Dancing with danger

Europe’s populists are waltzing into the mainstream

They and their ideas are both being picked up by established parties

ON AN icy January morning, twinkly lights and the glow from chic cafés illuminate Hässleholm’s tidy streets. The employment office opens its doors to a queue of one. Posters in shop windows invite locals to coffee mornings with immigrants asking: “What will you do to make Sweden more open?” At first glance, this small town fulfils every stereotype about the country: prosperous, comfortable, liberal. But last year it became the centre of a political storm.

Mainstream Swedish politicians have refused to co-operate in any way with the Sweden Democrats (SD), a right-wing populist party with extremist roots, since it was formed in 1988. In 2015 Fredrik Reinfeldt, a former prime minister and then still leader of the centre-right Moderates, described the SD’s leadership as “racists and the stiffly xenophobic”. But a year ago the Moderates used SD support to oust Hässleholm’s centre-left local government and elect Patrik Jönsson, the SD’s regional leader, vice-chair of the new council. In November the council adopted an SD budget that would cut spending on education and social care for immigrants and build a new swimming pool for locals instead. “We just want to shut Hässleholm’s doors,” announced Mr Jönsson. Per Ohlsson, a columnist on Sydsvenskan, the local newspaper, is alarmed: “I get a growing feeling that liberal democracy is something we have taken for granted for too long.”

Some European politicians saw 2017 as a welcome setback to the rise of populism across the continent. After a 2016 in which support for parties like the SD hit record highs, and England and Wales voted for Brexit, polls showed the populists’ popularity falling (see chart). Marine Le Pen of the Front National (FN) lost the French presidential election to Emmanuel Macron; her party fared poorly in the subsequent elections for the National Assembly. The Alternative for Germany (AfD) made it into the Bundestag for the first time, but not to a degree that truly threatened moderate politics. Two far-right “Freedom” parties, the PVV in the Netherlands and the FPÖ in Austria, did worse than expected in their national elections.

The continuing rise of populism, though, is something to measure decade by decade, not year by year. The financial crisis and the large influx of refugees contributed to a spike, but Euro-populism has been growing quite steadily since the 1980s. According to a new study by Yascha Mounk of Harvard University and others for the Tony Blair Institute, the populist vote in an EU state was, on average, 8.5% in 2000. In 2017 it was 24.1%. This quantitative increase is producing qualitative shifts in the continent’s politics. As Hässleholm shows, populists are no longer shunned by the democratic mainstream as a matter of course; they are increasingly called into coalitions, co-opted and copied.

Defining populism is notoriously subjective, but political science provides some guidelines. Jan-Werner Müller of Princeton University singles out its exclusive claim to represent a “morally pure and fully unified people” betrayed by “elites who are deemed corrupt or in some other way morally inferior”. Populism attacks judges, journalists and bureaucrats it deems not on the side of the people. It speaks the language of silent majorities, national humiliations, rigged systems; of “We are the people” (Germany’s anti-Islam PEGIDA movement), “Take back control” (Brexiteers), “This is our country” (the FN)—and, elsewhere, “Make America great again”.

Cas Mudde of the University of Georgia notes that populism is a “thin” ideology. It can have hosts on the left as well as the right and even create hybrids of its own, such as the Five Star Movement (M5S) which is topping Italian opinion polls in the run-up to the general election in March. It can also be practised by politicians whose parties are not avowedly populist. Such politicians can subscribe to a more or less monolithic and exclusive vision of “the people”; they can defend minority groups, the judiciary and the free press to a greater or lesser extent; they can choose honesty about policy trade-offs over convenient scapegoats more or less frequently. Their parties can inch along the spectrum over time. So can whole societies.

Take Hungary. The Fidesz party led by Viktor Orbán, the country’s authoritarian prime minister, grew out of the anti-communist movement and governed the country as a fairly conventional conservative party around the turn of the century. But partly under pressure from Jobbik, an extreme right-wing party founded in 2003, and increasingly citing “the will of the people”, Mr Orban has taken to demonising immigrants and minorities (particularly Muslims), attacking the judiciary and disenfranchising sources of dissent. He is demanding that, at the parliamentary election to be held in April, the voters give him a mandate to take on George Soros, the Hungarian-born, America-based billionaire who founded the Central European University in Budapest and who, Mr Orbán claims, has a secret plan to flood the country with Muslims.

Most political scientists now consider Fidesz a full-blown populist outfit. Elsewhere the entangling of mainstream parties with populist policies and the populist style takes place in subtler ways. The options open to Sweden’s Moderates illustrate the dynamics at play.

The slow growth of the SD has not been enough for it to form a government, as Fidesz, Syriza, a far-left party in Greece, and the Law and Justice party in Poland have done. But by 2014 it was big enough to make it hard for the established parties to form stable centre-left or centre-right coalitions, as was long their wont.

The Moderates might have joined a stodgily broad government of the centre right and left. Such governments have become much more common across the continent as the growth of populist parties, along with wider political fragmentation, has made more ideologically coherent coalitions harder to pull off. Today Germany, Italy, the Netherlands and Spain offer variations on this muddled-middle theme, some of them formal coalitions, some looser toleration agreements. Such arrangements are unappealing for ambitious politicians. They also pep up populist rhetoric by proving that the political class is indeed all in it together.

