Gold and silver thumped by Fed statement

Gold Today –New York closed at $1,142.60 yesterday after closing at $1,158.6 on the 13th December. London opened again at $1,136.80 today.

 Overall the dollar is much stronger against global currencies today.

         The $: € was stronger at $1.0478: €1 from $1.0649: €1 yesterday.

         The Dollar index was stronger at 102.54 from 100.87 yesterday. 

         The Yen was weaker at 117.81: $1 from yesterday’s 114.95 against the dollar. 

         The Yuan was much weaker at 6.9352: $1 from 6.9025: $1 yesterday. 

         The Pound Sterling was weaker at $1.2520: £1 from yesterday’s $1.2656: £1.

 Yuan Gold Fix

Trade Date Contract Benchmark Price AM 1 gm Benchmark Price PM 1 gm
      2016  12    15

      2016  12    14

      2016  12    13

SHAU

SHAU

SHAU

263.55

264.98

265.04

263.45

264.99

264.93

$ equivalent 1oz @  $1: 6.9352

      $1: 6.9025

$1: 6.9009

  $1,181.99

$1,194.58

$1,189.20

$1,181.54

$1,194.08

$1,194.08

Please note that the Shanghai Fixes are for 1 gm of gold. From the Middle Eat eastward metric measurements are used against 0.9999 quality gold. [Please note that the 0.5% difference in price can be accounted for by the higher quality of Shanghai’s gold on which their gold price is based over London’s ‘good delivery’ standard of 0.995.]

 Shanghai prices held $33.94 higher levels than prices in New York. London opened at a higher discount to Shanghai of $39.74.  In the last day London and New York gold prices have dropped in the dollar around 11% whereas Shanghai gold prices in the Yuan have dropped only 0.5%. This is an important point, we feel pointing to volatility in London and New York continuing then doing so both ways. i.e. Shanghai is implying that gold prices are falling too far too fast, despite the rising dollar..

This confirms that the moves in gold prices in the different markets are a reflection of currency movements not sales and purchases of gold. The arbitrage opportunities are huge for those selling gold to sell into China, not London or New York.

LBMA price setting:  The LBMA gold price setting was at $1,132.45 this morning against yesterday’s $1,160.95. 

The gold price in the euro was set higher at €1,085.45 after yesterday’s €1,090.45.

Ahead of the opening of New York the gold price was trading at $1,129.50 and in the euro at €1,083.66.  At the same time, the silver price was trading at $16.11.

Silver Today –Silver closed at $16.80 at New York’s close yesterday from $16.91 on the 13th December. We see it falling further than gold now, but also rallying, thereafter, faster than gold.  

Price Drivers

The gold price in the Yuan and the euro only fell slightly. It was a strong dollar rising against gold that brought the price down in dollar terms. We do not expect to see the dollar continue to get stronger over the next few weeks, as that is against the U.S. interests.

We see the fall in the gold price as coming to an end ahead of a rally soon. Shanghai and the silver price points to this. The sale of 6+ tonnes from the SPDR was a large amount but not one likely to cause such a fall. Once the Fed’s announcement is fully digested, then we see gold rallying.

The Fed’s announcement rocked all markets including gold and silver not because of the hike of 0.25% but for the three year forecast pointing to three hikes in each of the next three years. No more the waiting for data to guide them? This was a vote of confidence in the U.S. economy, where they clearly see the economy reaching a self-sustaining momentum, if not there already. Inflation is rising through their 2% target and pointing higher. Trumpanomics was certainly factored in by the FOMC which adds tremendous fiscal stimulus to the formula. If they stick to these rate forecasts [and they don’t have to] and they are too optimistic such rate hikes will hurt the economy and it will turn down fast. But will ‘real’ interest rates go positive?

Take a robust U.S. economy against a weak EU & Japan still in their QE phase and the prospects for exchange rates outside of the U.S. down strongly, something they have wanted for years. The race to the bottom in currencies will produce a very volatile currency world for several years. Right now the “Carry Trade” are racing to unwind their positions, strengthening the dollar and taking it back into its ‘bull’ market. Unless the Treasury takes action to restrain the dollar we expect several currency crises in the next three years. That’s the rosy picture for the future. Of course the Fed expressed intentions, not certain realities, so this picture could easily turn bad if the reality is very different.

