Considering Chinese Demand

It's one of those things. You hear about it every day but never stop to really think about it.

This began as an email discussion with my friend, Ned, yesterday. All of us in Turdville are aware that the Shanghai Gold Exchange has physically delivered something like 1200 metric tonnes of gold, year to date. That's a staggering number and it far exceeds the amount delivered through London and dwarfs the level delivered through the Comex. Prior to yesterday, I looked at that number and thought, "Wow. That's a lot.", but I never stopped to ask the follow-up questions:

  1. To whom is this being delivered?  AND
  2. Once it's delivered, where does it go next?

Let's start by looking at this handy chart. Note that, at this current pace of delivery, Shanghai is currently delivering each month the entire global mine supply. No wonder they were temporarily "out of stock" back in May! How long can this continue?

OK, now for some additional background. Recall that, since about 2006, the Chinese government has been aggressively promoting gold buying by its citizens. This campaign really began to pick up steam in 2009 following The Great Western Financial Crisis. A quick Google search returns all sorts of articles which describe this policy. Here are just a few examples: http://www.mineweb.co.za/mineweb/content/en/mineweb- gold-analysis?oid=88452&sn=Detail & http://www.bullionbullscanada.com/index.php?option=com_content&view=article&id=2545:china-urges-citizens-to-buy-gold-silver&catid=48:gold-commentary&Itemid=131 & http://news.goldseek.com/GoldSeek/1267715760.php & http://www.forbes.com/sites/gordonchang/2012/01/29/why-are-the-chinese-buying-record-quantities-of-gold/

We also know that officially reported Chinese imports are soaring. In just the first four months of this year, China has imported through Hong Kong nearly 500 metric tonnes of gold. This adds to the 834 metric tonnes that they imported in calendar year 2012. http://www.bloomberg.com/news/2013-02-05/china-gold-imports-from-hong-kong-gain-to-all-time-high-in-12.html

(Charts courtesy of ZH)

So where is all this gold going? I first wrote about it nearly a year ago. Much of it is being recast into kilo bars that, I believe, will ultimately be used to provide a hard asset backing to a future Yuan. http://www.tfmetalsreport.com/blog/3924/gonefor-good

But that still doesn't explain the almost-daily, 15-25 metric tonnes of physical delivery in Shanghai. This is why Ned and I were so perplexed.

So, next, I did what any sensible person would do, I rang up Andrew Maguire. His decades of experience in working the international wholesale market makes him the best source I have for answers to these questions. The conversation went something like this:

Me: "Andy, where the heck is all this gold going?"

Andy: "It's not going anywhere."

Me: "What do you mean?"

Andy: "I mean exactly that. Shanghai settles all that bullion each day to domestic wholesalers. That metal is then shipped off to Chinese dealers and refiners for domestic consumption."

Me: "So wait a minute. You're telling me that public demand in China is currently soaking up 250 metric tonnes per month or nearly ALL of the publicly-reported global mine supply?"

Andy: "Exactly."

And then I started thinking...Well how hard would that be to do? 250 metric tonnes is about 8,000,000 troy ounces. The current population of China is 1.344 billion. If only 25% of the population is taking their government up on the idea of gold ownership, that's 336,000,000 people or, roughly, an amount equivalent to the entire population of the United States!

So now let's say that these 336,000,000 people buy, on average, 1/40th of an ounce every month. That works out to be about 3/4 of a gram or about $35 worth at $1400/ounce. Working the math backward we get: 336,000,000 people buying .75 grams = 252,000,000 grams and 252,000,000 grams = 252 metric tonnes.

Hmmm. Well how about that? Makes you look at stories like this in a different light, doesn't it? http://usa.chinadaily.com.cn/china/2013-06/12/content_16611576.htm

A crowd of customers waits in front of a gold store to shop during a promotion, in Jinan city, East China’s Shandong province on June 11, 2013.