The other two options available to the Moderates were to co-opt the populists or to try to steal their voters. Last March Anna Kinberg Batra, Mr Reinfeldt’s successor as leader, leant towards co-option, announcing that after next September’s election she might try to form a government with SD support. This prompted furious arguments which led to her resignation. Ulf Kristersson, the new leader, moved the party towards option two: “In Sweden we speak Swedish,” he declared pointedly in his Christmas message. But an SD-backed Moderate government is still possible.

Such possibilities do more than anything to normalise parties like SD. Austria, Bulgaria, Denmark, Finland, Latvia, the Netherlands and Norway have all now seen mainstream parties govern with the formal or informal support of populist parties. In Slovakia a government led by the centre left has a similar arrangement. The number of European governments with populists in their cabinets has risen from seven to 14 since 2000. Their ranks may soon be joined by the Czech Republic and Denmark, where the centre-right Venstre party says it might invite the right-populist Danish People’s Party (DPP), now propping it up in government, to become a full partner after the next election, which has to be held by July 2019.

The left is looking at new alliances, too. Last year, for the first time, Germany’s Social Democrats (SPD) went into a general election without ruling out a coalition with Die Linke, a left-populist party descended from the East German communists. Similarly, Spain’s centre-left Socialists have flirted with a deal with Podemos, a movement which grew out of anti-austerity street protests.

This all suggests the populist tide will continue to rise. Through analysing 296 post-1945 European elections, Joost van Spanje of the University of Amsterdam has found that, in general, welcoming formerly ostracised parties into the mainstream tends not to reduce their support.

The sincerest flattery

Going hand in hand with normalisation-by-coalition—in part its cause and in part its effect—is a growing professionalism and a professed moderation among the populists. In their early days they were often closely associated with frank racism, as with the anti-Semitism of the FN in the days of Ms Le Pen’s father; such sentiments are now increasingly kept at arms length (though in the case of Mr Orbán’s attacks on Mr Soros not very convincingly). They were also chaotic and split-prone. Some, like the UK Independence Party (UKIP), still are. Others, tasting or scenting power, have been getting their act together. The FPÖ in Austria is an example. It was shambolic during its previous turn in government, from 2000 to 2007, but it returned to ministerial power last December with a more sober image, having made efforts to distance itself from the right-wing Austrian social networks known as “fraternities”. “I expect the FPÖ to be much more disciplined and effective this time,” says Mr Mudde.

Part of this sprucing up involves tailoring policies to broaden support, which normally comes from the working class. While voters for Podemos, M5S and Syriza tend to be more educated than average, and also younger, the best predictor of support for the right-populists of the north is usually how early an individual left formal schooling. Winning over more bourgeois voters means tempering their message in some ways. Thus the FPÖ is less stridently anti-EU than it was. The same is true of the FN—which now presents itself as a staunchly pro-Israel bulwark against Islamism—the Danish DPP and the AfD.

Another part is experience gained in state governments and running municipalities like Wels, near Linz; subnational politics offers a good way to gain acceptability. City government in the north of Italy has helped the populists of the Northern League; in Spain mayors allied to Podemos in Madrid and Barcelona have given the party a stronger national profile. But local power is not always a plus. Corruption scandals and piles of rubbish in the streets of Rome under mayor Virginia Raggi have damaged M5S.

Austria’s new government also exemplifies the second sort of populist-mainstream accommodation: copying the populists’ ideas. In the election campaign the established Austrian People’s Party (ÖVP)—now the senior party in the coalition—shamelessly ripped off FPÖ policies, such as a burqa ban and reduced social-security rights for migrants. A cartoon in the Kurier, a newspaper, showed Heinz-Christian Strache, the FPÖ’s leader, naked in a police station: “They took everything!”

This “contagion”, as political scientists put it, is visible across the continent. Mark Rutte, the liberal-conservative Dutch prime minister, has pioneered a style of politics he distinguishes from “the wrong kind of populism”. Before last year’s election his party, pressed by the PVV and the Forum for Democracy, a new nationalist-populist party, ran dog-whistle adverts in newspapers telling foreigners to “behave normally or go away”. In 2016 Theresa May, his British counterpart, rallied her party by attacking “citizens of nowhere” who “find your patriotism distasteful, your concerns about immigration parochial, your views about crime illiberal, your attachment to your job security inconvenient” in a speech that could have come from UKIP. In December France’s Republicans chose as their leader Laurent Wauquiez, a Eurosceptic opposed to gay marriage who wants immigration reduced to “a strict minimum” and plans to make his party “truly right-wing”. New Democracy in Greece and GERB in Bulgaria, facing competition from the extreme-right Golden Dawn and Zankina parties respectively, have taken tougher lines on immigrants and other out groups.

