May 19, 2015 6:44 pm

The wary retreat of the bond bulls

Martin Wolf

Long fall and recent collapses in nominal and real yields on safe securities should be at an end

James Ferguson illustration©James Ferguson
Is the three-and-a-half decade long bull market in the highest-rated government debt over? If so, would that be a good thing or a bad one? The answer to the first question is that it seems quite likely that the yield of 0.08 per cent (8 basis points) recorded on the 10-year Bund in April was a low point.
The answer to the second question is that it would be a good thing: it would suggest confidence that the threats of deflation and eurozone disintegration are fading. At the same time, this bounce does not mean that a rapid rise in yields to what used to be normal levels is on the way.

We should want to see yields rise, but modestly. This is also what we should expect.
Yields on 10-year bonds have behaved like the grand old Duke of York in the nursery rhyme: they marched right up to the top of the hill and then marched right down again. Yields on government bonds of the big advanced economies peaked in the early 1980s: Japan’s peak was near 10 per cent, Germany’s 11 per cent and those of the US and UK 15 per cent and 16 per cent. Then came a decline. Japan’s rates had fallen below 2 per cent by the late 1990s. Yields in the other three countries were between 3 and 6 per cent before the crisis, only to fall far lower still.
Theory suggests that long-term interest rates should be a weighted average of expected short-term interest rates, plus a “term premium”, as Ben Bernanke, former chairman of the Federal Reserve, argues in a recent blog. The premium should normally be positive, even in the absence of default risk.
Longer-term securities are riskier than short-term ones, because their prices are volatile. Expected short-term rates should be determined by expected real interest rates and expected inflation. Again, expected domestic real interest rates should be determined by expected global real interest rates and expected changes in real exchange rates. Expected global real interest rates should, in turn, be determined by the expected balance of saving and investment. Finally, special factors, such as risk-aversion — at the limit, outright panic — and purchases by foreign governments and central banks, will also affect the prices of long-term bonds.
Most of what explains the collapse in bond yields (and so the rise in the prices of such bonds) is reasonably clear. Up to the mid-1990s, the dominant causal factor was the collapse in inflation.

In Japan, deflation even became entrenched in the 2000s. From the late-1990s up to the crisis, the main explanation was a decline in long-term real interest rates from a little below 4 per cent to a little above 2 per cent, as shown in yields on the UK’s index-linked gilts.
Since the crisis, the dominant factor has been further marked declines in real interest rates.

These are close to zero in the UK and US. In America and Britain people expect prices to keep rising modestly, in line with targets, though not in Japan. The European Central Bank’s recent policy measures are designed to keep inflation expectations up in the eurozone. Meanwhile, the risk premium can only be estimated. Over the long run, it has been volatile. Estimates from the New York Federal Reserve suggest it is now close to zero.
Bond yields chart
Many think purchases by central banks are the dominant cause of low yields. The evidence suggests this is untrue, though it has to be a factor. Far more important is the expectation that short-term rates will stay low.
Today, long-term bond yields in the UK and US are remarkably low, given their economic recoveries. One reason is a spillover from the developments in the eurozone. In recent years, the ECB has been successful in eliminating perceived risks of break-up. Its current programme of asset purchases and other measures have also lowered the general level of eurozone nominal yields. But a powerful safe-haven effect also operates, with shifts into Bunds and also Swiss (and other) bonds. Ten-year yields on Swiss bonds became negative when the currency was allowed to appreciate. Ten-year yields on Bunds effectively fell to near zero. (See chart.)
So what might happen now? The following points must be remembered.

yield decomposition chart

First, nominal and real yields are very low in all the important high-income countries. Thus, they are vastly more likely to rise than fall from recent levels, unless sustained long-term growth and positive inflation are over.

Second, yields are astonishingly low in core European countries. If the ECB succeeds with its endeavours and so the recovery continues to gain pace, then yields should rise a great deal. The same should ultimately be true for Japan.

Third, post-crisis headwinds — among them, high levels of household debt — nevertheless are strong. Also important must be the economic slowdown in China. Thus, the equilibrium global real interest rate is likely to remain low by historical standards for quite a long time.

European yield chart

Fourth, sharp rises in expected short-term interest rates and so in long-term conventional yields are only likely to follow a strong recovery (which would drive up real yields) and so perhaps a strong rise in inflation expectations. This is possible. But it seems unlikely. Whether a big jump in yields would be a good thing depends mostly on whether it is driven by optimism about the real economy or pessimism about inflation.

Finally, falls in nominal and real yields below recent low levels would imply a descent into deflation. Central banks can and will prevent that; never say never, but this looks highly unlikely.
In short, the long fall and recent collapses in nominal and real yields on safe securities should now be at an end. One must hope so. Further declines would be highly disturbing. At the same time, a swift return towards levels considered normal before the crisis seems unlikely and would certainly create some instability. This might well be a turning point. But, given uncertainties, it would be best if yields turned slowly.

viernes, mayo 22, 2015



Why Cash Is King

by: Eric Parnell, CFA            

  • The investment world is a place where sensible thinking can sometimes get completely turned upside down.
  • This is absolutely true when it comes to holding cash.
  • The conventional wisdom among most investors is that you must be fully invested at all times.
  • This stubborn thinking defies rationale in many ways.
  • Cash is king for a reason, and this holds true when it comes to investing in capital markets.
The investment world is a place where sensible thinking can sometimes get completely turned upside down. This is absolutely true when it comes to holding cash. For the conventional wisdom among most investors is that you must be fully invested at all times. But in reality, this stubborn thinking defies rationale in many ways. Cash is king for a reason, and this holds true when it comes to investing in capital markets.

Expectations About Future Prices

The conventional thinking of why you should hold virtually no cash (NYSEARCA:BIL) and be fully invested at all times is based on a basic premise. People simply cannot justify keeping their money in a bank account earning less than 0.01%. Not only are they forgoing the long-term growth opportunities associated with investing in capital markets, such as stocks and bonds, but this money is also losing its purchasing power, since it is not even increasing in value enough to keep up with the rate of inflation. In this regard, the point makes sense.

But who said that just because you are holding cash today, you have made a commitment to keep it in cash permanently into the future? Perhaps instead, you are holding your money in cash to wait for a better deal to come along. For if the price of the item on which you intend to spend you cash deflates in value the near future, perhaps by going on sale or being liquidated, suddenly the purchasing power of your cash has been increased dramatically. All of the sudden, sitting on cash may not be such a bad idea.

The thinking behind using your hard-earned money, or cash, to purchase a stock should be no different than it is when considering spending on just about anything. Let's break this point down to its basics. Suppose you decide that you wanted to go out and buy a television set. Do you simply run out to the store immediately and buy one? The rational consumer likely would not. Instead, they would comb the weekly ads from the likes of Best Buy and H.H. Gregg, as well as cross-reference prices on, all in the effort to get the best deal. And if there is a particular television that the consumer decides that they want, they will often wait to make the purchase and hold on to their cash until such time in the future that the television goes on sale. Then they go out and buy the TV.

