Highlights of the week of November 17, 2014

 

Dear PGM Capital Blog readers,

In this weekend’s blog edition we want to discuss some of the most important events that happened in the global capital markets, the world economy and the world of money in the week of November 17, 2014:

• Japan Back into Recession:
• China Lowers Interest rate:
• Russia continues to expand its Gold reserves:

JAPAN BACK INTO RECESSION:
On Monday, November 17, Japan reported that the country’s real gross domestic product fell 1.6% on an annualized basis between July and September, which followed a revised 7.3% contraction in the second quarter.

Based on the fact that a recession is defined as two consecutive quarters of negative economic growth as measured by a country’s gross domestic product (GDP), Japan as the world’s third largest economy, is now technically in a recession.

As can be seen from below chart the Japanese economy has now contracted in three of the last four quarters and due to this has now entered its fourth recession since 2008.

As  a consequence of this the yen fell to US$ 0.0085 per Yen, its weakest level since August 2007 as can be seen from below chart.

 

CHINA LOWERS INTEREST RATE:
In a surprise move on late on Friday, November 21, the People’s Bank of China (PBOC) cut interest rates for the first time in more than two years .

As can be seen from below chart, last Friday, China’s central bank cut its benchmark,  one-year loan rate by 0.4 percentage point to 5.6%, which is its first interest-rate cut since July 2012.

By lowering the 1-year lending rate, the PBOC is making it cheaper for business to borrow in order to hire or expand their business.

Above chart shows also shows that the PBOC has reduced the benchmark one-year deposit rate to 2.75% from 3% but gave banks greater flexibility to raise deposit rates above that benchmark.

RUSSIA CONTINUES TO EXPAND ITS GOLD RESERVES:
On Tuesday, November 18, the Central Bank of the Russian Federation published its October official reserve assets and other foreign currency assets report indicating that it had added 600,000 ounces of gold to its reserves.

Russia’s gold reserves now stand at 37.6 million ounces equivalent to 1,169 metric tons as can be seen from below chart.

Russia’s current reserves of 1,169 metric tons, bring the country on the sixth position in the top 10 of countries with the biggest gold reserves.

The Governor of Russia’s central bank Elvira Nabiullina told the lower house of parliament on Tuesday November 18, that the country’s Central Bank bought around 150 tonnes so far this year, with the consequence that Gold currently constitutes around 10 percent of the bank’s gold and forex reserves.

The Russian government is a firm believer in gold and the position it may give Russia in any future re-alignment of the global reserve currency in the year ahead.

PGM CAPITAL COMMENTS:

JAPAN’s QUADRUPLE DIP RECESSION:
Japan’s Prime Minister Shinzo Abe, came into office in December of 2012 with a popular mandate to end Japan’s two-decade long malaise.

So “Abenomics” was born: fiscal and monetary stimulus, together with “structural reforms,” like getting more women in the workforce, to make up for at least some of Japan’s lost growth the last 20 years.

As a consequence of this, the Bank of Japan has expanded its balance sheet from 40 percent to around 50 percent of GDP over about 18 months. Then, at the end of October, Abe rolled the dice again, announcing a boost to a quite incredible 70 percent of GDP over the next three years. By that time, Japan’s monetary base will be close to the same size as that of America, even though the US economy is three times bigger and home to two and a half times more people.

If it worked, prices would stop falling like they have for 15 years now, and there would be a virtuous cycle of inflation leading to more consumer spending leading to more business investment, and finally more inflation at their 2 percent target.

But then, six months ago, the government became more worried about its debt of 230 percent of GDP than it was about the recovery. It raised the sales tax from 5 to 8 percent, and the economy promptly tanked. The BOJ has responded by buying even more bonds with even more newly-printed money, but not before domestic prices, as measured by the GDP deflator, began falling again, this time at a -0.3 percent pace.

Abenomics, in other words, has gone from being fiscal and monetary stimulus to fiscal austerity and even more monetary stimulus—and that, at least for now, has brought back deflation.

We believe that Japan and Abenomics have all the potential of bringing the world into a cruel currency war and money printing spree, which in the end will lead to hyperinflation and a depression in the west.

CHINA LOWERS INTEREST RATE:
The cut in the benchmark rates follows liquidity injections and targeted cuts to reserve requirements. Although the PBOC scrapped controls on most borrowing costs in July 2013, banks still use benchmark rates as a guide for loans including mortgages.

The People’s Bank of China’s rate move comes after the Bank of Japan sprang a surprise on Oct. 31 by dramatically increasing the pace of its money creation, while European Central Bank President Mario Draghi shifted gear on Friday and threw the door wide open to quantitative easing in the Euro zone.

In cutting rates, China joins the parade of global policy makers who are stepping up their stimulus efforts to support growth.

RUSSIA EXPENDING ITS GOLD RESERVES:
Of all the central banks that make their reserve actions public, Russia has been the “largest, most active” gold accumulator. The “elephant in the room, however, is ” how much gold China is buying, as Beijing does not publish these figures”.

A recent report from the World Gold Council showed that many central banks, including Russia’s, have beefed up their gold reserves. This investment, the report suggested, was “driven by a number of factors including a continued diversification away from the U.S. dollar and the backdrop of ongoing geopolitical tensions.”

The dip in gold prices has spurred purchases from Asia. Trading volumes on the Shanghai Gold Exchange’s (SGE) benchmark bullion spot contract jumped this week and India’s imports surged in October.

Gold and silver futures rose to three-week highs after China cut benchmark interest rates to support economic growth, boosting demand for precious metals as a store of value. Palladium jumped the most in 14 months.

Now that China also has joined the group of countries, lowering its interest rate in order to stimulate growth we believe that the demand for gold will increase as a hedge against diluting fiat currencies.

Before following any investing advice, always take your investment horizon and risk tolerance into consideration and keep in mind, that we are currently living in the age of turbulence and widow dressing  and due to this markets can behave irrationally longer that you can remain solvent.

Until next week.

Yours sincerely,