Tag: finance

Submitted by Juan Cole via OilPrice.com,

Prince Muhammad Bin Salman, 30, the deputy crown prince of Saudi Arabia laid out his vision for Saudi Arabia on Monday in a plan called “Vision 2030.” He wants to get Saudi Arabia off its oil dependence in only 4 years, by 2020, and wants to diversify the economy into manufacturing and mining.

In an interview with Al Arabiya, the prince said the future of the kingdom would be based on:

1. Its possession of the Muslim shrine cities of Mecca and Medina and the “Arab and Muslim depth” that position gave the kingdom

 

2. The kingdom’s geographical centrality to world commerce, with 30 percent of global trade passing through the 3 major sea routes that Saudi Arabia bestrides (not sure what the third is, after the Red Sea and the Persian Gulf).

 

3. The creation of a $2 trillion sovereign wealth fund through a sale of 5 percent of shares in Aramco, the world’s largest oil company.

Prince Muhammad said Monday that he thought these assets would allow the kingdom to cease its dependence on petroleum in the very near future.

CNBC summarized other planks of his platform this way:

“The planned economic diversification also involved localizing renewable energy and industrial equipment sectors and creating high-quality tourism attractions. It also plans to make it easier to apply for visas and hoped to create 90,000 job opportunities in its mining sector.”

Saudi Arabia’s citizen population is probably only about 20 million, so it is a small country without a big domestic market. It is surrounded in the general region by huge countries like Egypt (pop. 85 million), Iran (pop. 75 million) and Turkey (75 million), not to mention Ethiopia (pop. 90 million) Without petroleum, it is difficult to see what would be distinctive about Saudi Arabia economically.

The excruciatingly young prince, who was born in 1985, has a BA in Law from a local Saudi university and his way of speaking about the elements of the economy is not reassuring. Take his emphasis on the maritime trade routes that flow around the Arabian Peninsula. How exactly does Saudi Arabia derive a dime from them? The only tolls I can think of are collected by Egypt for passage through the Suez Canal. By far the most important container port in the region is Jebel Ali in the UAE, which dwarfs Jedda. His estimate of 30 percent of world trade going through these bodies of water strikes me as exaggerated. Only about 10 percent of world trade goes through the Suez Canal.

As for tourism, in a country where alcohol is forbidden and religious police report to the police unmarried couples on dates, that seems to me a non-starter outside the religious tourism of pilgrimage to Mecca. The annual pilgrimage brought in $16.5 billion or 3 percent of the Saudi GDP four years ago, but that number appears to be way down the last couple of years. Unless the prince plans to highly increase the 2-3 million pilgrims annually, religious tourism will remain a relatively small part of the economy.

He also spoke about the new bridge planned from Saudi Arabia to Egypt as likely to drive trade to the kingdom and to make it a crossroads. But the road would go through the Sinai Peninsula, which is highly insecure and in the midst of an insurrection. And where do you drive to on the other side? You could maybe take fruits and vegetables by truck from Egypt to countries such as Qatar and the United Arab Emirates. Would Saudi Arabia collect tariffs on these transit goods? I can’t see how that generates all that much money. The big opportunity for overland transport would be to link Egypt to a major market like Iran (pop. 77 million), and via Iran, Pakistan and India. But Prince Muhammad and his circle are hardliners against Iran and unlikely to foster trade with it.

Saudi Arabia suffers from the Dutch disease, i.e. its currency is artificially hardened by its valuable petroleum assets. They may eventually not be worth anything if hydrocarbons are replaced by green energy or even outlawed. But in 2016, they are still valuable, and they make the riyal expensive versus other currencies. The result is that anything made in Saudi Arabia would be unaffordably expensive in India (the rupee is still a soft currency). As long as Saudi Arabia produces so much petroleum, it is unclear how it can industrialize in the sense of making secondary goods.

As for the sovereign wealth fund, let’s say the ARAMCO partial IPO actually realizes $2 trillion. Let’s say it gets 5 percent on its investments after overhead and that all $2 trillion are invested around the world. That would be $100 billion a year, or 1/6 of Saudi Arabia’s GDP last year. It doesn’t replace the oil.

