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Euro-zone QE: How about buying Gold? | Forex Crunch
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Buying Gold in the Olympics and in the Global War for Talent - Boris ...

Euro-zone QE: How about buying Gold? | Forex Crunch

Posted: 24 Apr 2014 03:55 AM PDT

Opinions | Written By Yohay Elam | Created: Apr 24, 2014 13:20 GMT; Last Modified: Apr 24, 2014 13:23 GMT

Here's an idea: the European Central Bank could fight deflation by printing euros to buy gold from outside the euro-zone, thus weakening the exchange rate of euro. In turn, exports will become more attractive and import prices will rise, boosting growth and inflation.

Sounds like a crazy idea? It certainly is in the realm of unconventional monetary policy which the ECB has unanimously agreed upon. The central bank has limited tools and may be forced to take action sooner than later. Talking the euro down is now akin to crying wolf. Here is why action is becoming urgent, why the known tools are problematic and 3 advantages of buying gold.

Deflation is taking hold

The specter of Japan's lost decades is looming over the euro-zone: falling prices can result in consumers deferring buying, less production, less jobs, less consumption, etc. Upon entering such a vicious cycle, it is hard to escape.

Recent euro-zone inflation data for March shows headline CPI at 0.5%, very far from the ECB's "2% or below" target and the lowest since 2009. Also core inflation, which is the focus of other central banks, is at the post crisis low of 0.7%.

On a constant tax basis (Ben Lord explains here why this is important), deflation is already reality in Italy, Spain and the Netherlands. France is at 0.2% and German inflation is also below 1%. It is not only a case for the "program countries" as Draghi said, or the peripheral ones, but low inflation is seen everywhere. The ECB is not successful in its mission.

A higher level of inflation and support to growth can be achieved by a lower exchange rate of the euro, which remains stubbornly high. EUR/USD is on high ground, the weakness of the yen is keeping EUR/JPY at high ground and the recent halt in the depreciation of the Chinese yuan means that EUR/CNY is also too high. These are the world's three largest economies.

The ECB has refrained from action in recent months and preferred to keep its powder dry. Instead, officials tried their way by talking about possible tools, the unanimous readiness to use unconventional tools and ever growing explicit mentions of the exchange rate.

Problematic tool #1: negative deposit rate

The possible tools are powerful: Quantitative Easing and a negative deposit rate. Both can do the job, but the ECB seems reluctant to use them.

A negative deposit rate punishes banks for parking money with the ECB and is supposed to make them lend more money to the real economy. It also devalues the euro. However, this uncharted territory, which the ECB is "technically ready" to use, probably scares them off as it could have unintended consequences, such as sending money away also from European bonds.

Draghi's "everything it takes" speech and the subsequent OMT program from mid 2012 managed to restore confidence in government bonds of these countries much more than any austerity program. It is important to note that debt to GDP ratios continued rising in the euro-zone. Trust made the difference and bridged the gap over reality.

Problematic tool #2: QE

The US, the UK and Japan have launched large scale QE programs in which the central banks buy local government bonds, thus lowering the long term interest rates and also contribute to a lower exchange rate. The ECB is a different story.

How will the ECB decide which bonds to buy? There are 18 member states and any distribution would be criticized. In addition, there is a legal limit on monetary financing and also a moral hazard in doing so. Making such a move would be complicated and would draw not only criticism and legal challenges from Germany, and possibly other countries.

Another option, suggested here by Jeff Frankel, is that the ECB buys US treasury bonds. This would bypass all the internal issues in Europe and surely lower the exchange rate in much faster way.

Well, this would cause international criticism as it would be a direct intervention in foreign exchange markets by a very big player. Switzerland can maintain a 1.20 floor under EUR/CHF and the world accepts this with acquiescence. It is a small country with an important banking sector (for important people). US/UK/Japanese style QE is not considered direct intervention but domestic policy under the current G20 consensus.

Direct currency manipulation by a huge and democratic economic region would probably not go down quite well and could trigger retaliation.

The solution: gold?

The ECB could buy gold from outside the euro-zone using an expanded balance sheet, or printing euros if you wish.

