Gold Monitor
Murenbeeld & Co
February 24, 2017
Martin Murenbeeld
[email protected]
Brian Bosse
[email protected]
Chantelle Schieven
[email protected]
GOLD PRICE
US$ - Friday p.m. fix
Source: LBMA, Bloomberg
US DOLLAR INDEX
Euro, Yen, Pound, Cdn $,
Yuan, Swiss, Rupee, Aus$
Euro, Yen,
Pound
Euro, Yen,
Pound, Cdn $ January 1999 = 100
Source: WSJ, Bloomberg
US INTEREST RATES
10-year US Treasury
3-Month T-bill
Source: Bloomberg
Gold - 2nd Fix
Gold - COMEX
Silver - HH
Platinum - NYME
Crude Oil - NYME
CRB Bridge - NYBOT
US $ (Excluding Cdn.)
Fed Funds (Overnight)
US Bonds - CBOT
TSX Global Gold Index
S&P 500
Feb-20
1237.30
US
H
O
L
I
107.80
D
A
223.86
Y
Feb-21
1233.20
1237.50
1804.50
1006.00
54.06
192.05
108.29
0.68
151.31
223.24
2365.38
Feb-22
1236.65
1232.00
1795.50
1002.70
53.59
191.23
108.09
0.68
151.38
219.93
2362.82
Feb-23
1247.90
1250.20
1813.50
1011.90
54.45
191.63
107.56
0.67
151.81
219.24
2363.81
Feb-24
1253.65
1252.60
1813.50
1026.00
54.09
191.24
107.60
0.67
152.88
221.05
2355.79
Source: LBMA, CME, WSJ, Bloomberg, Murenbeeld & Co
The US Trade Deficit and National Savings: Implications for Gold
Many economists have
argued that the US trade deficit
is a direct function of the US
budget deficit and the US
domestic savings/investment
imbalance. They argue that
the trade deficit will not
disappear until/unless the US
corrects these internal financial
imbalances.
The argument rests on
the following (derived) GDP
identity: (T-G) +(S-I) = (X-M),
where T equals taxes, G equals
government expenditures, S
equals private savings, I equals
private investment, X equals
exports and M equals imports.
The identity indicates that
government budget deficits
(where T<G) and deficient
domestic savings (where S<I)
add up to a trade deficit (X<M).
To put it differently, when
T<G (when tax revenues are
insufficient to fund government
spending) and S<I (when
domestic savings are insufficient
to fund domestic investment) the
money to fund these imbalances
will come from abroad! Net, net,
those foreign capital inflows
equal the trade deficit!
This is all correct as it stands;
at the end of the day foreign
capital inflows (i.e. foreign
purchases of US government
debt, corporate financial assets
and direct investments) will
always equal the trade deficit;
the GDP identity will, ex-post,
never be violated.
But does this mean that
the US trade deficit is solely
Gold Monitor
a function of US domestic
policies that discourage private
domestic savings and boost
government expenditures
without commensurate tax
policies to help pay for these
expenditures?
The answer is no, and the
simple reason is that it takes
two countries to trade, and the
policies of US trade partners,
i.e. the policies of China, Japan,
and Europe, will directly affect
the size of the US trade balance
with these countries. (The US
has long-standing large trade
deficits with each!) Overseas
policies will also have a direct
bearing on US domestic savings
and tax revenues necessary to
fund domestic investment and
government expenditures.
Consider the following
hypothetical example: country
CJE “maintains” an extremely
competitive exchange
rate relative to the US and
discourages US imports in
many domestic economic
sectors for national security
(and domestic competitive)
reasons. This country will
accordingly run a trade surplus
with the US, if only because
the US has few barriers to
the imports form CJE - on
account of a strong domestic
consumer/import constituency
and a general “free trade” policy
mentality.
So how will this trade deficit
affect US financial imbalances?
Murenbeeld & Co
02/24/2017
One could write long essays
on all the many options the
Trump Administration might
consider. Yet, many economists
would continue to argue that
nothing will reduce/eliminate
the US trade deficit as long
as the US “needs” foreign
capital inflows to balance off
its domestic saving and tax
deficiencies.
First, CJE’s trade surplus will
lead to US payments for CJE’s
exports to the US. Those
payments should pressure
CJE’s currency to rise. But
CJE’s central bank (and/or
government) doesn’t want its
currency to rise (nor do CJE’s
exporters), and accordingly
decides to buy these US
payments in the foreign
exchange market (and even
force domestic exporters to
pass their dollar receipts up to
the central bank in exchange
for local currency). CJE’s
central bank then turns around
and invests these dollars back
into the US financial market
(buying US government debt,
corporate financial assets,
and direct investment by way
of government-sponsored
sovereign wealth entities).
This closes the circle: The
US trade deficit with CJE is
balanced off with foreign capital
inflows from CJE.
If anyone doubts the truth
inherent in this hypothetical
example, note that there
are some $10 trillion foreign
exchange reserves in the world.