Saudi Arabia’s Gross Domestic Product in 2014 was $746 bn., of which probably 70 percent was petroleum sales. In 2015 it was only $653 bn., causing it to fall behind Turkey, the Netherlands and Switzerland. It will be smaller yet in 2016 because of the continued low oil prices.

All this is not to reckon with the profligate spending in which the kingdom is engaged, with a direct war in Yemen and a proxy war in Syria, neither cheap. (Both wars are pet projects of Prince Muhammad bin Salman). It also has a lot of big weapons purchases in the pipeline, one of the reasons for President Obama’s humiliating visit last week. It ran a $100 bn. budget deficit in 2015. Saudi Arabia has big currency reserves, but I doubt it can go on like this more than five or six years.

Yemen in particular has proved to be a quagmire, and the Houthi rebels still hold the capital of Sanaa. The only new initiative is that Saudi and local forces have kicked al-Qaeda in the Arabian Peninsula out of the port of Mukalla. This campaign shows a sudden interest in defeating al-Qaeda, which had been allowed to grow in Yemen while the main target was the Shiite Houthis, which Riyadh says are allied with Iran (the links seem minor).

So it seems to me that the Vision for 2030 is mostly smoke and mirrors. As the electric car and better public transport replace gasoline-driven automobiles and trucks, the demand for petroleum will collapse over the next 20 years. A really big extreme global warming event, like a glacier plopping into the ocean and suddenly raising sea level by a foot, e.g., would spread panic and accelerate the abandonment of oil. Saudi Arabia probably cannot replace the money it will lose if oil goes out of style and so is doomed to downward mobility and very possibly significant instability. It has been a great party since the 1940s; it is going to be a hell of a hangover.

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Relations between Iran and Saudi Arabia, which supposed had thawed as part of Obama’s landmark 2015 nuclear deal which also allowed Iran to resume exporting its oil, are once again on the fence following a statement by Iran’s Supreme Leader, Ayatollah Ali Khamenei, which accused the United States of scaring businesses away from Tehran and undermining a deal to lift international sanctions. 

According to Reuters, Khamenei told hundreds of workers that a global deal, signed between Iran and world powers, had lifted financial sanctions, but U.S. obstruction was stopping Iran getting the full economic fruits of the agreement.

 

“On paper the United States allows foreign banks to deal with Iran, but in practice they create Iranophobia so no one does business with Iran,” he said in quotes from the speech posted on his website. 

Iran has repeatedly urged Washington to do more to remove obstacles to the banking sector, in the spirit of the July deal with the United States, the European Union, Russia and China to lift most sanctions on Iran in return for curbs on its nuclear programme.

The reason for Iran’s anger is that despite the overarching deal, some U.S. sanctions remain, and U.S. banks remain prohibited from doing business with Iran directly or indirectly because Washington still accuses Tehran of supporting terrorism and human rights abuses.

U.S. Secretary of State John Kerry told the Iranian Foreign Minister Mohammad Javad Zarif in New York on Saturday that Washington was not trying to stop Iran dealing with banks outside the United States. “There are now opportunities for foreign banks to do business with Iran … Unfortunately there seems to be some confusion among some foreign banks and we want to try and clarify that,” Kerry said.

The biggest problem, and the cause for Iran’s ire, is that as we reported last week, Iran is ready to start shipping out millions of barrels of oil, however it lacks the tankers and the agreements with shippers to transfer them from its oil terminals to any countries who may want to take advantage of its discounted prices. And one country is more at fault than any other: Saudi Arabia.

This is what we said last week:

As increasingly more of Iran’s tanker fleet is currently utilized or is otherwise out of commission, Iran desperately needs foreign ships to execute its plans for a big export push to Europe and elsewhere and meet its target of reaching pre-sanctions sales levels this year. There is just one problem: nobody wants to give their spare tanker capacity to Iran. 

 

According to Reuters ship owners, who are not short of business in a booming tanker market, are unwilling to take Iranian cargoes. One stumbling block is residual U.S. restrictions on Tehran which are still in place and prohibit any trade in dollars or the involvement of U.S. firms including banks – a major hurdle for the oil and tanker trades, which are priced in dollars.

