The chart displayed near the end of this discussion is effectively a pictorial representation of what Keynesian economists call a paradox* (“Gibson’s Paradox”) and Austrian economists call a natural and perfectly understandable relationship.

Gibson’s Paradox was the name given by JM Keynes to the observation that interest rates during the gold standard were highly correlated to wholesale prices but had little correlation to the rate of “inflation”, that is, that interest rate movements were connected to the level of prices and not the rate of change in prices. It was viewed as a paradox because most economists couldn’t explain it. According to conventional wisdom, interest rates should have been positively correlated with the rate of “price inflation”.

The problem is that most economists did not — and still do not — understand what interest rates are.

First and foremost, interest rates are the price of time. They reflect the fact that, all else being equal, humans place a higher value on getting something now than on getting exactly the same thing at some future time. Interest rates transcend money, because they exist even when money does not. With or without money and all else being equal, getting something now will always be worth more than getting the same thing in the future**. This is called time preference.

Time preference is the root of interest rates and the natural interest rate is a measure of societal time preference. That is, the natural interest rate is a measure of the general urgency to consume in the present or the amount that would have to be paid, on average, to make saving (the postponement of consumption) worthwhile. For example, the average 7-year-old child has a very high time preference, in that if you give the kid a choice between getting a desirable toy today or getting something more in 3 months’ time, the “something more” option won’t be chosen unless it is a LOT more, whereas a middle-aged adult with substantial savings is likely to have low time preference.

When interest rates are properly understood it becomes clear that the paradox named after Gibson is no paradox at all. The reason is that if the money is sound, as it mostly was under the Gold Standard, both interest rates and prices will move in the same direction in response to changes in societal time preference.

To further explain, during a period of rising time preference, that is, during a period when there is an increasing desire to consume in the present, the prices of goods will rise (on average) due to increasing demand and it will take a higher interest rate to encourage people to delay their spending. During a period of falling time preference, that is, during a period when there is an increasing desire to save, the prices of goods will fall (on average) and people will generally accept a lesser incentive (interest rate) to delay their spending.

In a nutshell, there is no paradox because, when the money is sound, interest rates don’t drive prices and prices don’t drive interest rates; instead, on an economy-wide basis*** both prices and interest rates are driven by changes in societal time preference.

That’s all well and good, but we no longer have sound money. Moreover, we have massive, continuous manipulation of interest rates by central banks. The signal that interest rates should send is therefore now being overwhelmed by central-bank-generated noise to the point where it’s a miracle (a testament to the resilience of entrepreneurial spirit, actually) that we still have a functioning economy. Quite remarkably, though, signs of the age-old relationship between interest rates and the price level can still be found if you know where to look.

The signs aren’t apparent when interest rates are compared with an official wholesale price index, because a great effort is expended by the central planners to ensure that the official money loses purchasing power year-in and year-out regardless of what’s happening in the world. However, the signs are apparent when interest rates are compared to a wholesale price index based on gold.

The commodity/gold ratio is the price of a broad-based basket of commodities in gold terms. In essence, it is a wholesale price index using gold as the monetary measuring stick. Although gold is no longer money in the true meaning of the term (it is no longer the general medium of exchange), it is still primarily held for what can broadly be called ‘monetary purposes’ and in many respects it trades as if it were still money. According to the age-old relationship discussed above and labeled “Gibson’s Paradox” by a confused JM Keynes, the commodity/gold ratio should generally move in the same direction as risk-free interest rates.

The risk-free US interest rate that is least affected by the direct manipulation of the Fed is the yield on the 30-year T-Bond, so what we should see is a positive correlation between the commodity/gold ratio and the T-Bond yield. Or, looking at it from a different angle, what we should see is a positive correlation between the gold/commodity ratio and the T-Bond price. That’s exactly what we do see.

Using the Goldman Sachs Spot Commodity Index (GNX) to represent commodities, the following chart shows that the age-old relationship has worked over the past 10 years when gold is the monetary measuring stick. It has also worked over the past 20 years, although there was a big divergence — possibly due to the ‘China effect’ on commodity prices or the ECB’s aggressive money pumping — in 2005.

I like this chart because it makes economic sense and because it can be helpful when trying to anticipate the next important turning point for the gold/commodity ratio and/or the T-Bond.

*As a general rule, if your theory leads to a paradox then your theory is wrong.

    **There are many real-life examples of a premium being paid to receive a good in the future rather than the present, but in such cases all is not equal. That is, in such cases there will be a difference between the future good and the present good that makes the future good more valuable. For example, an oil refiner will generally pay more for a barrel of oil to be delivered in six months’ time than a barrel of oil to be delivered immediately, because if it doesn’t plan to refine the oil until 6 months from now it can save 6 months of storage costs by purchasing oil for future delivery. To put it another way, in this oil-refiner example a barrel of oil for immediate delivery is priced at a discount because it comes with 6 months of storage-related baggage.

    ***For any specific interest-rate-related transaction, credit risk will be very important. As a result, at any given time there will be a wide range of interest rates within an economy even if the money has no “inflation” risk. However, it is reasonable to think of time preference as an interest-rate floor that rises and falls. In effect, time preference determines the interest rate that would apply on average throughout the economy if there were no credit or inflation risks.

It’s not just Donald Trump. Many political leaders around the world operate under the misconception that a trade deficit is a problem to be reckoned with. This misconception has been the root of countless bad policies over the centuries.

Trade, by definition, is not an adversarial situation resulting in a winner and a loser. Rather, both parties believe that they are benefiting, otherwise the trade would not take place. Most of the time, both parties do benefit. In general, one side wants a particular product more than a certain quantity of money and the other side wants the quantity of money more than the product. When the exchange takes place, both sides get the thing to which they assign the higher value at the time.

All the hand-wringing about international trade deficits is based on the ridiculous notion that the side receiving the money is the winner and the side receiving the product is the loser, but how could this be? If the side receiving the product was losing-out then it wouldn’t enter into the trade. Furthermore, given that today’s money is created out of nothing, if a trade were to be viewed as a win-lose situation then surely it’s the side receiving the product that should be viewed as the winner.

