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 June 16, 2016:
- Germany’s 10-year sovereign bond yield turn negative for the first time.
- The USA FED Surrenders.
- Gold closed the week at 22-month high.
GERMANY’S 10-YEAR BOND YIELD TURNS NEGATIVE FOR THE FIRST TIME:
Germany’s benchmark 10-year Bund yield, the benchmark for borrowing costs across the euro zone, fell into negative territory on Tuesday, June 14, 2016 for the first time, as nervous investors try to park their money in safe-haven investments.
Bond yields in Europe have been sliding for a year, weighed down by aggressive central-bank bond buying, negative short-term rates and skepticism about an economic recovery that seems persistently to falter.
But the catalyst for Tuesday’s drop into negative territory appeared to be a mounting concern among investors that Britain might quit the European Union.
Due to This, the 10-year German bund yield closed on Tuesday, June 14, at minus 0.008%.
Based on this, investors will now have to pay Germany, eight Euro cents a year, for a decade, for every thousand Euro lent to them.
Other countries with debt also perceived as safe – the U.S., Japan, and, interestingly, Britain – all also saw their government-bond yields fall. Falling yields mean rising prices.
THE USA FED SURRENDERS:
The USA Federal Reserve officials, at the end of the FOMC meeting of Wednesday, June 15, held interest rates steady while noting that economic data over the last six weeks had been mixed.
On the downside, Fed officials noted that job gains had diminished and business fixed investment had been “soft.” The central bankers also pointed out that market measures of inflation had declined.
Federal Reserve Chairwoman Janet Yellen on Wednesday cast doubt on a significant interest-rate increase in the near future, saying turmoil in global markets and a sluggish U.S. economy will likely keep rates low.
Against this backdrop, the FED decided to maintain the target range for the federal funds rate at 0.25 to 0.5 percent. The stance of monetary policy remains accommodative, thereby supporting further improvement in labor market conditions and a return to 2 percent inflation.
The FOMC vote holding the target fed funds rate steady at 0.25%-0.5% was unanimous, which reflects the genuine risks to growth of the USA Economy.
GOLD AT 22-MONTH HIGH:
As can bee seen from below chart, Gold, the ultimate safe haven, closed on Friday June 17, at US$1,298.19 per Troy ounce, its highest closing level since August 18, 2014, following the decision by the Federal Reserve late Wednesday to keep rates unchanged, while concerns continue to grow over a possible British exit from the EU.
The bullish impact of the Fed’s decision to leave rates unchanged and the tone of the statement are near-term gold bullish.
PGM CAPITAL ANALYSIS AND COMMENTS:
Negative German bond yield:
German bonds are considered a safe bet during turbulent times, because of the very low risk that Europe’s biggest economy would default on its debt.
You can rely on the Germans not to go on a borrowing spree and fritter away their savings due to this German bonds are a place to wait out the storm. Below chart shows a decreasing yield of the 10-year German bond as the demand for it increased for the reasons as mentioned here above.
But the threat of a Brexit isn’t the only reason behind the recent market move.
Bond yields in Germany – and many other countries – have been sinking for years thanks to low inflation, low economic growth and low interest rates.
Investors seeking a safe investment have seen their options erode, as credit agencies lower their ratings on a range of debt issued by companies and countries. That’s pushed investors to clamor for the few remaining “safe” bonds with the best ratings.
The FED:
The Federal Open Market Committee, which had been insisting for months that the economy is healthy enough to take rising rates, capitulated on Wednesday and signaled slow economic growth as far as their eyes can see.
Based on this the Fed has decidedly left rates unchanged. To our expectations, we had assumed the Fed would remain somewhat hawkish regarding the status of the economy. This, however, did not turn out to be the case as the Fed became even more dovish, dialing back their rate hike assumptions for 2016 and 2017.
We don’t think any one expected a rate hike with the pending Brexit vote and the weak jobs number. However, the Fed’s credibility has become questionable at best and here we will examine some of this disconnect.
Gold:
We believe that the FED and other Central Banks in the West are ChessMate and that the markt knows it, for which reason Gold and other precious metals are set to become the biggest beneficiaries of BREXIT, negative Interest Rates and all other crisis that are looming in the coming 3-4 years.
Due to this Investors should fasten their seat bells and prepare for a very rough ride for the coming 6 – 24 months.
The PGM Component 50 Index, which heavy weighted with precious metals and other wealth preservations securities, has beaten all mayor markets year to day as can be seen from below chart.
Due to this we have proven to be your trusted partner in these turbulent times.
The last four year, via several interviews and blog articles we have been warning investors, of turbulent times ahead and that Gold and other precious metals are the only insurance against it.
Based on this the following quotes of Warren Buffet might be applicable.
Warren Buffett;
“Time is the friend of the wonderful business, the enemy of the mediocre.”
“Be Fearful When Others Are Greedy and Greedy When Others Are Fearful”
John Maynard Keynes;
“The market can stay irrational longer than you can stay solvent”.
Until next week.
Yours sincerely,
Eric Panneflek