 

As a result only eight foreign tankers, carrying a total of around 8 million barrels of oil, have shipped Iranian crude to European destinations since sanctions were lifted in January, according to data from the tanker-tracking source and ship brokers.

 

That equates to only around 10 days’ worth of sales at the levels of pre-2012, when European buyers were purchasing as much as 800,000 barrels per day (bpd) from the OPEC producer. So far no Iranian tankers have made deliveries to Europe, according to data from the tanker-tracking source.

 

Whether it is due to politics or simple business precaautions, Paddy Rodgers, chief executive of leading international oil tanker company Euronav, said at present there was “no great urgency to do business in Iran”. “There is not a premium to do business in Iran and there is plenty of other business – the markets are busy, rates are good. So there is no stress on wanting to do it,” he told Reuters. “I don’t really want to set up a euro bank account in Dubai in order to trade with Iran – that would crazy.“

What it boils down to is that both charters and insurance providers simply do not want to transact with Iran, and are willing to leave money on the table or else risk angering either the US or Saudi Arabia:

One can almost smell Saudi intervention here, which we first described two weeks ago when we reported that not only has Saudi Arabia banned Iran from sailing in its territorial waters, but has taken proactive steps to slow Iran’s efforts at increasing oil exports, interfering with third parties and making Iran’s procurement of vessels virtually impossible. As the abovementioned oil tanker association Intertanko and other industry participants said then, while no formal notice has been given by Saudi Arabia, uncertainty is making some charterers less willing to lift Iranian crude.

And the primary impetus for Iran to push for the US deal was to resume exporting its oil (it is stil several million barrels short of its full production and export potential), suddenly the Iranian regime is starting to wonder if the U.S. a little less sincere than it led on, and if the deal wasn’t merely to add another feather in Obama’s foreign policy cap, even as Iran remains in the same state as before, albeit with a small kicker of being allowed to sell an extra 1 or so million barrels per day to foreign customers.

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What happens next?

The Six-month cycle strikes again…

h/t Brad Wishak

 

As last year’s analog remains in place…and with The Fed due…

 

It’s different this time though.

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The best, and so far most concise assessment of the FOMC statement comes from Stone McCarthy which points out the following:

Key Take-Aways:

1. The April 27 statement downgraded economic activity, said it “slowed”, but labor market conditions “improved further” and inflation still expected to rise toward 2% over the medium term.
2. Removed language that “global economic and financial developments continue to pose risks”.
3. Kansas City Fed’s Esther George dissented in favor of a rate hike.

The FOMC meeting statement of April 27 was downgraded its assessment of current economic activity as it “appears to have slowed”, but overall the tone was for moderate expansion, further improvements in the labor market, and low inflation that is still expected to gradually return toward the 2% objective as “transitory effects of declines in energy and import prices dissipate”. Inflation expectations “remain low”, while survey-based measures of inflation compensation were “little changed, on balance”.

Our read is that the key change in the statement is the removal of the language that said, “However, global economic and financial development continue to pose risks.” While the FOMC will continue to “closely monitor inflation indicators and global economic and financial developments”, the deletion suggested that FOMC participants are in consensus that impacts from global market turbulence will have a limited impact on the US, and that the US economy will remain resilient in the face of headwinds.

We think that this leaves the door open for a rate hike at the June 14-15 meeting provided the economic data remains about the same as at present, or improves. The forward guidance was unaltered. The statement said, “In determining the timing and size of future adjustments to the target range for the federal funds rate, the Committee will assess realized and expected economic conditions relative to its objectives of maximum employment and 2 percent inflation. This assessment will take into account a wide range of information, including measures of labor market conditions, indicators of inflation pressures and inflation expectations, and readings on financial and international developments. In light of the current shortfall of inflation from 2 percent, the Committee will carefully monitor actual and expected progress toward its inflation goal. The Committee expects that economic conditions will evolve in a manner that will warrant only gradual increases in the federal funds rate; the federal funds rate is likely to remain, for some time, below levels that are expected to prevail in the longer run. However, the actual path of the federal funds rate will depend on the economic outlook as informed by incoming data.”

