CENTRAL BANKERS PUSHING ON A STRING, ALGORITHMS & MOMENTUM

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THE BRITISH  RED CROSS SYRIA APPEAL

GOLD PRICES FROM JANUARY 2016 TO 10th MARCH

CHART COURTESY WWW.KITCO.COM

Are Central Banks Pushing on a string?

In the first west week of this January I posted this Goldwatcher note

 “Gold is insurance against the unexpected and the unthinkable. Gold is  poised to breach the psychologically and technically important $1100 threshold…Gold pundits like to punt gold demand as coming from fear or love trades. But they ignore the more important trade trades  – i.e. the speculative punts that  can account for most the money flowing in and out of gold”

The global risk landscape this time last year was fairly tame  and I posted several comments on gold price prospects for the year that proved to be useful.  The landscape this year has been different and recent posts on gold have included  Ray Dalio on Central Banks Risk Pushing on a string 

Messages from The Goldwatcher Book:

goldbook-book.png

The manuscript for The Goldwatcher was submitted to the publisher, at the end of 2007. At the time the gold price was a little over $800 – about double the where it was when I first submitted the book proposal to Wiley.

 The Goldwatcher (Page 186)    included this comment under the heading

Messages From History

.”…Pundits had been calling for the Gold Price to reach $850, the level it spiked to in 1980. That’s equivalent to about $1900 in 2007 money. However a price spike and a price average over a longer period are very different situations. “

As we all know the price  spiked to above $1900 in September 2011, fell again below $1100 in January this year and is now in sight of breaching $1300.

Motivation, Strategy & Timing

My contribution to investing in gold has been based on motivation strategy & timing. Yesterday’s dramatic responses to ECB President Draghi’s package of stimulus measures was followed by dramatic prices movements  that are settling down today  with these among  other price changes:

GOLD +0.60%,   COPPER+  0.68%  OIL + 2.27%, LEAD +1.15%,, ZINC +1.61%

 

MOMENTUM, ALGORITHMS & ANIMAL SPIRITS:

Price overshoots and undershoots are par for the course in currency and commodity markets.  As it’s likely that  future  price  movements will also be driven by momentum, algorithms and animal spirits it will make sense for  investors to monitor these influences themselves or keep well informed  from a reliable information source.

The Goldwatcher. Page 187 following, addresses past consequences of price overshoots.

 

All postings on this blog will remain freely accessible in the public domain but new postings will be on the Investor Literacy blog

For further Goldwatcher comments please follow Investor Literacy

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TIME TO START SHORTING GOLD?

Motivation, Strategy & Timing

Contributions in the Goldwatcher Book and this blog are based on decisions being made consistent  with an investor’s reasons for wanting to own gold (motivation) , whether to own physical gold, mining equities or derivative products (strategy) and of course timing.

Technical analysis is not addressed in this blog but timing usually involves  having regard to technical indicators.  There are multiple sources for current  technical analysis available – including contributors to Kitco.

Goldman’s call to start shorting gold is presented in this Bloomberg video.

An interesting observation in the Goldman video is that recent market turmoil was, to an extent, caused by panic.  This short Investor Literacy 9th February post  comments on what happens in markets when investors panic.

A well informed  view on gold price prospects:

HSBC’s James Steel contributes useful comment on likely gold price developments in this Bloomberg interview –  

 

 

RAY DALIO : CENTRAL BANKERS RISK PUSHING ON A STRING

# Note added 1st February 2016 :

Link to Investor Literacy comment on $5.5 Trillion Government Bonds with negative yield and notes on negative interest rates

INTRODUCTION:

Ray Dalio, billionaire founder and head of Bridgewater Associates,  one of the world’s most successful money managers, consistently makes the case for investors to own gold as protection against adverse outcomes with other investments. His view is unambiguous:

“If you don’t own gold…there is no sensible reason other than you don’t know history or you don’t know the economics of it…”

The above chart accompanies The Economist article “Falling Off The Supercycle – Trapped In A World Of High Debt, Low Rates and Slow Growth.”

