Safe Haven Treasuries Not So Safe

Doug Nolan

Technical issues putting together this evenings CBB...

A “sloppy” auction saw 30-year Treasury yields surge 21 bps this week to 1.45%, an almost seven-week closing high. Ten-year Treasury yields jumped 14 bps to 0.71%, while benchmark MBS yields rose 17 bps to 1.38%. 

But how about in dollars? 

The iShares 20+ Year Treasury Bond ETF (TLT) lost 3.9% for the week. Is a so-called “safe haven” losing almost 4% in a single week really a safe haven? Sure, Treasury yields could decline more from current historically low levels. 

But this week confirmed the risk versus reward calculus for owning Treasury bonds these days is unattractive.

Corporate bonds somewhat outperformed but posted losses for the week nonetheless. The iShares Investment Grade Corporate Bond ETF (LQD) fell 2.4%, and the iShares High Yield Corporate Bond ETF (HYG) declined 1.3%. We’ll see if this week’s reversal leads to any slowdown in the wall of “money” flooding into bond funds.

Perhaps of more consequence, the spectacular EM bond (price) “melt-up” came to a rather abrupt halt this week. 

Brazil’s 10-year (real) yields surged 51 bps to 7.27% - trading this week to the highest yields since April. Local currency Eastern European bonds were under notable pressure, with yields surging 30 bps in Romania, 16 bps in Hungary and 11 bps in Czech Republic. India’s 10-year yields rose 11 bps to 5.95% - the high since May.

Dollar-denominated EM yields abruptly reversed higher as well. Brazil’s 10-year yields surged 25 bps to 3.61%, with Mexico’s yields up 23 bps to 2.93%, Russian yields up 10 bps to 2.16%, and Indonesian yields up 10 bps to 2.12%.

Rising yields were a global phenomenon. European – “core” and “periphery” - yields surged higher, led by nine bps increases in German (negative 0.42%) and French (negative 0.13%) 10-year yields. Greek yields rose 12 bps (1.13%), and Italian yields gained six bps (0.99%). Portuguese (0.37%) and Spanish (0.36%) yields both rose eight bps. UK yields rose 10 bps to 0.24%.

Japanese JGB yields rose four bps to 0.45%, matching the highest yields since March. Yields rose eight bps in Singapore to 0.88% and seven bps in Australia to 0.93%.
At $6.911 TN, the Fed’s balance sheet is little changed over the past three months. Granted, Fed Credit is up $3.167 TN, or 85%, over the past year. But perhaps Fed liquidity effects have begun to wane somewhat. Meanwhile, there’s absolutely no end in sight for the unprecedented supply of new fixed-income securities (Treasuries and corporates).
August 14 – Bloomberg (Brian Smith): “With dealers calling for $30bn to price along with an already robust visible pipeline, 2020 U.S. investment-grade new issue volume is set to break 2017’s FY volume record early next week. High-grade new issue supply is up 76% YoY and less than $10bn away from breaking the new issue volume record of $1.333trl set in 2017. What started as a defensive cash grab - buoyed by the Fed’s backstop - has morphed into an opportunity to refinance, pre-fund or even add incremental debt.”

August 12 – Bloomberg (Max Reyes and Gowri Gurumurthy): “Junk-rated companies have borrowed $274.8 billion in 2020, exceeding the sum of cash raised during all of last year… The record comes after the high-yield market saw the best returns since 2011 in July, attracting hefty inflows as investors continue to hunt for yield…”

Along with never-ending supply, perhaps bond markets are also beginning to sense fledging inflation risk. July CPI and PPI readings both posted upside surprises. At 0.6%, consumer prices doubled estimates – and have quickly reversed the negative CPI prints from March and April. July producer prices also doubled estimates at 0.6%, posting the strongest monthly gain since October 2018.

Data out of China were also concerning. 

Challenging the bullish recovery narrative, July Retail Sales were down 1.1% (versus estimates of a small increase). This put year-to-date sales 9.9% below comparable 2019. July auto sales were up 16.4% for the month, though year-to-date sales were still down 12.7%. July airline passenger numbers were 34.1% below July 2019. Also noteworthy, July lending and money supply growth came in below estimates.

China’s Aggregate Financing expanded a weaker-than-expected $243 billion during July. This was down from June’s $494 billion. Year-to-date (seven months), Aggregate Financing expanded a record $3.240 TN. This was 42% ahead of growth from 2019 ($2.29 TN) and 70% above of comparable 2018 expansion ($1.91 TN). Over the past year, Aggregate Financing expanded $4.633 TN, or 12.9%. It’s worth noting bonds are the fastest expanding components within Aggregate Financing.