People crowding around a gold products counter jockey for position to pick up something in a gold store which sold its products at a price of 299 yuan per gram in a promotion – about 50 to 70 yuan lower than the normal level, in Jinan city, East China's Shandong province on June 11, 2013. The promotion attracted nearly 10,000 people who rushed to the store despite restricting each customer's shopping time to 15 minutes. While gold markets in the US and Europe saw panic selling, China has just seen a surge in gold sales in the past few months. Chinese households came under the spotlight with their generous purchase of the gold products amid a global fall of the gold price.

OK, then. So, do you still think that the Spec Shorts are on the right side of the trade, that price is going lower and that the "bull market" in gold is over???

Hmmmm. Chew in that over the weekend and then come back for more on Monday. It's going to be another interesting week.

TF

546 Comments

ag1969's picture

Did I really......

read the entire post and still get first?

1st Amendment

Congress shall make no law respecting an establishment of religion, or prohibiting the free exercise thereof; or abridging the freedom of speech, or of the press; or the right of the people peaceably to assemble, and to petition the Government for a redress of grievances

Zoltan's picture

Second

Can't we all just get along? Rodney King

Z

treefrog's picture

thurd

thurd!

wouldyoubelieve...'s picture

Turd

? nope 4th

ClosetTurdite's picture

if your not phirst...

your last.

chrtoo's picture

Top 10 first time.

Yikes!  On my first post!

   (other than the auction to help pay the bills)

Thanks Turd!

CHR.

Spartacus Rex's picture

Don't See China Lining Up To Buy Our Debt Anymore!

The%20Pied%20Piper_0.jpg

tyberious's picture

Nice investigative work

Another well done analysis!

¤'s picture

ag1969

Yep, you're the man yes

@Zoltan....lol!

Dr. Fix's picture

Top 10!

Okay, even I've got to admit that this post is completely juvenile, and serves no real purpose other than alleviating boredom in the middle of a storm swept night.

But what the heck,  It is a tradition, and such things should be honored.

Thank you all for being here.

donnojackshit's picture

..

..

kingboo's picture

yes...tradition.

kind of like owning gold

Spartacus Rex's picture

Remember: Tomorrow is Friday!

Just in case TPTB insist that Gold take a Dump, Be Prepared! Toilet%20Paper_0.jpg

donnojackshit's picture

How long can this demand keep up?

If this is the demand by the public, how much is the Chinlee Goobment getting?

dgstage's picture

My Thoughts

Au and Ag can go lower, premiums will go higher. I just say buy, buy and buy some more. The end game is coming soon!

Spartacus Rex's picture

I.O.U.S.A.’s Leadership Deficit 5 Yrs On

T

reasury Secretary Paul O’Neill refused to compromise with then Vice President Dick Cheney when it came to making decisions that he knew would affect not only Americans today, but also future generations.

David Walker and the Fiscal Wake-Up Tour participants had a similar goal. By warning Americans about what was ahead for their country if action wasnt taken, and educating them on the fiscal problems the United States has, they hoped to empower the average citizen to become involved in insisting that changes are made. And from what we saw, the attendees at the town hall meetings they were hosting were ready for a change.

By the time we joined them at a town hall meeting in Los Angeles, after 18 months of intermittent filming, the Fiscal Wake-Up Tour had visited 23 cities.

“It’s a lot of fun being able to get out and meet people,” said David Walker. “It gives you a lot of energy and it gives you a lot of hope. When you state the facts and speak the truth to the American people, they get it and they’re ahead of their elected officials. We can’t borrow our way out of this problem. Anyone who tells you we can does not study economic history and is probably not very good at math.”

“Here’s the thing about the future,” chimed in Robert Bixby, editorial director of the Concord Coalition. “If you knew that a levee was unsound and you knew people were moving into the area and you knew they were at risk, would you stand by and do nothing and say nothing about it? Of course not — that would be irresponsible.

“Yet that’s what we’re doing as a nation to the future. We know we have this problem, we know that the fiscal/federal levees are unsound, we know that the structure’s not sound for the long term. And yet we’re ushering future generations in and saying nothing about it, doing nothing about it, and that’s the immoral part of it.”