The Economist  cite BCA Research as having defined the debt supercycle  as” the period since the Second World War  in which debt levels have inched persistently higher and notes “BCA now thinks the Debt Supercycle has come to an end. This is not because the overall level of debt has fallen; indeed, if one excludes the financial sector, the global level is still rising (see above chart)… monetary policy has failed to create a credit boom in the private sector, even with the help of zero short-term interest rates.”

As early as 2013 BCA commented  :  “The Supercycle reached an important inflection point in the recent economic and financial meltdown with authorities reaching the limit of their ability to get consumers to take on more leverage.  This forced the government to leverage itself up instead. Once fiscal policy is pushed to the limits of sustainability, the debt Supercycle could come to a violent end.”

 RAY DALIO  ON CENTRAL BANKS RISK PUSHING ON STRING

 In an article published in  the Financial Times last week titled Pay Attention To The Long term Debt Cycle and  headlined limits to spending growth financed by debt and money raises risks of policy makers  pushing on a string Dalio writes:

“I have a controversial view that is based on my alternative economic template, and I feel a responsibility to share at this precarious time.

 “In brief, the Federal Reserve’s template, and that of most economists and market participants, reflects the business cycle (however) there are two important cycles to pay attention to — the business cycle, or short-term debt cycle, and the debt supercycle, or long-term debt cycle

  “We are seven years into the expansion phase of the business/short-term debt cycle — which typically lasts about eight to 10 years — and near the end of the expansion phase of a long-term debt cycle, which typically lasts about 50 to 75 years…Since the long-term debt cycle issue is the biggest issue that separates my view from others, I’d like to briefly focus on its mechanics…

“…There are limits to spending growth financed by a combination of debt and money. When these limits are reached, it marks the end of the upward phase of the long-term debt cycle. In 1935, this scenario was dubbed pushing on a string

“This scenario reflects the reduced ability of the world’s reserve currency central banks to be effective at easing when both interest can’t be lowered and risk premia are too low to have quantitative easing being effective.”

Noting our capital allocation system is driven by spreads Dalio writes:

“…where things now stand across the world’s reserve currencies. expected returns of bonds (and most asset classes) are relatively low in relation to the expected returns of cash. As a result, it is difficult to push the prices of these assets up and it is easy to have them fall. And when they fall, there is a negative impact on economic growth.

When this configuration exists…stimulating demand is more difficult, and restraining demand is easier, than is normally the case.

At such times the risks are asymmetric on the downside…

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1: This website is not advisory. Opinions, comment and analysis are provided for information, are not intended as investment advice and may not be used as investment advice.

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3: Opinions expressed in comment on this site have short sell by dates and may be  past their sell by the  date when they are read.

 

 

 

GUNDLACH ON $1400 AND GAN ON $950 OR $1200 GOLD

Star money manager Jeff Gundlach  thinks gold is going to $1,400 and says the current chart pattern is indicative of a bottom. This call, however, was one Gundlach got wrong in 2015.LINK TO ARTICLE ON GUNDLACH’S MARKET FORECASTS

By contrast Bloomberg’s Top Gold Forecaster Barnabas Gan Sees Prices heading lower.  According to Gan:


“The market may have started the year with a depressing note so far, but an eventual rosier 2016 will bring gold to new lows,” said Barnabas Gan, commodity economist for Oversea-Chinese Banking Corp. Ltd. (OCBC), in the bank’s commodity outlook report Wednesday 13th January… 
According to Gan, gold prices were pressured in 2015 not only by expectations for a U.S. Federal Reserve rate hike, which resulted in a stronger dollar, but also by lackluster physical demand from key markets like China and India..The “kingpin” for lower gold prices, according to Gan, is the prospect of higher U.S. rates in 2016, which would result in a stronger U.S. dollar, and a “rosy” global economic outlook…[W]e remain firm on our expectation for the U.S. Federal Reserve to hike interest rates, at least, by three more times this year to an eventual 1.25% print at end-year,” … “Should our expectations come to pass, gold prices are expected to stage another leg down to our forecast of $950/oz this year,” 

  Gan did note that if his expectations are incorrect and economic conditions worsen, he could see gold prices turn higher and touch $1,200 an ounce on safe-haven demand

 LINK TO BLOOMBERG  ON GAN’S  $950 AND $1200 G0LD FORECASTS 

GOLDWATCHER COMMENT

Steep equity market falls on January 14th and 15th support the view that three further Fed interest rates hikes this year are unlikely now.  Further, if gold does spike down to $950,  mine production will  be uneconomic and  supply will fall.

