Gold, Negative Rates and Putin

Posted On Mar 31, 2016 By Dave Gonigam

  • Reliable indicator for gold is flashing “go”
  • Russia acquires gold at blistering pace: What’s the plan?
  • Insurance company foils diabolical Fed plan (sort of)
  • The spy plane that’s never flown and other epic tales of government waste
  • A good Supreme Court ruling… will the Fed start buying stocks?… a word to the wise about money orders… and more!

It’s like the best of both worlds: The Federal Reserve has yet to resort to negative interest rates… but negative interest rates in Europe and Japan are driving up gold priced in U.S. dollars anyway.

As we write on the final day of the first quarter, gold sits at $1,234 — up 16% since the first of the year.

That’s the Midas metal’s best quarterly performance since the third quarter of 1986 — when Huey Lewis and the News topped the charts with “Stuck With You.” (Yecch… Your editor prefers to remember that summer with “The Captain of Her Heart” by the one-hit wonder Double.)

True, $1,234 isn’t as good as nearly $1,280 three weeks ago… but that price action doesn’t surprise our old friend Frank Holmes, chief of the U.S. Global family of mutual funds. “[Gold] is going through its normal, seasonal pattern that is sloppy, going through the next six weeks,” he tells Kitco News.

Keep your eye on the bigger picture of negative interest rates, says Frank: “Gold can turn around and have a quick pop because of the fight of global slowdown with negative interest rates.”

Negative interest rates “may result in structurally higher demand for gold from central banks and investors alike,” concurs a report out this morning from the World Gold Council, the trade group for gold miners.

The report reinforces a point we’ve been making all year — if people are destined to lose money in bank deposits and government debt, they’ll naturally look to gold as an alternative.

“The prolonged presence of low (and now even negative) rates has fundamentally altered the way investors should think about risk and may result in a broader use of assets like gold to manage their portfolios more effectively and preserve their wealth over the long run.”

Building on that idea, the report looks back to episodes in history when real interest rates — after inflation — were negative. During those times, gold returns tend to be “twice as high as the long-term average.”

The white paper anticipates central banks will buy record amounts of gold this year and in the years ahead “as foreign reserve managers all over the world continue to grapple with the challenges of native nominal interest rates.”

For the moment, Russia has surpassed China as the world’s leading gold buyer.

The Russian central bank added 356,000 ounces of gold to its reserves in February, according to the International Monetary Fund — surpassing China’s purchases of 320,000 ounces.

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As explained by Sputnik News — the state-owned media outlet that traces its lineage to the old Radio Moscow — “Gold is considered to be a buffer against external economic risks and is currently in favor in Russia, one of the world’s largest oil exporters, which was hit by a slump in global oil prices.”

Well, yes… but there’s a bigger agenda at work, says Jim Rickards. He calls it the “shadow gold standard.”

Russia, like China, wants that proverbial “seat at the table” whenever the international monetary system collapses and has to be reorganized. A big gold reserve relative to GDP earns a nation that seat.

He’s no one’s fool…

At present, Russia’s gold stash is about 2.7% of GDP — roughly equal to that of the United States. “Russia has only one-eighth the amount of gold the United States has,” Jim writes in his latest book, The New Case for Gold, “but its economy is only one-eighth the size of the U.S. economy, so the ratio is comparable.

“However, Russia is one of those nations that is acquiring more gold, and it seems set on passing the United States and matching the eurozone” — whose gold reserve equals 4% of GDP.

[Ed. note: The New Case for Gold is set for publication just five days from now — next Tuesday.

Amazon is charging $16.66. But if you order through us, your copy is effectively FREE. You pay only $4.95 for shipping and handling, plus you get a handful of bonuses you can’t get anywhere else…

  • Your hardcover copy will be signed by Jim…
  • You’ll get a no-obligation trial to Rickards’ Strategic Intelligence
  • And you’ll have access to a live online workshop next Tuesday where Jim will reveal a near-term catalyst that could meaningfully move the needle on the gold price — much more than the 16% it’s risen the last three months.

But the clock’s ticking: This offer comes off the table as soon as the book is released to the general public next week. Claim your signed copy of The New Case for Gold right now.]

Major U.S. stock indexes are treading water this morning, the afterglow from Fed chair Janet Yellen’s Very Important Speech on Tuesday finally wearing off.

(There’s a CNBC commentary on the Web this morning that, without a hint of irony or cynicism, labeled the speech a “blockbuster.” The only circumstance under which The 5 would give that label to a Yellen speech is if she unleashed a foul-mouthed tirade of Joe Pesci proportions. Or if she said something nice about gold. Heh…)

At last check, the S&P 500 has added a point at 2,065. Treasury rates are likewise little moved, the 10-year yield at 1.81%. The dollar index has drifted to a new year-to-date low at 94.5.

Crude has stabilized after yesterday’s whacking, a barrel of West Texas Intermediate fetching $38.57.

Never underestimate the power of good lawyers: MetLife is off the hook as a “too big to fail.”

It was two weeks ago Jim Rickards described in this space how epic-low interest rates were hurting insurance companies. And matters were worse for three of the big ones — MetLife, Prudential and AIG — because the feds had designated them “systemically important financial institutions” (SIFIs). That made them subject to many of the same regulations as the big banks.

“In the years ahead,” said Jim, “the Fed intends to force the SIFIs to buy government bonds as part of a plan to monetize the U.S. government debt.”

