Global connectivity today has reached previously unimaginable levels. Did you know there are more Internet users in Africa today than in North America? Nigeria has more Internet users than California and twice as many as either Texas or New York.
world-internet-users-statistics-and-2016-world-population-stats
The cost of publishing messages from anybody in the world to anybody in the world is virtually zero. Everybody’s now a player, and therein lies the problem. So much distraction. So much misinformation that fact-checking has become an industry.
Did you know that the term disinformation (i.e., published information purposefully intended to deceive) did not even appear in dictionaries until the late-1980s? Now the world wallows in the stuff to the point few people, including newsrooms, can differentiate fact from fiction.
All of us need to keep our eye on the ball because there will be an enormous price to pay if we drop it. Because of what’s at stake today, I thought it would be helpful to point all of us in the right direction so we might assist each another in what will be challenging months and years ahead.
I find that the politically and commercially independent OMFIF organization is worth following because they address the big picture: http://www.omfif.org/about/
OMFIF chairman John Plender recently published a sharp criticism of Japan’s monetary and financial system and its potential impact on the world: http://www.omfif.org/analysis/press-releases/omfif-report-at-the-edge-of-the-shock-japans-problematic-monetary-future/
Plender concludes:
The build-up of public debt and rising financial instability will ultimately lead to a crisis when confidence in the central bank’s ability to manage monetary conditions evaporates. These are the kind of circumstances in which a yen collapse could spark an inflationary surge. Linkages in today’s global markets make international repercussions inevitable.
The OMFIF website has interesting articles from many thought leaders, such as one of their directors David Marsh who recently published the ‘Seven Ages of Gold’ article: https://en.wikipedia.org/wiki/David_Marsh_(financial_specialist)
http://www.omfif.org/analysis/press-releases/seven-ages-of-gold/
In his article, Marsh states:
The latest ‘Rebuilding’ Period VII has been underway since the financial crisis in 2008. In these eight years, central banks in both developed and developing countries have shown a new fondness for the yellow metal, rebuilding gold’s importance as a bedrock of most countries’ foreign reserves.
Central banks have been net bullion buyers every year since 2008, adding more than 2,800 tonnes or 9.4% to reserves. Developed countries (accounting for the lion’s share of total official holdings) have been conserving stocks, while developing countries led by China and Russia have been building them up. This is the longest protracted spell of gold accruals since 1950-65, when central banks and treasuries acquired a net total of more than 7,000 tonnes during the economic recovery after the second world war.
Marsh also published his message at MarketWatch.com: http://www.marketwatch.com/story/central-banks-have-been-buying-gold-with-a-vengeance-2016-09-19
Many of you are interested in owning gold and trading the shares of the Goldminers. Rightfully so because, as David Marsh informs us, central banks have been huge net buyers, especially from 2015 and they are likely to continue on that track for maybe ten years or more.
What’s important is that the cost to discover, produce and deliver physical gold is about $1100 today, and the costs are constantly rising for many reasons that are not going away, such as inflation, government policies, environmental concerns and so forth.
The Gold market is of major interest to me because of the buying being done by central banks; however, I think the next major lift-off in prices is still possibly a year out. In the meantime, I am extra cautious. Yes, I know my Gold Bull friends Rob McEwen and Pierre Lassonde are telling everybody that as a minimum the price of gold will reach $5,000 and maybe $10,000 an ounce within five years. Of course we’ve been hearing that for five years, so what’s another five years!
What’s changed is that the Shanghai Gold Exchange (SGE) started in April 2016 to price gold based on real physicals trading. With no futures market to support the scam perpetrated for years by the London Bullion Market, it’s only a matter of time before SGE buyers cannot find sellers.
Because of my cautious approach to the long-run Gold Bull that I believe is here, I will hold a core position in the Goldminer accounts but also only buy and sell a trading position week-to-week or perhaps month-to-month. Excessive volatility caused by computer algos has damaged market integrity, so, for Goldminers, I am now trading mostly the ETFs (GDX in the US in USD and XGD.TO in Canada in CAD). That way I can buy and sell millions of dollars’ worth of Goldminer stocks in minutes.
The Oil market is also of major investment interest to me especially with the recent developments at the Shanghai International Energy Exchange (INE) and the Shanghai Petroleum & Natural Gas Exchange. I believe these new exchanges are making major inroads to a more open and fair global energy market.
As I see it, the central banks that are now buying Gold will also soon be buying Oil. Moreover, I believe that Oil is presently the Buy of the Generation just as Gold was in the 2000-2002 Bear Market years, and Bonds in 1982 when treasury rates were 15%.
Because Oil prices have collapsed to well below the levels needed for producers around the world to survive, and because most Oil in the world is owned by agencies of governments that are failing to meet budgetary demands; I believe that prices will soon have to lift.
For two years now, because the price collapsed, there has been no investment inflow in the Oil industry. Reserves have been drawn down and will only be replaced when investment inflows begin again, which will only happen at oil prices that would produce an economic return. Since the Oil companies do not have the funds to invest, they will have to turn to bank loans; however, until Oil prices rise, those loans will not be made, which is another reason central bankers and their agent banks will be buyers of Oil.