That being said, I don’t want to confuse the argument by asserting that it makes sense to view the side receiving the product as the winner in the exchange of money for product. Both sides are winners, because both sides get what they prefer at the time of the exchange.

For example, if you shop at Wal-Mart then you run a trade deficit with Wal-Mart. Is this trade deficit a problem for you? Obviously not, otherwise you wouldn’t shop there. Would it make sense for the government to step in and slap a tax on all Wal-Mart products, thus forcing you to buy less products from Wal-Mart and thereby reducing your trade deficit with that company?

Some will claim that a trade deficit is only a problem when it happens between different countries, but countries aren’t entities that trade with each other. People trade with each other, and political borders don’t determine what is and isn’t economically beneficial. If John and Bill have been trading with each other for years to their mutual benefit within the same political region, placing a political border between them wouldn’t mysteriously alter the mutually-beneficial nature of their trading.

Another point that should be understood is that a “trade deficit” for a country results in an investment surplus for that country. The reason is that the monetary surplus on the trade account doesn’t disappear or get placed under a mattress, it gets invested in securities (stocks and bonds), real estate, businesses and projects. A trade deficit therefore isn’t associated with a net flow of money out of the economy, it is associated with a re-routing of money within the economy. There is no good reason to expect that this re-routing will lead to a net loss of jobs. In fact, the opposite is the case.

Unfortunately, while a so-called trade deficit is not a problem, the taxes, tariffs, subsidies and other government measures that are implemented to reduce a trade deficit definitely do cause problems.

Here are a few of the charts that currently have my attention:

1) The industrial metals bottomed (in price) as a group early last year. They were then led higher as a group by iron-ore, the metal that according to many analysts had the most bearish fundamentals and could therefore not sustain a rally.

The following chart (from barchart.com) shows that the iron-ore price has more than doubled since its early-2016 bottom. It made a marginal new high this week, so there is no evidence yet that the rally is over.

When the iron-ore price eventually reverses it will be a warning that the broad-based industrial-metals rally is close to an end.

2) The following chart compares the euro with the difference in yield between 10-year German Government bonds and 10-year US Treasury notes. The euro has tracked this interest-rate differential quite closely over the past two years and very closely over the past 6 months.

The implication is that for the euro to extend its short-term rebound, German yields will have to remain in an upward trend relative to US yields. How likely is that?

3) The Dow Transportation Average (TRAN) traded comfortably above its November-2014 high during December-2016 and January-2017, but in each case it failed to give a monthly close above the November-2014 close. This means that TRAN still hasn’t broken above its 2014 peak on a monthly closing basis, which represents an interesting non-confirmation of the breakouts achieved by other indices.

Will TRAN finally break out on a monthly basis this month?

4) In early-July of last year the Commitments of Traders (COT) data indicated that speculators were as bullish as they ever get on long-dated Treasury securities. This set the stage for an important price top. By December the sentiment situation had shifted 180 degrees, with the COT data indicating that speculators were as bearish as they ever get on long-dated Treasury securities. The stage was therefore set for an important price bottom.

The recovery from the December-2016 bottom is probably not yet close to being over.

In response to the 3rd January blog post in which I pointed out the straightforward fact that evidence of market manipulation is not necessarily evidence of price suppression, a reader sent me a link to a year-old GATA article. The GATA article was presented by the reader as a refutation of what I had written.

It is certainly possible to construe the aforelinked GATA article as having at least partly refuted what I wrote, but only if you take the article’s headline (“State Dept. cable confirms gold futures market was created for price suppression”) and conclusion (“…[the cable confirms] the assertions by GATA and others in the gold-price suppression camp that futures markets function largely as mechanisms of commodity price suppression and support for government currencies”) at face value and give no further thought to what is being presented and asserted.

However, if you take the time to read the excerpt from the 1974 State Dept. cable included in the GATA article you will see that it does NOT say that the gold futures market was created for price suppression; it says that re-legalising private gold ownership in the US (it had been illegal since 1933) would result in the formation of a large and liquid futures market. In effect, it says that the formation of a futures market would be a natural consequence of the gold market becoming freer.

The State Dept. cable does express an opinion that large-volume futures dealing would create a highly volatile market, and that the volatile price movements would diminish the initial demand for physical holding and most likely reduce the long-term hoarding of gold by U.S. citizens. This opinion is certainly debatable, as a good argument can be made that futures markets tend to bring about LESS long-term volatility in the price of a commodity. In any case, it is just an opinion as to the price-related consequences of a naturally-occurring futures market.

It is also worth mentioning that the cable is from an embassy bureaucrat with no say in government policy.

So, in no way does the State Dept. cable do what the author of the GATA article claims it does. Moreover, the assertion that “futures markets function largely as mechanisms of commodity price suppression and support for government currencies” is not only in no way backed-up by the evidence presented, it is so illogical as to be laughable. There have been futures markets for many widely-traded commodities for hundreds of years. These markets were not created by and do not exist for the benefit of governments.

Sometimes, no specialised knowledge is needed to figure out that a conclusion doesn’t follow from the information presented. For example, detailed knowledge of the gold futures market is not needed to see that the State Dept. cable cited in the GATA article does not come remotely close to confirming GATA’s assertions. Sometimes, all that’s needed is a modicum of logic.

In a blog post last Friday I provided evidence that the extent to which a US president is “pro-business” has very little to do with the stock market’s performance during that president’s term in office. Regardless of whether the associated policies are good or bad for the economy, the key to the stock market’s performance over the course of a presidency is the market’s position in its long-term valuation cycle. On this basis there’s a high probability that the stock market’s return over the course of Trump’s first — and likely only — 4-year term will be dismal, no matter what Trump does. However, the policies of a president can have a big effect on the performance of the economy.

It’s obviously early days for the Trump Administration, but the initial signs are not positive. The main reason is that “regime uncertainty” is on the rise.

“Regime uncertainty” is the name given to the tendency of private investors to pull back from making long-term financial commitments due to uncertainty about what the government will do next. According to an essay by Robert Higgs, it was one of the factors that prolonged the Great Depression of the 1930s. Government intervention is generally bad for the economy, but it tends to be even worse when it happens in an ad hoc way.