Now some might immediately make the argument that a television is not an asset that is going to appreciate in value over time, unlike a stock. Fair enough. With this in mind, let's then assume that you decide that you want to go out and buy a house in which to set up your new television and pass your days into the future. Once again, do you simply call up a realtor and buy a house on the first day of home shopping? Most of us do not. Instead, we wait spending months and months, holding our money in cash and visiting properties until we find the right house at the right price. And hopefully, the house we purchase will not only provide us with a nice living arrangement, but also greater capital appreciation over time to reward us for the patience and diligence in waiting until we landed the best deal.

In short, if we believe that we can buy the item that we want for a lower price at some point in the future, we are going to forgo buying that item today and will keep our money in cash in the meantime as we wait. For by waiting until we have discovered that lower price in the future, our purchasing power has been enhanced in the end as a result.

If this principle is true for everything else, why then should it not hold true for the stock market?

Cash Is King

Let us now consider the stock market, in which, according to many, investors should supposedly be fully invested at all times. Suppose you had a big pile of cash at the exact start of the new millennium, and had two choices with which to allocate this money. You could either invest it entirely in the stock market as measured by the S&P 500 Index (NYSEARCA:SPY), or you could hold it in a checking account that earned no interest whatsoever. The following would have been your investment experience over the first decade of the new millennium.

(click to enlarge)

This choice would have left you with four possible outcomes. How could this leave you with four, you might ask? Because we do not live in a world where decisions made at any given moment in time are permanent. Instead, we have the ability to react and adapt along the way. With this in mind, the following are the four outcomes listed below.
  1. Go fully invested into stocks. Maybe you were already mostly invested, but decided to deploy the rest. Maybe you were all in cash. Regardless, you have decided to follow the mantra of being fully invested at all times. What is your subsequent experience? You see the value of your investment after dividends decrease by nearly half twice. And despite all of that stress, the nominal value of your investment twelve years later at the end of 2011 is essentially the same as it was at the start. The only problem is that the real value of your investment is still deeply underwater, as prices have cumulatively increased by more than 30% over this same time period. You have to wait another two years into 2013 before finally clearing that hurdle.
  2. Go fully invested into stocks initially. Investors can all talk a great game about how they will stick to their investment discipline and stay the course with their allocations, no matter what. This is easily said when the market is steadily rising and all of the news is good. But it is much more difficult when you have already seen nearly 50% of your portfolio value evaporate over the course of a couple of years, and much of the news in the mainstream business media suggests that more losses may be ahead. There is a reason why investors complain about buying high and selling low, and times like these are why, as investors remain fully invested, only to panic and exit positions after sustaining a meaningful loss, and to miss out on the subsequent upside.
  3. Stay in cash. Yes, the potential investor at the start of the new millennium may have decided that the stock market was not for them, simply kept the money in a checking account, and settled in Rip Van Winkle-style for a long nap. Awakening more than 11 years later, this same potential investor would have the opportunity to buy into the stock market at effectively the exact same price, and would have missed out on all of the excitement and agony that had taken place along the way.
  4. Stay in cash initially. Of course, the potential investor could have also decided at the start of the new millennium to stay in cash for now. Or maybe they decide to put some money to work in the market, but hold the rest back in cash to see how events unfold. Perhaps they think they may be able to get a better price a few years down the road, which, of course, they would end up having ample opportunity to buy in at much lower prices in about nine of the next twelve years.
Upon reflection, the most ideal selection would have been the last. By staying at least partially in cash initially and waiting for lower stock prices, the investor would have provided themselves with the opportunity to purchase the item they desired in the form of stocks, which repeatedly went on sale from their initial price.

Yeah, But...

The natural counterargument to this point is the following. Yeah, someone might say, one can see these opportunities in hindsight, but you've cherry-picked the starting point to make your argument. And to that I would say, this someone would be absolutely right. For I would presume that investors under this mindset would have less of a cash allocation after the market has dropped by 30-50% or more, because by then, they would have deployed their cash to purchase at least some of the stock items they wanted to buy as they went on a BOGO sale.

In fact, my reasoning for picking the start of the new millennium is that it was of only four times in history that stock valuations have been around as high as or higher than they are today. In short, stocks are expensive right now. And just as the sensible consumer does not run out and spend all of their money buying a television or a house when they are expensive, nor should they necessarily do so when stocks are expensive. Instead, the sensible consumer waits until the future, when these items go on sale before going out to buy. In the meantime, they hold cash while they wait.

What about those past four instances when stocks were roughly just as expensive, if not more so, than they are today? The most recent has been documented above, but what about the other three in 1901, 1929 and 1966?

In 1901, an investor could have waited until 1924 and still had the opportunity buy into the market at the same nominal price.

In the granddaddy of them all, an investor from 1929 could have waited more than a couple of decades until 1954 to buy into the market at the same nominal price.

In 1966, an investor could have returned more than twelve years later in 1978 and bought back into the market at the same price, even after including all of the dividends paid along the way. And this ignores the massive inflation that is taking place at the time as well.

In short, stocks are expensive right now. And when they have been this expensive in the past, the market has provided sale opportunities at some point in the future to buy at a better price.

Bottom Line

Maintaining a cash allocation in an investment portfolio can provide great value. For if it is your expectation that stock prices may be lower at some point in the future, the purchasing power of your cash will be increased once this sale finally arrives. And such a sale does not need to be across the entire market. It may simply occur for a specific sector or particular security. But by holding cash, you maintain the flexibility to seize the opportunity to purchase stocks on sale once the time comes.

Moreover, by holding cash, you are not forced to sell something else in your portfolio that you might otherwise be inclined to keep.

To this point, I am not suggesting that investors should sit fully on cash. Nor am I suggesting that they must hold a meaningful allocation to cash at all times. After all, it is when the market goes on sale that you want to put this cash to work. But by indicating that investors can derive great value by holding a meaningful allocation to cash for at least some of the time, it debunks the notion that investors must remain fully invested all of the time. For just because cash may only paying you a 0.01% interest on your savings today does not mean that it will not provide you with far more meaningful value in terms of purchasing power down the road once the stocks you desire are suddenly on sale.

Bond Bubble Will Explode Violently

By: Michael Pento
Monday, May 18, 2015

Central banks are incapable of saving economies or creating growth. The only thing a central bank can do is create inflation. These market manipulators set forth on a journey seven years ago to save the world by engaging in massive monetary manipulation, euphemistically called Quantitative Easing (QE), and a Zero interest rate policy known as (ZIRP).

As I could have told them before they started, all this easy money will fail to create viable growth. The economy, held back by massive debt levels, initially clocked in at 0.2% for the first quarter. This number is set to be revised down to negative territory due to a huge increase in the trade deficit during March. And the second half isn't setting up to be much better either.

But the Fed was successful in re-inflating the housing and equity bubbles and also creating another new massive bubble in the bond market.

Despite tepid growth, most at the Fed have become anxious to wave the "Mission Accomplished Banner" and to move towards interest rate "normalization". Ceremoniously, they have set goals for the economy to reach in order to begin that long journey: unemployment around 5% and inflation at 2%.