Outside of the U.S., difficult times lie ahead as the U.S. will become solely interested in what benefits the U.S., likely at the cost of its current trading partners. We do see a trade war but against a robust ‘enemy’, China. China is on course to eliminate poverty by 2020 and by then should also have a robust, self-sustaining economy too.  With their interests diverging we see more division in the world. This will directly impact the currency world to the detriment of the dollar as a reserve currency.

As to gold and silver in this environment we say this;

  • Currency turmoil will benefit gold and silver prices as it brings instability and uncertainty.
  • Trumpanomics will lessen the value of the dollar and all other currencies, [as they try to remain lower than the dollar], as rising debt and inflation benefits gold and silver prices.
  • A multi-currency monetary system is inevitable, which will benefit gold and silver.

Gold ETFs – Yesterday, there were sales of 6.818 tonnes from the SPDR gold ETF and a sale 0f 0.6 of a tonne from the Gold Trust holdings, leaving their respective holdings at 849.441 tonnes and 196.35 tonnes. Under these circumstances we would expect more sales today as the Fed’s announcement is digested.

Since January 4th this year, 245.322 tonnes of gold has been added to the SPDR gold ETF and to the Gold Trust. 

Julian D.W. Phillips – GoldForecaster.com | SilverForecaster.com | StockBridge Management Alliance 

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Could a gold revaluation happen? Would be wealth transformer

By David Smith*

As we move through 2016, the Horsemen of the geopolitical, economic, and social apocalypse are on the march.

China burns through its currency reserves as billions in yuan flee the mainland for safe harbor. Japan prints mountains of yen debt in an effort to create inflation – and thereby the conscious devaluation of its citizens’ purchasing power.

Saudi Arabia’s gamble of cutting oil prices to the bone in an effort to break the back of the shale oil industry is becoming so costly that it may have to sell a portion of mighty Aramco to outside investors, while keeping secret the amount of its U.S. debt.

The U.S. government holds an incomprehensible $19 trillion dollar debt, in a presidential election year where the programs offered by front-runners of both parties would increase that amount… by trillions more!

And to top it off, many nations – the U.S. included – are moving to implement a policy of negative interest rates (NIRP), where the bank charges you the customer for the privilege of holding a cash balance! Think about how corrosive NIRP would be. And while that’s going on, the government is actively working to promote inflation – in order to pay its social security and government pension obligations – while your purchasing power continues to decline.

The result of this policy is financial repression. A double sucker punch to your economic gut.

In Europe, NIRP is causing large corporations to hoard cash and buy gold rather than keep a large bank balance. In Japan, home safes, in which to store cash, are being purchased in record amounts, and demand for 100,000 yen (c. $1000) notes is going through the roof.

Central Banks Net Purchases of GoldSince 2010, central banks have become net buyers of gold

As the world’s governments come face to face with the prospect of currency collapse, something’s going to give. Confidence in (acceptance of) fiat money is literally all that holds things together.

Let a run out of a country’s paper money get underway – into anything of tangible value – and it’s GAME OVER. Even the ability of banks to suspend redemptions from your money market funds – instituted by federal decree last year – will prove to be nothing more than a metaphorical finger in the dike.

What is to be done? How can the central banks of countries around the globe, as they slip into a synchronized recession (or worse), dig themselves out of the approaching monetary-debt abyss without going through a systemic collapse first?

The Coming Revaluation of Gold

There is an answer… it’s written about occasionally, but scoffed at by virtually every “intellectual” and “economist” who has cared to give its backers the time of day.

That “answer” is born and nurtured through centuries of history in the crucible of economic need: There will be a revaluation in the price of the most powerful, effective, and durable store of value humankind has ever utilized – gold.

Talking heads and politicians like to say, “but there wouldn’t be enough gold for that!” Oh, yes there is… but only at the right price!

Gold revaluation (not monetization – where gold is redeemable in exchange for paper script as a monetary medium), would be instituted by central banks – perhaps first by the U.S. Federal Reserve, with others in tow…

Revaluing All Currencies against Gold Is as Simple as Eighth Grade Math

So far, the world’s major currencies have been taking turns devaluing against each other, to improve their country’s trade position in the global economy. It’s mathematically impossible to devalue all currencies at the same time, so as the “currency wars” intensify, the inevitable result is a spiraling race to the bottom.