Well, not MetLife. MetLife fought the SIFI designation full-bore, saying it doesn’t engage in the risky activities the banks do (or that AIG did in the run-up to the Panic of 2008). Yesterday, it won. A federal judge rescinded the company’s SIFI status.

MetLife executives are doing the Snoopy dance…

But in a way, it’s a Pyrrhic victory: MetLife already decided to spin off its U.S. life insurance business, hoping to appease the regulators. That deal will still go ahead despite yesterday’s ruling…

Elsewhere in the federal court system, the Supreme Court has stood up for property rights and the Sixth Amendment.

We made passing reference to the case of Luis v. United States last year. Sila Luis was indicted in Florida for Medicare fraud in 2012. The feds moved to seize not only her “tainted” assets — that is, her allegedly ill-gotten gains — but also her other assets that have no connection to criminal activity.

That was money she was counting on to fund her defense. She said she was effectively denied her Sixth Amendment right to counsel in a criminal prosecution.

Yesterday, five of the eight Supreme Court justices agreed. (Kennedy, Alito and Kagan were the dissenters, if that matters to you.)

Hooray for the rule of law?

Your government in action, again: From the people who brought you the $43 million gas station in Afghanistan comes the $86 million spy plane that’s never been used, and likely never will be.

The government watchdog who oversees U.S. spending in Afghanistan is out with another jaw-dropping report — which, considering we’re talking about the government, is a singular accomplishment.

Seven years ago, the Drug Enforcement Administration started work on the ATR-500 spy plane, specifically to fight the drug trade in Afghanistan. But the program for which the plane was developed wound down last year. The plane, meanwhile, “remains inoperable, resting on jacks, and has never actually flown in Afghanistan,” says a report from Special Inspector General for Afghan Reconstruction John Sopko.

The DEA blew its budget by a factor of four because the agency “did not take into account, when purchasing the ATR-500, the time and cost it would incur to establish an infrastructure of pilots, mechanics, trainers and spare parts required to operate the aircraft.”

Oh, yeah, that!

The plane isn’t even the best part of Sopko’s report. That’s reserved for a $6 million expenditure importing nine rare blond Italian goats, the better to boost Afghanistan’s cashmere industry.

Oversight was so lax, writes Mr. Sopko, that he can’t rule out the possibility the goats became someone’s dinner.

“Just a thought,” begins today’s mailbag: “If money is looking for the best return and a safe place to park, as it always does, why not strong stocks — i.e., low debt, cash strong and a strong product?

“I got to thinking about this and it seems to me that the power holders of money will go to stocks and not government bonds or weak companies or weak currencies or negative bank rates.

“Precious metals won’t hold the trillions of dollars, so… it will go to stocks. My guess is that there will major opportunities to see the stock market rise much, much higher than where it is now. Your thoughts, please.”

The 5: Hmmm… The Bank of Japan started buying Japanese ETFs in 2010. By last fall, the BoJ owned “more than half the nation’s market for exchange-traded stock funds,” according to Bloomberg.

Assuming there’s any connection with the performance of the Japanese stock market, it took two years for the Nikkei to get off the floor after the BoJ started its purchases. And while the Nikkei more than doubled from mid-2012 to mid-2015, it’s down 18.6% since last summer, near bear market territory.

It wouldn’t surprise us at all if the Fed started buying stocks one day… but whether it gooses the stock market is another matter entirely…

“Regarding the cashless society discussion,” a reader writes, “who says the grasping banks and Mark of the Beast theories are mutually exclusive?

“In this regard, I had a ‘revelation’ of my own some months back. To wit:

“Let’s say you were Supreme Ruler of Earth about 2,000 years ago, long before computers were even remotely conceived and electrons were a medium of economic exchange. And let’s say that you wanted to impose an edict by which ‘None may buy or sell without the Mark.’

“Keeping in mind that the majority of trade at that point in our history was barter, how would even an omnipotent dictator of that time have even imagined enforcing such an edict? How could one possibly police the entire population at all times in all places in order to prevent anyone without ‘the Mark’ from engaging in trade?

“Even with our vastly superior surveillance technology, it can’t be done today (yet). The only way they can do it is by eliminating barter and imposing a digital ‘cashless society.’ So how could someone (e.g., the author of the Book of Revelation) nearly 2,000 years ago even have imagined such a concept and written about it?

“Now imagine that you are a visitor from an advanced civilization — someone who can foresee such an eventuality for us because your civilization went through all of the economic, technological, social and political contortions too on its way to its current advanced state, and you recognize that it’s simply part of the natural progression in your social evolution.

“How would you go about explaining the concept of ‘cashless society’ to someone for whom the idea of electricity — let alone computers — can only be within the power of godlike entities?

“Just sayin’…

“Love The 5 every day. No ‘buts’!”

“Just remember there’s a limit to the money orders the Post Office can sell you without filling out a report,” cautions our final correspondent, in reply to yesterday’s mailbag.

“As long as your money order purchase is less than $3,000, there is no ID or questions. Above that, they will fill out a report and keep it on file to make sure you are not moving more than $10,000 a day. Same is true of the grocery store and 7-Eleven, except that their amount is $2,000.

“So you need to check their policy before buying too many money orders if you want to stay under the radar. Most all banks will do the same thing. If you buy them regularly, you can be charged with breaking the law for avoiding the reporting rules.”

The 5: Good stuff. Thanks for the heads-up.

Best regards,

Dave Gonigam
The 5 Min. Forecast

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