Here are 3 advantages:

No legal challenges / moral hazard: as with buying foreign bonds, avoiding the buying of local euro-zone bonds means avoiding any potential violation of the EU treaties, moral hazard and internal criticism.
No direct FX intervention: Buying the ancient previous metal would not be considered an intervention, even if the intention to lower the value of the euro would be clear. So, by buying gold the ECB would also avoid the external criticism.
German applause: the ECB is based in Frankfurt and built on the model and way of thought of the German Bundesbank. German wariness of inflation dates back to the Weimar Republic of the '20s. However, enlarging the physical assets of gold would be welcomed and counter the fears that a lower exchange rate would raise the chances of the dreaded inflation. Germany recently announced it would repatriate some of the gold stored in the United States in a popular move.

Needless to say, announcing the move would send gold prices higher, making it a less attractive investment for the central bank. However, the mere announcement would also lower the value of the euro, having an immediate effect before taking real action. And this is Draghi's favorite tool: using words instead of action.

What do you think? Is this realistic? What will the ECB eventually do?

Here is more about EUR/USD and more about gold.

About Yohay Elam

Yohay Elam – Founder, Writer and Editor

I have been into forex trading for over 5 years, and I share the experience that I have and the knowledge that I've accumulated. After taking a short course about forex. Like many forex traders, I've earned the significant share of my knowledge the hard way. Macroeconomics, the impact of news on the ever-moving currency markets and trading psychology have always fascinated me.

Before founding Forex Crunch, I've worked as a programmer in various hi-tech companies. I have a B. Sc. in Computer Science from Ben Gurion University. Given this background, forex software has a relatively bigger share in the posts.

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Tags: euro-zone deflation, euro-zone QE, EURUSDUpdate, gold prices, Mario Draghi, negative deposit rate

Silver And Gold: Buy And Hold [SPDR Gold Trust (ETF), iShares ...

Posted: 23 Apr 2014 03:15 PM PDT

Summary

Does a geopolitical prism represent pending economic doom for the US dollar?
Is ownership of physical precious metals the ultimate safe haven?
Are the US dollar's days numbered?

Sentiment surrounding precious metals is split into three camps. Those who despise silver and gold, those who are skittish because of price volatility, and those who embrace the metals as the only way to preserve purchasing power and wealth.

The nature of certainty suggested by our title is the impetus of this article. Though silver and gold do not pay a dividend and the stock market appears an attractive place to profit in a climate of easy money and zero interest rates, to play the market now if not certain of what you're doing is similar in nature to the financial risk of running with scissors.

Sixty-year market veteran and newsletter maven Richard Russell sees the stock and bond markets as functioning at extremely high risk and money managers frantically searching for income and profits. Russell questions:

"..is the risk worth the potential reward? As far as I'm concerned, the potential profits in these markets are not worth the risks."

"I'm increasingly worried about holding dollars. I'm buying all the physical precious metals I can, while they are still available."

Could there be a shortage developing?

Savers and investors around the world in growing numbers (this writer included) are protecting themselves with physical silver and gold fearing everything paper will sooner or later go into freefall. Do you think folks in Japan are lining up to put their money in the NIKKEI or in banks? Japan is headed for financial collapse, cracking under a debt to GDP of 250% while its yen is on the brink of extinction. People there are waiting sometimes three hours in line to purchase gold bars.

In the October 2013 article a picture is painted of an investor/saver disillusioned by the machine and changing course to survivalist rather than bullish investor. Indeed, self-serving politicians and bankers recklessly behaving within an already fragile economic system put a serious chink in this investor's armor. The writing is on the wall.

Cause for pause

The article exclaimed a belief in the salvation of silver and gold noting nothing had changed fundamentally in the reasons for a physical precious metals strategy. As is the case today, those strategic reasons are more prominent than ever while the clock ticks.

The stock market appears strong, but in this opinion is an obvious, teetering mess in dire need of the Fed's QE and zero interest rates.

