greece from the Eurozone will drop such a trend in its tracks. Greece – 4 days left! Eurozone deputy finance ministers want an agreement on the €7.2bn loan in time for a Eurogroup meeting on 24 April. If you take into account weekends and Orthodox Easter, there are only four days left. Greece met the deadline to repay €460m to the International Monetary Fund. Other, much larger, debt repayments are due within a few weeks. Greek Prime Minister Alexis Tsipras has said that Athens will not be able to service its debt without financial help from the European Union. Without new money it will struggle to renew €2.4bn in treasury bonds due to mature in the middle of April, or pay back another €0.8m to the IMF on 12 May. It also has to find the funds to pay wages and pensions. Since winning the elections in January on a mandate of ending austerity measures, Mr Tsipras' government has been locked in negotiations with its creditors to ease the conditions of the loans. It was reported that the country was using reserves from its health service and state owned utilities to pay off debts. It is with amazement that we watch the Greek tragedy play out. The country is bankrupt but worse still, it is just sitting back while its last remaining funds are leaving the country. If this continues Greece will be pushed out of the Eurozone on 25th of April by default. It will then return to the Drachma [we see two types of Drachma] and be able to point fingers of blame at Germany and the E.U. More importantly, the E.U. will have lost its weakest link and so the euro should strengthen, despite the ongoing quantitative easing on the go in the Eurozone until at the earliest September 2016. I does appear that the ball is no longer in the Greek government’s hands, but firmly in the E.U.’s. There is no doubt that a stronger euro will be welcomed in the U.S.A. as it will counter the Gold Forecaster 504 ongoing strength of the dollar. But we would be surprised if Draghi of the E.C.B. will be happy at all, as he wants to see ongoing weakness in the euro. Europeans are having deciding if it is better to hold gold ahead of further weakening of the euro or wait until after they see a stronger euro. Impact on Gold If Greece stays in the Eurozone the downward trend of the euro against the dollar will continue P a g e | 13 but gold appears, this week, to have moved with the dollar, lifting prices in the euro. If Greece exits the Eurozone, the € will rise, but as it is a crisis situation the impact on the gold price will remain positive. Once the dust settles Draghi’s Q.E. will then continue to push the euro down. The atmosphere of crisis will remain gold positive. Long-Term Gold TA Chart This week: here is the short covering bounce. $1,187-1,190 an important first target. A break can bring $1,200/$1,220-1,225/1238 into play, a pretty big resistance to overcome. We will watch the COT reports which at $1,140-1,150 gold was showing a very bullish picture so I suspect gold will find support on pullbacks around $1,150 for the moment with a pull towards $1,200 area still dominant feature with the US Dollar taking a much needed breather. Last week: Gold is back near its lows and a major support area. If $1,130 gives way, technically next big support is seen at $1,085. With the US $ rallying, this is growing in prospects. Yet the COT report after this pullback shows the banks covering shorts, going long. So will the funds continue to pile on the short side or pulled into a game of buying up the gold price back to $1,200 or more in the coming weeks? Upside reward is quite enticing for the trader here with tight stops near lows and an upside play in the coming week of $1,175-1,180 and possibly towards $1,200. A lot depends on this week’s FOMC meeting. Legal Notice / Disclaimer This document is not and should not be construed as an offer to sell or the solicitation of an offer to purchase or subscribe for any investment. Silver Forecaster - Global Watch / Julian D. W. Phillips / Peter Spina, have based this document on information obtained from sources it believes to be reliable but which it has not independently verified; Silver Forecaster - Global Watch / Julian D. W. Phillips / Peter Spina make no guarantee, representation or warranty and accepts no responsibility or liability as to its accuracy or completeness. Expressions of opinion are those of Silver Forecaster - Global Watch / Julian D. W. Phillips / Peter Spina only and are subject to change without notice. Silver Forecaster - Global Watch / Julian D. W. Phillips / Peter Spina assume no warranty, liability or guarantee for the current relevance, correctness or completeness of any information provided within this Report and will not be held liable for the consequence of reliance upon Gold Forecaster 504 P a g e | 14 any opinion or statement contained herein or any omission. 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