As the Fed's luck would have it, discouraged would-be workers have dropped out of the labor force and have found it more profitable to sit home than to work, which has allowed the unemployment rate to approach the Fed's target. The unemployment rate has finally returned to the 2008 bubble level of 5.4%. But when we look at the Employment to Population ratio it is nowhere near where it ought to be. (59.3% today, down from 63.3% prior to the Great Recession.)

Employment to Population Ratio: Source BLS

But those at the Fed stand determined to never let real data points get in the way of the narrative that printing money saved the economy. In fact, San Francisco Fed President, John Williams, was recently touting a new way to calculate GDP that he called GDP plus. It appears when you take out everything he defines as "noise", first quarter GDP would have come in at exactly 1.7%. Perhaps a better term would be GDP minus: GDP minus all the things we wish didn't happen in the economy this quarter.

Now the only thing hampering the Fed's path to rate normalization is the "too-low" rate of inflation--the inflation resulting from unprecedented money printing and years of ZIRP that caused massive stock, bond and real estate bubbles doesn't count in the government's inflation indices. Nevertheless, the official core CPI number used to measure inflation appears at the moment to be "just right."

And for a brief moment, if we dismiss those asset bubbles, ignore discouraged workers, cherry pick economic data points and squint a little--we can be deluded into believing the economy has reached Goldilocks Nirvana...or even Goldilocks Nirvana plus.

But before Goldilocks reaches for her porridge, she may want to pay closer attention to what the Bond Market is telling us.

Normally, interest rates are a product of credit and inflation risks. Until a few weeks ago, central banks got away with the notion they could monetize unlimited amounts of sovereign debt without creating inflation. That is until now; look at sovereign bond yields in the past month: the Italian 10 year went from 1.26 on April 14th, to 1.91%, Portugal--April 14th 1.71, to 2.49%, Spain April 14th 1.26, to 1.88%, France April 15th 0.35, to 0.99%, Germany April 16th 0.08, to 0.72%. And all this is causing the U.S. 10 Year Note to jump from 1.87% on April 16th, to 2.31%.

For the past seven years, investors didn't have to worry about credit risk because central banks were ready buyers regardless of a nation's insolvent condition; as long as inflation was thought to remain quiescent. But here is a news flash--investors won't own sovereign debt if real interest rates plunge much further into negative territory. And neither will they accept negative real and nominal yields on fixed income if they can instead own Precious Metals, Commodities, Real Estate, or any other hard asset.

There is also a lack of liquidity in bond markets because central banks have removed all the supply. Investors don't want to buy new debt with negligible yields, but also don't want to sell if central banks are providing a perpetual bid. Therefore, there is no trading outside of institutions front running the central banks' purchases--again, as long as there is no inflation.

But here is the rub; once inflation becomes a problem central banks will then become sellers instead of buyers of bonds and principal depreciation will quickly erase the paltry yield away from investors.

And here is where it gets interesting: the Headline CPI is down 0.1% YOY in March, but the core rate of CPI is up 1.8%--coming very close to triggering the Fed's "return to normalization" target. A steep decline in the price of oil that began in the summer of 2014 has dragged the overall CPI number down. But gas prices have risen over 30% since the January lows. And the effect of the energy price collapse on the headline number starts to diminish in July, and is completely erased by the end of the year.

Therefore, very soon the Fed should be confronted with all the data points it previously mapped out in order to start raising rates. But perhaps the central bank should be careful about what it wishes for.

This is because seven years of interest rate suppression has created a powerful vacuum that could suck higher long-term interest rates in accelerated fashion.

On The Other Hand

Despite years of QE and ZIRP, the economy is still scraping along the bottom. If the Fed were to raise the cost of money above the one percent level, it will bring this bubble-addicted economy to its knees, as it provides the pin to the bubbles in real estate and equities. The growth rate in broad Money Supply (M3) has been falling from 9% in 2013, to just 3% today.

Therefore, when short term interest rates rise it is also very likely that the yield curve will invert and cause money supply growth to turn sharply negative; just as it did during the Great Recession. This is precisely because the long-end of the yield curve has been artificially suppressed for so many years. Longer-dated maturities could discount even slower growth ahead, and the yield curve would quickly invert from its already compressed starting point.

As previously explained, if I'm wrong about the yield curve flattening after the Fed starts hiking rates, it will only be the result of the market losing complete confidence in the US tax base to service Treasury debt and for global central banks to keep inflation in check. This alternate scenario would occur if the Fed decided to hike rates just once and then sat on its hands for a long period of time. The Fed's prolonged "patience" in hiking rates further would soon lead to that intractable rise in US long-term rates and result in a complete disaster for markets and economies worldwide.

Either Way We're Sunk

Whether long-term interest rates rise or fall when the Fed begins its exit is still in doubt--it all depends on the slope of Fed Funds rate. The yield curve could quickly invert or rise intractably.

However, the only sure outcome is chaos on a global scale because central banks have never been able to extricate the economy from the bubbles it created. Such is the inevitable result of the massive and historic intervention of central banks into the sovereign debt market. In other words, bubbles never pop with impunity and the international bond bubble is certainly not going to be the exception. Therefore, no matter what happens to interest rates in the future you can be sure of one thing...the suffering will be immense.

Defiant Greeks force Europe to negotiating table as time-bomb ticks

EMU creditors have Greece's Alexis Tsipras by the scruff of the neck, but he has a knife to their throats

By Ambrose Evans-Pritchard

9:30PM BST 20 May 2015

Europe's creditor powers have started to wobble. Berlin, Paris and Brussels are coming to the grim conclusion that Greece may not capitulate as expected, and time is running out fast.

Athens is now warning openly that the "moment of truth" will come on June 5, when the country faces default on a €300m payment to the International Monetary Fund, unless the EU authorities hand over the next tranche of bail-out cash.
It would be hazardous to bet the integrity of monetary union on the assumption that this is just a bluff.

For the past four months the creditor bloc has been dictating terms, mechanically repeating the same demand that Alexis Tsipras and his Syriza rebels deliver on an austerity contract that they vowed to repudiate and which the previous conservative government was unable to implement.

EMU leaders have never at any moment acknowledged that the extra loans imposed on a bankrupt Greek state in 2010 were chiefly designed to save the euro and stem a European-wide banking crisis at a time when the eurozone had no defences against contagion.

They have yielded slightly on Greece's primary budget surplus but are still insisting on fiscal targets that can only trap Greece in a vicious circle of low growth and under-investment. Such a regime would leave the country just as bankrupt in the early 2020s as it was when the traumatic ordeal began, with nothing to show for so many cuts and a decade of depression.

They are still pushing Greece to sell off state assets for a pittance to the same old oligarchy, further entrenching the deformities of the Greek economy, presumably - for there is no other urgent imperative - so that they can collect their debts.

Yet creditor bluster has reached its limits. It is by now clear that Syriza is so angry, and so driven by a sense of injustice, that it may be willing to bring the whole temple of monetary and political union crashing down on everybody's heads, if pushed to the brink.

