Could Negative Interest Rates Arrive In America? The Collapse Of Cash

Could Negative Interest Rates Arrive In America?

They already have. Beginning on May 1st, JP Morgan Chase has announced they will charge certain customers a “balance sheet utilization fee” of 1% a year on deposits in excess of the money they need for operations. That amounts to a negative interest rate on deposits. Banks formerly competed for your money--now they want to charge you to park it with them.  

With interest on deposits at next to nothing, or now slightly negative, the only reason for consumers to keep money in the bank is convenience. The more money you lose money on your deposits in the form of a “utilization fee”, the more attractive your mattress becomes. But, as long as paper money and your mattress are available, the Fed will not be able to fully implement its negative rate policy in its quest to create inflation. After all, there would be a global run on the banking system if rates were to fall into negative territory by more than just a few percentage points.

So how can central banks and governments ensure rapid money supply growth and velocity if consumers have the option to hoard cash? Some of the “best minds” in Keynesian thought, like Kenneth Rogoff, have a solution to this. They are floating the idea that paper money should be made illegal and the evidence shows governments are listening. If you outlaw hard cash, and make all money digital, there is no limit to how much borrowers can get paid to borrow and how much savers get charged to save. This would make it unprofitable to hoard cash, and compel people to consume and borrow electronic currency as fast as possible. Money in the bank would become the “hot potato”: as soon as it hits your bank account the race would be on to move it to the next person’s account.  Whoever gets stuck with the money when the music ends pays a fee; that would be some increase in velocity!  And vastly negative real interest rates would force the amount of leverage in the economy to explode.

This idea sounds fairly Orwellian–allowing central banks to control every aspect of monetary exchange and giving the Federal Government an electronic gateway to every financial transaction. But when you think about it, the idea of a fiat currency and the Federal Reserve were radical ideas before they became common place. Indeed, this is exactly why the authors of our constitution tried to ensure gold and silver would have the final and only say in the supply and value of money.

Just as gold once stood in the way of governments' desire to expand the money supply, physical cash is now deemed as a fetter to the complete control of savings and wealth by the state. History is replete with examples of just how far governments will go to usurp control of people under the guise of the greater good. Sadly, the future will bring the collapse of cash through its illicit status, which will in turn assist in the collapse of the purchasing power of the middle class. Wise investors would take advantage of the opportunity to park their savings in real money (physical gold and silver) while they still have a chance.  

http://www.talkmarkets.com/content/us-markets/the-collapse-of-cash?post=64180


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We are in our seventh year of record-low interest rates and banks have been flooded with reserves. However, the developed world appears to be debt disabled. That is, already saturated in debt, therefore unwilling and unable to service new debt due to a lack of real income growth.

So the problem for central banks and governments is how to get the money supply booming in an environment where consumers want to deleverage and save. Zero percent interest rates (ZIRP) are inflationary and negative real interest rates foment asset bubbles and encourage new debt accumulation. For decades central banks have used their control of the price of money to coerce boom cycles that eventually turn to bust. But for the past six years, their foray into ZIRP land hasn’t provided the boom cycle they were expecting. Sure, they have created massive bubbles in bonds and equities--but the economy has yet to enjoy the promised growth that is supposed to trickle down from creating these bubbles.  They have set the markets up for a bust, yet the economy never enjoyed the boom. 

This has left Keynesians scratching their respective heads and scheming new ways to encourage even more borrowing and spending. The Keynesians who rule the economy now control the price of money but are having difficulty controlling its supply and producing rapid inflation rates.

Bank deposits that pay nothing and ultra-low borrowing costs haven’t proved effective in boosting money supply and velocity growth. The growth rate of M3 has fallen from 9% in 2012, to under 4% today. And monetary velocity has steadily declined since the Great Recession began. Therefore, unfortunately, the next baneful government scheme is to push interest rates much further into negative territory in real terms; and also in nominal terms as well! 