As discussed in a Bloomberg article last month, the economically-depressing effect of government by ad-hoc command was also addressed by Friedrich Hayek in “The Road to Serfdom”. The problem, in a nutshell, is that if the government’s actions are predictable then people are able to plan, but if officials are regularly issuing commands it will become much harder for people to have the kind of security that is a precondition for economic development and growth.

The signs were not good when Trump started singling-out individual companies for special treatment even before he took the oath of office and got worse when Trump started talking about imposing a 20% tax on Mexican imports as a way of forcing Mexico to pay for a wall between the two countries. Does he really believe that forcing US consumers to pay 20% more for products made in Mexico amounts to making Mexico pay for the wall?

And the signs recently became more worrisome due to the sudden imposition of immigration and refugee bans. The effects of these bans on the US economy will not be significant, but the concern is what they imply about the decision-maker’s level of understanding and willingness to ‘shoot from the hip’.

The immigration ban imposed on seven Muslim-majority countries is a particular concern because of its blatant irrationality. Making America safe from terrorism is the official justification for the action, but over at least the past 40 years there has not been a single fatal terrorist attack perpetrated on US soil by anyone from any of the banned countries. On the other hand, Saudi Arabia is not covered by the ban despite having supplied 15 of the 19 terrorists directly involved in the 9/11 attacks and being well known as a state sponsor of terrorist organisations. I am not suggesting that the ban should be expanded to include other countries, I am questioning the knowledge and logicalness of a political leader who would decide to do what has just been done.

To top it all off, late last week Trump began threatening Iran for no good reason via his preferred medium for conducting international diplomacy: Twitter. What will he do next?

Taking a wider angle view, the protectionist agenda that the Trump Administration seems determined to implement will have numerous adverse consequences, most of which aren’t quantifiable at this time because it isn’t known exactly what measures will be taken and how other governments will react. All we know for sure is that Trump wrongly believes that international trade is a win-lose scenario and that trade deficits are problems for governments to actively reckon with.

Perhaps the initial warning signs are not indicative of what’s to come and Team Trump will settle into a more logical, impartial and cool-headed approach, but right now it looks like Donald Trump is going to make uncertainty great again. If so, private investment will decline.

Putting aside the fact that prior to the US Presidential election last November almost everyone believed that a Trump victory would result in a weak stock market, the popular view now is that the stock market has strengthened since the election due to the incoming Trump Administration being more pro-business. It is arguable whether the Trump Administration really will be “pro-business” (early signs are that it won’t be), but in any case the historical record indicates that the currently-popular view is total nonsense.

According to the historical record, the stock market’s performance during a Presidential term has nothing to do with the extent to which the Administration is pro-business. Let’s consider some examples to help make this point, using the Dow Industrials Index as our stock-market proxy and the November election dates as the starting and ending points of a presidential term. It makes sense to use the election dates rather than the inauguration dates given that the financial markets will begin to discount the economic effects of a new president immediately after the election result is known.

First, F.D.Roosevelt probably led the most anti-business administration in US history, but during FDR’s first 4-year term the stock market had a phenomenal gain of about 160%.

Second, Ronald Reagan was supposedly a very pro-business president, but during his first 4-year term the stock market gained only 26%. The stock market’s gain during Reagan’s first term was not only a tiny fraction of the gain achieved during FDR’s first term, it was also less than the roughly 40% gain achieved during the first term of the supposedly anti-business Obama Administration.

Third, the stock market did much better during Reagan’s second term, enabling Reagan to chalk up an 8-year stock-market return of about 120%. This, however, wasn’t substantially better than the 90% gain chalked up by the anti-business Obama and pales in comparison to the 240% gain achieved by the Dow over the course of Bill Clinton’s two terms.

Fourth, two of the worst stock-market performances occurred during the supposedly pro-business administrations of Herbert Hoover and GW Bush. The Dow was down by a little more than 10% over the course of GW Bush’s two terms and by an incredible 70+% during Hoover’s single term in office.

To summarise the above, the historical record isn’t consistent with the view that a more pro-business President results in a stronger stock market.

There are, of course, a number of influences on how the stock market performs during any presidential term, including the amount of domestic monetary inflation and what’s happening throughout the world. One influence, however, dominates all others. That influence is the point in the valuation cycle at which a presidential term starts and ends. The reality is that some presidents get lucky with timing, others don’t.

I’ll explain what I mean with the help of the following long-term Dow chart. The chart was created by Nick Laird at goldchartsrus.com, but I added the red notes to indicate the first election victories of various presidents.

The above chart shows that when it comes to the gains achieved by the stock market during a presidency, timing is critical. For example, despite FDR implementing a set of policies that were economically disastrous, the stock market rocketed upward during his first term because at the start of the term the Dow was well below the bottom of its long-term channel. However, by the start of FDR’s second term the Dow had recovered to near the middle of its long-term channel, resulting in much weaker subsequent performance. For another example, there is no doubt that Hoover and GW Bush were terrible presidents, but they were certainly no worse than their successors and yet the stock market’s performance was relatively dismal during their presidencies. This is mainly because their presidencies began with the Dow above the top of its long-term channel.

Trump’s presidency is beginning with the Dow at the top of its long-term channel. This pretty much guarantees that the US stock market’s performance over the course of the next 4 years will be dismal, regardless of whether or not Trump’s policies are “pro-business”.

[This post is an excerpt from a TSI commentary published two days ago]

The Fed meets to discuss its monetary policy this week. There is almost no chance that an outcome of this meeting will be another boost in the Fed Funds Rate (FFR), but there’s a decent chance that the next official rate hike will be announced in March. Regardless of when it happens and regardless of how it is portrayed in the press, the next Fed rate hike, like the two before it, will NOT imply a tightening of US monetary policy/conditions.

