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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
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hold of your profits and minimize your
losses.
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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,
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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
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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
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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
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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.
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Gold Forecaster 504
P a g e | 14
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