You would think this is absolutely absurd but it is already happening. The European Central Bank, has a deposit rate of minus 0.2 percent and the Swiss National Bank, has a deposit rate of minus 0.75 percent. On April 21st the cost for banks to borrow from each other in euros (the euro interbank offered rate, or Euribor) tipped negative for the first time. And as of April 17th, bonds comprising 31% of the value of the Bloomberg Eurozone Sovereign Bond Index, were trading with negative yields.

Mining Stocks Explained - Silver and Gold

If you must, invest in physical silver or gold, rather than the mining company stocks.

Silver tumbles again, gold continues decline

May 5, 2011 - 7:07AM

A 5 per cent tumble in silver marked its biggest three-day loss in five years, and gold dragging with it as speculators continued to dump long positions after margins requirements were hiked early this week.

Spot silver dropped 4.9 per cent to $US39.58 an ounce having earlier hit a near one-month low at $US38.95.

Silver has now lost 20 per cent, the conventional criteria for a bear market, since it rallied to a record high near $US50 an ounce last Thursday.

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Spot gold was down 1.6 per cent at $USUS1,515.30 an ounce, having hit a record $US1,575.79 on Monday.

Gold also notched its worst three-day decline since January despite a broad dollar drop and a ramping up of gold reserves by Mexico. Despite a sharp pullback, silver is still one of the top-performing commodities of the year with a 30 per cent gain.

But investors remained wary of a market in almost chronic surplus and a highly volatile price.

Sentiment among precious metals investors also took a hit after a report said high-profile investor George Soros, who was bullish on gold and a top investor in gold funds, has been selling gold and silver in the past month or so.

"With the CME raising three times in a week the margin requirement of silver, that was enough to disrupt the parabolic move in silver prices," said Mark Luschini, chief investment strategist of broker-dealer Janney Montgomery Scott, which manages $US53 billion in client assets.

Spot silver dropped 4.9 per cent to $US39.58 an ounce by 3:17 p.m. EDT (1917 GMT), having earlier hit a near one-month low at $US38.95.

Technicals were in focus after silver broke below its 20-day moving average on Tuesday, which had held since February. But prices were still well above the 100- and 200-day averages, after a 170 per cent rally over the last 12 months.

Silver's decline sent the gold/silver ratio to a three-week high near 40 from just below 32 last Thursday.

Spot gold was down 1.6 per cent at $US1,515.30 an ounce, having hit a record $US1,575.79 on Monday.

COMEX June gold futures settled down $US25.10, 1.6 per cent, at $US1,515.30. Gold futures volume topped 230,000 lots, one-third above its 250-day average.

Holdings of the largest gold-backed exchange-traded-fund (ETF), New York's SPDR Gold Trust, fell 0.4 per cent from Monday to Tuesday, while the largest silver-backed ETF, New York's iShares Silver Trust, fell about 1 per cent.

Also factoring into gold was news that George Soros' big $US28 billion firm and some hedge funds have been selling gold and silver, while other notable managers including John Paulson continued to favor precious metals, the Wall Street Journal reported, citing sources.

In the third quarter of 2010, Soros reduced some of his big bets on gold, a market he has called "the ultimate bubble."

The bullion market largely ignored news that Mexico's central bank has beefed up their bullion reserves by buying over 90 tonnes of gold, more than $US4 billion worth, over the past couple of years to put some of their massive foreign exchange holdings to work.

"The size (of the purchase) is certainly pretty chunky to have been accomplished in that space of time. So it certainly gives another sizable layer of support to gold's position in the international reserves system," said Credit Suisse precious metals analyst Tom Kendall.

Platinum fell 1.8 per cent to $US1819.74 an ounce, while palladium fell more than 5 per cent to $US742.05.

Reuters

http://www.smh.com.au/business/markets/silver-tumbles-again-gold-continues-decline-20110505-1e8up.html#ixzz1LQOkw78T

Gold and Silver Prices Signal the Destruction of the Dollar (video)

'We are going to have higher prices for commodities'

'We are going to have higher prices for commodities'
Wheat, sugar, cotton and gold are arousing interest from investors across the globe.