Kansas City Fed President Esther George dissented for a second meeting in a row. The statement said she “preferred at this meeting to raise the target range for the federal funds rate to 1/2 to 3/4 percent”.

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The kneejerk – USD up, stocks down, bonds down – reaction has faded and with The Fed statement pitching its dovish tent back in domestic concerns while keeping a hawkish eye on global developments. The Long bond is back in the green but it appears machines are busier running oil stops higher and dumping gold.

 

Rate hike odds rose but very modestly from 21% pre- to 23.5% post-FOMC.

 

USDJPY stops were run high and run low…

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Since Yellow-Yellen's March dovefest, stocks have rallied, China has stabilized, and while economic data has been weak in general – jobs and inflation (which is what The Fed claims to care about) have been positive. So how does The Fed make June a live meeting, tilt hawkish, and still protect the narrative of recovery and the sanctity of their equity market (which is all that really matters)…

• *FED REMOVES REFERENCE TO GLOBAL EVENTS POSING RISKS TO OUTLOOK
• *FED SAYS LABOR MARKET IMPROVED EVEN AMID SIGNS OF SLOWER GROWTH
• *FED REPEATS ECONOMIC SITUATION WARRANTS ONLY GRADUAL RATE HIKES

So "risks" are "balanced" and The Fed is "data depedent" again – rate-hikes are back on the table, however here is a key change: instead of monitoring "inflation developments" the Fed is now "monitoring inflation indicators and global economic and financial developments" which is effectively the same as the struck language on "global economic and financial developments."

Pre-Fed: S&P Futs 2084, 10Y 1.888%, EUR 1.134, Oil $44.65, Gold $1249

Before today's statement, rate hike odds…

 

Since The Fed's Dovish-er than expected March meeting, Oil has been the big winner. Bonds & Bullion bounced off unchanged the last 2 days with stocks up 4%…

 

Let's hope they don't get too hawkish…

Additional headlines include:

• *FED SAYS HOUSING SECTOR IMPROVED FURTHER SINCE START OF YEAR
• *FED TO WATCH INFLATION, GLOBAL, FINANCIAL DEVELOPMENTS CLOSELY
• *FED: INFLATION BELOW TARGET DUE TO CHEAPER NON-ENERGY IMPORTS
• *FED SEES MODERATE GROWTH, STRENGTHENING LABOR MARKET AHEAD
• *FED REPEATS ECONOMIC SITUATION WARRANTS ONLY GRADUAL RATE HIKES

*  *  *

Full Redline Below:

 

With 576 words, the statement was just fractionally longer than the March FOMC statement:

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In order to attract and retain small and big business alike, it has long been a tactic by states and local governments to offer tax breaks – just ask Elon Musk who has been a happy recipient of taxpayer generosity over the years. However, as times have got touch in Obama’s “recovery”, government subsidies of at least $50 million have plummeted by 70% Bloomberg reports.

As an example, tax breaks for companies such as Boeing, IBM, and Toyota were part of $17 billion from state and local governments in 2013. In 2014 that number dropped to $7 billion, and last year plummeted to just $4.8 billion.

The reasoning may be twofold.

The first, is that new accounting rules will force state and local budgets to account for tax incentives given to business as lost income in order to stay compliant with GAAP. This could upset the public, knowing just how much each business in their area didn’t have to pay in taxes, and thus potentially increasing property taxes.

 

Another reason could be the fact that it’s political season, and a lot of the rhetoric on the television and radio has been centered on everyone paying their “fair share” and reducing “crony capitalism.”

Those that are critical of the incentives say corporations have gotten away with not living up to their end of the bargain.

“Corporations have long gotten pretty much whatever they wanted under the guise that they are doing something wonderful for the community or society as a whole,” wrote Tim Noonan of West Bend, Wisconsin, in a November 2014 letter to the board, arguing for greater disclosure of corporate incentives.

 

“This is rarely ever the truth, they get what they want so a politician can make themselves look good for a reelection.”

While admittedly more transparency and accountability is always better, and tax incentives are certainly not a guarantee a lasting partnership between business and community,  there are real consequences for those areas that won’t cut tax reduction deals with local businesses. There will always be a state or town willing to cut taxes in some way, shape, or form in order to lure new business in.