In Germany the notionally liberal Free Democrats have called for most refugees to be sent back eventually. In Angela Merkel’s Christian Democrats (CDU) there is talk of a more assertive German “lead culture” and a stronger sense of “homeland”, which may indicate the party’s direction when Mrs Merkel steps down. At the annual gathering in January of the Christian Social Union, the CDU’s Bavarian sister party, Mr Orbán was a guest of honour. Alexander Dobrindt, a CSU grandee, demanded a “conservative revolution” against Germany’s metropolitan minority.

One rationale for such cosying up is that it denies the populists exclusive ownership of sensitive issues such as identity, thus allowing reasonable voters to whom such issues matter an alternative not tinged with extremism. But in “The European Mainstream and the Populist Radical Right”, a new book, Pontus Odmalm and Eve Hepburn of the University of Edinburgh conclude that there is “no immediate pattern” suggesting that the availability of mainstream alternatives to the populist right weakens the latter's electoral performance.

Mr van Spanje’s analysis suggests that imitating populist insurgents only weakens them in the rare cases where they are also ostracised. Pointing to the dynamic between UKIP and Britain’s Conservatives before the Brexit referendum, Tim Bale of Queen Mary University of London observes that “the centre right often primes the electorate for the radical right’s message...helping it to take off and then, in an attempt to counter its appeal by talking even tougher, simply makes that message even more salient and further boosts its appeal.”

Meanwhile, on the left, social democratic parties are adopting what John Judis, an American journalist, calls “dyadic populism”. Insurgent populism often boasts three ideological players: the people, the elite, and the “other” (foreigners, immigrants, welfare spongers and the like) to whom the elite has sold the people out. Thus it is “triadic”. The dyadic version has no nefarious third party, just an us-and-them world where a corrupt capitalist political caste has betrayed the proletariat for its own benefit. Under Jeremy Corbyn, a 68-year-old from the party’s hard left, Britain’s Labour Party went into the 2017 election calling British politics a “cosy cartel” and a “rigged system set up by the wealth extractors, for the wealth extractors”. Martin Schulz, the SPD’s centrist leader, sought to protect his working-class flank in last year’s election by railing against bankers in “mirrored skyscrapers”.

Another way to get populist politics and policies without populist governments is to hold referendums. In 2013 Dutch populists keenly supported a law enabling any piece of primary legislation to be put directly to the country’s 12.9m voters if 300,000 of them demanded it. In Greece the Syriza government used a referendum to reject the conditions of a bail-out by international institutions. In Britain the referendum on Brexit—the fulfilment of a long-standing UKIP demand—compelled almost the entire political class to adopt a policy confined until recently to its populist fringes. Austria’s coalition agreement opens the door to more plebiscites; so, more tentatively, does the preliminary blueprint for a new CDU/SPD coalition in Germany. In Italy the M5S manifesto promises to give the people opportunities to vote on which laws to scrap.

Trilingualism against the triadics

Not all mainstreamers are parroting populist positions. The surge of what Mr Müller calls “illiberal democracy” has produced a backlash. The confidently pro-European, pluralist politics of Mr Macron and his En Marche! party is one instance. Another is the centrist Ciudadanos (“Citizens”) party now leading the polls in Spain. Its leader’s slogan is “Catalonia is my land, Spain my country and Europe is our future”—the first phrase spoken in Catalan, the second in Spanish, the third in English. Other new parties—Modern in Poland, Momentum in Hungary and NEOS in Austria—match the populists’ enterprise and presentational swagger while fighting their world view. As yet, though, they remain small.

It looks likely they will grow, but so will the sway of the populists. For a glimpse of what that may mean look at the continent’s last generation of political entrants: Green parties. Originally scrappy, over time they became more professional and started to join local and sometimes even national governments. None has ever led a European country alone, but their influence is felt in the attention now paid to green transport, recycling, renewable energy and certain civic liberties (particularly sexual freedoms).

What if the populists are as successful in the next few years? One might expect more authoritarian law-and-order policies, burqa bans, greater opposition to multilateral bodies like the EU, NATO and the WTO, and greater sympathy for Russia (an affection held across the populist spectrum, from Syriza to Fidesz by way of M5S). Expect, too, frequent referendums, less well integrated immigrants, more polarised political debates and more demagogic leaders emoting directly to and on behalf of their devoted voters.

Populists do not need to win elections to enact their policies and spread their style of politics.

They can do so through the very mainstream parties whose votes they threaten to take; infecting them and living off their political blood. “Eventually,” warns Mr Bale, “the parasite may end up consuming the host.”

Things Only a True Friend Would Say About Gold

By: Przemyslaw Radomski

We live in very specific times. Getting a “like” on a post or picture becomes a necessary daily activity and means of self-validation. Not “liking” something that others posted or that is massively “liked” like may be frowned upon or even viewed as being disrespectful. Plus, it seems that no matter what you do, everyone gets offended very easily. When did honesty, independence and common-sense stop being virtues?

When it comes to gold investments and gold investment analysis, it’s surprisingly similar. You either like gold and think that it’s going higher right away or you’re “one of them”. “Them” can be anyone who tries to manipulate gold or silver prices, “banksters”, or some kind of unknown enemy.

