01 April, 2015

Newsletter - The DELAIRE Report

The price of gold experienced its longest winning streak since 2012, last week as the price broke through the $1,200 level early Thursday and soared as high as $1,220 as Saudi Arabia launched airstrikes against Iran-backed Shiite militants in Yemen.

Although new geopolitical tensions in the oil-rich region prompted some safe-haven buying of gold, gold pared gains after hitting a 3-1/2-week high on Thursday. The jump in the price was due to a knee-jerk reaction to escalating tensions in the Middle East.

This Monday, gold fell more than one percent as the dollar climbed following the remarks made by Federal Reserve Chair Janet Yellen last Friday.

Chairwoman Janet Yellen said on Friday an increase in the Fed’s benchmark rate “may well be warranted later this year” given sustained improvement in U.S. economic conditions.

The Fed has kept its benchmark rate at a record low near zero for more than six years.

Almost two weeks ago, the price of gold rallied after the U.S. Federal Reserve sounded a cautious note on interest rates, curbing the strong dollar rally. The price of the yellow metal rebounded from its lows of around $1140 an ounce to trade back above $1180 an ounce.

Right now, global financial markets are reacting to what the Federal Reserve may or may not do. At the last FOMC meeting, Yellen decided to drop the word “patience” from its forward guidance. As far as I am concerned, the word patience is irrelevant and it makes no sense whatsoever, why this one word from the Fed should have such an impact on global financial markets. But, this is the madness of today that has pervaded these markets.

Basing critical investment decisions on garbage rhetoric, lies and deception rather than real, truthful and important fundamental information have become the norm. To me, it is unbelievable that people have attempted to predict the action of the most powerful bank in the world by deciphering the meaning of one word when the fundamentals are so very clear?

With or without the word “patience”, it is clear that the U.S economy is not in such great shape as authorities would like to have you believe. A key Bloomberg index shows that almost every major U.S. economic gauge has missed expectations, falling to the lowest level since 2009.

The U.S dollar is hardly stronger because the economy is booming, but because the euro is collapsing. Nevertheless, the financial/political elite give the perception that all is fine.

In what I think is of far more importance and relevance than the word “patience” are the developments taking place in Asia. One of these developments is the establishment of the Asian Infrastructure Investment Bank (AIIB), an international financial institution proposed by the government of China. The purpose of the bank is to provide finance to infrastructure projects in the Asian region.

The Chinese government has been frustrated with what it regards as the slow pace of reforms and governance, and wants greater input in global established institutions like the IMF, World Bank and Asian Development Bank which are dominated by American, European and Japanese interests.

On October 24, 2014, a signing ceremony held in Beijing formally recognized the establishment of the bank. 21 countries signed the bill, which included: China, India, Thailand, Malaysia, Singapore, the Philippines, Pakistan, Bangladesh, Brunei, Cambodia, Kazakhstan, Kuwait, Laos, Myanmar, Mongolia, Nepal, Oman, Qatar, Sri Lanka, Uzbekistan, and Vietnam.

U.S. pressure allegedly kept Australia and South Korea from signing up as founding members, despite the fact that they had formerly expressed an interest in it.

Now it’s Austria, Switzerland, and Australia that have joined dozens of other countries around the world in the anti-dollar alliance.

Recently, prime-minister Tony Abbott announced Australia would sign a memorandum of understanding that will allow Australia to be involved in negotiations to set up the $100 billion in the Asian Infrastructure Investment Bank (AIIA).

The United States has lobbied Australia and its other allies against signing up to the bank for fear it would dilute the influence of the World Bank and the Asian Development Bank, in which it and Japan hold dominant positions.

To-date Britain, Germany, France and Italy have all declared their support for the China-led AIIB. They join more than 30 other countries that have either signed up or applied as founding members so far.

The AIIB is the biggest disruption to the global monetary system since the end of World War II.

For decades, global finance has been completely dominated by the United States… and the US dollar. Nearly every major financial or commodity contract in the world is priced in US dollars. And this requires that the entire world not only holds US dollars in order to engage in trade, but to also use the US banking system.