Jim Rickards, in his recently-published seminal work, The New Case for Gold, shines a light on the way out for these dysfunctional entities, saying:

“..if you devalue it against gold – because gold is money. It’s not the kind of money that can be printed by a central bank… (but) with gold, everybody can devalue (their currencies) at once… It’s eighth grade math.”

In order to derive a per ounce dollar figure at which gold needs to be priced, in order to restore public confidence, and jumpstart inflation – central bank goals – Rickards suggests the following formula:

First take 40% of global money supply (M-I x 40%), then divide this figure by the official gold holdings of the world’s central banks (35,000 tonnes), and you get $10,000 an ounce as a realistic gold revaluation price. This action would stop deflation – a central bank’s worst nightmare – dead in its tracks. And they might not even have to reduce the money supply!

Other thinkers, including Antal Fekete and Hugo Salinas Price, have toyed with a gold figure of between $10,000 and $50,000. Price, who has been a tireless advocate for using the silver Libertad in Mexico as a circulating parallel currency, selects $20,000 as a realistic figure.

International Paper & Gold Reserves in Central Banks

Price says, “The discipline of gold as Reserves backing currency at a revalued price will restore order to a world that has refused to adopt the necessary discipline until forced to do so in the desperate situation now evolving, where there will be no other alternative but to accept the detested fiscal and financial discipline imposed by gold.”

Exchanging a “Paper Promise” for Real Money

The idea of backing a large portion of the floating debt that David Morgan of The Morgan Report has long referred to as “paper promises“, looks like it may be moving from a once far-fetched idea towards a place on center stage.

You may think that if a gold revaluation happens, you will be able to quickly go to the local coin shop and pick up a handful as soon as the possibility of a gold price rocket launch becomes obvious. But think again. Most likely announced on a Sunday evening, by Monday morning the precious metals supply would be gone. And mining stock share prices would go through the roof. Rickards notes:

“Gold will be in such short supply that only the central banks, giant hedge funds, and billionaires will be able to get their hands on any. The mint and your local dealer will be sold out. That physical scarcity will make the price super-spike even more extreme than in 1980. The time to buy gold is now, before the price spikes and before supplies dry up.”

In summary, continue to buy and hold physical gold (and silver) as insurance first and for possible profit generation second. But now you have a third compelling reason – if gold revaluation does come to pass, those who have it will also have a personal financial game-changer of the first order!

 *

Rapidly Weakening Dollar Boosts Gold and Silver Prices

We have been talking about a restraint on the dollar for weeks now. The U.S. does not want a strong dollar is our theme. Having failed to break through the 100 level on the index, the advent of bad data from the ISM index falling to 53.5% from 55.8% in December and no doubt more subsequently, tells us the U.S. economy is slowing. Companies in the U.S. service sector such as retail, banking and health care grew in January at the slowest pace in almost two years.

The global economy is slowing even faster too. The low oil price is a reflection, more of slowing demand than of oversupply.

For years now the global economy has relied on a recovering U.S. economy, so now we are not looking at a flowing economic tide but an ebbing tide there. The dollar dropped heavily against all currencies and commodities and precious metals. This again is a sea change from the last 8 years and particularly prejudicial against all those currencies that have been trying to weaken against the dollar. We expect to see larger and more negative interest rate levels across the world in 2016, as competitive devaluations increase. This will be destructive to the global monetary system.

The gold and silver prices are reflecting growing demand but also the rapidly weakening dollar and still have a long, long way to go before reflecting what we have written here.

Wednesday saw another large purchase of 4.461 tonnes yesterday making purchases of over 20 tonnes this week alone! The Gold Trust saw a relatively huge 3.7 tonnes added to the Gold Trust. The holdings of the SPDR gold ETF are now at 690.051 tonnes and at 170.56 tonnes in the Gold Trust. The ongoing large purchases are forcing the gold price up. Bear in mind gold prices are driven by U.S. demand almost exclusively as Asian demand appears to fail to affect gold prices, yet. The gold price picture remains technically positive.

The gold and silver markets

The New York gold price closed Wednesday at $1,142.10 up from $1,129.60 up $12.50. In Asia on Thursday, it held there ahead of London’s opening and then the LBMA set it at $1,146.25 up from $1,130.00 up $16.25 with the dollar index down at 96.66 down from 98.64 on Wednesday. The dollar was much weaker against the euro at $1.1180 up from $1.0919 against the euro. The gold price in the euro was set at €1,025.27 down from €1,034.89. Ahead of New York’s opening, the gold price was trading at $1,146.5 and in the euro at €1,025.49.  