This rising market does not resemble the rallying of just over a decade ago prior to the dot.com pop. Today with the potential for geopolitical calamity and various other potential black swan events, this market's rise suggests a much harder fall ahead in this very different and ever changing world. Not to say money can't be made in the market right now by experienced traders who have the know-how to sail through any market condition and come away smelling like a rose. Indeed, there is money to be made if you know what you're doing. But the clock is ticking and those lacking skills and resolve are better to steer clear and load up on what can be held in hand.

As was the case made in the current stock market is flexing make believe muscles pumped up by make believe money. It is a market driven by sales of shares as everyone piles in looking for profits rather than true growth of companies. And continued expansion of the money supply should create larger increases in the dollar price of paper assets rather than real value. This will continue until the Federal Reserve Note loses everyone's trust and faith and real value can only be measured in hard assets with intrinsic value.

How many ounces of gold does that apartment building cost?

That said gold and silver mining company's stocks stand to make considerable gains as trust in all national fiat currencies continue to erode. You might be among those investors willing to load up on shares of some of the touted favorites - Silver Wheaton (SLW), the streaming company with an envious book and business model, or Goldcorp Inc. (GG) owners of high-quality, high-grade assets that generate cash flow with a strong balance sheet that affords the potential for growth through mergers and acquisitions, among other companies. But be aware that government regulations, capital controls and tax demands will dictate investor success more so than the individual mining companies or your broker.

So how should we invest today?

Look at the people of Japan. Or take a look at a nation like China, as well other nations which hold US debt… they're bypassing USD in trade among themselves in favor of oil for gold or their own currencies to settle scores. What does this say about trust and good faith in the Federal Reserve Note?

A sobering example of in your face, real world economics - along with China's recent, largest monthly dump of US treasuries - is how that nation is ridding itself of USD reserves. China is now trading US dollars with Iraq for oil while Iraq turns those unwanted dollars into gold. Reported just a month ago, Iraq's central bank bought 36 tons of the yellow metal to "help stabilize the dinar against foreign currencies." To this writer that explanation sounds like a half-truth. It is obvious that faith in the mighty US dollar is already waning.

These two bed partners are not alone in the ditching of petro-dollars. It has become a trend.

And some analysts in the know feel this spring may bring more than showers and flowers when China, which hasn't reported the amount of gold it owns for quite some time, will announce the size of its secret stockpile and that such an announcement will trigger major problems for the US dollar's world reserve status.

Also worth considering is the outcome in America if Russia decides to wage economic war by dumping its US Treasury holdings (if it isn't already) possibly creating a dreaded domino scenario where other countries follow suit.

These, as well as other calamitous indicators, have this writer making the best value play possible - increasing personal swaps of Federal Reserve Notes for physical silver and gold. Ownership of metals is critical for maintaining wealth over the coming few years.

Richard Russell adds:

I'm increasingly worried about holding dollars. We can still trade in tangible unbacked dollars for real wealth, silver and gold. In a matter of months, I see the dollar crashing.

It is possible Richard Russell's time frame is wrong. But in this writer's opinion that may be the only thing wrong with his statement. It is not a matter of "if," it is a matter of "when." In the grand scheme of things anyone who knows anything about finance and budgeting knows it is only a matter of time before mass money, credit and debt creation causes a serious problem for the US government, its citizens, its investors, financial institutions and countless other governments around the world holding large amounts of US dollars and US treasuries as their reserves.

It is a fact that all central banks the world over are printing currency as economic stimulus and to stem the rising tide of debt. But while the currency sits in banks and not bolstering economies as it is intended to do, its velocity is compromised - sluggish at the very best. And when we consider the more than one quadrillion dollars in derivatives within the system - that very few even consider or of which are completely unaware - the very real potential exists for an ugly and chaotic end game.

Conclusion: Silver and gold have been money for more than 4,000 years. This won't change despite the current price suppression. Good advice is to buy as much physical silver and gold as you can now and hold it outside the banking system while there is still silver and gold available to buy. It is after all, the only real money.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article. (More...)

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Buying Gold in the Olympics and in the Global War for Talent - Boris ...