By Paul Farrow, Personal Finance Editor
Published: 7:00AM BST 02 Oct 2010


Sugar prices are at a seven-month high

It wasn't so long ago that investors were extolling the virtues of hedge funds, private equity, currency swaps and infrastructure. But these newfangled alternatives have been knocked off their perch by investments that were being traded by City gents wearing tails and top hats more than a century ago.

Wheat, sugar, cotton and perhaps the oldest of all investments, gold, are grabbing the headlines and generating interest from sophisticated investors across the globe. The reason is rising prices. This week, sugar climbed to a seven-month high on concern that adverse weather will curb output in Brazil, the world's biggest exporter, and Australia, the third-largest.

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Cotton extended its rally to its highest price in more than 15 years, wheat prices have risen by 60pc over the past 12 months, while gold continues to attract investors worried about a global double-dip recession and its price hovers around a record high of $1,300 an ounce.

For many private investors investing in commodities is a novelty. Yet research published this week by JP Morgan suggests that people who do not have any exposure to commodities within their investment portfolios could be missing a trick or two.

"Commodities are the oldest asset class known to man, but perhaps one of the least understood today," said Rumi Masih, the global head of the strategic investment advisory group at JPM. "You can go back even further – one of the first investors known to profit from a commodity trade was the pre-Socratic Greek philosopher Thales (pictured), who, as Aristotle recalls, invested in oil presses near the ancient Ionian cities of Chios and Miletus early in the growing season one year and thus reaped the benefits of a bumper crop of olives."

Mr Masih's research found that commodities were a hedge against rising inflation and improved returns while reducing volatility. Commodities outperformed equities and bonds when economies were in a late expansion phase by 10pc and marginally outperformed when economies were in the early expansion phase just after a recession. The only time they lagged other assets was towards the end of a recession.

The commodity recovery story has been triggered by the supply and demand effect – quite simply, demand for many commodities outstrips supply as giant economies such as India and China march forward.

Even though the demand for metals has been rising, supply is tight – no new mine shafts have been opened in 20 years worldwide, according to JPM. The last iron ore smelter to be built in the United States dates back to 1969.

"The case for including commodities as one component of a diversified portfolio has become stronger in the wake of the 2008 financial crisis and amid the economic ascendancy of China," Mr Masih said. "There are significant supply constraints on commodities amid burgeoning demand for them, not only among developed nations and China but also from a broader swath of the developing world. This includes emerging economies in places as far afield as Africa, Asia and South America."

JP Morgan is not the only commodity bull. Commodity analysts at Standard Chartered estimate that nearly $200bn (£130bn) worth of investment projects were suspended as a result of the financial crisis in iron ore, copper, and coal alone.

Among soft commodities, particularly grains, disruptions to climatic patterns have again tightened supply. "This combination of medium-term demand-side pressure against the background of a limited short-term supply response in many commodities looks set to keep commodity prices supported," said Philip Poole, the global head of macro and investment strategy at HSBC Global Asset Management.

The question for investors is which commodities to buy and whether they are arriving too late to the party – as the graphs show that commodities have recovered from their 2008 falls. Commodities are volatile beasts – just ask investors who piled into oil stocks as crude marched towards $147 a barrel in 2008, only to come down with a jolt as the price plummeted to $60. Investors who bought exchange-traded funds following sugar, natural gas, zinc, cocoa and lead prices have seen the value of their investments fall by 10pc or more.

Gold continues to win favour and, with the economic uncertainty set to linger, demand will be strong. The question is whether the price can go much higher. There are concerns that cotton may not be rich pickings. Connor Noonan, a commodities analyst at asset management house Castlestone, is bullish on the prospects for cotton over the medium term, but he expects a lot of volatility, "with prices easing over the next month".