Mr Tsipras spent five hours trying to calm the party leadership on Tuesday as a mutinous caucus on the hard-Left, but not only them, berated him furiously for raiding reserve funds to pay off creditors. Better to default and be done with it.

The mood was already clear at a "war cabinet" 10 days ago when all wings of the party agreed that they would stand and fight - whatever the consequences - rather than submit to demands for a further cut in wages and pensions, or accept any deal that fails to offer debt relief and imposes a primary surplus above 1pc of GDP.

Pensions have already been cut by 44pc, and 48pc for public sector workers, and these stipends are the final safety net for Greek society. The recipients are literally feeding their children and grandchildren and extended kin. More than 900,000 registered unemployed - or 86pc of the total - receive no benefits.

The Greek drama has, in any case, escalated to a higher level. Washington has brought to bear its immense diplomatic power, warning Germany ever more insistently that it would be a geo-strategic disaster of the first order if an embittered Greece were to spin out of control and into the orbit of Vladimir Putin's revanchist Russia.

Wiser heads in Berlin need no persuasion. Vice-Chancellor Sigmar Gabriel, the Social Democrat leader, clenches his teeth with exasperation when told that Europe can safely handle a €315bn default and a Greek ejection from the euro.

"It is extremely dangerous politically. Nobody would have any more faith in Europe if we break apart in the first big crisis," he said.

German vice-chancellor and head of Socialist party Sigmar Gabriel

Chancellor Angela Merkel is in turn meeting groups of MPs from her Christian Democrat family, quietly warning them that the Bundestag may have to vote on a third rescue package for Greece even if Syriza stands fast on its "red lines" and does not fully comply. The southeastern flank of Nato cannot be allowed to unravel.

Suddenly, the technocrats in Brussels have begun to talk of "progress". The word is out that Syriza is finally putting forward serious reform proposals.

This new rhetoric is humbug. The Greeks offered long ago to draw up plans for free market reforms under the tutelage of the OECD, the leading specialists in this field.

They offered to draw up flexible labour laws with the help of the International Labour Federation, a legitimate alternative to the German-style "Hartz IV" reforms being pushed by the EU institutions - and anathema to the radical Left.

Syriza put forward a detailed list of reforms weeks ago. The creditor powers rejected the suggestions out of hand. Yanis Varoufakis, Greece's finance minister, told me that EU authorities were interested only in securing a ritual submission. "The reforms were a smokescreen. Whenever I tried talking about proposals, they were bored. I could see it in their body language," he said.

The creditors could have found common ground with Syriza at any time had they wished to negotiate.

What has abruptly changed over the past week is the mood at the Kanzleramt and the Elysée, the twin power centres of the EMU system.

Alexis Tsipras is facing a mutiny among the Hard Left of Syriza

Ms Merkel and French president François Hollande together called for fast-track action on Tuesday.

"We expect that decisive progress now be made in the relevant forums. It’s in everyone’s interest that Greece stays in the eurozone,” said the German chancellor.

Behind closed doors they have told EMU negotiators to stop obstructing a deal and defuse the ticking time-bomb before it blows up in two weeks.

The European Central Bank is grudgingly doing its part, postponing the long-feared tightening of collateral rules for Greek banks. There is just enough liquidity in the system to limp on until early June.

The ECB can hardly do otherwise. If it were to pull the plug on the Greek banking system and - by its own authority, with no mandate from elected leaders - deliberately precipitate the bankruptcy of the first radical-Left government elected in Europe since the Second World War, it would create a martyr state for the European Left. It would establish for all to see that EMU's governing institions are beyond democratic control.
Syriza has always had a stronger hand than supposed in this high-stakes game of strategic chicken, even if it has misjudged horribly in trying to play off Europe's debtor bloc against the Teutonic core, or in playing off Washington against Moscow.

It is no light matter to shatter a currency built with ideological fervour to bind Europe together, the crown jewel of EU integration. As Mr Tsipras puts it, the eurozone is like a woollen jumper: “Once it begins to unravel, you can’t stop it anymore."

The EU itself is already in a deep moral crisis, discredited by a self-inflicted slump and mass unemployment across the Greco-Latin world. It no longer has the self-assurance to confront flagrant abuses of its core principles by more than one state in central and eastern Europe.

The European elections last year were a primordial scream by the souverainiste Right, a coronation for France's Marine Le Pen. The Left remains loyal, but tepidly, and not to be taken for granted.

Jean-Claude Juncker, the Commission's chief, admitted poignantly to Die Welt that the whole project is in dire trouble. "Europe has lost a huge amount of prestige. Nobody takes us seriously in foreign policy anymore," he said.

"A Greek exit from the eurozone would do irreparable damage to the European Union's reputation in the whole world."

The EMU creditors have Mr Tsipras by the scruff of the neck. He has a knife to their throats.

Who Did This To Peru's Jungle?

May 17, 2015 6:06 AM ET

Jason Beaubien

An aerial photo shows the environmental destruction in the wake of illegal gold mining in the Peruvian Amazon.i
An aerial photo shows the environmental destruction in the wake of illegal gold mining in the Peruvian Amazon. Courtesy of Gregory Asner, Carnegie Institution for Science hide caption
itoggle caption Courtesy of Gregory Asner, Carnegie Institution for Science

Gold has been a blessing and a curse for Peru for centuries. In the 16th century, one of the first Spanish explorers to arrive, Francisco Pizarro, was so enthralled by the mineral riches that he took the Inca king hostage.

Men strap replacement parts for mining equipment onto the back of a motorcycle. The only way to reach many of the gold mines is with dirt bikes on narrow trails through the jungle.i
Men strap replacement parts for mining equipment onto the back of a motorcycle. The only way to reach many of the gold mines is with dirt bikes on narrow trails through the jungle. Jason Beaubien/NPR hide caption 

Pizarro demanded a room filled with gold for the release of the Atahualpa. According to legend, the Inca delivered the ransom, packing a room from floor to ceiling with the precious metal.

The Spaniards killed Atahualpa anyway.

In the 21st century, the demand for gold is once again having a profound effect on Peru. As world gold prices have risen over the last decade to record highs, thousands of subsistence farmers from the Peruvian Andes have flooded east into the Amazon basin in hopes of uncovering tiny specks of the metal. A decade ago, when gold was trading at $400 an ounce, deposits in old riverbeds wouldn't have been worth pawing through. They became incredibly attractive as the price of gold shot up to as much as $1,800 an ounce.

As farmers-turned-miners invaded national parks and reserves to hunt for gold, they've left devastation in their wake, turning lush rain forests into denuded piles of gravel and contaminating waterways with mercury that threatens the health of nearby villages.