Outstanding Corporate Bonds are up 21.1% y-o-y, with Government Bonds rising 16.5%.

Bank Loans expanded $142 billion, down from June’s $261 billion. This was about 20% below forecasts and 6% below July 2019. It was also the weakest lending since February. Yet year-to-date Bank Loan growth of $1.882 TN ran 22% ahead of comparable 2019 (25% above comparable 2018). Bank Loans were up 13.0 year-over-year ($2.76 TN), with two-year growth of 27.2% and five-year growth of 84.1%.

Consumer Loans expanded a weaker-than-expected $109 billion, down from June’s $141 billion. Yet July Consumer Loan growth was 48% ahead of net lending from July 2019. Consumer Loans were up 14.3% year-over-year, 33% in two years, 58% in three years and 135% in five.

August 14 – Bloomberg: “After receiving dozens of phone calls and text messages from banks touting cheap, unsecured and easy-to-get consumer loans, Eric Zhang visited one of China’s largest lenders in June and borrowed 400,000 yuan ($57,600) at an interest rate of 4%. But there was a catch -- he had to sign a letter promising the money wouldn’t be invested in property or stocks. That didn’t stop Zhang. A few days later, he’d found a merchant who helped him make a fake purchase and move the cash to his brokerage account. ‘I don’t think the bank can track the money and identify its real use,’ said Zhang, who works at a… private equity firm. ‘It’s a great trade for me,’ he said, after seeing his fresh stock investments surge 6% in one month.”

Bank lending to corporations (“Non-Financial Corporations”) dropped to $38 billion from June’s $133 billion – the weakest expansion since October’s $18 billion. July is typically slow for corporate lending. Corporate bond issuance dropped from June’s $49 billion to $34 billion, also the weakest expansion since October.

August 11 – South China Morning Post (Georgina Lee): “Chinese banks’ net profits dropped a combined 24% during the second quarter, compared with a year earlier as banks grappled with bad loans caused by the coronavirus pandemic. The industry’s net profit stood at 426.7 billion yuan (US$61.4bn), down from 559 billion yuan during the same period a year ago. Profits were 29% down from the 600 billion yuan recorded in the first quarter… The fall in second-quarter profitability was sharper than expected, said some analysts, caused mainly by banks making higher provisions for loan losses. The industry’s loan loss ratio rose to 3.54%, up 0.04 percentage points from the first quarter. The non-performing loan (NPL) ratio for the industry rose to a 10-year high, at 1.94%, up from 1.91% at the end of the first quarter.”

China’s M2 money supply declined $136 billion during July, the first contraction since October. This followed June’s staggering $500 billion M2 surge. M2 expanded $2.00 TN year-to-date (seven months), or 11.7% annualized. M2 was up $2.965 TN year-over-year, or 10.7%. M2 was up 19.7% in two years, 30.5% in three and 57% over five years.

Beijing is in a tricky spot – quite a tenuous balancing act. While there are fears of waning domestic and international demand, speculative market Bubbles (stocks and apartments) are a major cause for concern. With system Credit (“Aggregate Financing”) up an unprecedented $4.6 TN over the past year, China’s Bubble Economy and Market Structures have turned only more unwieldy. July’s data support the view of a cautious Chinese consumer bereft of pre-COVID confidence.
And speaking of confidence…

Booming markets have assumed endless on-demand fiscal and monetary stimulus. And this might actually hold true – in crisis environments. When the markets are flying, politics make quite a resurgence. 

And there’s a reason Fed officials have become such strong proponents of fiscal stimulus: at this point they appreciate monetary stimulus comes with major risks, certainly including more destabilizing Bubble excess and worsening inequality. 

Along with pivotal elections (with all the potential for fiasco) only about 80 days away, market fun and games are officially on borrowed time.

A cold war does not answer China’s challenge

Guarding the west’s interests and values should not mean an ideological confrontation with Beijing

Philip Stephens

Ingram Pinn illustration of Philip Stephens column ‘A cold war does not answer China’s challenge’
© Ingram Pinn/Financial Times

We are always trying to make sense of the present by reaching into the past.

Not so long ago fashionable commentary on the rivalry between the US and China summoned up a sage of ancient Greece.

The Athenian historian Thucydides predicted inevitable conflict between an established hegemon and rising power.

Now, the favoured parallel for the Sino-American confrontation is the west’s fight against Soviet communism. Neat as it may seem, that analogy is more confusing than illuminating.

The cold war drum is being beaten most loudly by Donald Trump’s US administration. It is easy to see why. Mr Trump thinks his belligerent stance towards Beijing is worth votes in November’s presidential election. Not so long ago he was boasting about striking a trade deal with Chinese president Xi Jinping.

