SEMI-MONTHLY FISCAL/MONETARY UPDATE – GOLD SLOWLY RISES –  BITCOIN “ADJUSTMENTS”

The price of gold bullion firmed a bit through the month of July, with gold bullion up about 2.3% for the month. The chartists could say that a base has been formed to support a major move upward. The gold mining stocks were up somewhat more, reflecting the operating leverage from the change in price of their end product. Our major position in the miners continues to be our  emphasis and, as we have pointed out before, has the potential to multiply our portfolio value by many times. The weakening of the US Dollar which began in June continued through July. A weak dollar is not a necessity for gold (and the mining stocks) to go up in price but, all other factors being equal, should prove to be a positive for us.

We talked last month about the steady increase in the monetary base that has been created by Central Banks worldwide, and that this financial experiment will undoubtedly end badly. An increasingly dangerous corollary of Central Bank currency creation is the purpose to which those funds are put to work. What is not well known is that Central Banks have been buying hundreds of billions of dollars of equities. Since major Central Banks cumulatively hold over $11 trillion of foreign currency reserves, it is natural that they should want to diversify those reserves away from the currencies which are being continuously diluted. Along with steady buying of Gold (which we suggest is the “real money”), the Central Banks are adding equities to the mix/

The Bank of Japan has been buying Japanese ETFs at the rate of $53 billion per year, and now holds over 71% of those ETFs. The bank is now one of the top 5 owner of 81 companies within Japan’s Nikkei 225 index. As reported by Grant’s Interest Rate Observer, the Japanese Financial Services Agency (Japan’s SEC) is now “paying close attention” to this phenomenon.

The European Central Bank has been buying 60 billion euros worth of bonds monthly, and Mario Draghi recently announced a continuation (A hesitancy to back off?) In the meantime, Deutsche Bank CEO, John Cryan, has said: “There has been absolutely no price discovery now in corporate bonds….which is a very dangerous situation”.

The Swiss National Bank has been steadily buying equity securities, including US based companies. Equity securities, as of Q3’16, comprised 20% ($128 billion) of their of their $643 billion in foreign exchange reserves, up from 7% in 2009, including investments of $1.7 billion in Apple, 1.08 billion in Exxon, and $1.2 billion in Microsoft.

Here in the US, our Fed has talked about beginning to unwind our $4.2 trillion balance sheet by no longer reinvesting the funds from securities that are maturing. The result of this form of money “tightening” can only be a guess, especially with an already soft economy.

These are serious amounts of capital being put to work in an increasingly dangerous way. To some extent, Central Banks are biased toward continued equity (and bond) buying, because their absence from the marketplace would cause a price decline and trillions of dollars of “paper losses” on their respective balance sheets. I learned a long time ago (the hard way) that when you become “responsible” for supporting a particular market, the best possible strategy is “get out of the way” and take the current loss before it inevitably becomes much larger. The key question, at this point for Central Banks, now becomes “Sell to Whom?”.

Lastly,  a Wall Street Journal  Headline this morning reads: Bitcoin RIval Arises From Sector Spat. I will write more about Bitcoin, and the other “Cryptocurrencies” in the near future. As a preview: I believe that years from now, books will be written about the current fiscal/monetary world we are living within, and the cryptocurrrencies will be appropriately viewed as symptomatic of the tail end of the financial folly. Stay tuned on this subject and, in the meantime, be careful out there.