Gold ticked up after an eight-day losing streak on Monday, but languished near its lowest in three months as surging US nonfarm payrolls boosted expectations of a December rate hike in the US.
After several weeks of deteriorating or weakening data, and a relatively tepid ADP employment report, the US Labour Department shocked the financial markets last Friday when it released its’ latest employment report.
According to the Labour Department, the U.S. economy created 271,000 jobs in October, far greater than the 185,000 average gain expected by economists. That was also up from a downwardly revised reading of 137,000 in September.
The unemployment rate slipped to 5% from 5.1%, leaving it at its lowest since April 2008.
The dollar jumped more than 1% to a 7-month high and benchmark U.S. bond yields rose to their highest in five years while short-term rates surged. Meanwhile, the price of most commodities plunged and gold fell as much as $20 an ounce at one stage. However, it managed to pare back some of the losses toward the end of the session but still headed for the biggest weekly decline in a year. The price of the yellow metal fell by almost 5% last week, heading for the biggest such loss since October 31, 2014.
Fed fund futures are now pricing in 70% chance of a December hike, up from 56% on Thursday and around below 40% a month ago. The US dollar ended as the strongest major currency last week as the Dollar index jumped to close at 99.16.
Gold prices have come under some selling pressure since October 28, when the US Federal Reserve again left interest rates unchanged. At that time, market watchers suggested that fears of a looming recession are holding the Fed back from making a move. But, after Friday’s report, things changed considerably.
Earlier in the week, sterling fell to a six-month low against the dollar and also slipped against the euro, a day after it had been sent tumbling by the Bank of England (BoE) kicking a UK rate hike down the road.
The BoE lowered both its growth and inflation forecast. It noted that "inflation is likely to remain lower than previously expected until late 2017". The bank lowered its GDP projection to 2.7% in 2015 and 2.7% in 2016, compared to its previous forecast of 2.8% and 2.7% respectively.
Policy makers voted 8-1 to keep the Bank rate unchanged at 0.5% with Ian McCafferty the sole dissenter proposing a rate hike.
The European Commission released updated economic forecast for the regions. Overall, 2015 growth projection was revised higher, but 2016 growth projections were revised lower. And, the 2016 inflation projections were also revised sharply lower.
Eurozone growth projection for 2015 was raised to 1.6%, up from May's projection of 1.5%. For the 28 nation EU, growth projection for 2015 was raised to 1.9%, up from May's projection of 1.8%. However, growth projections were revised down for 2016. Eurozone growth is forecast to be 1.8%, down from prior estimate of 1.9%. EU growth is forecast to be 2.0%, down from prior estimate of 2.1%. Regarding inflation, for 2015, Eurozone inflation projection was left unchanged at 0.1%. But Eurozone inflation projection was revised down notably from to 1.0%, down from 1.5%. EU inflation projection for 2015 was revised down to 0.0%, from 0.1%. For 2016, EU inflation projection was revised down to 1.1%, down from 1.5%.
Since the Northern hemisphere spring 2013, the Fed has been playing with the idea of raising rates, which it had suppressed to basically zero percent in December 2008. So far, however, it has not taken any action. Upon closer inspection, the reason is obvious. With its policy of extremely low interest rates, the Fed is fuelling an artificial economic expansion and inflating asset prices.
Raising short-term rates could have an adverse impact on the current inflated bond, equity, and housing prices. And, if the economy slows down, let alone falls back into recession, the Fed’s fiat money pipe dream would run into serious trouble. So, it will be interesting to see what the Fed does in December.
Meanwhile, the debt ceiling for US government spending was once again increased. The US government now owes in the region of $18.5 trillion. The latest deal lets the U.S. Treasury borrow another $1.5 million through 2017, when Obama leaves office. That adds up to the $20 trillion milestone.
When Mr. Obama took over in January 2009, the total national debt stood at $10.6 trillion. That means the debt will have very nearly doubled during his eight years in office, and there is much more debt ahead with the abandonment of “sequestration” spending caps enacted in 2011.
The US debt is a massive bubble waiting to burst. And, if the Fed raises rates, the cost to service this debt will also increase. Simple mathematics reveal that the U.S. is already well past the 100% debt-to-GDP level which signifies a debt crisis, and that it is impossible for the US to sustain this without some major financial repercussions. And that means that gold, with its power to serve as an alternative currency to the dollar, is more important than ever.