By some estimates, there are now tens of thousands of illegal miners working the eastern Peruvian province of Madre de Dios.i
By some estimates, there are now tens of thousands of illegal miners working the eastern Peruvian province of Madre de Dios. Jason Beaubien/NPR hide caption
itoggle caption Jason Beaubien/NPR
Most of the mining is in remote nature preserves and on government land. The only way to get into a massive mining zone known as La Pampa is by motorcycle. Dirt bikes thread their way through narrow single-track paths in the jungle, carrying 20-gallon jerry cans of diesel fuel and steel crank shafts through the forest for the mining effort.

They rattle over loose wooden plank bridges, plunge up through swamps until they finally arrive at a barren expanse of sand and gravel. One minute you're under the cool canopy of the jungle. The next you're under the searing sun in what looks like a desert.

Motorcycle taxis like these are the only way to enter the La Pampa mining zone. They ferry people and mining supplies over narrow trails in the jungle.i
Motorcycle taxis like these are the only way to enter the La Pampa mining zone. They ferry people and mining supplies over narrow trails in the jungle. Jason Beaubien/NPR hide caption
itoggle caption Jason Beaubien/NPR

"The stretch of mining that we are in is about 40 miles long and about 5 miles wide," says Luis Fernandez, a tropical ecologist with the Carnegie Institution for Science. Just two years ago the area where he's standing was a rainforest. Now he's standing on a mound of gravel.

"This," Fernandez says kicking at the loose pebbles under his feet, "is what is underneath the rich Amazon forest that we see just on the edges here."

"If you strip away all the plants and the first layer of soil," he adds, "this is what's underneath it. And this is where the gold is."

In their rush for gold, the miners contaminate nearby waterways with mercury and mud.

The miners use water hoses attached to giant pumps to blast the topsoil. They then sift the soil to search for gold. After separating the finer sediments from the heavier gravel, they mix mercury into the slurry. The ball of mercury acts like a magnet, grabbing any remaining flecks of the precious metal.

Sabina Valdez Rondon lives in the village of Manauni, which is now surrounded by gold mining operations. Her village of two dozen simple wooden houses, set behind a buffer of tall trees, is now a green oasis in a sea of dun-colored dirt. Valdez says the illegal miners have had a huge impact on the village.

"The miners don't care about anything," she says. "They don't care if they if they pollute because they're not from here. They take out the gold and they leave. In contrast, we are from here, we live here, we stay here and we are worried about our environment."

Earlier this year, Luis Fernandez, from the Carnegie Institution for Science, tested Valdez and her neighbors in Manauni for mercury exposure.

He found that on average, the residents of Manauni had mercury levels in their blood six times above what's recommended by the World Health Organization. "Some people had as high as 14 times the maximum limit," Fernandez says.

In the Madre de Dios region of eastern Peru, miners use hoses to blast away the soil in the rain forest and then sift the sediment for gold.i
In the Madre de Dios region of eastern Peru, miners use hoses to blast away the soil in the rain forest and then sift the sediment for gold. Jason Beaubien/NPR hide caption
itoggle caption Jason Beaubien/NPR
Mercury is particularly dangerous for children and pregnant women. It's a neurotoxin that can cause stunting and developmental delays.

Federal officials in Lima have attempted to rein in the illegal mining. They've tried to block fuel shipments into the mining zones in an attempt to cut off power to the miners' pumps and generators. They've sent in the Peruvian military to blow up mining rigs. But the efforts have had little effect. By some estimates there are now tens of thousands of illegal miners working the eastern Peruvian province of Madre de Dios. Even officials in the environmental ministry say the illicit gold mining continues to expand.

The primary reason the industry is so hard to stop is that it's generating hundreds of millions of dollars worth of gold each year. Laborers who might have struggled to find work for $10 a day in other parts of Peru can make $50 or $100 a day on a mining rig.

The gold trade has become a major force in the local economy. Shops dedicated to mining equipment operate openly in Puerto Maldonado, even though it's clear their customers are engaged in illegal mining.

A new governor just took office in January, and he's a miner. Miners rail against any efforts to curb their activities. Many even argue that the issue of mercury contamination is a plot by American environmentalists to try to drive them out of the jungle.

Florentino Sucso, a miner and the mayor of a mining village called Tres Islas, denies that mercury is toxic.

"That's a lie!" he yells when asked about the health effects of spilling tons of mercury in the rivers each year. "That's a trick, my brother. I am 54 years old. I'm not sick. I can jump. I can run. I can play football. I can have children. Everything you want."

People in this part of Peru have few other ways to earn a living. Some harvest Brazil nuts from the jungle. There have been attempts to set up fish farms. But these industries are tiny compared to the mining. The only other major source of income is ecotourism, and tour operators are not happy about the destruction the miners leave in their wake.

The miners' greed could destroy this part of the Peruvian Amazon for everyone, says Jorge Borja, who runs a jungle lodge on the Tambopata River.

A massive gold mining zone in eastern Peru has turned thousands of acres of rain forest into wastelands. This strip of mining in La Pampa is 5 miles wide and 40 miles long.i
A massive gold mining zone in eastern Peru has turned thousands of acres of rain forest into wastelands. This strip of mining in La Pampa is 5 miles wide and 40 miles long. Jason Beaubien/NPR hide caption

The gold itself is being gobbled up by a global market. Forces outside Peru — the commodity exchanges in London, New York and Hong Kong — are once again proving more powerful than the Peruvian state.

Miners denounce efforts to curtail their use of mercury as a plot to keep them in poverty. They argue that if this gold had been beneath the ground in the U.S., Americans wouldn't just leave it there.

Borja figures the thing mostly likely to halt the destruction caused by gold mining in this part of the Peruvian Amazon is for global gold prices to fall dramatically back to where they were a decade ago.

viernes, mayo 22, 2015



Economist On Gold - A Dissection

  • In early May, The Economist published an editorial on gold, ominously entitled "Buried".
  • The question should actually not be "Why is gold down one third from its highs", but "Why is it still up by 400% from its 1999 lows?"
  • As Steve Saville has recently pointed out, if one looks closely at when the gold price has put in lows and reversed upward since 2013, it turns out that whenever an announced tightening of Fed policy (tapering, end of QE3) became reality, the price of gold has started to rise instead of falling further.
  • The assertion that "gold is in a rut" is clearly a matter of perspective. It is certainly back in a bull market both in euro and yen terms, while going sideways in dollar terms.
A Proven Contrary Indicator
In early May, The Economist published an editorial on gold, ominously entitled "Buried". We wanted to comment on it earlier already, but never seemed to get around to it. It is still worth doing so, for a number of reasons.

The Economist is a quintessential establishment publication. It occasionally gives lip service to supporting the free market, but anyone who has ever read it with his eyes open must have noticed that 70% of the content is all about how governments should best centrally plan the economy, while most of the rest is concerned with dispensing advice as to how to expand and preserve Anglo-American imperialism. We are exaggerating a bit for effect here, but in essence, we think this describes the magazine well. In other words, its economic stance is essentially indistinguishable from that of Financial Times or most of the rest of the mainstream financial press.