“Analyst’s” goal is often no longer to be as objective as possible and to provide as good and as unbiased analysis as possible, but to simply be cheering for gold and provide as many bullish signals as possible regardless of what one really thinks about them. The above may seem pleasant to readers, but it’s not really in their best interest. In order to make the most of any upswing, it’s best to enter the market as low as possible and to exit relatively close to the top.

What happens before a price is as low as possible? It declines. Why would something like that (along with those describing it) be hated by gold investors? It makes no sense, but yet, it’s often the case.

The discussion below can be viewed as something positive or negative for any investor, but while reading it, please keep in mind that our goal is the same as yours – we want to help investors make the most of their precious metals investments. Call us old-fashioned, but regardless of how unpleasant it may seem, we’ll continue to adhere to honesty, independence and common-sense in all our analyses.

In the previous free articles, we discussed the short-term situation and we emphasized that the initial 2018 rally should not be trusted. Based on Friday’s session, we took some of our profits on the short position in the sector and we prepared for a rebound, predicting that it could be seen. However, it doesn’t seem likely that this week’s rally is a start of another powerful upswing. Conversely, it seems that another big downswing will follow in the upcoming months.

In today’s analysis, we don’t want to get into details of multiple factors that confirm this outlook. Instead, we want to remind you about the most important non-chart factor that suggests that what we saw at the end of 2015 was not the final bottom and we want to discuss one factor that potentially appears to have bullish implications for the long run – but actually doesn’t.

The key factor that is rarely discussed is the fact (measured by surveys and feedback that we received at that time) that the sentiment toward gold at the end of 2015 was not very bad. It wasn’t bad at all. Those considering investments in the precious metals market, have been expecting to see higher prices, not lower or steady ones. That’s not what accompanies epic bottoms. What accompanies them is extreme bearishness, disappointment, and running for the hills. We saw nothing from it. The precious metals market might have been oversold – ok. It rallied based on the above – ok. But the key thing that should have been present for the 2015 bottom to be THE bottom – was missing.

Consequently, another – final – downleg is still likely to be seen before the final bottom takes place and preparing for it is critical.

Moving on to the second point that we would like to cover in today’s analysis, we recently received a question regarding the possible formation of a major bottom in gold (supposed technical proof that the bottom was indeed in in late 2015). Let’s take a look at the charts for details (charts courtesy of http://stockcharts.com).

The formation is supposed to look like on the above chart. The lower lows preceded the bottom and higher lows follow it. Gold is still below the red resistance line – based on 3 previous highs, but it’s “about to” break out shortly.

Let’s start with commenting on the latter. There was no breakout above the marked red line, let alone a confirmed breakout, which means that there are no bullish implications. Simple as that. What is more, since there was no breakout, and gold has just once again failed to move through a resistance and it’s relatively close to it, it’s likely to decline – just like it did previously after reaching the $1,350 - $1,400 range. Assuming that the history repeats itself to a considerable degree, the implications are not bullish, but bearish.

Now, moving to the lower lows and higher lows – it impact the outlook in any significant way. Higher lows confirm that gold has been in a kind of an uptrend. However, since it now reached an important resistance, it’s price can start another decline. The only thing that the analysis of the previous lows provides us with, is the major support line, which is current at about $1,220. The mere existence of a support line is something that can trigger a major corrective upswing, but it’s not – by itself – a reason for gold to break above the $1,350 - $1,400 level anytime soon.

The gold market, like other markets, has fractal nature, which means that the patterns that work on a smaller time-frame should work on bigger time-frames and vice-versa. Is it really the case?

Absolutely not. In the previous years, there were several cases when gold moved higher forming higher lows after a bottom. In some cases, it reached resistance before declining again, and in other cases it didn’t even manage to do just that. All these smaller formations were followed by further declines and this includes even the 2012 performance, which was followed by the biggest decline since decades. Interestingly, before this decline started, gold moved to its previous major highs – just like it did recently.

Now, why would something that was followed by lower prices so many times and that appears similar to the performance that preceded the biggest of gold’s declines in recent history, have any bullish implications whatsoever if the perspective is changed?

We don’t want to go so far to call the higher highs and a rising support line something bearish, but the overall implications of the patterns marked on the previous chart are neutral at best.

Summing up, the precious metals market doesn’t seem to have formed THE bottom in 2015 as the sentiment back then wasn’t negative enough. Higher lows in gold since that time don’t necessarily invalidate the above, especially that there was no breakout above the medium-term highs in the past several weeks. On a side note, before calling us perma-bears, please note that we were bullish (in terms of long-term investments) on precious metals for years – until April 2013. We’re looking for the true bottom in the precious metals sector, not because we’re its or gold investors’ enemy.

Conversely, we’re that true friend that tells you if something’s not right, even if it may be unpleasant to hear.

Is a Transition to Renewable Energy on the Verge of Being Unstoppable?