The silver price in New York closed at $14.65 up 34 cents at Wednesday’s close.  Ahead of New York’s opening, the silver price stood at $14.76.

Silver is now outperforming gold.

Julian D.W. Phillips for the Gold & Silver Forecasters- www.goldforecaster.com and www.silverforecaster.com

 

Huge purchases into SPDR Gold Trust boost gold price

The New York gold price closed Monday at $1,129.20 up from $1,117.30 up $11.90. In Asia on Tuesday, it slipped to $1,126.35 ahead of London’s opening and then the LBMA set it at $1,123.60 up $1.60 with the dollar index down at 98.91 up from 99.40 Monday. The euro was up at $1.0918 down from $1.0863 against the dollar. The gold price in the euro was set at €1,029.13 down from €1,032.86. Ahead of New York’s opening, the gold price was trading at $1,125.15 and in the euro at €1,030.55.  

The silver price in New York closed at $14.35 up 8 cents at Monday’s close.  Ahead of New York’s opening, the silver price stood at $14.26.

Price Drivers

Monday saw a huge purchase of 12.196 tonnes into the SPDR gold ETF but none into the Gold Trust. The holdings of the SPDR gold ETF are now at 681.425 tonnes and at 166.45 tonnes in the Gold Trust. The huge purchase was responsible for gold’s rise yesterday and took the gold price back to resistance [small] at $1,130. The gold price picture remains technically positive.

Mario Draghi’s statement yesterday surprised us with its content. He is a brave central banker made so by his calls to E.U. governments to ‘step up’ and take action to lift prospects in the E.U. Governments have been sadly lacking in this area since the start of the credit crunch in 2007. They continue to be so passing the buck to central banks. Only so much can be achieved by central bank policies and without the support of governments, eventually central banks will fail to deliver. What he said yesterday is, to us, a signal that there is little more the E.C.B. can do and they should not be ‘blamed’ for a lack of solid economic growth. This raises the prospect of failing economic strength and disunity in the E.U.

If the U.S. sees a downturn for at least one quarter the E.U. will fare far worse. The E.U. wants a weaker euro to grasp at other nations exports, but is now unlikely to get it. The real answer lies in going to the consumer and boosting his income, job security and the value of his assets. Until this happens economic prospects in the developed world are unlikely to improve.

With the Yen falling again due to negative interest rates the likelihood of a ‘currency war’ is real. China will not tolerate being expected to hold its currency up [when it should fall] while Japan is taking advantage by intentionally lowering its exchange rate. This is ‘war’ and will meet with a reaction when it suits China. China has its own Q.E. program [a rose by any other name] and to hold the Yuan up, has de facto exchange controls in position, but may well formalize these shortly. This will be positive for gold in all currencies as the ‘war’ produces casualties.

Silver should hold its gains but will be more volatile than gold.

Julian D.W. Phillips for the Gold & Silver Forecasters – www.goldforecaster.com and www.silverforecaster.com

2008 Comparisons Give Gold Big Boost

By Frank Holmes – CEO and Chief Investment Officer, U.S. Global Investors

Plunging oil prices, rising market volatility, surging global debt—it’s all beginning to remind some investors of 2008. Earlier this month, billionaire former hedge fund manager George Soros warned of an impending financial crisis similar to the last major one, which sent shockwaves throughout global markets.

The comparisons to 2008 have triggered gold’s Fear Trade, with many investors scrambling into safe haven assets. Jeffrey Gundlach, the legendary “bond king,” recently made a call that amid further market turmoil, the metal could spike as much as 30 percent, to $1,400 an ounce.

Are we headed for another 2008? George Soros thinks so.

Making such predictions is often a fool’s game, but there’s no denying that gold demand is on the rise, both in the U.S. and abroad. For the one-month period ended January 20, gold (and silver) outperformed, comfortably beating domestic equities as well as a basket of other commodities.

Precious Metals on Top in 2016
click to enlarge

I’ve already shared with you the fact that gold has historically had a low correlation with equities. This point is worth reiterating: When equities have zigged, gold has zagged. And with volatility high in global markets right now, many investors are choosing to rotate a portion of their portfolios into the precious metal.