Such reserve hoard can only
be built on the back of trade
surpluses and massive currency
intervention. The counter party
here is the US, which has
massive trade deficits for many
years.
The Trump Administration
wants to put a stop to this!
2
I totally disagree; my simple
example of country CJE
suggests that foreign policies
go a long way to explaining the
US trade deficit (and hence
also the US domestic financial
imbalance). Furthermore, if CJE
refuses to adopt policies that
will reduce its trade surplus,
there isn’t a damn thing the
US can do short of introducing
protectionist policies (or adopt
domestic deflationary policies,
which no US Administration
in my living memory has ever
considered).
Peter Navarro, Trump’s
Director of the National Trade
Council, has indicated that the
euro is too low (that Germany
benefits hugely from the
ultra-competitive euro), and
that China (and others) have
undervalued currencies and
largely eschew free trade. This,
he suggests, needs to change.
So we need to wait and see
what sorts of policies the Trump
Administration will employ to
nudge (force/command/direct/
threaten) its trade partners in
the desired direction.
www.murenbeeld.com
Gold Monitor
But what of the GDP identity?
Well, if CJE adopts policies
that quickly reduce its trade
surplus with the US: i.e. as a
start forcing its currency higher
against the dollar and opening
its market to more US exports
(and back these policies up
with policies boosting domestic
consumption instead of policies
boosting yet more domestic
production and exports) the
specifics of the US GDP identity
will change quite dramatically.
For example, when US
exports (X) rise and US
imports (M) decline (1) monies
spent on imports will be spent
domestically – meaning among
other things that the domestic
savings pool will rise; (2)
revenues of exporters will rise,
which will draw investment to
export sectors (funded more
by the higher domestic savings
pool – and less by foreign
capital inflows); (3) employment
will rise in import-competing and
S&P/TSX COMPOSITE INDEX
02/24/2017
export sectors of the economy,
(4) government expenditures
on social assistance will likely
decline, and (5) tax revenues
will rise on the back of rising
GDP.
domestic financial imbalance
before the trade deficit can
decline!
In other words, the variables
on the left-hand side of the
identity (T-G) +(S-I) = (X-M) will
all change when (X-M) rises
sharply in response to more
balanced foreign policies. Taxes
will rise, government social
expenditures will decline as
employment rises, savings will
rise, and investment will rise.
Any imbalance resulting from a
pickup in domestic investment
can usefully be plugged with
tax policies that encourage US
corporate savings held overseas
to return to the US.
Ex post the identity holds,
but ex ante we cannot specify
all the dynamics of the eventual
balance in the identity. The key
point here is that it is not set in
stone the US must first solve its
S&P 500 INDEX
Future Trump/Navarro
policies will, I suspect, go at
this much along the lines I have
suggested here – these will
force trade partners to reduce
their deficits with the US by
adopting more import-friendly
policies and more appropriate
currency values. If US trade
partners do not yield on this,
a trade war is likely because
the US will almost certainly
commence blocking foreign
goods (with taxes, tariffs, and
non-tariff barriers).
Gold investors need take
note; a trade war will benefit
the price of gold! Gold investors
need also take note of the fact
that a weaker dollar, which is
somewhat central to foreign
trade surpluses coming down, is
also very positive for the dollar
price of gold.
DOW JONES INDUSTRIALS
Source: Bloomberg, Murenbeeld & Co
Murenbeeld & Co
3
www.murenbeeld.com
0
1945
1955
Source: IMF
Gold Monitor
1965
1975
1985
1995
2005
02/24/2017
2015
GOLD VS S&P 500
30
25
20
15
RATIO: S&P 500 VS. GOLD
S&P Index: 1941-43 = 10.0
Gold: US$/oz.
Recession 1973-1975:
Gold price “cut loose: in 1971
Gold cut 5 years after peak
Depression 1930-1933:
Gold revalued to $35 in 1934
Gold revalued 5 years after peak
Current
10
Last date: February 24
5 Gold
1871 = 1.00
Annual Data
0
1870 1880 1890 1900 1910 1920 1930 1940 1950 1960 1970 1980 1990 2000 2010 2020
Source: Global financial Data, Bloomberg, Murenbeeld & Co
This chart tells a vital story across 150 years. More importantly, please note
how since the 1920s, this ratio traces out the secular bull and secular bear
cycles of the S&P 500. Three clearly visible spikes depict the three secular
S&P 500
bull markets
in living memory. Each spike is greater than the previous spike.
An unanswered question remains: is the current secular bear in equities finally
exhausted, or will this ratio eventually move back down below 5? Certainly this
is a topic we intend to discuss in depth later on in 2017. Stay tuned.