Evercore Pan Asset invests in commodity ETFs, but at present owns only two – ETF Securities Agriculture and iShares Timber. And it avoids gold. "We sold out of a general, 'hard' commodity ETF, which was a play on oil earlier in the year," said Christopher Aldous, the chief executive. "We have no way of understanding its movement. Its prices seem to be driven by speculators and we have missed out on the price rises – and we are not going to start chasing it now."

Legendary investor Jim Rogers, who set up one of the world's first hedge funds with George Soros in the Seventies, is also an advocate of commodities over the long term – although he warns investors not to simply buy those that have shot up in price in recent months. He recommends commodities that have not moved up that much. "Buy silver rather than gold, for instance, if you want to buy precious metal," he said. "I would like to buy coffee too. But there is still a huge potential [in general]. If governments are going to continue to print money, we are going to have higher prices for commodities."

http://www.telegraph.co.uk/finance/personalfinance/8036344/We-are-going-to-have-higher-prices-for-commodities.html

Investors see silver lining in economic gloom

Investors see silver lining in economic gloom
Forget gold. Silver, the yellow metal's poor cousin, has been the investment of the year.


By Garry White
Published: 7:00PM BST 03 Oct 2010

The price of silver is at a 30-year high

Silver prices have risen 31pc in 2010 to a 30-year high, outperforming gold, equities and most base metals. On Tuesday, the gold-silver ratio dropped below 60 for the first time in 11 months.

The gold-silver ratio is simply the number of ounces of silver it takes to buy one ounce of gold. The silver price is currently $22.11 and the gold price is $1,317, so the silver ratio now stands at 59.6.

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The ratio varies wildly. In 1970, it was about 20 and it peaked at just under 100 in 1991. The average is around about 40 – and that is the key to any silver bull's argument. Historically, it appears that silver is undervalued in relation to gold, they argue.

In 2010, the ratio has been as high as 72, recorded in February, and is now just below 60. Many believe it could have further to fall.

The reasons for gold's outperformance are well documented – inflationary fears, currency woes and safe-haven demand – but does the declining ratio towards its average mean that silver is going to continue with its charge forward?

Most analysts are not that bullish – with a price of about $24 targeted for next year. There are some, however, that believe the silver price will become much more lustrous over the coming years.

James Turk, who founded bullion dealer GoldMoney in 2001 and manages $1.2bn (£758m) of assets, thinks prices could hit $50 by the end of next year, but accepts that there will be volatility along the way.

Mr Turk believes quantitative easing will devalue currencies and send precious metals much higher.

"Just pick up your newspaper to see what central banks are doing to destroy currencies," Mr Turk says. "Unlike the 1970s, there are no safe havens from currency debasement – such as the deutschemark."

Mr Turk is more bullish on silver than gold. "The problem is the volatility," Mr Turk says. "Essentially it is a cheap form of gold, but it is not for everyone because of the volatility."

He says investors should always buy the physical metal and not paper and advises a portfolio of one-third silver to one-third gold.

Suki Cooper, a precious metals analyst at Barclays Capital is not so bullish. She has an average target for silver next year of $22.2, expecting the metal to peak in the second quarter at an average price of $23.7.

"Silver mine supply is still growing and industrial demand – although improving – remains relatively weak. Silver is still in surplus, but it has benefited form safe-haven buying," Ms Cooper says. "The price could fall sharply if investor interest wanes."

Already investor interest this year is much lower than last year, which is surprising given the recent bull run.

In the current year to date investment inflows into silver have amounted to 1,377 tonnes. In the nine-months to September 2009 it was 2,942 tonnes – with full year 2009 inflows at 4,112 tonnes, Ms Cooper notes.

However, Mr Turk remains unbowed. "I expect the gold-silver ratio to fall back below 23 over the next three-to-five years," he says, despite most analysts thinking this is unlikely.

Precious metals consultancy GFMS also believes that there is a risk of a sharp fall in the silver price.

Silver has risen on gold's coat-tails, but it is also used in industrial processes so it has risen on hopes of a recovery in the global economy too.

Philip Klapwijk, GFMS's chairman, said last week that the absence of an improvement in the economy will be a negative for the silver price.