Marc Faber suggests that it might be a good time to get back into gold.

This was the advice of my friend Marc Faber, who recently warned investors in his influential “Gloom, Boom & Doom Report” newsletter that global stocks could fall an additional 40 percent on mounting liquidity and debt problems. In the event such a crisis occurs, Marc says, investing in gold—which, again, has been shown to be inversely correlated with stocks—might be one way to protect one’s wealth.

I’ve always recommended a 10 percent weighting in gold: 5 percent in physical bullion, the other 5 percent in gold stocks or mutual funds. This applies in all market conditions, good or bad.

Something else I want to draw attention to in the chart above is the extreme divergence in performance between gold and oil, which is trading at levels we haven’t seen in a long while. Declines in oil have traditionally invited enormous selloffs in other commodities, making gold’s resilience at this time all the more impressive.

China Consumed Nearly All of Global Gold Output in 2015

Investors in China appear to recognize the importance of gold in times of market uncertainty. Since June 2015, the Shanghai Composite Index has dropped close to 45 percent, prompting scores of retail investors to pivot into safe haven assets such as gold. As you can see below, 2015 was a blowout year for the Shanghai Gold Exchange (SGE), which in the past has served as a good measure of wholesale demand in China.

Physical Gold Delivered from Shanghai Gold Exchange (SGE) vs. World Mining Output
click to enlarge

Not only did gold deliveries climb to a record number of tonnes in 2015, they also represented more than 90 percent of the total global output of the yellow metal for the year.

The SGE has made it incredibly easy for Chinese citizens to participate in gold investing. Recently it rolled out a smartphone app, making it more convenient than ever before to open an account and begin trading.

Gold Miners Are Winners of the Currency Wars

Gold priced in the strong U.S. dollar might have netted a loss in 2015, but in many other parts of the world, prices were either stable or even made gains. For buyers of gold in non-dollar economies, it’s the local price that matters most, not the dollar. In Russia, the third-largest producer, the metal rose 12 percent—and came close to an all-time high. In South Africa, the sixth-largest, it was well above the all-time high. Investors there saw returns of greater than 20 percent in 2015.

Gold Was Positive in Non-Dollar Currencies
click to enlarge

This has been beneficial to many mining companies based outside the U.S. Operations are paid for in local currencies—most of which have weakened in the last year—but companies sell their production in U.S. dollars. This has helped offset the decline in gold prices since they peaked in 2011.

Canadian-based companies such as Claude Resources, Richmont and Agnico Eagle Mines are performing well, even in the gold bear market and amid high volatility.

Canadian Gold Stock Performance
click to enlarge

For the last three years, gold miners all over the globe have been thoroughly beaten up. Today, they’re heavily discounted, and there are signs that conditions are stabilizing.

Managing Expectations

With the Fear Trade heating up, it’s important that we manage our expectations. The length and extent of the current bear market, which began in September 2011, might seem unprecedented to many investors. In actuality, it doesn’t veer very far from what we’ve seen in the past, according to data presented by the World Gold Council (WGC).

Current Gold Bear Market Not Far off the Mean
January 1970 – January 2016
Current Gold Bear Market Not Far off the Mean BULL MARKET Current Gold Bear Market Not Far off the Mean BEAR MARKET
Dates Length (months) Cumulative Return Dates Length (months) Cumulative Return
Jan 1970 –
Jan 1975
61 451.4% Jan 1975 –
Sep 1976
20 -46.4%
Oct 1976 –
Feb 1980
41 721.3% Feb 1980 –
Mar 1985
61 -55.9%
Mar 1985 –
Dec 1987
33 75.8% Dec 1987 –
Mar 1993
63 -34.7%
Apr 1993 –
Feb 1996
35 27.2% Feb 1996 –
Sep 1999
43 -39.1%
Oct 1999 –
Sep 2011
144 649.6% Sep 2011 –
Present
52 -44.1%
Average 63 385.1% Average 47 -44.0%
Median 41 451.4% Median 52 -42.7%
Source: World Gold Council, U.S. Global Investors

Reaching back to 1970, the WGC identified five bull and bear markets, with bull markets defined as periods when gold prices rose for longer than two consecutive years, bear markets as the subsequent periods when they fell for a sustained length of time. Although these lengths vary, the cumulative loss in each bear market is relatively uniform, with median returns at negative 42.7 percent.