Now, as it condemns Beijing on every front, the Trump White House wants to rally US allies to the cause. How better to do so than to draw a comparison with the west’s resolve to defeat Soviet communism. The analogy is as careless of history as it is heedless of present geopolitics.

The US administration’s matchless ignorance was on display a week ago in a speech by Mike Pompeo, the secretary of state, intended to set the terms for a united western stand against Beijing. Speaking ominously of “Communist China and the Free World’s Future”, Mr Pompeo prefaced next year’s 50th anniversary of then president Richard Nixon’s famous “opening” to China.

Perhaps imagining himself as the George Kennan of our times, Mr Pompeo declared that “securing our freedoms from the Chinese Communist party is the mission of our time”. Kennan, of course, was the US diplomat who set the framework for America’s cold war policy of Soviet “containment”.

It was obvious from Mr Pompeo’s speech that he had read neither Kennan’s famous “long telegram” from Moscow nor glanced at the once-secret policy papers setting out the purpose of Nixon’s outreach to Beijing in 1971.

Mr Pompeo’s premise was that Nixon’s goal had been to bring Mao’s China into the western democratic fold. On that basis, he said, it was time for everyone to admit that the policy of “opening” had failed.

The record of the negotiations between Nixon’s envoy Henry Kissinger and the then Chinese premier Zhou Enlai tell a different story. Kissinger was an arch realist, scornful of allowing values to get in the way of hard-headed diplomacy. He did nothing to press the cause of freedom. His purpose, plain and simple, was to isolate Moscow.

The parallel drawn between the ambitions of Mr Xi’s China and that of the former Soviet Union is equally misleading. The cold war was a struggle between competing systems. Today’s Sino-American rivalry is a contest between states.

The Chinese regime has grand ambitions. It wants to push the US out of the western Pacific and establish its own hegemony in east Asia. It is a fair assessment that the long-term goal is to replace the US as the world’s most powerful nation. But, to borrow from Kennan’s characterisation of Soviet aims, Beijing is not seeking the defeat of capitalism across the world. 

Moscow presented the world with an alternative way of ordering society. It had fellow travellers, allies and agents in established parties across the world. This was a contest that only one side could survive. Beijing thinks in terms of “spheres of influence”. Mr Xi is not anticipating what Mr Pompeo calls the “global hegemony of Chinese communism”.

This is not to deny the obvious clash of ideologies. On that score, however, Mr Pompeo’s rallying cry for freedom is scarcely helped by Mr Trump’s frequent public applause for unpleasant autocratic regimes, including that of Mr Xi. By the account of his former national security adviser John Bolton, the president offered personal backing to Mr Xi for the brutal crackdown against Muslim Uighurs in Xinjiang province.

The Communist party’s repression at home is indeed matched by an increasingly aggressive foreign policy: deploying military might in the South China Sea, economic sanctions against governments that dare to criticise it, and an ugly mix of coercion and threats in emerging nations.

But its posture is that of the 19th-century great power rather than the 20th-century Soviet Union. It knows, too, that its claims have to be managed in the context of economic interdependence with the west. The Soviets thought they could crush capitalism. China depends on it.

Certainly America and its allies should speak out about human rights abuses and draw solid boundaries against aggressive behaviour by the Chinese — and be prepared to defend its values and interests in setting the framework for its relationship.

Mr Trump and Mr Pompeo, however, are seemingly ignorant of the most important piece of advice in Kennan’s dispatch from Moscow. As vital as it was that the west resisted any Soviet advance, the answer was not provocation or war but to ensure “the health and vigour of our own society”.

Kennan’s last sentence might have been written specifically for Mr Trump: “The greatest danger that can befall us in coping with this problem of Soviet communism, is that we shall allow ourselves to become like those with whom we are coping.”


The COVID-19 pandemic is accelerating the long-term shift away from cash, and monetary authorities risk falling behind. A recent report from the G30 argues that if central banks want to shape the outcome, they need to start thinking fast.

Kenneth Rogoff

rogoff196_vladwelGetty Images_digitalbankphoneapp

CAMBRIDGE – As the COVID-19 crisis accelerates the long-term shift away from cash (at least in tax-compliant, legal transactions), official discussions about digital currencies are heating up. Between the impending launch of Facebook’s Libra and China’s proposed central-bank digital currency, events today could reshape global finance for a generation. A recent report from the G30 argues that if central banks want to shape the outcome, they need to start moving fast.

From Latin America’s lost decade in the 1980s to the more recent Greek crisis, there are plenty of painful reminders of what happens when countries cannot service their debts. A global debt crisis today would likely push millions of people into unemployment and fuel instability and violence around the world.