The physical demand for gold rose throughout October 2015 and continues to rise in November as the Hindu festival of Diwali in India approaches. Previously, demand had stayed low due to the patchy monsoon season. Most of the rural population in India is into farming, and so scanty rainfall means fewer earnings, which usually causes the purchasing power of investors from India to remain subdued.
The discounts rates in India were higher for gold during the last week of October 2015, before the US Fed meeting—a discount as high as $10 per ounce. However, after the decline in precious metals prices, demand slowly picked up, and the discount came down to almost $2–$2.5 per ounce on Monday, November 2.
Meanwhile, the South African rand has made fresh all-time lows this week. The Rand fell to below ZAR14.25 to the USD from its previous close of R14.1962. The rand was at R15.3387 against the euro from R15.2003 and at R21.4600 against the pound from R21.3752. The euro was at $1.0771 from a previous close of $1.0726.
It seems that the South African government is oblivious to the impact its corruption and failed policies have on the overall state of the economy or perhaps they couldn’t care. Instead, of tackling this massive problem, the ANC government seems more intent on enlarging the government when it should actually be reducing the size of its payroll.
An article by Magnus Heystek entitled SA on road to bankruptcy – now gradually, soon suddenly published on Business Day Live piqued my interest.
According to the article, a cushy job in government is now the surest way to middle-class wealth for most South Africans.
Much of that is the consequence of cadre deployment, among other things. Merit seemingly counts for very little in the greater scheme of things. Such is the power of the civil service that National Treasury had to allocate money from its contingency reserves – emergency money in other words – to satisfy the demands of government workers. Middle-class taxpayers are not, generally, beating inflation with their salary increases. This can already be seen in new motor car sales, home sizes, travel and even medical aid membership – they are all shrinking. Middle class SA is under a tremendous amount of pressure. Over the weekend the Lever Institute at the University of Cape Town confirmed this trend. As it is, according to economist Mike Schüssler, the average salary in government is now R241 000 per annum versus R196 000 per annum in the private sector. The bloated government salary bill lies at the heart of much of our financial problems at the moment. And what are we getting in exchange? Surly, sloppy service with attitude and if you can’t do your job, you employ a consultant. There was a time that a government employee would accept a lesser salary (relative to the private sector), in exchange for job security, medical aid, housing allowance and a generous pension fund. It was in the private sector where you would make the big bucks but where you could also lose your job and/or business if things went pear-shaped. In the current financial year SA will spend R550bn on the salaries of all civil servants from local to national government, more than half of the four major taxes central government receives, namely VAT, personal income tax, company tax and fuel taxes. People often ask me what a fiscal cliff is. Just open your eyes and observe. We are busy storming at one right now. A fiscal cliff is when your expenses keep on rising but your income suddenly drops away, leaving you with a massive debt to service.
Our media is barely scratching the surface when it comes to the thievery and gross incompetence at local government level. All the North West municipalities, for instance, are under administration. It has become so common that reports of theft and maladministration do not even receive a mention anymore. Last month trade union Solidarity released a report on the ‘ghost workers’ of the North West province, highlighting that at least 36 000 ghost employees have been drawing a combined amount of R19bn in salaries in this province alone. R19bn! This report received barely a mention in the media and one battles to find any discussion on it. But in the end government will find someone else to blame: the private sector, the ‘privileged’ whites, the colonialists or the foreigners. Government spending will be higher next year; so too the budget deficit, the wage bill as well as interest payments on government debt.
As long as the current ANC government remains in power, the future looks rather dire. Afterall, there are only around 7 million tax-payers supporting a population in excess of 55 million.
In such an environment, it is likely that the domestic currency will continue to weaken against the majors. Frankly, I see twenty rand to the US dollar on the horizon. One way to protect your wealth against such a devaluation is to own some physical gold and silver.
While physical cash is a great short-term hedge against risk in the banking system, gold and silver are excellent hedges against long-term risks in the monetary system and global financial system as a whole. But, in addition, these precious metals will act as an insurance against a corrupt government.
There may be a time when you currency becomes worthless just as it did in Zimbabwe, and at that point, the only thing that will make any sense at all is direct ownership of real assets.
If you’re holding paper currency, you have to have some kind of trust that the country that issued it is not just going to print its way out of its problems. That’s a real concern right now. Gold, on the other hand, has real intrinsic value, unlike a paper currency which can be debased by its government.