Time to Shine
For the time being, if you hadn’t noticed, the 0% interest rate world where money just fell from the sky is over. 14 years of whatever it takes, an era that forced investors to take on more and more risk to achieve some yield or capital gain via speculation is starting to blow back.
At the forefront of speculative investing has been the “Crypto World”. Remember when Crypto was promoted as “good as Gold”, in fact, many a Crypto bro/ho genius spruiked it as a better store of value than Gold.
And now, over the last 6 months as interest rates rose and liquidity dried up there have been a steady stream of crypto exchange “dislocations” as new money stops coming in and current hoddlers want out.
Things got a bit more serious recently with the not so sudden implosion of the FTX Crypto exchange. So far, there appears to be a 30ish USD Billion sinkhole that sucked investor money away.
There is no need to unpack events that lead to the demise of the virtue signalling FTX leader, Sam Bankman Fried (SBF), you can do that in your own time. We’ll just note you couldn’t make up the irony of the name in this case, Bankman Fried, as it was when Bernie Madoff “made off” with his billions.
As we opined in our last note, when the tide goes out it’s all about collateral. https://aurumecho.com/illiquidity-crisis/
As investors, we need to work out how far the dominos have fallen, who or what might be next, what are the chances of contagion to broader markets and what collateral do we own should the music actually stop.
On the matter of “next”, it was interesting timing that not more than a few days post the FTX collapse news broke that Softbank Supremo, Masayoshi Son, would be stepping down from the day to day running of the company.
Reasons considered by varying outlets included:
- The 100% write down of Softbank’s $100 million investment in newly collapsed crypto exchange FTX.
- The most recent quarterly investment losses of $10 BILLION.
- Or, according to the FT the not so small matter of the $5 BILLION he personally owes the company.
- All of the above plus more = big bikkies!
Next up Tether?
Tether, just wait for it, this may be mother of all collatoraless ponzi boondoggle messes, the one that really gets things going. The only saving grace for Tether may be its size. TBTF.
Or crypto.com, cripes, the amount of money crypto.com has spent on advertising over the last 12 months has been nothing short of amazing. UFC, F1, World Cup Soccer, NBA, AFL, NFL (US and Aus)…….EVERYWHERE, surely a “sign”!!
This was written in October 2022. https://protos.com/crypto-com-is-in-big-trouble-but-the-warnings-were-there/
Anyway, bringing all this on is the not so small matter of the 400 basis points of rate rise, bubbling up bodies to a surface near you!
As for the above mentioned 400 points, that’s in the US and, to remind those regulars readers of these notes, we’re going to keep things US centric as a reminder to investors, for now (and not much longer), the US Fed matters the most.
Like, US collapsing economic data is great for equity markets, as usual. Bullish.
Fully inverted.
So dire is the data that US Treasury curve is now more than 70% inverted. In the last 50 years of history, every time we have surpassed this threshold a recession followed. We are now at 76% with the Fed still hiking rates and doing QT.
Looking at the leading indicators of the above charts it’s easy to understand why The Fed has already delivered the soft pivot the market was waiting for, despite propaganda to the contrary.
Real Markets have already picked this up. The top in the USD index is in! The bottom for Gold is in!! Even Gold equities are up.
Check the Australian Gold Miner ETF, the GDX, below. A minor miracle
But still, many a gold investor have been asking themselves the question: ‘with inflation running at 7% to 8%, why hasn’t gold responded better.
The answer is that 80% of the value of gold, long-run, is tied to the U.S. dollar, and for the last four years the dollar has been on a tear, and it’s essentially suppressed gold demand.
Another proposed reason, other than the obvious derivative shenanigans, is cryptocurrency. Cryptocurrency went from nothing to a $4 trillion industry in the space of less than 10 years. An entire generation got attracted to it and that’s probably a pretty nervous demographic right now.
With cryptocurrency in the doldrums and the U.S. dollar weakening, gold is starting to get a lift. There are estimates that 20% to 40% of gold liquidity was affected by crypto.
Add to this some remarkable buying over the last 6 months by central banks all over the globe.
Below, if 2022 purchases continue, Central Banks are on target to purchase the most gold in the last 12 years by a significant amount.
This chart below does not consider the fact that the largest producer, China, does not export an ounce of Gold (neither does Russia and a few others for that matter).
For the “conspiracy” theorists, waiting for another conspiracy to be proven fact, the Europeans are busy rebalancing their gold reserves for some reason.
The commentary below best sums up the attitude of some that realise Collateral Does Matter (CDM, might trademark that!!)
(Simon Hunt): [I]f any European central bank will cover losses by using its gold revaluation account in full, the ECB has to put a floor under the gold price. And if more losses need to be covered than the current gold revaluation accounts of European central banks allow, the ECB will need to revalue gold.
Most of Europe’s monetary gold was accumulated during Bretton Woods at $35 dollars an ounce, with prices now about fifty times that level, revaluation will bail out central banks. All central banks are in the same boat as the Dutch/Swiss.
Are we then going to see gold returning to its rightful place in the monetary system? As the World Gold Council writes central banks bought near 400 tons of gold in the third quarter, over four times their purchases a year ago. These purchases take the total so far to the highest since 1967 when the dollar was still backed by gold.
At some point the massive unallocated paper gold derivatives which have been an impediment to the price of gold appreciating to its true market level will break along with the global sovereign debt bubble.
The real opportunity, at this moment, is in real money – i.e., gold, play it in multiple ways, physical Gold for insurance, Gold producers for leverage, Gold explorers for speculation and Prospecting for fun~!
Intentionally, we left energy out of today’s note.
Net zero by 2030? What a joke, the only success climate change social justice warriors will have will be pushing energy costs beyond those they pretend to represent.
Such is life.
How about nuclear power? Any takers? Check the chart for Uranium below, any buyers?
Leave you with it.
Peace.
