03 March, 2015

Newsletter - The DELAIRE Report

Gold prices pared earlier gains on Monday after hitting the highest in almost two weeks as gains for equities cut demand for haven assets.

In a surprise move, the People’s Bank of China (PBoC) lowered the benchmark one-year loan rate by 0.25% to 5.35%. The one-year deposit rate was also cut by 0.25% to 2.50%.

U.S. equities rallied on Monday, with the Nasdaq composite crossing 5,000 for the first time in 15 years, while the U.S. dollar climbed to its strongest level since September 2003 against a basket of currencies. The dollar index was 0.2% higher in late trading at 95.478.

The Dow Jones industrial average jumped 155 points to 18,288, the S&P 500 gained 12 points to 2,117 and the Nasdaq Composite finished up at 5,008.

Last week, gold prices managed to hold above the key psychological support level at $1200 an ounce against a slightly stronger U.S. dollar and record highs for global equities.

The financial markets were also watching U.S Federal Reserve Chair Janet Yellens’ testimony before Congress. While many topics were discussed, the financial media focused on her remarks on interest rates.

Yellen cautioned that the word “patient” could be removed in the FOMC’s next statement on monetary policy. But, she assured everyone that just because the word “patient” may not appear, it doesn’t mean an increase in interest rates is imminent.

Frankly, I think it is bizarre how market participants react on few words, in this case the word “patient.” Since when has market action become solely dependent on a few words about what may or may not happen in the future?

The U.S. Fed has nearly quintupled the monetary base in the last six years. It recently finished its latest round of quantitative easing, which was the biggest round of money injection in the Fed’s history.

Despite the fact that the Fed has printed enormous amounts of money, the U.S. dollar has been strengthening, at least compared to other currencies. The reason for the strong dollar right now is just the comparative advantage over other countries that are engaging in monetary stimulus and that have weak economies. In other words the weakness of the other currencies is making the greenback look relatively strong.

Now that the Fed has ended its program of quantitative easing, the Bank of Japan is embarking on its own programme of money printing – unprecedented for a country of its size and economy. And, the ECB is now getting ready to begin its own programme of money stimulus that is weakening the euro. The Bank of England has also been engaged in quantitative easing. And, we must not forget the low interest rate environment.

For now, the U.S. dollar is the best currency amid a group of really bad fiat currencies. But, eventually the dollar will also fall in value, and when that happens, you need to be protected against this.

To protect yourself, you should allocate a certain percentage of your portfolio to physical gold and silver. Despite its current strength, now is a good time to invest in physical gold and silver.

Once again, one of the major banks has made headlines. This time it is HSBC. Recently, HSBC, Europe’s biggest bank, has been involved in a string of scandals and has paid billions in penalties to regulators around the world. The bank has been found guilty of money laundering, Libor and foreign exchange rigging. So what’s news? Now recent revelations show that the bank has also been involved in tax evasion.

Last Wednesday, lawmakers on the U.K. Parliament’s Treasury Committee interrogated HSBC Chairman Douglas Flint and Chief Executive Stuart Gulliver with questions about personal accountability amid allegations that its Swiss private bank helped wealthy clients evade taxes.

And, on February 24, German prosecutors launched an investigation into Commerzbank and its clients in connection with suspected tax evasion involving accounts in Luxembourg.

Commerzbank said in an emailed statement that it was fully cooperating with the investigation which it said concerned old cases that date back 10 years or more.

While it has been well-known that all of the major Western banks as well as the major central banks have been involved in rigging practically every market, they have always denied that they manipulate the prices of precious metals. However, the US Department of Justice is now investigating at least 10 major banks for possible rigging of precious-metals markets.

According to the Wall Street Journal, “prosecutors in the Justice Department’s antitrust division are scrutinizing the price-setting process for gold, silver, platinum and palladium in London, while the Commodity Futures Trading Commission has opened a civil investigation. The agencies have made initial requests for information, including a subpoena from the CFTC to HSBC Holdings PLC related to precious-metals trading, the bank said in its annual report Monday.

HSBC also said the Justice Department sought documents related to the antitrust investigation in November. The two probes “are at an early stage,” the bank added, saying it is cooperating with U.S. regulators. Last year, the FCA fined Barclays £26 million ($40.2 million) for lax controls after one of its traders allegedly manipulated the gold fix at the expense of a client.

The Justice probe is centering around the actions of Bank of Nova Scotia, Barclays PLC, Credit Suisse Group, Deutsche Bank, Goldman Sachs Group, J.P. Morgan Chase, Societe Generale, Standard Bank Group, and UBS.

This investigation comes shortly after European regulators dropped a similar probe after finding no evidence of wrongdoing. No doubt, the reason why the investigation was dropped in Europe is because it would have implicated virtually the entire trading desk at the biggest and most important European bank: Deustche Bank, as well as the biggest bank in Switzerland, UBS and UK’s own Barclays.

Swiss regulator Finma settled last year allegations of foreign-currency manipulation with UBS. The regulator said it found “serious misconduct” among precious-metals traders at UBS, including “front running,” or trading ahead of, the silver-fix orders of one client. A spokeswoman for UBS, which said at the time that it “instituted significant cultural and compliance changes,” declined further comment.