Indeed, Washington is “badly broken,” as David often says in his presentations at the town hall meetings and in interviews. Americans can’t continue to rely on their government to make the tough choices that are needed to restore the U.S. economy.

When many Americans think of debt and deficits, their knee-jerk reaction is to blame it on the war in Iraq or on defense spending. Some people think that we can solve the country’s financial problems by stopping fraud, waste and abuse or by canceling the Bush tax cuts. The truth is, the United States could do all of these things and still would not come close to solving the nation’s fiscal challenges.

The United States already has $11 trillion in fiscal liabilities, including public debt. To this amount, add the current unfunded obligations for Social Security benefits of about $7 trillion. Then add Medicare’s unfunded promise: $34 trillion, of which about $26 trillion relates to Medicare parts A and B, and about $8 trillion relates to Medicare D, the new prescription drug benefit which some claimed would save money in overall Medicare costs. Add another trillion in miscellaneous items and you get $53 trillion. The United States would need $53 trillion invested today, which is about $175,000 per person, to deliver on the government’s obligations and promises. How much of this $53 trillion do we have? Nada.

[Ed Note. Update on Unfunded Liabilities: Since the release of I.O.U.S.A. back in 2008, that $53 trillion figure has ballooned to roughly $87 trillion... although even that may be a conservative estimate. Laurence Kotlikoff, a well-respected professor of economics at Boston University, looked at the fiscal gap versus the official debt and came up with a slightly different number: $222 trillion. And he’s not alone. Niall Ferguson calculates U.S. unfunded liabilities are even larger, at roughly $238 trillion. Bottom line is it’s a massive amount. And unfortunately, “nada” is still the amount of it we actually have.]

“By the time today’s college graduates are ready to retire 40 years from now,” says David Walker, “the only things our government will be able to pay for are interest on the federal debt and some of the Social Security, Medicare and Medicaid benefits. All other parts of the federal government will be closed and out of business!”

As far as taxes go, the United States would have to raise income tax rates across the board by about 2.5 times today’s levels to close the financing gap — and some politicians complain when there is any talk of tax increases. Americans are facing a 150% increase in federal taxes if they continue down this road. By the year 2048, the United States’ debt-to-GDP ratio will be over 400%, more than two times the debt levels we hit at the height of World War II. Good luck trying to get any country to lend the United States money then. No matter which way you slice it, whether you are a Democrat or Republican, the magnitude of this fiscal challenge is much larger than most realize.

For example, let’s assume that the Bush tax cuts expire at the end of 2010. That would only solve about 10% of the country’s federal financial hole. And what about Iraq? Even if the Iraq War ended in 2009, the ultimate estimated cost over time is less than 3% of our total financial problem.[Again. Update on Closing the Gap: If you assume the Kotlikoff’s $222 trillion figure, you would need an immediate and permanent tax increase of 64% -- or a cut of projected government outlays across the board by 35%. If the government waited a decade to take these steps...those numbers would become 70% and 38%, respectively.]

[Ugh, tedious. Update On Bush Tax Cuts: Raising the rates on those over $400,000 will net $617 billion over 10 years...pretty insignificant]

Historical debt to gdp ratio w/ projections including automatic reductions

America’s budget, savings, trade and leadership deficits individually are bad enough, but in combination they create a toxic mix that threatens the country’s and each American family’s futures.

”And yet,” says David, ”there is little talk about making these tough choices today. The longer we wait, the harder the choices become. As the baby boomers begin retiring, this tidal wave of spending is about to reach our shores, and we are not prepared for it. And trust me, it could swamp our ship of state.

”Unlike many other problems facing our country, this one is ours alone. We can and we must solve this one.”

The question is: When will we?

Indeed,

Addison Wiggin

for The Daily Reckoning http://dailyreckoning.com/americas-leadership-deficit/

Addison Wigginby Addison Wiggin.

Posted Jun 13, 2013

Swift Boat Vet's picture

What a fine day to .......