Much is at stake, including global financial stability and control of information. Financial innovation, if not carefully managed, is often at the root of a crisis, and the dollar gives the United States significant monitoring and sanctions capabilities. Dollar dominance is not just about what currency is used, but also about the systems that clear transactions, and, from China to Europe, there is a growing desire to challenge this. This is where a lot of the innovation is taking place.

Central banks can take three distinct approaches. One is to make significant improvements to the existing system: reduce fees for credit and debit cards, ensure universal financial inclusion, and upgrade systems so that digital payments can clear in an instant, not a day.

The US lags badly in all these areas, mainly because the banking and financial lobby is so powerful. To be fair, policymakers also need to worry about keeping the payments system secure: the next virus to hit the global economy could well be digital. Rapid reform could create unexpected risks.

At the same time, any effort to maintain the status quo should provide room for new entrants, whether “stable coins” pegged to a major currency, like Facebook’s Libra, or redeemable platform tokens that large retail tech companies such as Amazon and Alibaba might issue, backed by the ability to spend on goods the platform sells.

The most radical approach would be a dominant retail central-bank currency which allows consumers to hold accounts directly at the central bank. This could have some great advantages, such as guaranteeing financial inclusion and snuffing out bank runs.

But radical change also carries many risks. One is that the central bank is poorly positioned to provide quality service on small retail accounts. Perhaps this could be addressed over time, by using artificial intelligence or by expanding financial services offered by post office branches.

In fact, when it comes to retail central-bank digital currencies, economists worry about an even bigger problem: Who will make loans to consumers and small businesses if banks lose most of their retail depositors, who comprise their best and cheapest source of borrowing?

In principle, the central bank could re-lend to the banking sector the funds it gets from digital currency deposits. This would, however, give the government an inordinate amount of power over the flow of credit, and ultimately the development of the economy. Some may see this as a benefit, but most central bankers probably have deep reservations about assuming this role.

Security is another issue. The current system, in which private banks play a central role in payments and lending, has been in place around the world for more than a century. Sure, there have been problems; but for all the challenges banking crises have created, systemic breakdowns in security have not been the major issue.

Technology experts warn that for all the promise of new cryptographic systems (on which many new ideas are based), a new system can take 5-10 years to “harden.” What country would want to be a financial guinea pig?

China’s new digital currency offers a third, intermediate vision. As the G30 report describes in greater detail than previously available, China’s approach involves eventually replacing most paper currency, but not replacing banks. In other words, consumers would still hold accounts at banks, which in turn would hold accounts with the central bank.

When consumers want cash, however, instead of getting paper currency (which is rapidly becoming passé in Chinese cities anyway), they would receive tokens in their digital wallet at the central bank. Like cash, the central-bank digital currency would pay zero interest, giving interest-bearing bank accounts a competitive edge.

Of course, the government can change its mind later and start offering interest; banks may also lose their edge if the general level of interest rates collapses. This framework does take away the anonymity of paper currency, but many monetary authorities, including the European Central Bank, have discussed ideas for introducing anonymous low-value payments.

Last, but not least, a shift to digital currencies would make it easier to implement deeply negative interest rates, which, as I have argued for many years, would go a long way toward restoring the potency of monetary policy in crises. One way or another, the post-pandemic world will move very fast in payments technologies. Central banks cannot afford to play catch-up.

Kenneth Rogoff, Professor of Economics and Public Policy at Harvard University and recipient of the 2011 Deutsche Bank Prize in Financial Economics, was the chief economist of the International Monetary Fund from 2001 to 2003. He is co-author of This Time is Different: Eight Centuries of Financial Folly and author of The Curse of Cash.


Chris Vermeulen
Chief Market Strategist

- The US Dollar Presidential Price Cycle indicates rising US Dollar

- The US Dollar is not the best asset, but rather the best of all currencies

- Price Relationships Suggest The US Dollar Is Currently Undervalued

- How The Presidential Price Cycle May Create Opportunities in Precious Metals and the US

It’s been a while since we published an article about the US Dollar and this is the perfect time to discuss that is likely to happen over the next 6 to 18+ months. 

The US Presidential Election is just around the corner and traders/investors are certain to interpret the uncertainty of the US Presidential Election cycle, and the pending policy and liability related changes, as a warning that equities and the US Dollar may be in for a wild ride over the next 6+ months.


Typically, the US Dollar declines over the 6 to 12+ months prior to a major US Presidential election cycle. Whenever there is a major contest for a new US President or an active and aggressive campaign between two individuals, there is a lot on the line.

A US Presidential Election is not just about electing a President – it is about setting US, Foreign, Social, Economic, and Taxation polities well into the future. How businesses and voters interpret the benefits vs. risks usually decides the outcome fairly openly. 