The two-part explanation for why hikes in the FFR no longer imply the tightening of monetary policy has been discussed many times in TSI commentaries over the past few years and was also addressed in a March-2015 post at the TSI Blog titled “Tightening without tightening“. The first part of the explanation is that with the US banking system inundated with excess reserves there is no longer an active overnight lending market for Federal Funds (banks never have to borrow Federal Funds anymore because they have far more than they require). In other words, when the Fed hikes the FFR it is hiking an interest rate that no one uses.

The second and more important part of the explanation is that Fed rate hikes are now implemented by increasing the interest rate PAID by the Fed on bank reserves. That is, Fed rate hikes are now implemented not by charging the banks a higher rate of interest but by paying the banks a higher rate of interest. To put it another way, whereas in the “good old days” rate hikes were implemented by removing reserves from the banking system, the Fed now implements rate hikes by injecting reserves — in the form of interest payments — into the banking system.

So, what’s widely known as monetary tightening is now a Federal Reserve action that actually has the effect of LOOSENING monetary conditions.

Orwell’s “1984″ had the slogans “War is Peace”, “Freedom is Slavery” and “Ignorance is Strength”. Thanks to the Fed we can now add “Loosening is Tightening”.

The US Constitution is often held up as an ideal to be aspired to, but it is actually far from ideal.

One reason it is far from ideal is that the section setting out the powers of Congress (Article 1 Section 8) is too general. For example, it gives Congress the power to “lay and collect Taxes, Duties, Imposts and Excises, to pay the Debts and provide for the common Defence and general Welfare of the United States.” The terms “Taxes” and “general Welfare” had different (much narrower) meanings back then, but it’s not hard to understand how this statement could be construed to justify much of the growth in the federal government over the ensuing 200+ years. Another example concerns money. The Constitution gives Congress the power to “coin Money [and] regulate the Value thereof.” It’s not hard to understand how the words “coin Money” could be interpreted to mean “create Money”, since “coin” and “create” (in reference to money) were effectively the same thing when the Constitution was penned.

It is often claimed that the Constitution requires money to be gold or silver coin, but this is not the case. The only mention of gold or silver is in the section that sets out the limitations on the powers of individual states (Article 1 Section 10). This section prohibits any State from making “any Thing but gold and silver Coin a Tender in Payment of Debts”, but imposes no restrictions on the power of Congress to coin money and regulate the value thereof.

Should the Constitution have been much clearer in defining money as gold and/or silver?

The answer is no, because the government should not have the right to determine what is and isn’t used as money by private individuals. The Constitution should simply have forbidden the government from having anything to do with money. In particular, rather than empowering the government to coin money and regulate the value thereof it should have prohibited the government from exerting any influence over the supply or value of money.

What is/isn’t money should be chosen by ‘the market’. It’s likely that the market would choose gold and/or silver if it were free to make the choice, but the freedom to choose something other than a precious metal should always be available. That’s why a “Gold Standard” is not a worthwhile objective. The government doesn’t have the legitimate right to impose gold as money any more than it has the legitimate right to impose pieces of paper as money.

The US Constitution opened the door to much of what happened later. It’s therefore likely that if the writers of the Constitution had the chance to do it over again knowing what is known today, they would cobble together a very different document.

Doug Casey recently predicted that we are heading for financial chaos. Should this prediction be taken seriously? The answer is no, but not because Doug Casey doesn’t know what he’s talking about or is necessarily wrong.

Doug Casey has been right about enough trends/events in the past to have become wealthy and is one of my favourite writers. Also, throughout his career he has fought the good fight against government coercion, the fake information that’s routinely put forward to ‘justify’ bigger government, and the political-correctness tyranny. However, he is ALWAYS predicting financial chaos and/or economic collapse and/or a crash in the stock market or the bond market.

I have no problem with Doug Casey’s crisis predictions. I understand his bias in this area and can take it into account when reading his opinions/analyses. I do, however, have a problem with the way that Doug’s predictions are used to promote the Casey Research service.

This post was prompted by an email from Casey Research that appeared in my inbox last week. The email contained something along the lines of: “Doug Casey correctly predicted the Dot.com crash of 2000 and the financial-market crash of 2008. Given this amazing forecasting record, you won’t want to miss Doug’s latest prediction. Click the link below to find out what it is.”

I didn’t click the link so I don’t know the specific prediction that is currently being used to attract new subscribers, but I cringed at the misleading way that the forecasting record was portrayed. It’s certainly true that Doug Casey correctly predicted the market crashes of 2000 and 2008, but if you are always predicting a crash then of course you will be right every year the market crashes. And you will be wrong every year the market doesn’t crash.

Betting on a crash year after year after year is actually a viable speculative strategy. It’s the strategy that has been used by Nassim Taleb with success over the past few decades. Taleb bets on a market crash every year with a small portion of his investment portfolio while keeping the rest of his portfolio in cash or cash-like securities. The result is that he makes a small loss in the vast majority of years and a huge profit once or twice per decade.

I’m only guessing, but Doug Casey has probably applied a similar approach to good effect.

The Taleb approach is not suited to most people, though. This is because most people do not have the required combination of knowledge, patience and nerve, and even if they do there are ways to generate excellent long-term returns without having to go 5-10 years between pay-offs.

Getting back to the main point of this post, there is some chance that Doug Casey’s recent prediction of financial chaos will be correct in 2017, but it shouldn’t be taken seriously. The reason it shouldn’t be taken seriously is that regardless of whether or not it pans out this year, there will be a similar prediction for next year and the year after and so on. The prediction is bound to be right…eventually.

Don’t be hoodwinked by the relentless propaganda into believing that the efforts being made to eliminate physical cash are motivated by a desire to reduce crime and corruption. Fighting crime/corruption is just a pretext.

The logic behind the propaganda goes like this: Criminals often use physical cash in their dealings, therefore cash should be eliminated. This makes as much sense as saying: Criminals often use cars, therefore cars should be banned. From an ethical standpoint, the fact that criminals use an item will never be a good reason to prevent law-abiding citizens from using the item.

That being said, the anti-cash propaganda is not just wrong from an ethical standpoint; it is also wrong from a utilitarian standpoint if we assume that the stated reasons (to reduce the amount of crime and strengthen the economy) are the real reasons for wanting to eliminate physical cash. This is because neither logic nor historical data provide any basis for believing that forcibly reducing the use of physical money will reduce crime or boost the economy.