...'liberate' a tube of ASEs .    Always brings a smile to my face and a spring in my step.

Swifty

Spartacus Rex's picture

From Jesse's

13 JUNE 2013

Gold Daily and Silver Weekly Charts - Watch for Price Shoving After Europe Goes to Bed Tomorrow

 

FOMC next week.

A late day rally in the metals and stocks was caused by a Fed mouthpiece implying that they would not be ending QE anytime soon, taper or not. 

Until the FOMC meeting confirms this, or not, then it will largely be a technical trade.

Lately the wiseguys have been hitting the metals on the Comex after Europe goes to bed.

Let's see if that still works, or if it has become a crowded trade.

I see where John Hathaway says that Gold Will Shock World With $1,000 Rapid Advance.  Shut up!

It would certainly be a topic of conversation to say the least.  Stranger things have happened. Bill Clinton was just named 'Father of the Year.'   You can't make this stuff up.

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silverweekly6.PNG

 

 

http://jessescrossroadscafe.blogspot.com/

Hammer's picture

http://www.boj.or.jp/en/mopo/

http://www.boj.or.jp/en/mopo/mpmsche_minu/minu_2013/g130522.pdf

Not to be released until 8:50 a.m. Japan Standard Time on Friday, June 14, 2013.

June 14, 2013 Bank of Japan

Minutes released a couple of hours ago.

In a nutshell

members agreed economy has started to pick up

reaching 2% in 2 years is hard, could lead to speculation BOJ will ease for a long time

Timeline may be upsetting bond market expectations

One member should limit QE to 2 years as could cause financial imbalances

One member said limiting QE could help stabilise JGB market

Massive JGB buys restraining upwards yield pressure

Several members said need to monitor impact of the Fed’s tapering debate

Spartacus Rex's picture

Middle Class Jobs, Income Quickly Disappearing (INFOGRAPHIC)

As President Obama continues his “Middle Class Jobs and Opportunities Tour" in Mooresville, N.C., on Thursday, middle-class Americans continue to experience historic losses of jobs and opportunities. The recession eliminated many mid-wage jobs, leaving moderately educated workers to take low-wage jobs if they can find work at all.

While the Obama administration has trumpeted job growth in recent months, the middle class is taking home a shrinking portion of the country's income. Deep job losses in occupations such as construction, information technology, manufacturing and insurance are not likely to recover. Middle-class families also saw nearly 30 percent of their wealth disappear over the past decade, while the cost of goods and services they rely upon steadily climbed.

The swift contraction of the middle class has left most Americans fearful they may be unable to maintain their standard of living.

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MiddleClass_14.png  http://www.huffingtonpost.com/2013/06/06/middle-class-jobs-income-_n_3386157.html?ir=Politics&ncid=edlinkusaolp00000009

Spartacus Rex's picture

U.S. Mint June Silver Coin Sales @ 4,651,429 Ounces...

Record 2013 Likely [By Mark O’Byrne 13 June 2013] Today’s AM fix was USD 1,386.25, EUR 1,039.71 and GBP 885.33 per ounce.

Yesterday’s AM fix was USD 1,377.25, EUR 1,036.77 and GBP 878.40 per ounce.

Gold climbed $10.00 or 0.73% yesterday to $1,388.70/oz and silver surged to $22.012 and finished up 0.37%.



Silver in USD, 5 Year – (Bloomberg)

Silver continues to perform very poorly and is down 28% year to date to make it one of the worst performing commodities in the world and on track for its worst performance since 1984.

At the end of 2012, investors expected silver to be one of the biggest gainers in 2013, expecting a 33% return, a Bloomberg survey showed. Analysts expected silver to surge because either turmoil would boost demand for precious metals as a protection against inflation and currency debasement or accelerating growth would spur more industrial buying for everything from solar panels to batteries.



Total Known Silver ETF Holdings – (Bloomberg)

Investors are maintaining their belief in silver even as they lose faith in gold. While the amount of silver held through exchange-traded products is little changed this year, and within 5% of the record reached in March, gold holdings dropped 19%, data compiled by Bloomberg show.