"If you think gold will continue to advance in the medium term, then why wouldn't silver necessarily follow suit? One reason could be that if economic prospects take a bath, that side of the argument for silver becomes a lot weaker," Mr Klapwijk said.

"In the current situation, silver is benefiting from both general optimism on industrial production in emerging markets, and the investor interest in safe-haven assets like gold," he added.

All of this implies that, on a fundamental basis, silver is looking more toppy than gold at the moment after its recent outpeformance.

Instead of chasing the price of the physical metal, investors may want to invest in silver mining companies that are expanding production, such as the FTSE 100 group Fresnillo.

In the first half of this year, the group's cash cost of production was just $3.58 an ounce – one of the lowest in the industry. It aims to bring on line one new mine or expansion per year until 2014.

Of course the share price will be hit if the silver price falls, but the company will remain highly profitable. But cautious investors may want to wait for a dip before they pile in.

Quantitative easing could boost oil prices

Oil prices could rise by more than a quarter if there is more QE – even if demand stays weak, according to new analysis from Bank of America Merrill Lynch.

The broker's economists expect the Federal Reserve to expand its easing programme by $500bn (£317bn) to $750bn as early as the first quarter of 2011.

If the global money supply expanded at the same pace as this, gold would move 15pc higher and oil prices by 26pc, the broker argues.

This could bring Brent crude oil prices up from an average of $78 a barrel this year to an average of $83 a barrel next year irrespective of demand, Merrill said.

COPPER for delivery in three months hit a two year high on the London Metals Exchange on Friday, following upbeat manufacturing data from China.

The price rose to $8,078 (£5,101) a tonne, the highest level since August 1 2008, but prices eased in the afternoon.

The purchasing managers index rose to 53.8 in September from 51.7 in August, the China Federation of Logistics and Purchasing said. A figure above 50 indicates expansion.


http://www.telegraph.co.uk/finance/markets/8039595/Investors-see-silver-lining-in-economic-gloom.html

Will copper outshine gold and silver?

Will copper outshine gold and silver?
All the talk of metal investing in recent months has focused on the safe-haven and inflation hedge of gold. Yet other metals, notably copper and silver, have been starting to attract investor attention too.

By Paul Farrow
Last Updated: 7:55AM BST 18 Apr 2009

The copper price has risen by more than 50pc this year Photo: GETTY
All the talk of metal investing in recent months has focused on the safe-haven and inflation hedge of gold. Yet other metals, notably copper and silver, have been starting to attract investor attention too.

It is only a year ago that the commodity bull run was still in full swing. The wheels fell off in August, since when the price of metals has nose-dived. Orders for metals dried up overnight and the subsequent price falls have been deeper than during the worst years of the Great Depression.

But could there be glimmer of hope for a metals revival?

John Meyer, a mining analyst at Fairfax, the investment bank, thinks so. He is revising many of his metal forecasts upwards because of several factors, including a weaker US dollar, inflation fears and the renewed demand from China.

"The ratio of the copper price versus gold is at its lowest level since 1990 – people forget that many metals, not just gold, are a hedge against inflation. China is buying up copper and, while some see it as strategic buying, it also has to buy metals simply to maintain its economic growth," said Meyer. "Copper is our principal focus, although lead, zinc and tin may fare well too."

The revelation that China's State Reserves Bureau (SRB) has been buying copper on a scale that appears to go beyond the usual rebuilding of stocks for commercial reasons has caught many investors' imagination. There's even talk of China creating a 'copper standard' for the world's currency system.

Nobu Su, the head of Taiwan's TMT group, which ships commodities to China, said the next industrial revolution was going to be led by hybrid cars - and that needs copper. "You can see the subtle way that China is moving into 30 or 40 countries with resources," he said.

The SRB has also been accumulating aluminium, zinc, nickel and rarer metals such as titanium, indium (used in thin-film technology), rhodium (catalytic converters) and praseodymium (glass).