Keynesian shibboleths about "market failure" and the need to prevent it, as well as the alleged need for governments to provide "public goods" and to steer the economy in directions desired by the ruling elite with a variety of taxation and spending schemes as well as monetary interventionism are dripping from its pages in generous dollops. It never strays beyond the "acceptable" degree of support for free markets, which is essentially book-ended by Milton Friedman (a supporter of central banking, fiat money and positivism in economic science, who comes from an economic school of thought that was regarded as part of the "leftist fringe" in the 1940s, as Hans-Hermann Hoppe has pointed out). Needless to say, the default expectation should therefore be that the magazine will be dissing gold - and indeed, it didn't disappoint.

Another reason is that the magazine has one of the very best records as a contrary indicator whenever it comments on markets. If a market trend makes the cover page of The Economist, it is almost as good as if it were making the front page of The Mirror or The Daily Mail. If you do the exact opposite of what an Economist cover story prediction indicates you should do, you can actually end up being set for life.

A famous example was the "Drowning in Oil" cover story, which was published about two months after a multi-decade low in the oil price had been established, literally within two trading days of the slightly higher retest low. The article predicted that crude oil would soon fall from then slightly over $10/bbl. to a mere $5/bbl. - a not inconsiderable decline of more than 50%. Instead, it began to soar within a few days of the article's publication, and essentially didn't stop until it had risen nearly 15-fold - a gain of almost 1,400%.

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One of the most ill-timed cover stories of all time - The Economist's early March 1999 cover "Drowning in Oil". In the article, it was argued that there was such a huge oversupply of oil on the market that a 50% price decline to $5 per barrel was highly likely.

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From the "what really happened" department: Within days of being left for dead by The Economist, oil embarked on a 1,400% rally.

The Economist's Disjointed and Irrelevant Musings on Gold

Unfortunately, gold hasn't yet made it to the front page, but The Economist has sacrificed some ink in order to declare it "dead" (or rather, "buried"). We hasten to add that during the recent trading range, every time we have written something mildly positive about gold, it usually felt as though we had jinxed it, often within hours. It is no secret that we are favorably disposed toward gold in the medium-to-long term, but we do, as a rule, inject some objectivity by mentioning the potential short-to-medium term downside risks that could become manifest, should important support levels give way. It doesn't seem very likely to us that this will happen (we believe a lengthy bottoming process is under way), but obviously, the probability isn't zero.

The Economist article is a typical "after the fact" denouncement - we wouldn't have seen such an article appear in August/September 2011, when gold was still trading near its highs. It is also a disjointed mess, with many irrelevant arguments and non-sequiturs - basically a hit piece.

However, since some of these arguments are at times mentioned by both bulls and bears, we thought it worthwhile to discuss their merit (or the lack of the same). The article begins:
"Uncertainty is supposed to lift the gold price. But neither upheaval in the Middle East, nor the travails of the euro zone, nor startlingly loose monetary policy in the rich world is brightening the spirits of those who swear by bullion. After a big rally during the financial crisis, the price has sagged to about $1,200 an ounce, a third below its peak in 2011. Little seems likely to turn it round. "We've seen everything gold bugs could hope for: endless money printing, 0% interest rates (both short-term and long-term adjusted for inflation), rising debt and debt ratios in the public and private sectors... So where's the damn hyperinflation?" asks Harry Dent, a newsletter publisher, in a recent blog post."
We would submit that with developed market stock markets at one of their most overvalued levels in history and government bond yields recently trading at absurdly low and even negative yields, there are exactly zero signs of "uncertainty" in the financial markets. The St. Louis Fed's financial stress index is presently at one of its lowest levels in history. As we have mentioned previously, gold has primarily lost its "euro break-up premium". The question should actually not be "Why is gold down one third from its highs", but "Why is it still up by 400% from its 1999 lows?"

The sentence "Little seems likely to turn it around" is, well, golden in a sense. When a market trend changes, it always seems as if nothing could possibly turn the market around. Of course, that doesn't necessarily mean that a market turn in gold is imminent - we merely want to point out that the phrase used by The Economist perfectly describes the conditions found near major market turns. The above discussed "drowning in oil" article from early 1999 is a very good example of just such a situation.

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Uncertainty? There is none - the "financial stress index" is near the lowest levels in the history of the data series. The faith of market participants in central banks and their policies is close to an all-time high. One should ask why gold is still trading at such high levels, not why it is down from the euro crisis peak.

The remark by Harry Dent is downright bizarre. Where was the "hyperinflation" when gold rose from $250 to $1,900? There wasn't even a single mild inflation scare over the entire period.

Is this meant to indicate that Dent believes "hyperinflation" is required for the gold price to rise? If so, then he should really refrain from commenting on the gold market. Although the true US money supply has increased by a chunky 265% since the year 2000, it would be ludicrous to expect "hyperinflation" anytime soon. The probability that we will experience hyperinflation over the next several years is so extremely low, it is hardly worth mentioning.

However, the process that historically ends with hyperinflation has always begun in a very similar manner: government debt rises to such an extent that debt monetization by central banks is initiated.

For many years, nothing happens. Occasionally, the pace of debt monetization is slowed down again, only to speed up again a short while later. Eventually, the price effects of the enlarged money supply begin to migrate from capital goods and asset markets to consumer goods (especially if the economy's structural integrity becomes severely compromised by incessant credit expansion). At this point, it is still possible for the authorities to arrest the inflationary trend by abandoning the inflationary policy. Only when they consistently fail to do so will the public's confidence in the currency be suddenly lost. The actual "hyperinflation" process usually plays out in just a few short months - as the final conflagration in a process that takes many years, sometimes even decades, to play out. So we would advise Mr. Dent to be patient.

Hyperinflation does not seem likely from today's perspective, but a time may come when it does become likely. You will almost certainly read about it here if/when that should happen. In the meantime, rest assured that gold can easily rise to much higher prices than today's, even if "CPI inflation" remains perfectly tame.

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Gold vs. the y-y change rate in CPI - the direction of the latter seems to matter empirically (see "In Gold We Trust" by Ronnie Stoeferle and Mark Valek) - falling rates of inflation ("disinflation") tend to be gold bearish, and rising rates as well as "deflation" tend to be bullish. Hyperinflation is not required at all.

The Economist continues:
"The biggest pressure on the gold price comes from the expectation that interest rates in America will rise later this year. Matthew Turner of Macquarie, a bank, says that low interest rates cut the opportunity cost of owning gold. Higher interest rates, by contrast, raise the cost of holding non-interest-bearing assets. Mr Turner thinks expectations of rising rates are already built into the gold price; if they do not materialize as quickly as expected, there could even be a rally."
While it is true that the opportunity cost of holding gold is an important factor influencing its price, nominal rates are irrelevant - only real interest rates count. The idea that fear of Fed rate hikes exert the "biggest pressure on gold prices" is largely a myth, however (even though Mr. Turner may turn out to be correct - that if the Fed fails to hike rates soon, gold could rally for a while). If the Fed were to raise rates by 15 or 25 basis points, they would still be at levels that are among the lowest in history. Moreover, if inflation expectations rise by a similar amount, absolutely nothing would change for gold. If they were to rise at a faster pace than the Fed's rate hikes, then the real interest rate backdrop would turn increasingly bullish for gold. As Steve Saville has recently pointed out, though, if one looks closely at when the gold price has put in lows and reversed upward since 2013, it turns out that whenever an announced tightening of Fed policy (tapering, end of QE3) became reality, the price of gold has started to rise instead of falling further.