As the world inches towards using more renewable energy and less fossil fuel for generating electricity, intermittency is an often-cited constraint to scaling up — that is, the availability of many renewables, such as wind and solar, cannot be controlled. But now there may be a workaround, according to Steve Kimbrough, Wharton professor of operations, information and decisions, and Michael McElfresh, a professor from Santa Clara University. Critics point out that when using many renewables, coal, nuclear or natural gas must take up any slack. What’s more, once idle, coal and nuclear sources require long ramp-up times. But natural gas has the flexibility to blend well with renewables. That, combined with probably long-lasting low natural gas prices, is beginning to look like a game-changer, Kimbrough and McElfresh note in the following opinion piece.  Meeting inherent technical “challenges successfully … would make the transition to renewable energy unstoppable.”

A fair amount of confusion was recently created when Rick Perry, secretary of the Department of Energy, filed a notice of proposed rulemaking (NOPR) that claimed the “base load” generation provided by coal and nuclear was essential for a reliable and resilient power grid.

Perry’s proposal has been defeated, quite correctly in our view, but it raises issues and teaches lessons that are important in moving forward with the all too necessary transition to large-scale use of renewable energy.
In Perry’s proposal, coal and nuclear are described as providing needed security due to their ability to store 90 days of fuel on site.  Perry argued that today’s electricity markets do not provide economic security for essential coal and nuclear power generators. He proposed that they (coal and nuclear generators) should receive special financial treatment — subsidies paid by the customers — in order to recover their full costs. On January 8, the Federal Energy Regulatory Commission (FERC) rejected Perry’s NOPR, with the five commissioners (four Trump appointees and one Obama appointee) voting unanimously against the proposal.

Although the proposal is now off the table at FERC, it received some support at a more recent U.S. Senate hearing and may stage a comeback.

In any case, Perry’s proposal created questions that remain: What exactly is base load and what role does it play in the electricity grid? The transition to renewable energy is too important to be put at risk or even delayed by confusions, whether intended or not. Let us be clear, then, for this will yield insight into the coming of renewable energy at large scale.

Shown in Figure 1, the top (solid) curve is the variation in total power demand, or total load, over a week in the summer. Base load (below the dashed line) is simply the non-varying portion of the load while the varying load is simply the variable portion of the load (between the dashed and solid lines). That is all there is to the distinction. Base load can be supplied by either inflexible generation (historically coal and nuclear) or flexible generation, while the varying load needs flexible load-following and peaking generation capabilities that have historically been provided by natural gas plants in the U.S.

Figure 1. Data from PJM.

Even though coal and nuclear are usually described as base-load generators, base-load generators are not a particular type of equipment, but rather a mode of operating the equipment. Figure 2 helps reveal the economic reasons why a generator would be operated in base-load mode. The figure shows how energy prices can vary quite a bit depending on how much energy is being generated at a given moment and the type of fuel being used. The “capacity/utilization factor” shown along the horizontal axis of the graph simply refers to the fraction of time the generator is actually operating. The natural gas combined cycle (NGCC) capacity factor is represented by three curves, with natural gas (NG) fuel prices of $9 per million BTUs, $6/MBTUs, and $3/MBTUs. In 2006 the price of NG peaked at over $13/MBTUs and, primarily as a result of fracking, current prices have been under $6/MBTUs since 2010.
Figure 2 shows how differences in natural gas (NG) pricing alters the economics of generation of different fuel types. At high NG prices, represented by $9/MBTUs, coal and nuclear power plants are only economical to operate at high capacity factors, and for this reason they have typically been operated at maximum capacity factors as base load plants. On dropping to $6/MBTUs, the cost of natural gas plants is at, or below, that of coal and nuclear over the full range of capacity factors. This helps explain how the recent and current low natural gas prices —which are projected well into the future — have been disrupting the economics that made coal and nuclear previously economically competitive under some circumstances.

In some other countries, coal generators are used for load-following because natural gas is at a premium. This happens, for example, in Ukraine. It does not happen in the U.S. normally because the price of natural gas (NG) generation is the lowest at the lower capacity factors often used in load following.

Figure 2. After Energy for Sustainability: Technology, Planning, Policy, 3rd ed., by Randolph and Masters; used with permission.

The world has been working to build a modern grid, one with greatly reduced greenhouse gas (GHG) emissions, and one that also has improved reliability and resilience. Even so, the most important consideration today is still the cost. Can the older grids deal with the continuing loss of nuclear and coal power plants, without building new plants to replace them?

In principle, because of its flexibility, all electricity generation could be replaced with natural gas plants (NGCC, natural gas combined cycle and CT, combustion turbines), assuming there is enough natural gas available for peak times and the transportation system can deliver it to where it is needed.

This has not been a serious problem of late in the United States, but of course it always needs to be studied and monitored as the generation mix evolves. With the rapid growth of renewables that produce no GHGs, however, there are even more interesting options than natural gas alone as replacement.

Here we assess base load generation synthesized from a generation mix composed of natural gas and solar, a renewable, in order to demonstrate the potential for replacing coal and nuclear base load plants.