With regard to the crime-fighting claim, yes, criminals often use cash due to cash transactions being untraceable, but no criminal is going to change his ways and ‘go down the straight and narrow’ in response to physical money becoming obsolete. If physical money were eliminated then genuine criminals would find some other way of doing their financial transactions. Perhaps they would start using gold, which would give governments a pretext for the banning of gold. Or perhaps they would use Bitcoin, which would give governments a pretext for the banning of Bitcoin. The point is that there will always be many media of exchange that could be used by genuine criminals to conduct their business. The banning of cash would only be a short-lived and relatively-minor inconvenience to this group.

The economy-strengthening claim stems from the crime-fighting claim, in that all else being equal a change to the monetary system that resulted in less genuine crime (the only genuine crimes are those that result in the violation of property rights) would lead to a stronger economy. Since there is neither a logical reason nor a reason based on the historical record to expect that banning physical cash would lead to less genuine crime, the economy-strengthening claim is baseless.

On a side note, if the elimination of physical cash would actually provide a benefit to the overall economy, that is, if it would result in a higher average standard of living, then it is something that would happen without government intervention. In general, a greater amount of government economic intervention is only ever required when the desired change will NOT create a net benefit for the overall economy.

The reasons being put forward for the elimination of cash are therefore bogus. What, then, are the real reasons?

The main real reason is to maximise tax revenue. If all transactions are carried out electronically via the banking system then every transaction can be monitored, making it more difficult to avoid tax. In other words, the main reason that governments are very keen to eliminate physical cash is that by doing so they increase the amount of money flowing into government coffers. Unless you believe that the government generally uses resources more efficiently than the private sector you must acknowledge that this would result in a weaker rather than a stronger economy.

There is, however, an important secondary reason for the forced shift towards a cashless society, which is that it would help the banks in two ways.

First, it would help the banks by ensuring that 100% of the economy’s money was always in the banking system. Currently about 90% of the money in developed economies is in the banking system, with a physical float (currency in circulation outside the banking system) making up the remaining 10% of the money supply. The move to eliminate physical cash can therefore be thought of as the banking industry going after the final 10% of the money supply.

Second, it would ensure that there was no way for the public to avoid the cost of negative interest rates or any other draconian charge on monetary savings/transactions implemented by the banking establishment. Any single member of the public could avoid the charge, but only by transferring money — and the associated liability — to another person’s account.

So, any economist or financial journalist who advocates the elimination of physical cash is clueless at best and a government/banking-system stooge at worst.

Here is an excerpt from a recent TSI commentary:

Until the S&P500 Index (SPX) broke out to the upside in early-July of 2016 we favoured the view that an equity bear market had begun in mid-2015. Supporting this view was the performance of NYSE Margin Debt, which had made what appeared to be a clear-cut downward reversal from an April-2015 peak.

As we’ve explained in the past, leverage is bullish for asset prices as long as it is increasing, regardless of how far into ‘nosebleed territory’ it happens to be. It’s only after market participants begin to scale back their collective leverage that asset prices come under substantial and sustained pressure. For example, it was a few months AFTER leverage (as indicated by the level of NYSE margin debt) stopped expanding and started to contract that major stock-market peaks occurred in 2000 and 2007. That’s why, during the second half of 2015 and the first few months of this year, we considered the pronounced downturn in NYSE Margin Debt from its April-2015 all-time high to be a warning of an equity bear market.

As at the end of November-2016 (the latest data) NYSE Margin Debt still hadn’t exceeded its April-2015 high, but the following chart from Doug Short shows that it is close to doing so. Furthermore, given the price action in December it is likely that NYSE Margin Debt has since made a new all-time high.

Even if it didn’t make a new high in December, the rise by NYSE Margin Debt to the vicinity of its April-2015 peak is evidence that leverage is still in a long-term upward trend and that the equity bull market is not yet complete.

More timely evidence that the US equity bull market is not yet complete is provided by indicators of market breadth, the most useful of which is the number of individual stocks making new 52-week highs.

The number of individual stocks making new highs on the NYSE and the NASDAQ peaked with the senior stock indices at multi-year highs during the first half of December. The number of individual-stock new highs has since fallen sharply, but this is normal and is not yet a significant bearish divergence.

The change over the past 6 weeks in the number of individual stocks making highs is consistent with the view that a sizable short-term decline is coming, but at the same time it suggests that neither a long-term top nor an intermediate-term top is in place. The reason is the strong tendency for the number of individual-stock new highs to diverge bearishly from the senior indices for at least a few months prior to an intermediate-term or a long-term top.

The US equity bull market may well continue, but that doesn’t mean it’s worth participating in. No investor should attempt to buy into all, or even into most, bull markets. In our opinion, it’s best to restrict participation to those bullish trends that are underpinned by relative value.

If the US equity bull market continues it will definitely not be because the market is underpinned by relative value. As illustrated by another chart from Doug Short (see below), based on an average of four valuation indicators the S&P500′s valuation today is the same as it was at the 1929 peak and second only to the 2000 peak.

The market has primarily been propelled by and to a certain extent remains underpinned by the combination of monetary inflation and artificially-low interest rates, that is, by the machinations of the Fed.

Whenever I write about gold-market manipulation in an effort to debunk the story that gold has been subject to a long-term price suppression scheme I am always careful to point out that ALL markets, including the gold market, are manipulated. They always have been and they always will be. Presenting evidence that the gold market is manipulated is therefore like presenting evidence that the Earth revolves around the sun — perfectly true, but not useful information in this day and age. However, whenever I write on the topic I invariably receive vitriolic responses in which I’m called a manipulation denier. Sigh.

The main point I was trying to make in last week’s blog post on this controversial topic is simply that evidence of gold-market manipulation is not evidence of long-term price suppression. Yes, if long-term price suppression has occurred then it would be an example of market manipulation, but market manipulation generally does not involve long-term price suppression. To further explain using an analogy, it’s a fact that a poodle is a dog, but armed with this fact it would be logically incorrect to point to an animal and say “that animal is a dog therefore it must be a poodle.” The animal might be a poodle, but there is a vastly greater probability that it is some other type of dog.