Why is this so? The explanation is that the gold market is very much a forward-looking market. It senses trouble long before anyone becomes consciously aware of it. If one looks closely at the final phases of stock market bubbles in recent years, the gold price always stopped falling even while the stock market was still rising (at times sharply), but closing in on its peak. Anything that is bad for "risk assets" will be good for gold. Many people buy gold as "insurance" (even Ray Dalio has a sizable percentage of his personal assets in gold, if we can believe what he recently stated in a Q&A at the CFR). These people represent a steady stream of demand that is usually buttressed by strong reservation demand that tends to surge whenever "bubble talk" with respect to other markets becomes prevalent. In short, because a certain percentage of market participants recognizes the danger posed by the bubble, a floor is put under the gold price.

In order to understand the reasoning of gold buyers and gold holders who don't sell at current prices, we only have to gauge our own demand for bullion, including our reservation demand, and consider what motivates it. Would we sell any bullion here? There isn't a snowball's chance in hell of that happening. What is the motive? We regard the monetary experiments performed by central banks in recent years as extremely dangerous. Furthermore, we believe that most of the Western world is suspended in a state of "pretend solvency".

A giant confidence game is underway, in which a critical mass of people still pretends that governments are fiscally sound and that the banking system is in fine fettle. It seems to us that the reality is a tad more sobering, and while we have a lot of faith in the ability of what remains of the market economy to generate real wealth, we doubt it will suffice to stave off a less-than-happy outcome. On the day a sufficiently large number of people stops keeping up the pretense, we will have reached a fork in the road: either much of the world will get the "Cyprus treatment", or we will indeed see hyperinflation emerge. It will be a default either way. Is there any possibility to hedge against such an outcome - or even a slightly less apocalyptic one - that still involves a great deal of financial and economic distress? If anyone has a better idea than gold, we'd love to hear it.
The Economist continues:
"That cannot come soon enough for gold producers. Nikolai Zelenski, the boss of Nordgold, which has mines in Africa and the former Soviet Union, says that half of all producers have negative cashflow. Some are heavily indebted, too. If the price does not rise, production could fall on a scale not seen since the two world wars."
That is, of course, irrelevant for the gold price, but we would point out that gold producers somehow survived the bear market from 1980 to 1999 as well, and their production actually surged rather dramatically that time period. What Mr. Zelenski seems to be forgetting is that mining margins are a moving target. They depend not only on the gold price, but also on input costs.

The article continues:
"Gold bugs are determinedly optimistic. Gold is priced in dollars, so the fact that it stayed stable while America's currency was rising (making gold more expensive for buyers in foreign currencies) is cause for cheer."
With closed-end bullion funds trading at discounts of almost 10% to NAV, we have our doubts about the size and importance of this allegedly "determinedly optimistic" group. Anecdotal evidence actually suggests that most "gold bugs" are, at best, frustrated at this point. It is, however, true that it is a bullish sign when gold stays strong in the face of a strengthening dollar.
"Chinese consumers are buying more gold, after a sharp decline sparked partly by an anti-corruption campaign. So are Indians, the world's biggest consumers of gold, after the government removed restrictions on imports last year. Yet the fact remains: gold is in a rut."
This is one of the points often made by gold bulls: see how much gold China is importing! This is, however, at best of tangential importance, roughly on a par with the ups and down in mine supply.

Gold is not an industrial commodity, it is a monetary commodity (for an explanation of the difference between the two see our previous missive "Misconceptions About Gold"). When gold moves from COMEX warehouses to warehouses in Shanghai, it is not a bullish event, but a completely irrelevant event. Having said all that, we do believe that Chinese investors could play a role in the eventual blow-off move we expect to occur a few years down the road. However, this is just speculation on our part.

The assertion that "gold is in a rut" is clearly a matter of perspective. It is certainly back in a bull market both in euro and yen terms, while going sideways in dollar terms. The chart below illustrates the current situation. Note that both in euro and yen terms, it is impossible to not see that a textbook technical bottoming process has taken place. Of course, The Economist hasn't exactly lost its magic touch either: Since the article appeared, gold has risen by $45 in USD terms as well.

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Whether one thinks that gold remains in a "rut" clearly depends on where one happens to reside.

Could it be that all that money printing in the euro area and Japan does have an effect on the gold price, after all? Just asking.

The Economist continues:
"One reason may be that investors have so many more options nowadays. Humble citizens who distrust their own currencies can buy assets ranging from shares to bitcoins. Laurence Fink, the chairman of BlackRock, the world's biggest asset-management firm, said in March that gold had "lost its lustre", thanks to the wider availability of property and even contemporary art. "It's become much more accessible for global families worldwide to store wealth outside their country."
Obviously, the chairman of BlackRock is at odds with the chairman of Bridgewater, which is another one of those "largest asset management firms" in the world. Judging from what Fink says, we actually doubt that he has any expertise with respect to gold. Shares and Bitcoins?

Property and contemporary art? Three of these four asset classes are in egregious bubbles, which clearly depend on confidence being maintained. The fourth is, at the moment, pretty much a burst bubble (Bitcoin has declined from $1,200 to a little over $200, so if people indeed see it as an "alternative to gold", it has proved to be a rather poor one). It is, in principle, true that all these asset classes compete with gold to some extent, but it is a bit misleading to call stocks, property and works of art an "alternative" to gold. Gold is sought after when these assets are not - it is not merely an "alternative" to them, it is their antithesis.

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Bitcoin - A bubble that has burst for now (it may well make a comeback, though, and as we have previously noted, Bitcoin is likely here to stay).

Gold is currently dormant precisely because people are confident enough to pay absolutely ludicrous prices for assorted "risk" assets (recently, a Gauguin painting sold for a record $300 million - a sign that some sectors of the economy are indeed displaying almost "hyperinflationary" characteristics by now). At the same time, the fact that these bubbles have grown to such exorbitant heights (there are countless breathtaking property bubbles underway around the world, along with those in contemporary art and stocks) is a major reason why it makes sense to hold gold as insurance.

Gold is akin to money - although it is currently not money in the strict sense, as it doesn't serve as the general medium of exchange, the market "knows" that it would be money if the market were free, and treats it accordingly. So Fink's statement is simply yet another non-sequitur. People were able to buy stocks and art works between 2000 and 2011 as well, and yet, gold was the preferred asset in most of that time period, because confidence frequently faltered.


Gauguin's "Will You Marry Me" - certainly a nice picture, but 300 million smackers? Come on...