But in recent years, we’ve started to see a shift away from this. The BRICS – along with a handful of other developed and developing economies – have opted to settle foreign transactions through bilateral trade agreements. Sometimes they’ve even opted to pay for each other’s goods with gold.

Iran is one of the latest to join the list of countries ditching the dollar. Just last week, their central bank announced that the U.S. dollar will no longer be used for trading purposes. Instead, Iran will trade in currencies such as the Chinese yuan, euro, Turkish lira, Russian ruble and South Korean won.
The dollar being the reserve currency of the world has put the United States in a position of unparalleled privilege. And in return, this privilege has afforded the United States the opportunity to indebt itself more than any other nation in the history of the world.

Anyone with the ability to think can see that the debt levels are so massive, it’s now mathematically impossible for the US to ever pay it off.

And as the U.S. continues to place sanctions on nations all around the world – like Iran and Russia – just when they don’t agree with the U.S., these threatened countries will find an alternative currency with their partners by bypassing the dollar system.

It is now apparent that many other nations have had enough and no longer want to be dictated to by the U.S. And they’re joining with China’s new AIIB in a clear sign of alignment against the US government and the US dollar.

China’s intention is not to destroy the current financial system but to seek a greater role for it in the decision-making and running of the institutions such as World Bank and IMF. China hopes to force a rethink on the part of the US as regards the IMF (ie, expand and reform the institution, accommodate the renminbi and so on).

There are indications that the inclusion of the Chinese yuan in the International Monetary Fund’s “special drawing rights” basket will be connected to China’s announcement of a substantial increase in its gold reserves.

In an environment of market rigging, low interest rates and huge unsustainable debts, it’s vital that you own some precious metals as “financial insurance”. It is no wonder why countries such as China are accumulating massive amounts of gold.

And, whether or not you believe a financial collapse is imminent it would be very prudent to buy some physical gold.

Newsletter - The DELAIRE Report

In the past two years, like gold, silver prices have fallen sharply.

Traders have used this as an opportunity to stock up silver. In 2014, silver imports reached a record high of 6,842 tonnes, an 18 per cent increase over the previous year, according to GFMS Thomson Reuters data. In value, however, the import bill fell, owing to the decline in silver prices. Silver imports in 2014 were worth $3.46 billion compared with $3.64 billion in the previous year.

Silver prices fell 24 per cent in 2013 and another 15 per cent in 2014 in Mumbai.

India’s gold import bill in the past two years was $30-35 billion, with net imports registering 750-800 tonnes.

Gold trade was under stringent controls in 2013 and 2014, prompting several traders to move to silver. The commodity’s lower price, which almost halved from the all-time high price seen four years ago, has generated huge investment interest. The increasing demand for silver jewellery and articles was also a factor that led to increase in imports.

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“The surge of this magnitude in volume terms was attributed to higher investment demand and to risk-free returns in the cash-futures arbitrage. Silver jewellery and article fabricators re-stocked in high volumes as the price had declined sharply,” said Sudheesh Nambiath, senior analyst, GFMS Thomson Reuters, a precious metals analytical company.

The silver trade, too, has changed, with imports — especially those by sea — now concentrated in Ahmedabad. Sixty per cent of imports happen via the sea route and40 per cent by air.

In 2014, half the import by sea landed in Ahmedabad. Sources say the ease of operating through the port there has attracted imported cargoes getting cleared from there. Mumbai’s demand is also met through the Ahmedabad. Other major centres that have seen higher activities in silver trading are Salem and Chennai in south India and Agra in north India.

According to GFMS data, Germany has emerged a major exporter of silver to India. China, Hong Kong and Taiwan, the UK, Germany and Russia are the largest exporters of silver to India.

Monal Thakkar, director of Ahmedabad-based Amrapali Group, said: “Half of the incremental demand for silver is investment-driven. Silverware and gifting of silver articles have also become trendy.”


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.