As far as I can tell, none of the evidence of market manipulation presented to date constitutes evidence of long-term price suppression. At best it falls into the “evidence that the Earth revolves around the sun” category — true, but not useful in this day and age. At worst it is designed to paint a misleading picture.

This brings me to the “London gold bias”, an issue that is often cited to support the long-term price suppression story.

I have been aware of the “London bias” in the gold market for a long time and dealt with it in a blog post about two years ago. It’s time to revisit the issue.

The idea behind the “London bias” is that there is a tendency for the London PM gold fix to be lower than the London AM gold fix. The result is that you would have lost money almost every year, through gold bull markets and gold bear markets, by simply buying a position at the London gold AM Fix every day and selling the position at the London PM Fix the same day. Here’s a chart from Nick Laird’s goldchartsrus.com web site illustrating the dismal performance that a hapless investor would have achieved if he had done exactly that:

That’s the type of chart that would be presented by someone who was keen to prove long-term price suppression. The thing is that by using exactly the same data a case could be made that the gold market has been subject to long-term price ELEVATION.

Here’s the backup for the above statement in the form of another chart prepared by Nick Laird, this time showing the performance that would be achieved by buying a position at the London gold PM Fix every day and selling the position at the London AM Fix the next day. This chart could be used to ‘prove’ upward manipulation of the gold price over a very long period.

The first of the above charts can be used to support the claim that the gold price has been unjustifiably suppressed and the second could be used to support the opposite claim. Furthermore, the claim of long-term upward manipulation supposedly supported by the second chart has an advantage in that it assumes manipulation during a part of the day when the market is relatively illiquid. If you were intent on manipulating a price in a particular direction over the long-term, would you be more likely to act during the most-liquid part of the trading day, when shifting the price would be most costly, or during the least-liquid part of the trading day, when shifting the price would be least costly?

In no way do I believe that the gold market has been subject to a long-term price elevation scheme. My point is simply that it is possible to ‘mine’ the same set of data in order to substantiate diametrically-opposed preconceived conclusions.

Humans love to find patterns and there are all sorts of patterns to be found in gold’s price action and the price action of every other widely-traded commodity or financial asset. However, these patterns often aren’t tradable, because if they were then they would be traded and the effect of the trading would be to make the pattern disappear. For example, if gold has a strong tendency to fall between time A and time B each day then there is money to be made by repeatedly selling at time A and buying at time B, but doing this trade in significant size will raise the price at time B relative to the price at time A and eliminate the opportunity.

The very-short-term patterns in the gold market (the price rising at certain times and falling at certain other times during the day) must have cancelled each other out, because over the past 20 years the gold price has generally done what it should have done based on measures of economic and financial-market confidence (the true fundamental drivers of the gold price). Also, like most markets the gold market tends to overshoot in both directions, thus creating excellent profit-generating opportunities for investors and speculators who remain objective.

Global Warming, or Climate Change as it is now called, is not a problem. Earth’s climate has always been changing and will continue to do so, regardless of what anyone does. Pollution, however, is often a problem and in China the pollution problem has grown to the point where it could collapse the economy.

Here are a couple of Youtube videos that show the horrendous smog that engulfed Beijing over the past week. The commentary is in Chinese, but you don’t need to understand Chinese to understand what’s going on.

The first video shows several vehicle collisions caused by the near total lack of visibility on the road.

In the second video, a couple of guys stop their cars on the road due to the lack of visibility. They get out, walk a short distance and are then unable to find their way back to the cars. The video is obviously staged, but it does a good job of showing the absurdly-bad air quality.

How are China’s policy-makers going to deal with this without shutting down a lot of power plants and refineries and without substantially curtailing the use of cars, that is, without crashing the economy? I have no idea.

One of the most annoying claims made by manipulation-focused gold-market commentators is that evidence of market manipulation constitutes evidence of long-term price suppression. The claim is annoying not so much because it is obviously false, but because many people get fooled by it even though it is obviously false.

Experienced traders are well aware that banks and other large-scale operators regularly attempt to shift prices one way or the other in most financial markets to benefit their own bottom-lines. It has always been this way and it always will be this way. As I mentioned in previous blog posts (HERE, HERE and HERE, for example), when news emerges that banks have been caught manipulating prices in a market it isn’t really news at all.

Sometimes the manipulation is unethical and/or illegal (what’s illegal and what’s unethical aren’t always the same), but a lot of the price manipulation attempted by private operators in the financial markets is neither illegal nor unethical. A lot of the time it is a legitimate business practice.

From the perspective of manipulation-focused pontificators about gold, the big story over the past two years was the evidence that major banks had been scalping profits by manipulating the London Gold Fix. Deutsche Bank even settled lawsuits over allegations it manipulated gold and silver prices via the London Fix, thus providing plenty of grist for the conspiracy mill.

Assuming that banks were indeed using the twice-daily London Fix to manipulate gold prices, then in this case the manipulation was probably illegal and almost certainly unethical. If nothing else, it involved a breach of trust. However, as noted in a previous post on this topic the price manipulation that potentially occurred via the London Fix could only have affected prices by small amounts for very brief periods. Furthermore, the small effects would have been to both the upside and the downside.

The ‘news’ that banks used the London Gold Fix to illegitimately increase their profits is therefore completely irrelevant to the claim that there has been a successful price suppression scheme in operation in the gold market over a great many years. And yet, it has been portrayed as if it were the veritable “smoking gun” evidence of such a scheme.

If the gold market had really been subject to price suppression over a long period then gold’s performance would be totally ‘out of whack’ with related financial markets. However, that is not the case. For example, the following chart shows the close relationship over the past three years between the US$ gold price and the bond/dollar ratio (the T-Bond price divided by the Dollar Index).

All of that being said, you are allowed to make money in the financial markets by doing something other than buying/owning gold. Therefore, if you truly believe that a powerful group has both the means and the motive to suppress the gold price then the solution is obvious: don’t buy gold.