Yet, global traders vote by deciding how much they believe in the policies and leadership in the new US President and/or how they interpret the risks related to new policies, laws, and regulations.

The US is a major driver of global economic growth throughout the world. The US leads the four other large mature economies by 8.5% to over 20% when compared by global GDP. China is the closest economy to the US, yet it still falls nearly 8.5% behind the US economy annually. 

Even if we were to combine China, Japan, Germany, and India into one economic block, it would beat the US economy by only 5.5% annually.

This is why, at least for now, unless some other global economy rises to the level to dramatically threaten the US economy, the US Dollar will likely continue to sustain value and dominance throughout the world. It also aligns with my “Shiniest Pile Of Poop” theory. 

Yea, I know that is a horrible name for a currency valuation theory – but it helps us understand how currencies (and other commodities) are processed in the minds of consumers and traders.

A simple example is that of having to dig through the garbage trying to find something to eat (again, a horrible example). Yet, within this example, any human would automatically start ranking the quality of the garbage attempting to determine which items were the “best quality” – even though they are all trash. This process comes naturally for anyone in this position – you simply must select the best items in the pile of trash as potential food items.

How does this relate to currencies? Even though certain currencies may become more attractive from time to time, as traders find value in them and perceive stronger future prices, the reality is that major global currencies will always be considered “shinier” than others. Keep this in mind as we explain our thinking related to the US Dollar going forward.


As we can see from the chart below, the US Dollar reacts to US Presidential Election cycles by typically weakening 6 to 12+ months prior to the election date. Each of the last three US Presidential Elections was predicated by a declining US Dollar value and a rise in the US stock market. 

In 2012, there was virtually no active challenger to Obama’s second term – the expected US Dollar price rotation was rather muted. In 2016, the US experiences once of the most heated and aggressive Presidential campaigns between Hillary Clinton and Donald Trump – the expected US Dollar price rotation was much larger. Currently, as the Presidential Election cycle heats up, we expect a similar range to the 2016~2018 US Dollar price range.

The initial downside selloff in the US Dollar appears to be nearly complete. The second phase of the US Dollar Election cycle should prompt a moderate upside price move in the US Dollar while the US Stock market stalls ahead of the 2020 US Presidential Elections. 

Our researchers equate this to the uncertainty and potential liabilities of a change in the Office of the US President and the implications related to new policies, taxation, regulation, and other future changes. Traders move into safety within the US Stock market while higher-risk sectors weaken. 

Essentially, everyone attempts to “place their bets” as to the outcome of the US Presidential Election cycle.


by Egon von Greyerz

Two major asset classes are major beneficiaries of the unlimited money printing and credit creation that is now taking place globally. One of them will end in tears and the other one has just started a major secular bull market.
As the world economy and financial system is disintegrating, investors are under the illusion that all is well with many stock markets still not far from their all time bubble highs.

Many companies and services are haemorrhaging cash and are not going to recover for years and some never. As very few people are travelling, many airlines, cruise lines, hotels and restaurants for example will not survive. This is a global industry that employs 330 million people and represents 10% of global GDP. International tourism could fall as much as 60-80% in 2020 according to some estimates. The car industry is 3% of global GDP and is expected to drop 25% in 2020.
Real and hidden unemployment is a major problem and if furlough or social benefits are stopped many people will not survive. As many can’t pay their rents they will also become homeless.
Currently 31 million Americans are on some kind of unemployment benefits. That is 20% of all workers.
But if we include workers who are not receiving any benefits the total unemployment is 30% according to Shadow Government Statistics. This is worse than in the 1930s depression.


Stocks market investors still live in dreamland and translate all the bad news to good news as the continuous flood of printed money and credit inject liquidity.

This has always worked before so why won’t it this time? No one knows what the US deficit will be at the end of calendar 2020 but it could easily be $10 trillion as the debt grows to over $30t and on to $40 trillion within a year or two.
How wonderful for stock investors. More liquidity means higher share prices.

Very few understand that all this money has zero value as it has been created out of thin air. Also, none of the money goes to productive investments but instead just to give a dying economy some temporary artificial respiration. So the worthless money will go to individuals and businesses just to survive.

It will also in ever bigger quantities go to an extremely fragile financial system. In the end $100s of trillions and later quadrillions of worthless money will have been spent on non productive survival aid.
It is possible that the stock mania continues based on the fake trillions created. But at some point soon, stock markets will wake up to the nightmare the world is experiencing.
There is at least one asset class which reacts sensibly to the problems in the world and the continued destruction of paper money. Gold is up $200 in the last two weeks and $500 or 33% in 2020. Since the Maginot line at $1,350 was broken in June 2019, gold has gone up by more than 50% as I discussed already back in February 2019.
But the spectacular market has been silver which has virtually exploded as I have been predicting in the last few weeks.
The Tweet was timely as silver started to move up the following day and surged $10 in the last three weeks to just under $30. Silver bottomed at $11.60 on March 18th and has gone up 2.5x since then.
The gold silver ratio duly crashed from 109 on May 14th to 72 today, a 35% fall. Since the peak in March at 128, the gold silver ratio has come down 45%.