Evy Hambro, who runs the BlackRock World Mining investment trust, said the key question for metal commodities was whether the renewed demand for metals was due to companies restocking inventory levels which had been run down, or whether they were turning the capacity tap back on. If it is the former, the commodity revival could be short-lived.

He remained unconvinced that it was the latter. "We are not seeing a pick-up in demand in Europe or the US – and demand for commodities tends to slow in the summer in the northern hemisphere anyway. But we remain overweight copper, which has some of the best fundamentals."

Investors looking at copper ought to be aware that its price has risen by more than 50pc this year, so late joiners have missed some of the recovery already.

Hambro is still positive on gold, but is less convinced that aluminium will shine. Aluminium's price has fallen by more than half since last summer, but there is still a huge oversupply, which is unsupportive of a sharp price rise if demand turns.

The central banks' stimulus to kick-start the flagging car industry could also provide a fillip to metals. For example, more than 80pc of lead is used for car batteries, while 53pc of a car is made from steel.

Fairfax pointed out that sales of cars rose sharply in Germany in February after its government introduced a stimulus plan which allows consumers to trade an old car for a new one with state aid of €2,500. "That's a pretty huge increase – sales had fallen 14pc year-on-year in January," said Meyer.

Hambro agreed that fiscal stimulus would boost many metals involved in car production, but that it was difficult to judge when it would be seen to filter through. "If a car plan is announced in next week's Budget, will orders for aluminium rise sharply? Unlikely."

But early signs that the economic downturn may be reaching a floor have led many analysts to believe that silver could outperform gold. The debate about the relative merits of gold and silver was triggered because the world's largest consumer, India, did not import any gold in March for the second month running.

"In India you have people who can only afford silver and people who will only buy gold, but there are a large number of people in the middle who will rotate from gold to silver," said Ashok Shah, the chief investment officer at London & Capital.

That phenomenon is likely to be repeated in other countries as unemployment, salary cuts and potential tax rises take their toll on consumer spending. Eugen Weinberg, an analyst at Commerzbank, said: "Silver over the past 30 years has been the poor cousin. In the first half of the last century gold and silver were on a similar footing in terms of monetary value and their roles as safe havens."

Just as with copper, a measure of value is the ratio of gold to silver prices, which in the last century fell as low as 14 and compares with levels of around 70 now – suggesting gold is overvalued. Since the early 1980s the ratio has averaged about 65 and mostly ranged between 30 and 100.

Weinberg added: "The ratio could drop to between 40 and 50 in the medium term. People who cannot afford to buy gold for jewellery will buy silver."

Industrial demand for silver, including from the photography industry, is reckoned to be about 65pc of total global supplies, estimated at 895 tonnes. For gold, industrial and dental demand is about 11pc of supplies estimated at around 3,880 tonnes, according to consultants GFMS.

Part of the boost for silver will come from investment demand. With gold prices still near $900 an ounce, holdings of exchange- traded silver funds are expected to rise.

The iShares Silver Trust, the largest silver-backed exchange-traded fund listed in New York, holds a record 8,413 tonnes, a gain of more than 20pc since early January. That compares with a rise of more than 40pc in the SPDR Gold Trust, the world's largest gold-backed exchange-traded fund.

Metal commodities have become a staple part of many portfolios, as investors look for diversification and assets that are not correlated to the performance of shares. There are several ways you can get exposure to individual metals – one of the most popular is exchange-traded commodities (ETCs), which you can buy through most stockbrokers or online share dealers.

London-listed ETCs last week experienced net inflows for the fifth consecutive week, with precious metals ETCs seeing the largest inflows. They included ETFS Physical Gold ($38m), ETFS Physical Platinum ($14m) and ETFS Nickel ($2m).

The other option is to buy a unit or investment trust that invests in a spread of equity-related commodities. Popular funds include BlackRock World Mining, Investec Resource Enhanced or JPM Natural Resources.

http://www.telegraph.co.uk/finance/personalfinance/investing/gold/5165209/Will-copper-outshine-gold-and-silver.html



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