Yes, I think many of us agree that central banks have a deplorable record of making policy mistakes. But I believe we can trade securities off their mistakes if we take a longer-run view.
Today, and for several years now, central banks have manipulated bond yields to essentially zero. As that situation is unsustainable in the long-run, and rates must rise in order for capital markets to function well, I believe that Bonds are now the Sell of the Generation. Moreover, major investors like the central banks will be able to recoup their treasury debt losses with the humongous gains to come in Oil and Gold.
On Monday October 3, OMFIF’s John Nugée will be discussing the implications of central banker negative rate policies, calling that a dead end:
http://www.omfif.org/analysis/commentary/2016/october/dead-end-for-central-banks/
When commercial banks get into trouble, their last resort when all else has failed is to turn to their central bank. But another group of banks is in trouble now – the central banks themselves.
Current central bank policy is rapidly resembling a dead end. It is not working, it is not stable, and it is not sustainable. Their balance sheets are bloated, their position in financial markets uncomfortable. Negative interest rate policies are causing mounting damage to banks, pension funds, insurance companies, and the workings of capitalism itself. Not a single person in all of finance believes that a situation in which large swathes of government bonds have negative yields is either sensible or healthy.
As you know, I am concerned that central banks have turned to actively trading our equity markets.
About two years ago, Zero Hedge and other publishers added to an article published by OMFIF’s David Marsh about how central banks have become in fact the major player in equity markets with, at that time, $29.1 trillion invested:
http://www.marketwatch.com/story/central-banks-becoming-major-investors-in-stock-markets-2014-06-16
http://www.zerohedge.com/news/2014-06-15/cluster-central-banks-have-secretly-invested-29-trillion-market
http://www.thenewamerican.com/economy/markets/item/18520-central-banks-now-dominate-stock-market-study-finds
At the time this information came to light, I believed the Fed and other central banks were buying only mortgage-backed securities and bonds. But recently, the Swiss National Bank admitted to selling Francs to buy Dollars for purchasing millions of shares in Facebook (NYSE:FB) and other key US stocks. They are doing it, they say, to weaken the too-strong Swiss Franc. But the capital market was created for purposes of price discovery and trading for profit, not one that serves government and central bank policies, which have proven over the years to be most often wrong.
There are multiple problems with central bank involvement in equity markets, the first one being that any player that has unlimited funds cannot lose. That’s why casinos restrict player access. The second issue is that these unlimited funds used by central banks are not taxed whereas there were heavy taxes on the funds we earned to invest in the same markets and on the profits that we earn from our capital trading. Our cost of capital is real. Thirdly, as I recently discovered in my trading, central bank algorithms now control prices of all equities in all markets in every trading session. However, their algorithms are quite simply wash trading, a statement I can prove; so these central bankers believe they are above the law.
As noted in a recent blog I published: Does our society now operate by Rule of Law or Rule of the Fed? I challenge the Senate and House Banking Committees along with the President of the United States to tell the world that Congress is more powerful than the privately owned Fed (and not their puppets like Greenspan, Bernanke and Yellen) and prove it. They won’t and they can’t.
Unfortunately, these faceless central bankers – unelected and unaccountable – control the money. We know that who controls the money controls the world!
What disturbs me greatly is that High Frequency Trading (HFT) is controlled by central banks and their agent bankers, and they are using their machines to control market prices, saying it is only a liquidity enhancing mechanism. That’s nonsense. Real traders are not stupid so they are withdrawing capital from the market. HFT is not increasing liquidity; it’s killing it. In addition, banker short selling is not being declared, another statement I can prove.
Our regulators are enabling this illegal trading, seemingly powerless to control it.
Finally, some say, securities regulators may be getting the message re the need for HFT regulation: http://blog.themistrading.com/2016/09/the-regulators-get-it/
Five HFT firms have told Reuters they are holding back new investments given the uncertainties surrounding the proposed regulations [in India].” “We were about to set up a new strategy and we were ready to deploy capital, and build a team of traders and programmers, but if these changes are implemented that strategy would effectively be zero.” “[The Regulator] is looking at potential limits on so-called algo traders, including “speed bumps” to randomly delay execution of some orders, and forcing exchanges to take orders from co-located servers and other sources alternatively, removing another advantage enjoyed by HFT platforms.
But that is India. The Fed, Bank of England, Bank of Canada and the ECB know who’s in control of the world and it’s not India and for a while yet it won’t be China.
Should you want to understand more about HFT, Credit Suisse published this article on May 20, 2014:
https://doc.research-and-analytics.csfb.com/docView?sourceid=em&document_id=x569866&serialid=lZPbU6l0cgAqB%2b1gg4uZFLk14dBwhfSb9lZ3%2bdmPHV4%3d
Finally, yesterday, China’s yuan joined the International Monetary Fund’s Special Drawing Rights (SDR) basket of reserve currencies that include the US Dollar, British Pound, Euro and Japanese Yen.
http://www.reuters.com/article/us-china-currency-imf-idUSKCN1212WC
The inclusion of China is a good start on achieving a global General Agreement on Currencies that I was advocating in 2004 when I started this blog.
That’s all I have for today.
Enjoy your weekend.
/Bill