Silver is now in an explosive phase on the way to much, much higher levels. But the corrections will also be vicious like the one we have just seen. With such high volatility we have always advised investors not to hold more than 25% in silver and 75% in gold. Sleeping well at night is an important part of your investment strategy.
The moves we have seen in the last few weeks in gold and silver is just the beginning. The long term bull market is well established and will go to heights that no one can imagine today. And we will see much bigger daily and weekly moves than we have just experienced as the market panics due to dire financial news combined with major shortages in physical gold and silver. I would not be surprised to see gold move by $100s and silver by $10s in a single day.
The gold market has this year not just been booming in price but also in volume.

For lazy investors, gold ETFs are the most convenient instrument. But buying a gold ETF is in most cases just an investment in paper gold. The holder of the paper has no security in the physical gold.
The total investment into gold ETFs and gold funds is today $316 billion or 4,878 tonnes, which is a record. The increase in 2020 in the total value has been considerable and amounts to $160 billion which is a 100% increase since the end of 2019.
So all gold ETFs and Funds are today valued at $319 billion. If we compare that to the S&P 500 total market cap of $27 trillion, it is totally insignificant. The top 5 companies in the S&P index are worth $6 trillion.
Just take Apple that with their $200 billion cash pile and some stock could easily acquire all the gold funds and ETFs. This tells us how small the gold market is. In the next few years as stock markets crash and gold surges, the relative sizes of stocks versus gold will look very different.

The biggest gold ETF is GLD or State Street. GLD holds a total 1,258 tonnes with a value of $82 billion. This makes GLD the 7th biggest holder of gold in the world.
GLD’s value has gone from $42 billion at the beginning of 2020 to $82b today as both inflow and the gold price have increased. This ETF is the primary investment vehicle that investors use when they want exposure to gold.
What most investors don’t understand is that to own a gold ETF like GLD is no better than to have a futures contract in gold.
An ETF is a tracking vehicle and doesn’t own the gold. The gold is not bought outright by GLD but is instead borrowed. The holder of an GLD share has no claim on the borrowed gold and therefore does not own anything tangible. 
Thus all he holds is a piece of paper with no underlying security in the form of gold in case of insolvency. The gold is borrowed or leased from a central bank and not bought with clear title.
So a shareholder in GLD is just a holder of a piece of paper that doesn’t entitle him to physical gold. A paper claim on gold is very different from owning real physical gold. The gold price could surge but the ETF could still go bankrupt
As I have often pointed out, when an ETF like GLD buys gold, it doesn’t come from the Swiss refiners. Instead it comes from the bullion banks who borrows the gold from a central bank.
The GLD ETF has an official audit with bar lists and numbers. But since central banks never publish a full physical audit, there is no way of knowing if the same gold has been rehypothecated several times by the central bank.
So firstly the GLD doesn’t own the gold and secondly the gold that it doesn’t own might have been lent multiple times by central Banks.
One of the major advantages with owning physical gold is that it is the only asset which is not someone else’s liability. But buying a gold ETF like GLD involves multiple counterparty risk with no ownership of the underlying metal.
Investors in GLD buy shares in the fund’s trustee, SPDR Gold Trust. The custodian, HSBC sources and stores the gold for the Trust. This obviously makes HSBC a major counterparty risk.
But HSBC also uses sub-custodians, other bullion banks and even the Bank of England to source and store the gold. This means that investors have multiple sub-custodian risk.
There are no contractual agreements between the Trustee and the sub-custodians or the custodian. This means that the ability of the trustees or the custodian to take legal action against the sub-custodians is limited. The Trustee is not insured. That is left to the custodians. Gold held in the Trust’s unallocated gold account is not segregated from the custodian’s assets. If a custodian becomes insolvent, its asset may not be adequate to satisfy the claim of the trust.
The above relatively detailed explanation how a gold ETF like GLD functions is intended to enlighten the investors of $82 billion in GLD what they are actually holding.
For wealth preservation investors, GLD doesn’t satisfy any of the criteria of holding a reserve asset like gold totally risk free.
The main problems with buying gold through GLD, as outlined above, are the following:
  • It is a paper security held within the financial system
  • It has multiple counterparty risk
  • The gold holding are not segregated from custodians’ assets
  • It owns no gold directly
  • The gold is stored within the banking system
  • The gold held is probably rehypothecated
  • The gold is not fully insured
  • Investors have no access to their gold
Thus holding gold through GLD is no better than holding gold futures. For wealth preservation purposes, gold must be held outside the banking system in the safest private vaults in the world. The gold must be controlled directly by the investor with direct access to his gold in the vault. No other party must be allowed to touch his gold without his authorisation.
The gold must be held in the safest jurisdictions like Switzerland and possibly Singapore.
For major investors above $ 5 million we offer the largest private gold vault in the world in the Swiss Alps. It is also the safest gold vault in the world with a security level which doesn’t exist anywhere else. The vault is nuclear bomb proof, earthquake proof and gas attack proof. We also have vaults for investors below $5 million.
This video clip gives an idea of the mountain vault but obviously doesn’t reveal any of the major security aspects.