What I find extremely annoying is the fact that while these banks commit just about every financial crime imaginable, the regulatory bodies refuse to prosecute any banker and continue to harass hard working individuals instead. And, many of these individuals have merely taken precautionary measures to protect their wealth against corrupt governments as well as bad monetary policies.

As I have stated before, it is the individual who needs to do due diligence on the banks and not the other way around. And, while the justice system should apply equally to everyone, it is very clear that bankers and corrupt politicians are not included in this. It is a disgrace and it is time something is done about this. Corrupt government officials should be the first to be investigated and should be prosecuted if found guilty. The list of these individuals is endless. They are the parasites of society, unable to create any wealth and only able to suck on the wealth of tax payers. It is not illegal to have an offshore bank account and under the present circumstance it is a necessary financial survival tool just as long as it is not used to evade tax.

Last week, the Ukrainian National Bank (UNB) suspended foreign currency trading, cancelled the suspension, then resumed the suspension, then cancelled the suspension.

Ukrainian supermarkets have imposed rationing of basic products after the drastic fall in the value of the hryvnia. The currency has lost 70% of its value causing people to stockpile food and buy electronics as a hedge.

Restrictions apply for goods such as cooking oil, flour and sugar, Ukraine’s news agency UNN reported. Retailers may sell no more than two bottles of sunflower oil, and two packs of buckwheat per customer and, depending on the store, from 3 to 5 kilograms of flour and sugar.

Bread, rice, potatoes, meat and milk are not yet rationed, but are not so plentiful on supermarket shelves.

The situation in Ukraine reminds me of what happened to Zimbabwe. There are many similarities between the two countries. Both countries are corrupt and totally mismanaged by the government.

Most Western people have no idea of where Zimbabwe is located or what happened to the country. Perhaps this is understandable as most people have no interest in this country as it has become the third poorest country, not only in Africa but also in the world.

For many years, Zimbabwe was known as the “jewel” of Africa. Rich in raw materials and productive farmland, it grew enough food to feed its people and export the rest.

Yet, unlike most other African countries, Zimbabwe had a sophisticated manufacturing base as well. That sector employed thousands of workers who made things such as textiles, cement, chemicals, wood products, and steel. Zimbabwe also had a strong banking sector, vibrant tourism, and more dams than any other Sub-Saharan country except South Africa. Most people trusted the police and believed the court system would treat cases fairly; indeed, the low crime rate rivalled that of many European countries. Perhaps most important, the country had a secure rule of law, with a modern property rights system that allowed owners to use the equity in their land to develop and build new businesses, or expand their old ones. All that led to strong real GDP growth, which averaged 4.3% per year after independence in 1980.

All that changed when President Robert Mugabe began to seize most of the white owned commercial farms. Between 2000 and 2003, his government went ahead and authorized the seizure of nearly all the 4,500 commercial farms. The official goal was to divide the farms into hundreds of thousands of small plots for traditional black farmers. In practice, most plots ended up in the hands of Mugabe’s political supporters and government officials, who had no knowledge of farming.

The result was catastrophic. As the economy collapsed the Reserve Bank of Zimbabwe engaged in massive money printing. Individuals had to barter in commodities such as petrol, grain, cooking oil, milk, soap and toilet paper. One egg cost trillions of dollars! People were unable to keep up with price increases. Eventually, the Zimbabwe dollar became worthless and every single saver and pensioner was wiped out. Ultimately, in order to avoid starvation, millions of Zimbabweans fled to South Africa.

And, as to be expected foreign financial investors fled. And, only a few people who owned hard assets such as gold and silver managed to escape the utter devastation.

While the disaster was clearly due to the policies of the current regime, Mugabe has blamed the country’s economic collapse on a variety of external factors, including Western conspiracies, the British government, colonialism and white people. Mugabe has also blamed “continuous years of drought,” even though dams in Zimbabwe were full throughout the economic downturn.

Meanwhile during the entire economic collapse, Mugabe and his cronies didn’t suffer at all. In fact, there living standards probably improved! None of the pensioners and savers were ever compensated in anyway at all and many of them ended up destitute.

While Zimbabwe is insignificant in the global economy there are lesson to be learned. The most important one being that if you have not protected yourself when an economy collapses your wealth could be totally wiped out. And, be assured that if any government policies result in a financial collapse and as in the case of Zimbabwe they won’t have your interest at heart. Nor will they accept any blame. In the case of Mugabe and despite the fact that he ruined an entire country and was responsible for the displacement of millions of people he was recently appointed as the head of the African Union!

While everything may look fine now, a massive currency crisis is on its way.


About the author

David Levenstein is a leading expert on investing in precious metals.  Although he began trading silver through the LME in 1980, over the years he has dealt with gold, silver, platinum and palladium. He has traded and invested in bullion, bullion coins, mining shares, exchange traded funds, as well as futures for his personal account as well as for clients.

His articles and commentaries on precious metals have been published in dozens of newspapers, publications and websites both locally as well as internationally. He has been a featured guest on numerous radio and TV shows, and is a regular guest on JSE Direct, a premier radio business channel in South Africa. Rand Refineries, the largest gold refinery in the world use his daily and weekly commentaries on gold.

David has lived and worked in Johannesburg, Los Angeles, London, Hong Kong, Bangkok, and Bali.

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Information contained herein has been obtained from sources believed to be reliable, but there is no guarantee as to completeness or accuracy. Any opinions expressed herein are statements of our judgment as of this date and are subject to change without notice.