Holdings of silver in ETPs rose 1.1 tons this year, compared with a 1,621-ton expansion in 2012, data compiled by Bloomberg show.

Silver investments stand at 18,905.8 metric tons, valued at $13.2 billion and enough to meet global demand for jewelry and silverware for almost three years. The value of gold ETP investments slumped 34% to $94.1 billion this year.

Investors for now are treating silver more like a precious metal than an industrial one, with its 30-week correlation coefficient to gold at 0.85, from 0.68 in 2011. A figure of 1 means the two move in lockstep.

Silver also tumbled into a bear market in April and is 56% below the record $49.8044 reached in April 2011. However, silver is up 31.5% in the last 5 years of the financial crisis, thereby protecting investors and savers globally from stock market crashes, bail-ins and currency debasement. 



Precious Metals & Currency Ranked Returns in USD

Hedge funds and other large speculators have turned bullish again after betting on lower prices as recently as mid-May, U.S. Commodity Futures Trading Commission data show. They are holding a net-long position of 1,230 futures and options, compared with a five-year average of 21,400 contracts.

Industrial demand may gain as the global economy improves, with the International Monetary Fund predicting growth of 3.3 percent this year and 4 percent in 2014, from 3.2 percent in 2012. About 50 percent of silver is used in industry, compared with 10 percent for gold, data from the Silver Institute and London-based World Gold Council show.

Consumption by industrial users will rise 1.7 percent to a three-year high of 14,625 tons this year and gain another 2.8 percent in 2014, Barclays Plc predicts. A car contains as much as 30 grams (1.1 ounces) and a mobile phone as much as 0.25 gram, according to Washington-based Silver Institute data.

The slump spurred demand for physical metal, with the U.S. Mint predicting last week that its gold and silver coin sales may reach a record in 2013. 

The Austrian Mint sold about 2 million ounces of silver in April, compared with 8.8 million for all of 2012.





Cross Currency Table – (Bloomberg)

The U.S. Mint has sold 1,628,000 ounces of silver coins so far in June, according to figures on the Mint’s website. At that pace, total sales for the month would be 4,651,429 ounces, up 62.8% from a year earlier:

================================================================

                       Total

                      Ounces        YOY%        MOM%

================================================================

June 2013

Month-to-Date       1,628,000

Full month pace     4,651,429       62.8%       34.5%

----------------------------------------------------------------

May 2013             3,458,500       20.3%      -15.4%

April 2013           4,087,000      168.9%       21.8%

March 2013           3,356,500       32.0%       -0.4%

----------------------------------------------------------------

Feb. 2013            3,368,500      126.1%      -55.1%

Jan. 2013            7,498,000       22.8%      358.6%

================================================================

                       Total

                      Ounces        YOY%        MOM%

================================================================

Dec. 2012            1,635,000      -18.6%      -48.3%

Nov. 2012            3,159,500      128.3%        0.2%

Oct. 2012            3,153,000        2.9%       -2.2%

Sept. 2012           3,225,000      -27.7%       12.4%

Aug. 2012            2,870,000      -22.0%       26.0%

July 2012            2,278,000      -23.2%      -20.3%

June 2012            2,858,000      -16.0%       -0.6%

May 2012             2,875,000      -21.3%       89.1%

----------------------------------------------------------------

April 2012           1,520,000      -46.1%      -40.2%

March 2012           2,542,000       -8.1%       70.6%

Feb. 2012            1,490,000      -54.0%      -75.6%

Jan. 2012            6,107,000       -4.9%      204.0%

Dec. 2011            2,009,000       13.4%       45.2%

Nov. 2011            1,384,000      -67.5%      -54.8%

Oct. 2011            3,064,000       -2.7%      -31.3%

Sept. 2011           4,460,500      137.3%       21.2%

================================================================

                       Total

                      Ounces        YOY%        MOM%

================================================================

Aug. 2011            3,679,500       50.1%       24.0%

July 2011            2,968,000       -0.4%      -12.8%

June 2011            3,402,000       13.4%       -6.9%

May 2011             3,653,500        0.5%       29.6%

---------------------------------------------------------------- Continue reading @ http://www.goldcore.com/goldcore_blog/us-mint-june-silver-coin-sales-4651429-ounces-%E2%80%93-record-2013-likely

