Sunday, July 10, 2016

Gold and silver becoming currency of choice amongst negative bond yields and devaluing currencies

Peter Boockvar saying gold and silver are due to loss of confidence in fiat currencies as a result of central bank actions and after a 4.5 years cyclical bear, the current bull market will take gold and silver much much higher.

I agree only to the movement of currency weightings towards gold and silver due to devaluation of fiat currencies.

After rallying for 12 straight years and peaking in September 2011 at around $1,900 per troy ounce, gold fell into a very lengthy bear market that I believe ended in December 2015 at $1,050. The trigger for the end of the bear and the onset of the bull I attribute to a few things.First, we saw the slap in the face that some markets (particularly foreign exchange) gave the European Central Bank and the Bank of Japan in December and January when they seemed to have crossed the line in their monetary experiments. Second, slowing global economic growth and fear of everything has put off for possibly years the likelihood of another Federal Reserve rate hike.On Dec. 3, the ECB cut its deposit rate by another 10 basis points to -0.3 percent but instead of falling further, the euro actually rallied and European stocks fell, led by bank stocks that suffer from negative interest rates. Not one to learn a lesson, the ECB cut this rate again by another 10 basis points in March and the euro continued to rally. This is important because a weaker currency is a desired transmission mechanism for easing monetary policy.The Bank of Japan in January took its first step in the negative interest rate world by cutting its benchmark rate to -0.1 percent and the yen since has rallied to 100 yen to the dollar from 120 yen to the dollar – the exact opposite of the BoJ plans.The consequences are twofold: 1) Central bankers are beginning to lose control of the markets they are trying to influence and 2) Negative interest rates are a growing cancer on the global economy because it is an outright tax on capital, it is killing the European and Japanese banking systems and greatly damaging the existence of insurance companies and the return prospects of pension funds and savers. According to Fitch, we now have $11.7 trillion worth of negative yielding bonds.What looks best against money that penalizes the holder? Gold and its little but more hyperactive sibling named silver. While yielding nothing and providing no cash flow, gold and silver are positive yielding assets compared to the penalty paid to holding trillions of dollars of negative yielding assets. We are truly living in a world of monetary mayhem where modern day central banking has embarked on an experiment that is now going haywire. I challenge anyone to find any section in any economic textbook that has ever been written in the history of the world that discusses the usefulness of negative interest rates. We are witnessing the culmination and likely end of the post 1971 global monetary regime when fiat currencies shed any and all ties to the price of gold. I am most confident that gold and silver will be the last currencies standing.The secular bull market in both (Gold and Silver) that began 15 years ago has resumed again after the 4 ½ year cyclical bear market and the behavior of central banks and what they are doing to their respective currencies is the main reason why. If I am correct, a new bull market usually takes assets to levels above the previous highs and thus I believe there is a further ways to go in the years to come.