The present bear market, at negative 44.1 percent, falls easily within the realm of normalcy.

Further, the table suggests that a turnaround in gold prices is overdue.

Gold and silver to thrive in currency war environment

The New York gold price closed Friday at $1,089.10 up from $1,076.90. In Asia on Monday, it was moved down to $1,088.25 and London held slightly higher until it was set by the LBMA at $1,090.45 with the dollar index almost the same at 99.03 up from 98.97 on Friday. The euro was at $1.0891 down from $1.0897 against the dollar. The gold price in the euro was set at €1,001.24 up from €992.29. Ahead of New York’s opening, the gold price was trading at $1,090.00 and in the euro at €1,000.83.  

The silver price in New York closed at $13.90 up 5 cents at Friday’s close.  Ahead of New York’s opening on Monday, the silver price stood at $13.90.

Price Drivers

Friday saw purchases of 3.867 tonnes of gold into the SPDR gold ETF and a purchase of 0.30 of a tonne into the Gold Trust. The holdings of the SPDR gold ETF are now at 657.924 tonnes and at 161.46 tonnes in the Gold Trust.  Without physical sales and with persistent gold purchases into the U.S. gold ETFs, dealers look as though they will be pushed to reflect gold and silver prices moving higher in line with U.S. demand and supply. COMEX speculators have increased their bullish positions last week.

We do see emerging market capital outflows from India, South Africa and importantly China. The People’s Bank of China is doing its best to prevent brutal falls in the Yuan by using Capital Controls [increasing reserve requirements for the offshore Yuan] but all know that the Yuan should be 6% lower at 7.00 to the dollar to just remove the appreciation caused by its ‘peg’ to the dollar. It could fall up to 30% more in time. Meanwhile ahead of the Chinese New Year we see gold demand in China quadrupling to 238 tonnes in the first week of January.

Gold and silver investors should note that currencies are not moving on economic fundamentals but reflect the tsunamis of capital leaving the weaker emerging nations. 2016 will be a year when we see battles to lower exchange rates by individual countries, lessening the credibility of those currencies internationally and undermining monetary system confidence. Gold and silver will thrive in this environment.

China is building an ‘empire’ independent of the developed world through ignoring politics and doing business with anyone. It is now trying to get its feet under the tables of the Middle East on both sides of the Persian Gulf on this basis. Now that Iran has seen sanctions lifted we do not think it will turn to the developed world but to China, so that it is not vulnerable to the U.S. Saudi Arabia too, sees similar advantages in developing ties with China. Over time this will lead to a lower use of the dollar replacing much of it with the Yuan.

The silver price will see a volatile start to the week, but still follow gold.

Julian D.W. Phillips for the Gold & Silver Forecasters – www.goldforec aster.com and www.silverforecaster.com

Currency Wars 2015 – The year of the Central Banks

Frank Holmes of U.S. Global Investors – www.usfunds.com – presents hs views on the race for the bottom in global fiat currencies and what this means for gold and other investments

Frank Holmes in Zurich holding a gold bar
Frank Holmes in Zurich holding a gold bar

The Chinese Year of the Ram (or sheep or goat depending on which translation one uses) will kick off at the end of this month, but for now it looks as if 2015 will be the Year of the Central Banks.

I spend a lot of time talking about gold, oil and emerging markets, and it’s important to recognize what drives these asset classes’ performance. Government and fiscal policy often have much to do with it. But in the past three months, we’ve seen central banks take center stage to engage in a new currency war: a race to the bottom of the exchange rate in an attempt to weaken their own currencies and undercut competitor nations.

Indeed, amid rock-bottom oil prices, deflation fears and slowing growth, policymakers from every corner of the globe are enacting some sort of monetary easing program. Last month alone, 14 countries cut rates and loosened borrowing standards, the most recent one being Russia.

A weak currency makes export prices more competitive and can help give inflation a boost, among other benefits.

“The U.S. seems to be the only country right now that doesn’t mind having a strong currency,” says John Derrick, Director of Research here at U.S. Global Investors.

Since July, major currencies have fallen more than 15 percent against the greenback.

U.S. Dollar CLimbing HIgher Against Other World Currencies
click to enlarge

Two weeks ago, Switzerland’s central bank surprised markets by unpegging the Swiss franc from the euro in an attempt to protect its currency, known as a safe haven, against a sliding European bill. Its 10-year bond yield then retreated into negative territory, meaning investors are essentially paying the government to lend it money.