The St. Louis Rams moved their entire franchise to Los Angeles as a result of the inability of the local government to come to an agreement on incentives.

Those that are on the receiving end of a business packing up and leaving suffer greatly as jobs, net taxes, and any community investment leaves with it. As as was so eloquently put by Kenneth Thomas, a professor at the University of Missouri-St. Louis:

“There’s an ebb and flow to subsidies, but somewhere down the line there will be another recession, and we’ll see what state and local governments do.”

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Moments ago, former House Speaker Dennis Hastert was sentenced to 15 months in prison in his hush-money case by a judge who called him a “serial child molester” and ordered him to enroll in a sex-offender treatment program.

As NBC reports, Hastert, 74, was accused of abusing four boys between the ages of 14 and 17 when he was a coach at Yorkville High School decades ago. While he was not charged with any sexual crimes because of the statute of limitations, but he pleaded guilty to making illegal cash withdrawals to pay off one of his accusers.

Hastert pleaded guilty to illegally structuring bank transactions between 2010 and 2014 to avoid having them reported to regulators. Prosecutors say he was using the money to pay off a man known only as Individual A, who says Hastert molested him on a wrestling camp trip. Individual A is not testifying at the hearing and sued Hastert this week to collect the remainder of the $3.5 million he says he was promised after he confronted Hastert.

The ex-politician, who arrived in a wheelchair, had no reaction as U.S. District Judge Thomas Durkin handed down the sentence, which includes a $250,000 fine and two years supervised release, in a Chicago courtroom.

Earlier, Hastert listened as one of his accusers broke a lifelong silence and testified about being molested in a locker room in 1979 and as the sister of another accuser demanded he “tell the truth.” Before he learned his fate, Hastert apologized “to the boys I mistreated when I was their coach” but pointedly did not use word abuse. “What I did was wrong and I regret it,” the onetime Republican power broker testified. “They looked up to me and I took advantage of them.”

One of the ex-students, Scott Cross, told the court that when he was a senior in high school in 1979, Hastert took off his shorts and sexually fondled him during a massage after a workout. “As a 17-year-old boy I was devastated. I tried to figure out why Coach Hastert had singled me out. I felt terribly alone,” Cross, who is called Individual D in court papers, testified. “Today I understand I did nothing to bring this on, but at age 17, I could not understand what happened or why.”

“I’ve always felt that what Coach Hastert had done to me was my darkest secret,” the father of two told the judge, adding that he was not sure until he took the stand that he could bring himself to talk about the incident.

“I wanted you to know the pain and suffering he caused me then and still causes me today. Most importantly, I want my children and anyone else who was ever treated the way I was that there is an alternative to staying in silence.

The sister of another accuser, who died of AIDS in 1995, took the stand to tell Hastert he stole her brother’s innocence.

“Don’t be a coward,” Jolene Burdge, sister of Steven Reinboldt, told him. “Tell the truth. You were supposed to keep him safe, not violate him,” she added. “I always wonder if you’re sorry for what you did or if you’re sorry you got caught.”

The answer should be obvious.

Asked by the judge if he had sexually abused Cross, Hastert said he did not remember doing it but would “accept his statement.”

He was more defensive about Burdge’s molestation claim. “It was a different situation, sir,” he said when the judge asked he had abused Reinboldt. When the judge pressed him, Hastert added, “I will accept Ms. Burdge’s statement.”

Hastert, who had a stroke several months ago, has cited his health problems as a reason he should be sentenced to probation. Prosecutors recommended a six-month sentence in accordance with the sentencing guidelines.

 

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Submitted by Axel Merk via Merk Investments,

Is gold, often scoffed at as being an unproductive asset, more productive than cash? If so, what does it mean for asset allocation?

There are investors that stay away from investing in gold because it is an 'unproductive' asset: the argument points out gold doesn't have an intrinsic return, it doesn't pay a dividend. Some go as far as arguing investing in gold isn't patriotic because it suggests an investor prefers to buy something unproductive rather than investing into a real business. In many ways, it is intriguing that a shiny piece of precious metal raises emotions; today, we explore why that is the case.