Spartacus Rex's picture

Matt Taibbi Everything is Rigged... This Time, It's Currencies

Everything is Rigged, Vol. 9,713: This Time, It's Currencies

POSTED: 

 
 
 
A foreign exchange banker stands behind US dollar bank notes
A foreign exchange banker.
Chung Sung-Jun/Getty Images

I'll get into this in more detail later (I'm on deadline for a magazine feature), but this story just landed. Given the LIBOR story, the Interest Rate Swap manipulation story, the Euro gas price manipulation story, the U.S. energy price manipulation story, and (by now) countless others of the "Everything is Rigged" variety, this screams out for immediate notice. Via Bloomberg:

Traders at some of the world's biggest banks manipulated benchmark foreign-exchange rates used to set the value of trillions of dollars of investments, according to five dealers with knowledge of the practice . . .

Employees have been front-running client orders and rigging WM/Reuters rates by pushing through trades before and during the 60-second windows when the benchmarks are set, said the current and former traders, who requested anonymity because the practice is controversial. Dealers colluded with counterparts to boost chances of moving the rates, said two of the people, who worked in the industry for a total of more than 20 years.

This time the rates allegedly being rigged are in the foreign-exchange or "FX" markets, meaning that if this story is true, it would almost certainly trump LIBOR for scale/horribleness.

As one friend of mine who works on Wall Street put it, "It's endless! This is the biggest market in the world." Bloomberg suggested the story is just the tip of the iceberg:

"The FX market is like the Wild West," said James McGeehan, who spent 12 years at banks before co-founding Framingham, Massachusetts-based FX Transparency LLC, which advises companies on foreign-exchange trading, in 2009. "It's buyer beware."

The $4.7-trillion-a-day currency market, the biggest in the financial system, is one of the least regulated. The inherent conflict banks face between executing client orders and profiting from their own trades is exacerbated because most currency trading takes place away from exchanges.

Again, more on this later. But the key thing here is the, uh . . . well, the consistent leitmotif of all these stories. One after another, it's the same thing: Insiders rigging benchmark rates, shaving money from basically everyone on earth, systematically and over periods of many years. It's the ultimate taxation-without-representation story – crazy stuff.





Read more: http://www.rollingstone.com/politics/blogs/taibblog/everything-is-rigged-vol-9-713-this-time-its-currencies-20130613#ixzz2WAEthcFR 

Follow us: @rollingstone on Twitter | RollingStone on Facebook

Owtovit's picture

The President and Precious Metals

Chewed on it........here's more food for thought/dots to connect?

http://silvermarketnewsonline.com/articles/ThePresidentAndPreciousMetals_Savoie022813.pdf

Karankawa's picture

Middle Class Jobs, Income Quickly Disappearing

Great Post Spartacus Rex!

I want EVERYONE to THINK.

Who have WE supported or demonized over that time period.  How much effort have WE put into the fight for Liberty and Truth to hold people accountable?

Ask yourself.  Have we all been wagged by the Tail for a long time?

If you have kids you owe it to them to think about it.  It's not about TV personalities.  TV personalities aren't going to save you.  Especially if they are part of the corporate machine.

Hammer's picture

I think this a VERY decent

I think this a VERY decent read indeed. I have pasted the second half of the article. For the first half, click the link.

http://www.bbc.co.uk/news/business-22871588

Since the crisis, central banks have injected more than $12 trillion of cash. As an indication of how much money that is, there are only 15 countries in the world whose GDP or annual output exceeds $1 trillion.

The key question is whether these countries are better prepared this time to cope with money leaving their borders.

