Post From Philosophy of Metrics
Economics, Free PoM
Precious Metals Panic Selling? Or Something Else?
October 4, 2016 JC Collins
This is a re-post from an article which was originally posted on July 7, 2016. One of the other aspects of the POM thesis is that gold will see a price drop to below $1000.00/oz. as the SDR and RMB liquidity expands and USD liquidity contracts.
The on-going drop in gold today could very well be a first sign of this shift. The metrics and fundamentals are being widely speculated with the usual “gold is getting hammered” scripts unfolding across the internet.
The fact is that just two trading days after the new renminbi loaded SDR basket composition was implemented we are seeing massive devaluation in precious metals. Could be a coincidence.
Gold is still up from the beginning of the year and will likely have another rally before further depreciation is experienced. But this could very well signal the beginning of a new gold bear market, as previously discussed. – JC
Will a New Gold Bear Market Begin This October?
SDR & Renminbi Bond Markets will feed Yield Hungry Private Investors
By JC Collins
The recent surge in gold is great news for precious metals investors. But the question remains on how long this trend can last. The reality of increasing financial market and banking volatility cannot be denied.
This instability has long been predicted to establish the precedent required to shift the international monetary system towards a multilateral framework.
Such multicurrency architecture is being implemented through broad liberalization of the Chinese renminbi and deeper deregulation of the Chinese financial markets. The inclusion of the renminbi in the Special Drawing Right basket this October will increase its attraction to global investors as a major investment currency.
China is in the process of developing a larger RMB bond market and opening up the onshore renminbi market to foreign investors. The People’s Bank of China is planning on issuing SDR denominated bonds and setting up an SDR-based borrowing platform.
There are some serious international implications to this massive expansion of RMB liquidity. Let’s review them and apply those learnings to a possible reversal in the recent gold trend.
Foreign Capital Inflows to Chinese Bonds – This will provide high yields across the yield curve, which attracts investors. China’s low debt-to-GDP ratio and strong RMB performance will make RMB denominated bonds even more appealing.
Catalyst for Further Financial Reform – The more RMB liquidity expands the greater demand for additional reforms, which will only increase RMB liquidity. It will create a cycle with years of momentum.
Monetary Policy Independence – As an extension of the above, expanded RMB bond markets will create the environment for even broader Chinese policy reforms.
Mitigation of Funding Risk – This directly references the decrease in risk to foreign investors as RMB bond markets grow. Less risk means the Chinese government can issue even more debt.
Long-Term RMB Liquidity and Stability – An increase in RMB settlements will create a more liquid currency market for the renminbi. This will encourage a more flexible exchange rate and confirm China’s role as a global economic player.
The rise of the RMB as a major investment currency will ensure that Chinese banks and institutions offer more innovative renminbi denominated banking services to a yield-hungry private sector. This is not great news for gold and other precious metals.
Gold offers no yield and serves as a safe haven in times of economic turmoil. Gold’s role as money, or a stabilizing force, cannot be debated, and it’s re-introduction into the international monetary system will happen at some point.
But the growing reality is that the broader use of both the SDR and the RMB will work alongside the US dollar to stabilize the international monetary system and financial markets. The increases in global growth will create an environment where investors will have plenty of areas to gain yields.
It’s all about return on investment. As the SDR and RMB help stabilize the system the role of gold as a safe haven will be reduced. This will happen at the same time as a risk-off investing environment develops around the renminbi and Chinese financial markets.
Based on the above scenario the fundamentals would suggest that gold will get hammered and enter into a new bear market which could last for years.
This would align with a strategy to include gold in the next SDR review in four or five years. Including gold in the SDR at a lower valuation will leave room to maintain SDR valuation as other currencies depreciate and gold appreciates down the road.
Readers should also reference the following posts:
Massive Chinese Capital Inflows Will Shift World Wealth
Re-Introducing Gold into the International Monetary System
SDR Event Horizon
Unnamed American Bank to Invest in 250 Billion Renminbi
Bank for International Settlements to Offer SDR Products and Services
Renminbi expansion could be gradual with incremental increases, but could just as equally happen suddenly as a response to an acknowledgement of coming USD depreciation. A broader use of the SDR in the international monetary system could also be gradual or sudden, depending on the increase of risk associated with more volatility.
Gold could go higher in the interim, based on its safe haven status, but the long-term trend would suggest a sub-$1000 valuation sometime in the next 12 to 24 months. Risk-on for gold is developing. – JC