 

 

 

 

CHINA INTRODUCES INTERBANK GOLD TRADING SYSTEM

LINK TO CCTV VIDEO 

“China has launched interbank gold trading at the beginning of this year in an effort to open up the country’s bullion market. The trading mechanism is introduced by Shanghai Gold Exchange and the China Foreign Exchange Trading System.

“It is aimed to boost liquidity of interbank gold trading, and promote market making. Ten banks including China’s big four banks and a local branch of Australia and New Zealand Banking Group ANZ will act as first-tier market makers. Another six smaller Chinese banks are listed as second-tier market-makers.

“Before the new mechanism, banks were not allowed to trade gold with each other and could only buy the precious metal through the Shanghai Gold Exchange, which is the world’s biggest physical trading platform for the metal.” Source CCTV.com

CHINA’S ICBC STANDARD BANK GAINS FOOTHOLD IN LONDON GOLD MARKET

Reuters reported on January 8th  ” ICBC Standard Bank is buying the lease on Deutsche Bank’s London gold and silver vault, enlarging its footprint in the city’s bullion market, four industry sources close to the companies said on Friday.

“China’s ICBC, which took a controlling stake in Standard Bank’s London-based Global Markets business last year, has also applied to become a clearing member of the London gold and silver over-the-counter business.

“No one at ICBC Standard Bank was immediately available to comment and Deutsche Bank declined to comment. The Chinese and South African lender is aiming to fill the gap left by Western banks, which are retreating from commodities to cut costs and reduce regulatory burden..

LINK TO REUTERS ARTICLE

 

 

 

 

LONDON, Jan 8 ICBC Standard Bank is buying the lease on Deutsche Bank’s London gold and silver vault, enlarging its footprint in the city’s bullion market, four industry sources close to the companies said on Friday.

China’s ICBC, which took a controlling stake in Standard Bank’s London-based Global Markets business last year, has also applied to become a clearing member of the London gold and silver over-the-counter business.

No one at ICBC Standard Bank was immediately available to comment and Deutsche Bank declined to comment.

The Chinese and South African lender is aiming to fill the gap left by Western banks, which are retreating from commodities to cut costs and reduce regulatory burden.

 

LARRY SUMMERS ADVISES HEED THE FEARS OF FINANCIAL MARKETS

 Larry Summers writes in a 10th January  FT article “policy makers should heed the fears of financial markets. They understood the gravity of the 2008 financial crisis well before the Federal Reserve.”

The article continues “…Because of China’s scale, its potential volatility and the limited room for conventional monetary manoeuvres, the global risk to domestic economic performance in the US, Europe and many emerging markets is as great as at any time I can remember. Policymakers should hope for the best and plan for the worst…

“…Policymakers who dismiss market moves as reflecting mere speculation often make a serious mistake. Markets understood the gravity of the 2008 crisis well before the Federal Reserve. They grasped the unsustainability of fixed exchange rates in the UK, Mexico and Brazil while the authorities were still in denial, and saw slowdown or recession well before forecasters in countless downturns. While markets do sometimes send false alarms and should not be slavishly followed, the conventional wisdom essentially never recognises gathering storms.“The Chinese financial services sector is about as large relative to gross domestic product as in Britain…

“…The Economist reports that, looking across all major countries over the past several decades, there were 220 instances in which a year of positive growth was followed by one of contraction. Not once did International Monetary Fund forecasts anticipate the recession in the April of the growth year…