What it does show is how major investors must store their gold rather than holding it in extremely unsafe form like GLD. Holding physical gold in this mountain vault costs about the same as GLD and is fully insured. Buying and selling is instantaneous. Investors have full access.
Holding physical gold as described above is far superior to any gold ETF with none of the negatives. It is really surprising that major gold investors can even consider an inferior method like a gold ETF.


Chris Vermeullen

As much as we may not want to deal with the reality of the situation, recent news from the state of California suggests it and many other states may be reaching the fiscal boundaries of the COVID-19 economic contraction. 

The reality of the economic situation is that when consumers are restricted from normal activities, taxes, sales, and revenues decrease for the state exponentially. States that depend on consumers and business activity with very large budgets are at greater risk of experiencing immediate fiscal issues the longer the COVID-19 virus event continues. 

A recent Moody’s Analytics article suggested Nevada, Hawaii, New York, Washington, Florida, DC, and Connecticut would be hit the hardest by the COVID-19 virus.


One has to use their imagination to attempt to understand the true scope of the issues ahead for states that experience what we are calling the “COVID Fiscal Cliff”. See the Yahoo! Finance graph below for a view of states that have the most economic exposure to COVID.

Expenses don’t stop that much for these states. They’ve made commitments many years into the future based on budgets and revenue expectations entrenched in the political works of each state. 

When a contraction of 10%, 20%, 30%, or more is experienced in revenues/income, it can be disastrous. The longer this type of revenue contraction exists, the more painful the Fiscal Death Thrashing for each state is likely to be.

Currently, the revenue levels appear to have decreased by approximately -30% from March 2020 to May 2020 according to a recent NPR article. As we can see from the chart below, the effect on each state varies state-by-state. Regardless, a -25% to -30% in revenues will crush many states’ future operations – almost immediately.

The article further states “Record-high unemployment has wreaked havoc on personal income taxes and sales taxes, two of the biggest sources of revenue for states.

Hawaii’s and Nevada’s tourism industries have crashed, and states like Alaska, Oklahoma and Wyoming have been hit by the collapse of oil markets.

From March through May of this year, 34 states experienced at least a 20% drop in revenue compared with the same period last year…”

When one looks at the US stock market reaching new all-time highs and expecting a continued “V-shaped” recovery, we believe the expectations many traders/investors have may be grossly inaccurate given state revenue data.

Be sure to sign up for our free market trend analysis and signals now so you don’t miss our next special report!


Consumers make up nearly 80% of the US total GDP. Certainly, a 20% to 30% decrease in consumer spending and activity will dent state and local city revenue sources. 

When we consider the huge wave of foreclosures, evictions, and job losses that are still pending to hit the economy, we are likely looking at tens of millions of US citizens being displaced or disqualified from consumer activity. 

This process will likely take 24+ months to fully materialize, yet we are only 5+ months into the process right now.

What happens to the support systems, housing, and how consumers engage in economic activity when states and cities have reached their limits and start cutting budgets and services? 

What happens to the stock market when investors suddenly realize the total scope of the true economic environment ahead? 

Will they be as aggressive in buying assets and stocks as they have been over the past 5+ months? 

One thing is certain, we have yet to identify and experience the total impact of the COVID-19 economic contraction yet – get ready for a “reality shock”.

I believe the Fibonacci Price Amplitude Arcs, shown below on this YM Monthly chart, are key to understanding how and where price risk may become excessive. Currently, price levels are trading just above the two GREEN Fibonacci Price Amplitude Arcs.

If the economy continues to recover at a moderate pace, then we may see further upside price activity from these levels. Yet, with only about 80 days to go before the US Presidential elections and with late Summer/Early Fall economic cycles in place, I believe the next phase of the economic contraction will come when consumers/cities/states start to become burdened with the lack of income and economic activity related to the COVID-19 virus event. 

We believe that process is starting to unfold right now.