I published a blog post in late-June titled “Gold has peaked for the year“. In this post I argued that relative to other commodities (as represented by the Goldman Sachs Spot Commodity Index – GNX) gold’s peak for 2016 most likely happened in February. As evidenced by the following chart, I was correct.

The reason for this follow-up post is not to give myself a public ‘pat on the back’. I’ve made my share of mistakes in the past and I will make mistakes in the future. The sole reason for this post is the vitriolic response that my earlier article received.

My earlier article should not have been controversial. After all, the February-2016 peak for the gold/GNX ratio wasn’t just any old high, it was an all-time high. In other words, at that time gold was more expensive than it had ever been relative to commodities in general. Furthermore, it is typical for gold to turn upward ahead of the commodity indices and to subsequently relinquish its leadership.

With gold having outperformed to the point where it was at its highest price ever relative to the prices of other commodities and with other commodities likely to recover, saying that gold had probably peaked for the year in commodity terms should have been viewed as a statement of the bleeding obvious. It would have taken a financial crisis of at least 2008 proportions during the second half of 2016, that is, it would have taken an extremely low-probability financial-market outcome, to propel the gold/GNX ratio to new highs during the second half of the year. That some readers took my “Gold has peaked” article as an affront was therefore remarkable.

Remarkable, but not really surprising given that in the minds of some gold devotees the gold price is always too low. It doesn’t matter how high the price is or what’s happening in the world, the price is always about to skyrocket. The only obstacle in the way is a cabal of evil market manipulators that will soon be overwhelmed by the forces of good. And in any case, a financial crisis of at least 2008 proportions is always about to happen.

Gold’s poor performance during the second half of 2016 was consistent with what I refer to as the true fundamentals*. This means that it wasn’t the result of downward manipulation. That being said, the great thing about believing that market trends have almost nothing to do with “fundamentals” and almost everything to do with manipulation is that you never have to be wrong. If any market goes against you it was due to the distortive effects of manipulation rather than a fatal flaw in your analysis.

*The true fundamental drivers of the US$ gold price are, in no particular order: US credit spreads, the US yield curve, the real US interest rate, the relative strength of the US banking sector, the US dollar’s exchange rate and the general trend in commodity prices.

[This post is an excerpt from a recent TSI commentary]

There are three reasons that the Trump Presidency will very likely go down in history as a disaster for the US, only the last of which has anything to do with Trump. The first two reasons are inter-related in that they are primarily the consequences of distortions/imbalances created by the Federal Reserve.

Due largely to the aggressive interventions of the Fed, including the creation of trillions of dollars via QE programs and keeping interest rates pegged near zero for eight years, the mal-investment problem in the US economy today is more serious than the mal-investment problem that led to the “great recession” of 2007-2009. This means that the next recession will probably be even more severe than the previous episode. It is possible that the extension of ultra-easy monetary conditions combined with fiscal ‘stimulus’ in the form of tax cuts will delay the start of the next recession by another 6-12 months, but for no fault of Trump it will almost certainly happen on his watch.

Also due to the aggressive interventions of the Fed, the US stock, bond and real-estate markets are now valued at levels that all but guarantee terrible performance over the coming few years. As is the case with an economic recession, it is possible that the extension of ultra-easy monetary conditions combined with fiscal ‘stimulus’ in the form of tax cuts will delay the start of the coming period of terrible performance; however, for no fault of Trump there will very likely be bear markets in the major US asset classes during his first — and almost certainly only — Presidential term.

While the coming severe recession and the bearish trends in asset prices were bound to occur and clearly have nothing to do with Trump, it looks like Trump is unwittingly setting himself up to take the blame.

His one chance of avoiding blame and paving the way for a genuine recovery to be in progress by the time of the next Presidential election would have been to stay out of the way and allow a major liquidation of the mal-investments to happen during the first half of 2017. This would have enabled the blame for the debacle to be appropriately placed at the feet of the Fed and the preceding Administration. However, having previously (and correctly) chided the Fed for having created a “big, fat, ugly bubble”, it seems that the deadly combination of hubris and ignorance has convinced Trump that he can set in motion a long period of strong growth with no intervening painful purgation.

In summary, certain bad economic and financial-market outcomes are currently set in stone. What’s not set in stone is who gets the blame. Unfortunately, Trump appears to be positioning himself to take the blame for the economic damage caused by others.

Here is an excerpt from a TSI commentary that was published about a week ago.

A cottage industry has developed around manipulation-focused gold commentary. In this industry, gold’s price changes are portrayed as the outcome of a never-ending battle between the forces of good and evil, with the evil side constantly trying to beat the price down and the good side constantly buying or holding. Also, in the world imagined by this industry the fundamental backdrop is always gold-bullish. The implication is that all price rises are in accordance with the fundamentals and all price declines are contrary to the fundamentals and likely the result of manipulation by the forces of evil.

In the real world, however, the fundamentals are always in a state of flux — sometimes bullish, sometimes bearish, and sometimes mixed/neutral. Furthermore, our experience has been that gold tracks fundamental developments more closely/accurately than any other market.

When the gold price was topping in July-August of this year, the fundamental backdrop wasn’t gold-bearish; it was neutral. The ‘fundamentals’ therefore didn’t signal a top, but they did indicate that additional gains in the gold price would not have been fundamentally-supported and would therefore have required a further ramp-up in speculative buying.

From early-July through to early-November the ‘true fundamentals’ shifted between being neutral to being slightly-bearish for gold and then back again (we thought they were slightly bearish from mid-September through to mid-October and otherwise neutral). They turned bearish, however, a couple of days after the US Presidential Election and since around mid-November have been their most bearish in at least three years.

The fundamental backdrop is now definitively gold-bearish because we have a) real interest rates in an upward trend and at a 6-month high in the US, b) US credit spreads immersed in a major contraction (indicating rising economic confidence), c) dramatic relative strength in bank stocks (indicating sharply-rising confidence in the banking/financial system), and d) the Dollar Index in a strong upward trend and near a multi-year high. Given these conditions, any analyst/commentator who is now claiming that the ‘fundamentals’ are bullish for gold is either clueless about gold’s true fundamentals or is trying to promote an agenda.