Renewables, particularly wind and solar, are said to be intermittent because their availability comes and goes, and cannot be controlled. This poses a challenge to incorporating them into electric power grids, especially for base load (constant) generation. The challenge is not a major issue at low levels of renewables, which we see today. Rather, the problem is how to run an electric power grid on a long-term basis with, say, 60% or more of its power provided by renewable sources. Some problems, while real enough, can be overcome.  Can this one be overcome?

Figure 3. Energy block combining solar and non-solar generation to produce constant (base load) net output.
Figure 3 shows a stylized base load demand (“energy block”) example. In the figure, there is a constant demand of 1 gigawatt over a 24-hour period (about what a nuclear power plant would produce). This is shown by the dashed line in the figure. We have also drawn production from a hypothetical solar farm (or collection of farms) for August 1, 2016, based on solar radiation received at the Philadelphia International Airport. In the example then, the base load demand for the day is 24,000 MWh and the solar farm produces about 8,515 MWh, or 35% of the total demand, as shown in the figure.

Could the solar production possibly be useful to the base load, even though it hardly provides on its own the required generation to meet the stated base load demand? In conjunction with nuclear or coal generation, the solar is not very useful because nuclear and coal are inflexible and cannot be scaled back economically to follow the solar production and maintain the constant 1 gigawatt. But combined with natural gas combined cycle (NGCC) plants, it is possible to maintain a constant net production, as required, by adjusting the NGCC output in response to the varying solar generation. With NGCC cheaper than coal and nuclear, and solar competitive with or even cheaper than NGCC (at the relevant capacity factors), it may well be both technically possible and cheaper to synthesize a base load (constant) output. And of course, wind, hydroelectric, and other renewable generation sources can be brought into the mixture. Here we have discussed only solar plus natural gas combinations for base load synthesis, but similar exercises can be used for other renewables, such as wind and hydroelectric, with integration of all renewables as the goal.

What does this all mean going forward with the transition to renewable energy? There are inevitably challenges to synthesized base load arrangements (“synthetic base load”) at high levels of penetration of renewables.

If you combine renewables with NG plants to synthesize base load (constant) generation, the main challenge issue may be generator ramp up rate. Can the NG plants adjust fast enough to meet the solar decline on summer afternoons as air conditioning load is increasing? If the plants cannot, are there economic ways to assist the transitions, such as storage, demand response, peaker plants, and curtailing renewables modestly at times to give the gas plants more time to ramp up and down? Some utilities have had to take extra measures to guarantee ramping availability. These are engineering and management questions that can be resolved objectively and that have been resolved successfully to date.

Another issue to consider is what happens when the solar penetration increases to the point where the solar peak power exceeds the required base load level, as it has done in Hawaii on occasion. On an island like Hawaii, using storage is the most apparent solution, but in a widely connected grid a range of solutions is possible for addressing the excess. And of course, curtailment of the solar power and wind power input always remains a possible option.

That said, combining multiple sources of renewable and non-renewable electricity to synthesize base load generation is being done today and is a large part of why the Perry proposal is such a non-starter.

This is not to say that base load synthesis at a competitive cost is trivial or without challenges at high levels of penetration of renewables. Instead, we would emphasize that this —the base load synthesis problem — is a challenge that supporters of the energy transition would do well to embrace. Meeting these challenges successfully — demonstrating that sufficient electric power can be generated economically and reliably — would make the transition to renewable energy unstoppable.

Acknowledgement: We thank Roberta Fallon and Ed Gruberg for insight and clarifying comments on earlier versions of this piece.

Today’s Market Is Anything but Normal

by Bill Bonner

In this issue, we aim to develop a compass… to help us figure out where we are and where we are going.

On Planet Earth, we can find our direction by reference to the Magnetic North. For investing, we use the most reliable force in finance – the relentless return to “normal” – to get our bearings.

And searching for normal, we may have stumbled upon what could be the Trade of the Century.

More on that later…

Reversion to the Mean

As economists describe it, reversion to the mean is merely a recognition of the tendency for things to stay in a range that we recognize as “normal.”

Trees do not grow 1,000 feet high. People don’t run 100 mph. You don’t get something for nothing.

Normal exists because things tend to follow certain familiar patterns, shapes, and routines.

When people go out in the morning, they know, generally, whether to wear a winter coat or a pair of shorts. The temperature is not 100 degrees one day and zero the next.

Occasionally, of course, odd things happen. And sometimes, things change in a fundamental way.

But usually, when people say “this time is different”… it’s time to bet on normal.

This phenomenon – reversion to the mean – has been thoroughly tested and studied in the investment world. It seems to apply to just about everything – stocks, bonds, strategies, markets, sectors… you name it.

But let’s push on. What is unusual in the chart below? What is so abnormal that the mean is likely to revert against it?

You will note that global debt was only $30 trillion in 1994. Now it is $230 trillion. That $200 trillion in extra credit is probably the whirlwind that sent equities spinning up to the top right.

Those gusts blew stock and other asset prices up to heights never seen before. The Dow reached over 26,000. Houses went on the market for more than $100 million. Gold rose above $1,900.