This and other monetary shifts have huge effects on commodities, specifically gold. As I told Resource Investing News last week:

Gold is money. And whenever there’s negative real interest rates, gold in those currencies start to rise. Whenever interest rates are positive, and the government will pay you more than inflation, then gold falls in that country’s currency. Last year, only the U.S. dollar had positive real rates of return. All the other countries had negative real rates of return, so gold performed exceptionally well.

Other countries whose central banks have enacted monetary easing are Canada, India, Turkey, Denmark and Singapore, not to mention the European Central Bank (ECB), which recently unveiled a much-needed trillion-dollar stimulus package.

U.S. Dollar CLimbing HIgher Against Other World Currencies

Gold bears are puzzled as hedge funds raise bullish gold bets.
clever image of a Panda crushing an american eagle (see below)

 

A recent BCA Research report forecasts that as a result of quantitative easing (QE), a weak euro and low oil prices, the eurozone should grow “by about 2 percentage points over the next two years, taking growth from the current level of 1 percent to around 3 percent. This is well above the range of any mainstream forecast.” The report continues: “[European] banks, in particular, are likely to outperform, as they will be the direct beneficiaries of rising credit demand, falling default rates and the ECB’s efforts to reflate asset prices.” This bodes well for our Emerging Europe Fund (EUROX),which is overweight financials.

Speaking of oil, the current average price of a gallon of gas, according to AAA’s Daily Fuel Gauge Report, is $2.05. But in the UK, where I visited last week, it’s over $6. That’s actually down from $9 in June. You can see why Brits don’t drive trucks and SUVs.

But that’s the power of currencies. As illustrated by the clever image of a Chinese panda crushing an American eagle (above), China’s economy surpassed our own late last year, based on purchasing-power parity (PPP).

China's Economy Surpasses the U.S.'s Based on Purchasing Power Parity
click to enlarge

Financial columnist Brett Arends puts it into perspective just how huge this development really is: “For the first time since Ulysses S. Grant was president, America is not the leading economic power on the planet.”

Burgerology: Price of a Big Mac as of 2015

An easier way to comprehend PPP is by using The Economist’s Big Mac Index, a “lighthearted guide to whether currencies are at their ‘correct’ level.” The index takes into account the price of McDonald’s signature sandwich in several countries and compares it to the price of one here in the U.S. to determine whether those currencies are undervalued or overvalued. A Big Mac in China, for instance, costs $2.77, suggesting the yuan is undervalued by 42 percent. The same burger in Switzerland will set you back $7.54, making the franc overvalued by 57 percent.

Earning More in a Low Interest Rate World

From what we know, the Federal Reserve is the only central bank in the world that’s considering raising rates sometime this year, having ended its own QE program in October.

Last month we learned that the Consumer Price Index (CPI), or the cost of living, fell 0.4 percent in December, its biggest decline in over six years. We’re not alone, as the rest of the world is also bracing for deflation:

Global Consumer Price Index (CPI) Trends
click to enlarge

Following Fed Chair Janet Yellen’s announcement last Wednesday, the bond market rallied, pushing the 10-year yield to a 20-month low.

U.S. 10-Year Bond Yield Dips to a 20-Month Low
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Interest rates remain at historic lows, where they might very well stay this year. But when they do begin to rise—whenever that will be—shorter-term bond funds offer more protection than longer-term bond funds. That’s basic risk management. We always encourage investors to understand the DNA of volatility. Every asset class has its own unique characteristics. For example:

The Longer the Maturity, the Greater the Price Volatiity
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Upcoming Webcast

To those who listened in on our last webcast, “Bad News Is Good News: A Contrarian Case for Commodities,” we hope you enjoyed it and received some good, actionable insight. If you weren’t able to join us, you can watch the webcast at your convenience on demand. Our next webcast is coming up February 18 and will focus on emerging markets, China in particular. We hope you’ll join us! We’ll be sharing a registration link soon.

Please consider carefully a fund’s investment objectives, risks, charges and expenses. For this and other important information, obtain a fund prospectus by visiting http://www.usfunds.com or by calling 1-800-US-FUNDS (1-800-873-8637). Read it carefully before investing. Distributed by U.S. Global Brokerage, Inc.