Investing is about returns…

Each investor has their own preference in determining asset and sector allocations. Some investors prefer to stay away from the tobacco, defense or fossil fuel industry. During times of war, countries have issued bonds calling upon the patriotism of citizens to support the cause. At its core, however, investing, in our assessment, boils down to returns; more specifically, risk-adjusted returns. The "best" company in the world may not be worth investing in if its price is too high. Similarly, there may be lots of value in a beaten down company leading to statements suggesting profitable investments may be found "when there's blood on the street."

Gold is not only unproductive, but has a storage cost and is expensive to insure. So what could possibly be attractive about gold?

Investors like nothing…

We wonder where all these patriotic investors are hiding. That's because if we look at long-term yields, they are near historic lows throughout the developed world, with many countries showing near zero or even negative yields on governments bonds. Differently said, many investors rather get a negative yield on the safest investments available to local investors (disclaimer: U.S. regulatory point of view, foreign government bonds aren't considered "safe") than invest in so-called productive assets: a corporate bond may qualify as a 'productive asset' if a company uses the proceeds to invest in future ventures; yet, in today's environment, corporations frequently issue bonds to buy back shares. Why do investors prefer "nothing" – as in no or negative returns – over investing in productive assets? And if investors really like negative returns, is gold – that doesn't have an intrinsic return – suddenly attractive?

Productivity is king

On April 7, Fed Chair Yellen joined an "International House" panel with all living former Fed Chairs: Bernanke, Greenspan and Volcker. When Bernanke was asked whether we need more fiscal stimulus as monetary policy may have reached its limits, we interpreted Bernanke's long-winded answer as agreeing to the basic notion that it would be helpful to ramp up fiscal spending. Little coverage was given to Greenspan's response: "No!" Focusing on the U.S., he said unemployment is close to what's historically considered full employment: if fiscal spending were to be ramped up, we might get a short-term bump in growth due to the induced government spending, but we would foremost get wage inflation and increased deficits that will come back to haunt us. Instead, he argued, we need policies that increase productivity: when you are near full employment, the way you grow an economy is to increase the output per worker. He suggested the best way to increase productivity is to encourage investments.

While we acknowledge that not everyone agrees with Greenspan's policies over the years, we believe he is dead right on this one. So why the heck aren't investors investing? Why are they buying bonds yielding just about nothing?

Investment is dead…

There may be many reasons why investors are on strike. Current low inflation, in our view, is a symptom, not a cause of that. At its core, we believe investors don't think they get rewarded for their risky investments. Our analysis shows that investors in recent decades have – on average – focused on ever more short-term projects. That is, projects that require massive investments with an expected return in twenty years rarely happen these days.

In his book "Civilization: The West and the Rest," economic historian Niall Ferguson makes the point that what differentiates the West from 'the Rest' is the rule of law. When there's certainty over the future rules and regulations, i.e. when the rules of the game are clear, investors are more likely to invest. We believe that rule of law has been deteriorating, but not necessarily in the most apparent way:

• Regulatory risks. We allege regulatory burdens have substantially increased in many industries. This increases the barriers to entry (stifling innovation), as only large players can afford to comply with the rules. If we take the U.S., gridlock in Congress, has caused regulatory agencies to increasingly change the path of regulations without legislative process. The cost of doing business has gone up in many industries, from finance to pharmaceuticals to energy, to name a few.

• Government debt. We allege investments are at risk when governments have too much debt. That's because the interests of a government in debt is not aligned with the interests of savers. A government in debt may be tempted to induce inflation, increase taxation or outright expropriate wealth. In our assessment, investors need to be convinced government deficits are sustainable for them to have an incentive to invest.

Neither government deficits nor regulations are new phenomena, of course. But we believe it's concerns over trends like these that are key to holding back investments. It's often argued that the U.S. can print its own money and, as a result, will never default. Possibly, but that doesn't mean the U.S. won't induce inflation or find other ways to tax investors. And while there are solutions to any problem, investors must be convinced that those that benefit risk takers will be embraced. Eurogroup chief Dijsselbloem, at the peak of the Eurozone debt crisis phrased it well, arguing that we cannot expect long-term investments if we don't tell people where we want to be in ten years from now. While a crisis is apparent when Greek government bonds rattle global financial markets, the global strike by investors to invest in productive assets may be just as alarming.