That’s the situation today, but the situation will change. In broad-brushed terms, here are the two most likely ways that the situation could change to become supportive of an intermediate-term gold rally:

1) Rising inflation expectations

US inflation expectations have been rising since 11th February and have been rising at a quickened pace since late-September, but since Trump’s election victory the rate of increase in nominal interest rates has exceeded the rate of increase in inflation expectations. This has brought about a rise in REAL interest rates.

In effect, over the past month economic growth expectations have risen faster than inflation expectations. This doesn’t make a lot of sense considering the plans of the Trump Administration, but when speculating in the financial markets we must deal with ‘what is’ rather than ‘what should be’.

It’s certainly possible that at some point over the next few months the markets will figure out that the combined plans of the US government and the Fed will lead to more “price inflation” than economic growth, resulting in a relatively fast increase in inflation expectations. As well as causing real interest rates to fall, this would result in a weaker US$ and a further steepening of the yield curve. All told, it would result in the fundamental backdrop becoming gold-bullish.

2) A banking crisis in Europe

The major banks around the world are intimately and intricately connected via their massive derivative books, so a banking crisis that began in Europe would not remain confined to Europe. It would lead to concerns about the profitability of US banks, which, in turn, would lead to relative weakness in bank stocks and a general shift towards safety. Interest rates on Treasury debt would fall faster than inflation expectations, resulting in a lower real interest rate in the US. Also, short-term interest rates would fall relative to long-term interest rates due to a flight to liquidity and the market beginning to anticipate a shift in the Fed’s stance, resulting in a steepening of the yield curve. The overall effect would be a fundamental backdrop that was gold-bullish.

Either of the above could happen within the next few months, but neither is happening now.

By one measure, the Dow Industrials Index is now at its second-most ‘overbought’ level since 1980. The measure I’m referring to is the 14-day RSI (Relative Strength Index), a short-term momentum oscillator shown in the bottom section of the following Dow chart.

Being the most something-or-other (the most overbought/oversold, optimistic/pessimistic, etc.) since a distant past time often isn’t as important as it sounds. For instance, the only time since 1980 that the Dow’s daily RSI(14) was as high as it is today was in November of 1996 (interestingly, almost exactly 20 years ago), but nothing dramatic happened during the days, weeks or months that followed the November-1996 momentum extreme.

As illustrated below, a pullback to the 50-day moving average (MA) got underway within a few days of the momentum extreme, after which the Dow resumed its long-term advance. There was a more significant short-term pullback (to the 200-day MA) a few months later and an intermediate-term correction a few months after that (more than 8 months after the momentum extreme), but the bull market continued for another 3 years.

A short-term momentum extreme occurred at the price peak that was followed by the October-1987 stock market crash, but it is a lot more common for such extremes to be followed by nothing more serious than a routine multi-week correction. With measures of market breadth pointing to a 6-12 month extension of the bull market we probably won’t get anything more bearish than a routine multi-week correction within the next couple of months, although I admit that the near-vertical rally since the Presidential Election has me ‘on edge’.

Blackham Resources (BLK.AX), a junior gold producer that has just begun to ramp-up production at a newly-commissioned mine in Western Australia, reported something interesting earlier this week. Having forward-sold about half of next year’s expected gold production a few months ago when the gold price was near its highs for the year, the company recently took advantage of gold’s price decline by closing-out the bulk of its forward sales. It did so by purchasing gold and delivering it into the forward sales contracts, thus realising a cash profit of A$6.3M.

In other words, having sold high during May-September, BLK’s management turned around and bought low over the past couple of weeks. Sell high, buy low. Sounds like a good strategy to me. More gold producers should try it.

The euro-zone appears to be on target for another banking crisis during 2017. Also, the stage is set for political upheaval in some European countries, a general worsening of economic conditions throughout Europe and widening of the already-large gaps between the performances of the relatively-strong and relatively-weak European economies. It’s a virtual certainty that as was the case in reaction to earlier crises/recessions, blame for the bad situation will wrongly be heaped on Europe’s experiment with a common currency.

The idea that economically and/or politically disparate countries can’t use a common currency without sowing the seeds for major problems is just plain silly. It is loosely based on the fallacy that economic problems can be solved by currency depreciation. According to this line of thinking, countries such as Italy and Greece could recover if only they were using a currency that they could devalue at will. (Note: The destructiveness of the currency devaluation ‘solution’ was covered in a previous blog post.)

The fact is that economically and politically disparate countries throughout the world successfully used a common currency for centuries up to quite recently (in the grand scheme of things). The currency was called gold.

The problem isn’t the euro; it’s the European Central Bank (ECB). To put it another way, the problem isn’t that a bunch of different countries are using a common currency; it’s that a central planning agency is attempting to impose the same monetary policy across a bunch of different countries.

A central planning agency imposing monetary policy within a single country is bad enough, in that it generates false price signals, foments investment bubbles that inevitably end painfully, and reduces the rate of long-term economic progress. The Federal Reserve, for example, has wreaked havoc in the US over the past 15 years, first setting the scene for the collapse of 2007-2009 and then both getting in the way of a genuine recovery and setting the scene for the next collapse. However, when monetary policy (the combination of interest-rate and money-supply manipulations) is implemented across several economically-diverse countries, the resulting imbalances grow and become troublesome more quickly. That’s why Europe is destined to suffer a monetary collapse well ahead of the US.

It should be kept in mind that money is supposed to be neutral — a medium of exchange and a yardstick, not a tool for economic manipulation. It is inherently no more problematic for totally disparate countries to use a common currency than it is for totally disparate countries to use common measures of length or weight. On the contrary, a common currency makes international trading and investing more efficient. In particular, eliminating foreign-exchange commissions, hedging costs and the losses that are incurred due to unpredictable exchange-rate fluctuations would free-up resources that could be put to more productive uses.

In conclusion, the problem is the central planning of money and interest rates, not the fact that different countries use the same money. It’s a problem that exists everywhere; it’s just that it is more obvious in the euro-zone.