But while stocks and bonds may have the wind at their backs, it seems to blow in the economy’s face… making forward progress almost impossible. The real economy – as depicted by GDP at the bottom of the chart – has grown in a rather normal way, but at a slower and slower rate.

Its steady, plodding increase gives no hint of the chaos going on above it. The real economy and the financial world are as different as the eye of a hurricane and the swirling clouds and storms around it.

Another thing you notice is that until the mid-’90s… and again between 2008 and 2012… the average investor got essentially no benefit in exchange for the added risk of putting his money into equities (the chart above includes dividends). He might just as well have left his money in U.S. Treasury bonds.

In theory, he is supposed to be able to earn some return – over pure cash – by lending his money to the U.S. government (with the 10-year Treasury bond as the benchmark). He should be able to earn even more, a premium (more than he would earn from risk-free Treasurys), by investing in stocks. The premium is supposed to compensate him for the risk that his stocks could go down at an inconvenient time.

In practice, we find that risk-free Treasurys gave him less than nothing. He has earned less from Treasurys than he would have from gold (which pays zero interest) – over the entire 48-year period.

Stocks, meanwhile, earned him nothing for the first 24 years. Then they exploded to the upside, along with debt, until the financial crisis brought them back in line with gold.

By 2008, the average investor was again earning less on stocks – despite all the risk and bother of market investing – than on gold. It continued like that until 2012, when his stock investments shot up.

But there is a time to be in stocks… and a time to be out of them. Without knowing the future, you can still know when something is not normal. And when something is not normal… it is just biding its time until it becomes normal again.

Gold-Backed Cryptocurrencies: Icing On An Already Tasty Cake

The blockchain has discovered gold (or gold has discovered the blockchain). Either way, this means several things. First, the decades-long dream of a gold-backed cybercurrency may finally be realized. Second, gold and probably silver are looking at a big new source of physical demand. Third, the huge number of gold-related initial coin offerings (ICOs) in this largely unregulated pipeline will require buyers to learn how to tell the legitimate offerings from the scams.

Two probably-legitimate examples:
UK’s Royal Mint Launches Gold-Backed Cryptocurrency 
(Cointelegraph) – The UK’s Royal Mint, the institution responsible for producing all the physical money the country has for circulation, has announced the launch of its own gold-backed cryptocurrency.
The Blockchain-based coin, called Royal Mint Gold (RMG), is a digital representation of gold stored in The Royal Mint vault. 
The Royal Mint Bullion, the Royal Mint company that sells physical gold, is the first company to allow customers to hold gold-backed assets on Blockchain, Tom Coghill, RMG’s Commercial Lead, stated in an interview with Express.co.uk. Coghill also mentioned that one RMG coin is equal to one gram of gold, adding that “it’s real gold you’re holding when you’re holding our RMG.” 
A recent report published by the World Gold Council (WGC) compared Bitcoin and gold, declaring that though Bitcoin saw a higher growth in value in 2017, gold would remain an important store-of-value investment. 
Coghill claimed that Bitcoin investments are more uncertain than investments in gold: 
“Gold has probably had an argument that it’s been a store of value for 6,000 years, bitcoin’s a bit younger and the future of bitcoin is uncertain.” 
Cryptocurrency backed by gold being developed by Perth Mint to entice investors back to precious metals 
(ABC) – Australia’s biggest gold refiner, the Perth Mint, is developing its own cryptocurrency backed by physical precious metals.
The ambitious plan, which is subject to a confidentiality agreement, will make it easier for consumers to buy gold. 
The mint also plans to make use of blockchain technology, first used as the core component of the digital currency Bitcoin, where it works as a public ledger for transactions. 
In the 10 years since its inception, blockchain has been used to track transactions in industries from agriculture to land registration and the music recording industry. 
For the Perth Mint, the need to bring investors back to precious metals after a boom in alternative investments such as cryptocurrencies posed an opportunity, according to chief executive Richard Hayes. 
“I think as the world moves through times of increasing uncertainty, you’re seeing people look for alternate offerings,” he said. 
“And you’re seeing this massive flow of funds into the likes of Bitcoin at the moment because people are looking for something outside of the traditional investments.” 
But Mr Hayes said the volatility of some of the current cryptocurrencies meant they did not suit all investors. 
And that is where a gold-backed offering may fit. 
“With a crypto-gold or a crypto-precious metals offering, what you will see is that gold is actually backing it,” Mr Hayes said. 
“So it will have all the benefits of something that is on a distributed ledger that settles very, very quickly, that is easy to trade, but is actually backed by precious metals, so there is actually something behind it, something backing it.”
Some thoughts on gold-backed cryptocurrencies (or tokens or whatever the correct term ends up being):

24 hour trading

Most financial markets have trading hours that are limited to the business day. Which means that most US investors can buy and sell, say, Amazon stock or silver coins only when domestic markets are open. Owners of a blockchain asset, in contrast, can wake up in the middle of the night, see an accurate quote, and act on it instantly. Whether this is a good or bad thing depends on the temperament and self-control of the individual. It’s possible that we’re creating a financial time-suck comparable to social addictions like Facebook and Instagram. And maybe a new danger for sleepwalkers…sleep trading?