And some are - having built up foreign exchange reserves that can be used to bolster the value of their currencies if needed. Plus, financial regulation has improved, which is a result of learning the lessons of the Asian crisis.

End of cheap money?

There aren't indications that the Federal Reserve is planning to raise interest rates any time soon, and the Bank of Japan continues to reflate its economy. The ECB recently cut rates to a record low and several members of the Bank of England have been voting for further cash injections.

But, there is a growing concern (as seen in these markets) that the era of cheap money could begin to taper off in the US as the economy improves.

And, central banks may be contemplating their so-called "exit strategies."

"Exit" refers to central banks reversing their monetary actions, so unloading the trillions of dollars of assets (government bonds and others) from their balance sheets. They bought those in order to inject cash into the economy.

Plus, interest rates would then rise from the 0% or very low levels in major, developed economies.

A sign that investors are worried is the rise in US government bond yields. This is the interest rate that the US government pays to borrow, which has been low, partly because the Fed is a big buyer in the market. In fact, that was the aim of the Fed to lower interest rates to stimulate the economy.

But, the yield on 10 year US government bonds, the benchmark for borrowing costs, has risen to nearly 2.3% from below 2% just a couple of weeks ago.

This is still a far cry from being expensive to borrow. But, it reflects an expectation that interest rates will rise in the future. In other words, some are betting on the end of the current era of nearly 0% rates.

The record sell-off last week shows that some don't want to be left holding these bonds at all.

What exit looks like

This may be why. To "exit," a central bank will raise interest rates and sell their assets (government bonds and others) to re-absorb the money that they had pumped into the economy.

For instance, the Fed could decide to first raise rates and then gradually sell the government bonds that it owns.

But, once the Fed starts selling bonds, then it increases the supply that pushes down the price. So, the remaining bonds held by the Fed and those held by the private sector could be worth less. That may be why some investors don't want to own those bonds.

Of course, central banks don't want to disrupt the market too much, so will likely act at a moderate pace and specify their "exit strategy."

But, there are those who will worry about how central banks can take $12 trillion, or the equivalent of about one sixth of global output, out of the world economy in a smooth manner.

Five years on from the global financial crisis, it's perhaps unsurprising that investors think that central banks would begin to contemplate how to "exit" from very loose monetary policies.

But, looking around at the still weak world economy and the elevated unemployment rates in major economies, the last thing that we need is disruptive markets or worse, a big reversal of money flows that leads us into another crisis.

Newager23's picture

Love Those Pictures

I don't know about you, but those pictures of shoppers in China say it all. There is literally a frenzy going on in China and India to buy gold at what are rightfully perceived as bargain prices for gold.

Gold should be at least $2,000 per oz based on the economic fundamentals. We are having rampant buying at today's spot price. There is no way the price can stay low much longer. Gold is quickly moving from west to east. At some point the western consumers have to wake up and start buying gold in the quantities that the Chinese and Indian are buying.

Why will western consumers wake up? Well, here are ten reasons:

1. The USA, the biggest economy in the world, has been living off of debt to maintain our standard of living. We have been playing a dangerous game since 1980 of living off of the reserve currency of the world. Now we have 10+ trillion of debt that requires interest payments. This debt has gotten so large, the we can't service it without printing money.

2. Oil, the engine of the economy, is no longer cheap. Without cheap energy, robust growth is no longer possible.

3. Taxes and regulations have crushed small business. Many companies have to cheat to make a profit.

4. Demographics in the USA and Europe are impinging growth in a negative way (older is not better).

5. Governments have gotten so large that they are squeezing the private sector into paying more taxes.

6. Healthcare costs are out of control and impacting many families and business in a detrimental way.

7. The financial system has become a ponzi scheme with the bond market and derivatives ready to blow up.

8. The financial system has become so manipulated that valuations are impossible to make.

9. The government no longer respects its citizens and instead collects their private information.

10. The political system is broken with gridlock and no possibility for solutions.

These are just ten reasons why the move to gold is gaining traction. For those who think gold is a dysfunctional investment or asset class, what are the alternatives? Where does all of that bond, CD, and money market money go? Are those asset classes safe? Is cash still king? Is real-estate going to maintain its value if the economy tanks? The one asset that is likely to appreciate is gold. It's that simple. And if gold is recognized as a liquid asset that it has always been, then it will be the equivalent of money.