Finally, The Economist cannot fail to get one last dig in by letting us know that only the evil Vladimir Putin and his henchmen in Moscow are buying gold (either they are stupid, or it is a sign that gold is only bought by foaming-at-the-mouth crazies - take your pick!):
"The main exception to the trend is Russia, where the central bank has been a notable buyer of gold, tripling its holdings since 2005. It bought 30 tonnes in March alone, bringing its hoard to 1,238 tonnes. The Kremlin's growing stockpile does not so much reflect a belief in gold's prospects, however, as a distaste for the American dollar. Whatever Vladimir Putin's other qualities, most investors would hesitate to take him on as a financial adviser."
First of all, neither The Economist nor anyone else can properly judge Putin's qualities as a "financial advisor". Russia's central bank may have very good reasons for buying gold. As Alan Greenspan once remarked, gold it is the only form of payment that will always be accepted. He dissuaded the US treasury from selling its hoard, precisely because extreme situations can arise when gold ownership can prove very useful. We would assume that strategic reasons are the Russian government's main motive for buying gold as well - we doubt it cares much about where gold trades next week, next month or even next year.

Secondly, just because the Russian central bank is one of the few known big official gold buyers certainly doesn't mean one has automatically hired Putin as one's financial advisor when investing in gold. Incidentally, what Russia's central bank is doing is not directly relevant to the gold price. What it buys in an entire year trades in London and Zurich in a few hours every trading day. It is a pittance compared to the total supply of gold.

Lastly, we still remember how Bloomberg, another viciously statist mainstream financial medium that disses gold at every opportunity, tried to scare less well-informed would-be gold buyers by asserting that Russia would be forced to sell its gold reserves! See "Will There be Forced Official Sellers of Gold" for our assessment at the time. We have so far been proved right, but obviously we can't win, because now Putin is our "financial advisor"!


We enjoy picking on The Economist, of course, but our main motive for dissecting its editorial on gold was to show that the gold market remains widely misunderstood. Moreover, given the publication's record as a contrary indicator, it might prove to be a useful marker - although we don't want to make too much of this (if it had been a cover story, we'd recommend mortgaging the house and renting a vault). In the meantime, the fundamental backdrop for gold remains largely in neutral, with some factors improving and others not. However, buyers seem to be willing to step in every time gold dips below the $1,200 level. Technically, it remains in no-man's land in dollar terms, but continues to look encouraging in euro and yen terms. Maybe The Economist has managed to ring the bell after all? Stay tuned...

Charts by: StockCharts, St. Louis Federal Reserve Research, Bitcoincharts

Behind the Pope’s Embrace of Castro

Speculation runs from a Trojan horse plan to Latin American antipathy of the U.S.

By Mary Anastasia O’Grady  

The warmth and hospitality that Pope Francis showed to Raúl Castro at the Vatican last week has baffled many Catholics—and for good reason. The dictator went to Rome for a PR boost. The pontiff obliged him.
The warmth and hospitality that Pope Francis showed to Raúl Castro at the Vatican last week has baffled many Catholics—and for good reason. The dictator went to Rome for a PR boost.

The pontiff obliged him.

During their encounter Castro mocked the faith with a quip about returning to the church if the pope behaved. He also mocked every Cuban refugee, dead or alive, by giving the pope, of all things, a piece of art depicting a migrant at prayer.

Pope Francis gave the dictator a copy of his 2013 apostolic exhortation titled “The Joy of the Gospel,” in which he sharply criticizes economic freedom. Talk about preaching to the converted. As Raúl put it, “The pontiff is a Jesuit, and I, in some way, am too. I studied at Jesuit schools.” No kidding.

It’s always possible that Pope Francis is hoping to get close to the regime in order to change it.

Maybe he has in mind a spiritual version of a Trojan horse that once inside the gates of Cuban hell will unleash an army of angels.

With God all things are possible. But I suspect that this papal rapprochement with Castro has more mundane roots.

The Holy Father is a native of 20th-century Argentina, ideologically defined by nationalism, socialism, corporatism and anti-Americanism. It wouldn’t be surprising to learn that this influences his views toward the U.S. and the island 90 miles from its shores.

When the Cuban dictatorship lost its Soviet sugar daddy in the early 1990s, it nearly crumbled.

Last year deep economic troubles again looked as if they might force change. As Venezuelan oil subsidies to Havana slowed, the rotting system teetered on the edge of collapse.

It was an opportunity for the church to show solidarity with the powerless Cuban people—or at least stand back. Instead the Vatican stepped in to help the Castros. In December we learned that Pope Francis brokered the Obama-Castro thaw, which while unlikely to spur improvements in human rights is already generating new interest in investing with the military government.

Some Catholics have tried to excuse the pope’s hostility toward economic freedom in “The Joy of the Gospel” by arguing that he grew up in a corrupt state-run economy and probably mistook it for a capitalist system. This is nonsense. Argentine statism explicitly denounces market economics.

There is another more plausible explanation for why the pope shows disdain in his exhortation for “a crude and naive trust in the goodness of those wielding economic power and in the sacralized workings of the prevailing economic system.” It lies in an Argentine sense of cultural superiority over the money-grubbing capitalists to the north and faith in the state to protect it.

Mexican historian Enrique Krauze traces this to an intellectual backlash against the U.S. after the Spanish defeat in the Spanish-American war. Examples he cites in his 2011 book “Redeemers” include the Nicaraguan poet Rubén Darío and the Franco-Argentine historian Paul Groussac, who both painted Americans as uncivilized beasts. According to Mr. Krauze, the southern cone—especially Argentina—also had imported the idea of a “socialism that fought to improve the economic, cultural and educational level of the poor, while generating a nationalist state.”

In 1900 Uruguayan José Enrique Rodó published “Ariel,” which emphasized “the superiority of Latin culture over the mere utilitarianism espoused” by the North. Rodó was “the first ideologue of Latin American nationalism,” and his influence spread throughout the region.

“Latin Americanism, especially in the South, was also anti-Yankeeism,” Mr. Krauze writes.

Fast forward 115 years and Cuba is again a symbol of struggle between the North and the South.

Many Latin American intellectuals don’t like the dictatorship but they loathe U.S. affluence and power. They know that a full-blown collapse of Cuba would likely bring back the Americans. That’s why they tolerate the status quo.

I can only speculate about the Holy Father’s Cuba views. But he is earning a dubious political reputation. In August 2014, he lifted the church’s 29-year ban on Maryknoll priest Miguel d’Escoto Brockmann’s right to celebrate Mass. The communist cleric who once served as Nicaraguan foreign minister for the Marxist Sandinistas was demoted by Pope John Paul II for refusing to get out of politics.

After the ban was lifted, Father d’Escoto rushed to denounce the late beloved Polish pontiff for “an abuse of authority.” He also declared Fidel Castro a messenger of the Holy Spirit in “the necessity of struggle” to establish “the reign of God on this earth that is the alternative to the empire.”

Last week Rev. Gustavo Gutierrez, the Peruvian who launched liberation theology, was back at the Vatican. He told journalists that the church never condemned his brand of thinking and praised Pope Francis’ views on poverty. He didn’t mention the sharp drop in Peruvian poverty since policy makers threw out his ideas. Maybe the pope will talk about it on his September trip to Cuba.