On the positive hand, when things spin out of control in Asia or Europe, American owners of crypto-gold won’t have to wait until morning (which may be too late) to move their assets out of harm’s way.

Is it allocated?

Lots of different kinds of gold and silver accounts are already available, with the biggest differentiator being the ownership of the bullion sitting in custodial vaults. With allocated accounts buyers own specific metal bars, while with unallocated accounts buyers are in effect creditors of the company running the fund. The former is vastly safer and should be the only way that anyone ever owns remotely stored precious metals, including cryptos.

Good for gold/silver price?

Precious metal cryptos might engage some of the animal spirits that have been driving the bitcoin bull market — especially now that existing cryptos are correcting hard, thus reinforcing the lesson that these currencies aren’t backed by anything real. It’s possible that the contrast between bitcoin and crypto-gold will become a major topic of conversation in 2018, with the latter looking good by comparison and attracting serious speculative cash.

Existing tokens

It turns out that there are already a number of gold-backed cryptocurrencies out there. Here’s a list compiled by GoldScape:

Gold-Backed Cryptocurrency Directory

This is a current list of gold-backed cryptocurrency. This is a directory and not an editorial endorsement, so research all of the alternatives before investing. Some of the cryptocurrencies listed here don’t detail how they store and account for gold either, so proceed with caution. Any questions regarding each coin should be referred to their social media channel or forum listing.
Since this post was first published there have been new coins added to the list and some are now ready to buy. The list is now sorted in order of availability. 
Flashmoni (OZT)
Location: UK
Flashmoni is a blockchain-powered fintech company that offers a physical gold-pegged cryptocurrency, innovative payment solutions and a smart contract-based advertising solution. In addition to using gold to back their tokens, they also plan to raise funds to directly operate mines to “improve miner’s working conditions, their lives and of the communities where they live.” 
There are two gold-backed tokens: OZG which is a private token pegged with 24 K gold stored in Dubai’s DMCC Free Zone and in Singapore. 1 OZG = 1 grain of gold (1 grain is approx 0.065 gram). OZT is the public token tradable on crypto exchanges and OZTs core value is 1/20th of the OZG. 
GoldCrypto (AUX)
Location: Belize
AuX tokens by GoldCrypto are a cryptocurrency backed by physical gold.  
Currently, each 750 AuX Tokens will be backed by one ounce of gold (approximately US$1.70 per AuX Token). This gold backing per AuX Token then progressively increases. 
Gold Bits Coin (GBeez)
Location: Australia
Gold Bits Coin is a gold-backed crypto but the site and White Paper is light on details. It says that each coin is “backed by real gold”, but it doesn’t say how much gold is in each coin, or how it is stored. Gold Bits Coin Pre-ICO is on until 31 January 2018. 
XGold Coin (XGC)
Location: Panama
XGold Coin (XGC) is a gold backed digital crypto-currency option. The price of one XGC Coin at initial pricing is based on a single gram of Gold. PRE-ICO First Round is on until 10 February 2018 and is offering a Pre-ICO 35% bonus. 
AurusGold (AWG)
Location: Netherlands
AurusGold is fully-allocated, gold-backed cryptocurrency. The Aurus asset tokenising protocol is used by top European gold traders to tokenise 99.99% LBMA approved, fully audited gold under the AurusGold (AWG) currency. 
PureGold (PGT and PGG)
Location: Singapore
Website: puregold.io
Puregold is a payment gateway using Gold backed cryptocurrency. They offer two digital tokens called PGT for transactions; and PGG which is a cryptoasset backed by physical gold. The company uses physical gold (of 999.9 quality) as its security.  
Puregold’s gold reserves equal or exceed its circulated amounts of PGG gold-backed tokens. The physical gold is stored by a third party in a decentralized storage unit that Puregold stores investment grade gold, gold jewellery, small ingots (up to 100 grams) and coins. Puregold is part of Puregold.sg, which is a private mint in Singapore with its own in-house factory producing gold and bars. The ICO for Puregold runs from 15 January 2018 to 14 March 2018 
Reales (RLS)
Location: Estonia
Reales coin is a token that combines a basket of precious metal and cryptocurrencies. The breakdown of each token is 10% physical gold, 35% physical silver, 20% Bitcoin, and 20% for ICO’s and alt-coins (total 85%). The remaining 10% is for company’s budget and 5% for operational costs. Reales ICO ends 8 March, 2018.

Icing on the cake

 The forces driving precious metals higher (out-of-control credit creation pretty much everywhere, geopolitical chaos in much of the world, bond and stock bubbles that should, if history still matters, burst shortly, and the looming mass devaluation of fiat currencies) are already nothing short of spectacular. So gold and silver don’t need the blockchain to be big winners in the next few years.

Still, the number of gold-related blockchain products is apparently going to soar in 2018 as the big gold players stake their claims. The result? A potentially significant jump in demand for physical gold as all these promoters acquire metal to back their offerings. So while gold is likely to soar in any event, the blockchain connection might be a big help. Think of it as icing on an already tasty cake.