Demographics

But aren't demographics at least partially to blame for the low rates? It cannot be entirely a view about fiscal deficits and regulations? Sure enough, we agree that demographics put downward pressure on real rates of return. Yet, we see this as part of the same issue: we could introduce policies that encourage workers to be productive longer rather than retire at age 65. Instead, we have policies in place that have enabled many to go into early retirement by claiming disability benefits. With increased life expectancies throughout the world, we feel retirement at age 65 has become a major fiscal burden.

Is gold now good or bad?

As we have pointed out many times in the past, it's not gold that's good or bad. Gold doesn't change – it's the world around it that does. We believe an investment in gold should be looked at in the context of an overall portfolio construction. There, one should look at the expected risk and expected return of any asset one considers including in a portfolio. Please read our Gold Reports for more in-depth analysis of gold's low correlation to other assets that might make it a valuable diversifier; you may also want to read our recent analysis Gold Now as to why we think gold might be good value for investors. For purposes of this discussion, however, we like to put gold in the context of productive assets. Our interpretation of the bond market suggests investors are shunning productive assets these days. Part of that may be concerns by investors that they will not be rewarded, with part of that due to what may be excessive government debt and regulations; another attribute may well be valuations, as we believe monetary policy has pushed many so-called productive assets into what may be bubble territory. Following this line of reasoning, reasons to hold gold in a portfolio may include:

• We may be pushing the can down the road. A belief that policies in place have not put us on a sustainable fiscal path. Concerns of ballooning entitlement obligations come to mind. Namely, we are pushing the can down the road. Importantly, we don't see a change in that trend for some time, if at all.

• Regulatory uncertainty is only increasing. Regulations are strangling businesses, discouraging investments.

In contrast, reasons to reduce gold holdings in a portfolio may include, with respect to the above bullet points:

• Recent government deficits have been improving; folks have always complained about the long-term outlook, but when push comes to shove, politicians will find solutions.

• Both small and big business have always complained about regulation, there's little new here.

Phrasing it this way, it's not a surprise that an investment in gold often has a political dimension. We caution, however, that gold is anything but political. As such, it may be hazardous to one's wealth to make investment decisions based one's political conviction. Instead, investors may want to take a step back and acknowledge that investors in the aggregate give a thumbs down to investments as evidenced by the low to negative long-term yields in the U.S. and other countries.

 Gold: cash or credit?

Before we settle the discussion on gold being 'unproductive,' let's clarify that cash isn't productive either: the twenty-dollar bill in your pocket won't earn you any interest either. To make cash productive, you need to put it at risk, if only to deposit it at a bank. With FDIC insurance or similar, such risk might be mitigated for smaller deposits. Gold is no different in that regard: to earn interest on gold, one needs to lend it to someone. Many jewelers are only leasing the gold until they find a buyer for the finished product; to make this happen, someone else is earning interest providing a loan in gold. Many of today's investors don't like to loan their gold, concerned about the counter-party risk it creates. The price such investors pay is that they don't earn interest on their gold, a price those investors think is well worth paying.

Gold more productive than cash?

The reason we started this discussion wondering whether gold may be more productive than cash also relates to the fact that real rates of return on cash, i.e. those net of inflation, may be negative in parts of the world. There are many measures of inflation and some argue that government statistics under-represent actual inflation. As such, each investor might have his or her own assessment where inflation may be. However, when real rates of return on cash are negative, it may be appropriate to say gold is more productive than cash.

In summary, anyone who thinks that we are heading back to what might be considered a 'normal' economy, might be less inclined to hold gold, except if such a person believes that the transition to such a normal economy might be a bumpy ride for investors (due to the low correlation of the price of gold to equities and other assets, it may still be a good diversifier in such a scenario).

However, anyone who thinks history repeats itself in the sense that governments over time spend too much money or over-regulate, might want to have a closer look at gold. There may well be a reason why gold is the constant while governments come and go.

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Forget DOE data, it’s time to buy ahead of The Fed!!

 

 

We suspect this won’t last as the algos are struggling to catch the high stops.

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