Posted: 20 Feb 2014 05:40 AM PST

by Boris Groysberg and Robin Abrahams | 8:40 AM February 20, 2014

Entire nations are going head to head in the global war for talent — and using citizenship to buy it. Countries eager to make a splash in the Olympic Games offer "plastic passports" to promising athletes from other regions. The Pew Research Center estimates that at least 4% of the athletes competing in this year's Games are representing countries other than their birth nations. This practice isn't new, but it's been on the rise in recent years. In In 2012, the New York Times published a round-table debate about it. Writers discussed reforms, but no one questioned the premise that, in the 21^st century, talent is and will remain mobile.

As University of Toronto professor Ayelet Shachar explained in a Yale Law Journal article: "Countries seeking to attract Nobel Prize contenders, gifted technology wizards, acclaimed artists, promising Olympians, and other high-demand migrants have come to realize the attractive power of citizenship. This represents a significant shift in the conception of citizenship — turning an institution steeped with notions of collective identity, belonging, loyalty, and perhaps even sacrifice into a recruitment tool for bolstering a nation's standing relative to its competitors."

Loyalty to a company may be an artifact of yesteryear, but loyalty to one's country is generally considered an important part of a person's identity. But some Olympians change citizenship when their nationality hampers their ability to practice their sport at the highest level. They become less loyal to their country than to their profession or industry.

Consider one of the brightest stars in the 2014 winter games, short-track skater Viktor Ahn, who won a gold medal for Russia last week — and three gold medals for South Korea in the 2006 Olympics. After a falling-out with Korean sports authorities, Ahn looked at both the U.S. and Russia as potential new homes, deciding ultimately to emigrate to Russia, where there were fewer Olympic-level skaters to share resources with. Russia, he felt, could invest more in his success.

Ahn's story upends conventional wisdom about national character. An athlete from a non-individualist country emigrates in order to maximize his potential — but he doesn't move to the U.S., so often the home of choice for top performers dissatisfied in their native countries. Ahn changed his first name to "Viktor," for victory and also in honor of a Russian rock star of Korean descent, and he studied Russian. After his win, he draped himself in the Russian flag and wept. The phrase "mobile talent" implies rootlessness, but the ability to commit to one's new environment — broadly and deeply, as Ahn did — is crucial to succeeding in it.

South Koreans have reacted to the story of Viktor Ahn — but their anger is not, in general, directed at Ahn. In November, 61% of a sample polled by Gallup Korea said that they understood his decision to migrate. After his 2014 gold medal win, the KSU — the Korean skating union — endured heavy criticism from fans and the media, with even the president launching an investigation into what went wrong. Rather than characterizing Ahn as a traitor or a mercenary, Koreans were angry at their own institutions for treating such a valuable asset so carelessly.

South Korea may make changes in the wake of Ahn's emigration, and other nations should learn from his example. They can no longer treat quitters like traitors. As Ayelet Shachar pointed out, governments now view emigrants as "immensely important remittance providers, generous supporters in times of crisis in the home country, foreign investors (through specialized bonds, for example), builders of transnational knowledge networks, and ambassadors of good will." All this, of course, holds equally true in the business world: Performers who leave your company today may appear tomorrow as clients, suppliers, or consultants.

So both sending and receiving nations — or organizations — can benefit when talent migrates. The thing is, mobile talent isn't always portable. Even top performers need a platform from which to succeed. They require infrastructure, training, and commitment.

In business, many people are discovering this the hard way. Long after the demise of corporate loyalty and the emergence of "Brand You" and "Free Agent Nation" ideology, managers and executives still, far too often, approach job changes in a reactive, nonstrategic fashion. They make moves based on short-term gains — more money, a chance to escape a disliked boss — instead of long-term growth and development. (For background on other 21^st century challenges of managing your career, see our article "Manage Your Work, Manage Your Life" in the March issue of Harvard Business Review.)

Companies, as well, assume risk when they hire star performers. Organizations often poach top talent from competitors in order to rapidly and dramatically increase their capabilities. Having scooped up top talent, however, it can be tempting to fall prey to the "plug and play" fantasy and assume that the new hires will automatically succeed in their new environment.

Like countries that woo high-performing athletes such as Ahn, fast-tracking them to citizenship and Olympic glory, companies must provide their new stars with the training, coaching, and continuing investment that will allow them to soar — and make them want to stick around.