(axis inverted)
GOLD AND S&P 500 – DAILY DATA
Daily
Corr: -.52
Corr: -.71
Corr: .56
Gold
2012
Corr: .12
Corr: .41
Corr: .74
Corr: -.88
S&P 500 (axis inverted)
2011
Last date: February 24
Gold
2013
S&P 500
(axis inverted)
Last date: February 24, 2017
2014
2015
2016
2017
Source: Bloomberg, Murenbeeld & Co
Currencies
The
S&P6 500 and the gold price generally trend opposite to each other, but
both have been rising as of late. Note that the S&P 500 axis is inverted.
GOLD AND S&P 500
Daily
Murenbeeld & Co
4
www.murenbeeld.com
Corr: -.52
Gold Monitor
02/24/2017
THE SHORT-TERM TECHNICAL PICTURE
Daily p.m. fix
50-day moving
average
200-day
moving average
Last date: February 24, 2017
2013
2014
Source:LBMA,
LBMA,Bloomberg,
Dundee Economics
Source:
Murenbeeld & Co
2016
2015
2017
CHANGE IN GOLD ETFs
5-day sum of daily change
tonnes
2014 : -164 T
2015 : -137 T
2017 : 52 T
To Date
2016 : 315 T
2013: -869 T
Gold had a good week
last week and the 4-year
technical picture is beginning
to suggest a breakout of
the downtrend channel.
However, a developing
pattern of ‘higher lows
and higher highs’ since
December 2015 must come
to fruition before it can
consign our red lines to the
dustbin of history.
Demand for gold ETFs
remains quite strong ...
Last date: February 23, 2017
2013
Source: Bloomberg
2014
2015
2016
COMMITMENTS OF TRADERS DATA
“Specs” net long
(tonnes)
Gold Price 7
Gold price
(%Q/Q)
GOLD AND SILVER ETFs
tonnes
tonnes
ETF-Silver
Total
Last date: February 21, 2017
ETF-Gold
Total
Source: US Commodity Futures Trading Commission, Bloomberg
*Futures Contracts: in tonnes-equivalent
... similar improvements can
be seen in the Commitments
of Traders data chart. The
year end low of 2016-2017
is hundreds of tonnes
higher than its 2015-2016
equivalent.
Last date: November 23, 2016
Source: ExchangeTradedGold.com, Bloomberg
Gold Price 10
Murenbeeld & Co
5
www.murenbeeld.com
Corr: -.29
Corr: -.80
Last date: November 25, 2016
Gold Monitor 2011
Corr: -.58
Corr: -0.82
02/24/2017
2013
2016
2012
2014
2015
(NEFXR0 - US$ index includes: Cdn$, Euro, Yen, Pound, Yuan, Swiss, Aus$, Rupee)
Last date: February 24
Gold
GOLD AND THE DOLLAR – DAILY DATA
Last date: November 25
Gold
Last date: February 24, 2017
Last date: February 24
Last date: Novembe
Gold
Gold
Gold
Corr: -.75
to date
10-year
USTIPS
(Axis inverted)
US Dollar Index (EFXR0C)
(axis inverted)
NEFXR0
Corr: -.71
Corr: -.54
2011
2012
Last
date: February
(EFXR0C
- US$24
index
NY Crude
Currencies 4
Corr: -.59
Corr: -.63
Corr: -.85
2015
2014
2013
includes: Euro, Yen, Pound)
Corr: -.84
2016
2017
Last date: February 24
Gold
Corr: -.16
Corr: -.78
Corr: -.91
(axis inverted)
(axis inverted)
GOLD AND 10-YEAR TIPS – DAILY DATA
Daily
EFXR0
EFXR0C
(axis inverted)
Gold– DAILY DATA
GOLD AND THE DOLLAR
Corr: -.46
to date
Gold
Last date: November 25, 2016
Corr: -.86
Gold
Corr: -.92 Corr: -.27
US Dollar Index
Corr: -.86
(EFXR0)
10-year US TIPS
(Axis inverted)
2012
2011
Currencies 11
Last date: February 24, 2017
2014
2013
2015
2016
(axis inverted)
2017 Corr: -.24
Corr: -.76
10-year
USTIPS
(Axis inverted)
Corr: -.77
Corr: -.82
2012
2011
2013
2014
(EFXR0 - US$ index includes: Cdn$, Euro, Yen, Pound)
GOLD AND OIL – DAILY DATA
Corr: -.83
to date
2016
2015
Last date: February 24
New York Crude
NY Crude
Gold 5
Currencies
GOLD AND 10-YEAR TIP
Daily
Corr: -.32
Corr: .18 Corr: -.41
Corr: .39
Corr: .13
to date
2015
2016
2017
Corr: -.16
Corr: .76
Gold
Last date: February 24, 2017
Daily
2011
Corr: .56
2012
2013
2014
Corr: -.92 Corr: -.27
10-year US TIPS
(Axis inverted)
2012
2011
Currencies 9
Source: Bloomberg, Murenbeeld & Co
Currencies 11
Murenbeeld & Co
6
Corr: -.86
2013
2014
GOLD AND OIL – DA
New York Crude
www.murenbeeld.com