States and cities that suddenly find themselves broke, or close to being broke, suddenly start acting differently – as we all do. We start to become more “protectionist” in our thinking. Whereas, prior to being broke, we could spend and enjoy different things. 

Now, being broke, means we can’t spend and enjoy – heck we may not even be able to pay for essential services or to keep the lights on.

A perfect example of the Economic Death Spiral event that often takes place when cities/states destroy their economic future is what is being reported in New York City. 

People with the means and ability are fleeing New York City “in droves” and the Mayor is pleading with these wealthy residents to “stay”. The only people that may eventually be left are those that don’t have the resources to leave.

These near all-time highs may seem like a very good opportunity for buying before the breakout, but we urge everyone to stay cautious because we believe a broader, longer-term cycle is taking place and we are just at the start of this potentially 24+ month cycle. 

Yes, the Fed can print lots of money and spread it around, but consumers and assets need to be engaged in real organic economic function for the economy to grow. If the Fed continues to attempt to buy up everything, this is not real organic growth – it is “life support”.

Pay very close attention to the risks in the current market setup. The process of global recovery after the COVID-19 virus is likely to take years.

Legal intimidation takes new form in Latin America

Court seeks to silence Panama’s biggest newspaper amid corruption probes

Diego Quijano

Corporación La Prensa faces 15 lawsuits from former president Ricardo Martinelli, pictured at the Supreme Court in Panama City in 2018
Corporación La Prensa faces 15 lawsuits from former president Ricardo Martinelli, pictured at the Supreme Court in Panama City in 2018 © Luis Acosta/AFP/Getty

Public scrutiny and freedom of the press are under threat in Panama, home of the famous canal and also large legal services and offshore banking sectors. Last month, a judge froze $1.13m in assets of La Prensa, the country’s leading newspaper, as part of a defamation lawsuit filed by former president Ernesto Pérez Balladares over a 2012 article that linked him to money-laundering. (Mr Pérez Balladares has denied the relevant allegations.)

The ruling came despite the fact the case is eight years old, is still in its initial phase and there has been no finding on its merits. Given that Panama is among those countries ensnared by Odebrecht’s giant corruption scandal, the ruling also sets a precedent that could threaten national and even hemispheric anti-corruption efforts.

Panamanian law allows for the freezing of assets in commercial disputes. But the judge in Mr Pérez Balladares’ case utilised this process in a libel claim. This is of particular concern to Corporación La Prensa, the company that publishes La Prensa and Mi Diario newspapers and of which I am president. It faces 12 civil defamation lawsuits and 22 criminal cases for libel, in which claimants have demanded a total $85m in compensation.

Of these lawsuits, 15 — totalling $46m in claimed damages — are from former president Ricardo Martinelli, who was extradited from the US in 2018 to face charges of illegally wiretapping during his 2009-14 time in office. Mr Martinelli, who denies wrongdoing and was declared not guilty last year by a junior court, has said he is the victim of a political vendetta; the case is currently in appeal at the Supreme Court.

La Prensa has long warned that Panama’s current civil procedures do not protect freedom of expression, or the public’s right to information. Indeed, the Inter-American Press Association stated in this year’s country report that: “Legislation enables the claimant [in a lawsuit] to seek the freezing of assets, which could paralyse the continuous and uninterrupted operation of the media.”

In fact, the risk is far greater as any individual or citizen is at risk of having their assets frozen in a libel lawsuit, and before a court finds wrongdoing. Although current law excludes serving government officials, former officials and private citizens can sue.

To cite just one recent example among many: in 2016, an energy company blamed the complaints of activist Larissa Duarte as the cause for the cancellation of a hydroelectric project and sued her for $10m. The lawsuit was dismissed the following year.

That such mechanisms are used against critics is a subversion of the rule of law. Indeed, all the lawsuits that La Prensa faces are from public figures and former government officials who claim their reputations have been damaged by our coverage of issues of legitimate public interest.

The intent of such cases is clear: to bleed us out with legal fees in the defence of endless frivolous lawsuits. Furthermore, with each lawsuit now comes the substantial risk of a court-ordered freezing of assets before courts rule.

The Inter-American Court of Human Rights has strenuously warned of the pernicious effects that such judicial intimidation can have in Latin America.

Sadly, there is little hope of swift justice in Panama, a country that was ranked 129 out of 141 countries in terms of judicial independence in the World Economic Forum’s 2019 global competitiveness report.

Panama has made important advances since the end of the military dictatorship in 1989. But its democracy rests on unstable ground. In particular, its judicial system needs to be able handle libel claims fairly if there is to be vigorous public debate and proper vigilance of the use of public funds — key attributes of any functioning liberal democracy.

The author is president of the board of directors of Corporación La Prensa