Anyone who thinks that gold isn't money is playing a game of semantics. What is the first thing that people sell when they are out of cash or need cash? Gold! Why because it is so liquid. It is instant money.

I've said this for years, but the only thing that keep gold prices down is economic growth. We have had stagnant growth since 2009, but the writing is on the wall that growth is becoming precarious. Once we fall back into a recession and the mass layoffs begin, the fear trade with gold is going to take off. At that time, you will see a flip-flop and a new appreciation of the value of gold. You will see in America and Europe what you are seeing in the Chinese gold shops. Customers. Lots and lots of them.

And then physical becomes hard to find. And that is when the price explodes.

www.goldsilverdata.com

Spartacus Rex's picture

Real wages, not wealth effect, drives the economy!

Thursday, June 13, 2013

Small problem with Fed policies, it is real wages, not wealth effect, that drive US consumer spending

 
As Pedro da Costa reports in his Reuters blog, a survey shows that it is real wages and not the wealth effect that drive US consumer spending.

This is important because the Fed's monetary policy, including zero interest rates and quantitative easing, is reliant on the wealth effect to drive growth in demand.

Did this reliance ever make sense in anything other than an economic model?

No.

There is no reason to believe that the wealthy dramatically increase or decrease their spending because of the level of interest rates rather than base their spending on what they earn as income each year.

If your humble blogger had to guess why economists believe in the wealth effect it is that they confuse correlation with causation. 

Specifically, they saw consumption pick up over the last 30 years as both stock and house prices increased and said "aha, there must be a wealth effect as an increase in wealth is correlated with higher consumption".

In reality, what was really happening is that Wall Street became quite proficient at letting Main Street tap the equity in their houses and Main Street needed to tap this equity because growth in income was insufficient to support the lifestyle they had from previous years.

Federal Reserve officials have touted the ‘wealth effect’ from higher stock prices and rising home values as a key way in which monetary policy boosts consumer spending and economic activity. 

But according to the results of a recent survey from the Royal Bank of Canada, that ethereal feeling of being richer on paper is no substitute for cold, hard cash.

Here’s how Fed Chairman Ben Bernanke explained the benefits of rising asset prices to the real economy during a press conference in September

The tools we have involve affecting financial asset prices and those are the tools of monetary policy. There are a number of different channels – mortgage rates, I mentioned corporate bond rates, but also prices of various assets, like for example the prices of homes.  

To the extent that home prices begin to rise, consumers will feel wealthier, they’ll feel more disposed to spend. If house prices are rising people may be more willing to buy homes because they think that they will make a better return on that purchase. So house prices is one vehicle.... 

The issue here is whether or not improving asset prices generally will make people more willing to spend. 

One of the main concerns that firms have is there is not enough demand, there’s not enough people coming and demanding their products. If people feel that their financial situation is better because their 401(k) looks better for whatever reason, or their house is worth more, they are more willing to go out and provide the demand..... 

RBC survey’s findings, explained by the bank’s chief U.S. economist, Tom Porcelli, in a research note: 

That wages and the jobs backdrop matter for consumption is not only borne out in the hard data, but this also came through loud and clear in our June consumer survey. 

When asked about what would embolden them to increase spending, nearly half of respondents noted wage increases while about 1/5 said a better job backdrop. So 65% of consumers think employment dynamics are what matter most. Contrary to popular belief, there was little “wealth effect” from stocks and housing apparent here. 

The bad news: U.S. wages have been stagnant for quite a while.  http://tyillc.blogspot.com/2013/06/small-problem-with-fed-policies-it-is.html

Spartacus Rex's picture

@ Love Those Pictures

And Remember those pictures are just from ONE Store in ONE Town in CHINA!

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