“…Over the past year, about 20 per cent of China’s growth as reported in its official statistics has come from its financial services sector, which is now about as large relative to gross domestic product as in Britain, and Chinese debt levels are extraordinarily high. This is hardly a case of healthy or sustainable growth…

“…In recent years, China’s growth has come heavily from massive infrastructure investment; China poured more cement and concrete between 2011 and 2013 than the US did in the whole of the 20th century. This, too, is unsustainable. Even if it is replaced by domestic services, China’s contribution to demand for global commodities will fall… Because of China’s scale, its potential volatility and the limited room for conventional monetary policy the global risk to domestic economic performance in the US, Europe and many emerging markets is as great as at any time I can remember. Policymakers should hope for the best and plan for the worst…

THE GOLDWATCHER MONITOR SERVICE

 

 #  Note Added 7th January

 GOLD PRICE HAS BREACHED $1100

Back to 5th January posting:

ANNOUNCING THE GOLDWATCHER MONITOR 

Gold is insurance against the unexpected and the unthinkable. Gold is  poised to breach the psychologically and technically important $1100 threshold.

Gold pundits like to punt gold demand as coming from fear or love trades. But they ignore the more important trade trades  – i.e. the speculative punts that  can account for most the money flowing in and out of gold.

The global risk landscape this time last year was fairly tame  and I posted several comments on gold price prospects for the year that proved to be useful.  Last month I posted a link to Bloomberg’s Pessimists guide for 2016 that’s  also worth reading again.

NO BRAINERS

An easy and ill informed approach to gold this year will be to say the world is in an unholy mess again. BUY GOLD.  That sounds like a no brainer – depending whether you think a no brainer is a proposal so obvious you don’t need a brain or a proposal that will only work if you have no brain.

IAN BREMMER’S ANALYSIS ON THE TOP 2016 RISKS

We all have access to quality information in the information age . Here is a link to analysis on the top 2016 risks  published in the last few days by the internationally recognised strategist Ian Bremmer.

THE GOLDWATCHER IN 2016

In the seven years since the global financial crisis erupted investor anxiety has been focused mainly on the economic and financial problems that followed .   There is still cause for concern over many of these problems. But in 2016 the spotlight has moved  to global geopolitical crises and, absent a miracle, is going to stay there.

THE GOLDWATCHER MONITOR

It’s likely gold will  be  finding  its way back on important  asset allocation agendas.  Institutional  and private money managers will need up to date and unbiased information on all aspects of supply and demand for gold and possibly for silver and other precious metals.  Supplying such information will obviously be beyond the scope of this  open access free blog  launched in 2007 to promote The Goldwatcher book.

Providing ongoing reliable information  will require a dedicated team of  remunerated  contributors who will together produce THE GOLDWATCHER MONITOR

For further information on

THE GOLDWATCHER MONITOR

Please contact

THEGOLDWATCHER@ICLOUD.COM

 

 

 

 

 

 

 

Last year in response to requests to readers of this bog and friends I posted several comments on supply, demand and price expectations.  The postings are still accessible on this website.

A PESSIMIST’S GUIDE TO THE WORLD IN 2016

Picture credit Boomberg

# Note added 8th January 2016

Link to Bloomberg Video Discussion on {Pessimists Guide

December 15, 2015

Bloomberg News asked dozens of former and current diplomats, geopolitical strategists, security consultants, and economists to identify the possible worst-case scenarios, based on current global conflicts, that concern them most heading into 2016.

LINK TO BLOOMBERG’S PESSIMISTS GUIDE TO 2016

# Trump wins U.S Presidency

# Oil climbs to $100 per barrel

# The UK leaves the European Union

 

# Banks hit by cyber attack

# The EU crumbles under anti-immigration  fears

 

# China’s economy falls, military rises

 

# Israel attacks Iran’s nuclear facilities

 

# Putin sidelines America

 

# Climate change heats up

 

# Latin America’s lost decade

 

LINK TO related Story: Imagine a World Where Black Swans Really Do Come True in 2016

Goldwatcher Comments are being  published in the Goldwatcher Investor Literacy page    

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