Following day-to-day financial headlines is never a good idea, but we’re all forced to at least scroll past them.
In this sense, even ignoring the articles doesn’t mitigate one of the worst effects of the constant misappropriation of long-term trends to explain broad market churn and volatility.
We’re trained to categorically ignore major catalysts that will have massive effects on long-term investments.
For example, Friday’s headlines focused on Greek worries and weak data, yet these “worries” inexplicably vanished in Monday’s rally.
The explanations clearly don’t fit, and undisciplined investors will take the headlines as gospel and conclude that the improperly cited catalysts are nothing to consider.
The simple fact of the matter is that, outside of very rare days, broad market moves that are around 1% to 2% are functionally meaningless.
Professional traders and institutions don’t make money unless there is some movement, and they can collect plenty from these small differences while the rest of us cannot.
That will never get anyone to read an article, so it is never published. Tag something on about Greece or problems in Europe and we are trained to view them as guilty of being non-issues by association.
This is a terrible disservice to readers and the problems with Greece and Europe in particular should be getting far more attention.
This is especially true when it comes to gold.
Liquidating Greece
Greece, in spite of its relatively small economic clout, really is a big deal for Europe. If you haven’t noticed, things are getting pretty hairy.
Following raids on Greek pension funds, the Greek government is now centralizing all of the cash it can grab citing “an extremely urgent and unforeseen need.”
This legislative act requires all public sector entities, including local governments, to transfer all funds to the Bank of Greece. A mere 2.5% interest will be offered in return.
For perspective, Greek three-year yields recently spiked above 27%.
According to Markit, the cost of insuring Greek debt against a default has spiked alongside yields. Current data implies a 77% chance of default within five years.
This is a precursor to full on capital controls. There is officially nothing left to take without state control of the private sector.
One billion euros are due to the IMF next month, and Greece is plundering the coffers to meet it.
There is no word yet on the next debt payment it will have to make, or the ones it will have to make every month after that.
The EU and Eurozone are in dire straits. Interest rates are going negative in strong regions and soaring in the periphery.
As much as the ECB has been strengthened, it simply cannot contain individual nations that use a common currency that are in such starkly different economic situations.
Publicly, the ECB, Germany, and Greece all insist that there is no possible way a default and exit will happen.
Even if they were being honest, history is filled with negotiations ending in failure when consensus on what everyone wants is unanimous. Think of the sequester in the U.S.A., or the current immigration crisis in the Mediterranean.
All of this would be fine for Europe as a whole, if only these debt obligations weren’t issued in euros.
The Long Term
The flaws intrinsic in the EU and Eurozone that we’re seeing play out in the Greece debacle create an intrinsic risk for anyone attempting to maintain long-term wealth.
The euro, with all of its flaws, accounted for well over a quarter of the value of world central bank reserves in recent years.
As of 2014, that fell to 22%. Further concerns about deflation in core states and economic weakening in the periphery will only drive this further down.
Holding euros has become too much of a risk, but what other options are there?
The dollar is a perennial favorite, but it now accounts for 63% of worldwide reserves. Adding more makes no sense for diversification, let alone exposure to everything that is wrong with currency and economic intervention in the U.S.A.
This is hobbling a global drive to shore up the books as sovereign and private debt has degraded in quality while massively increasing in volume.
As Bloomberg noted, “Global reserves declined to $11.6 trillion in March from a record $12.03 trillion in August 2014, halting a five-fold increase that began in 2004,” and “…China and Russia — added an average $824 billion to reserves each year over the past decade.”
Russia and China are making strong moves to create alternatives to the U.S. dollar in international trade, but they will take time.
Needless to say, neither country has any intention of doing the U.S.A. a favor unless there is no other alternative.
The only solution to divesting from the euro without gaining even more exposure to the dollar is to buy gold. No other currency can possibly absorb the volume at this time.
Go For Gold
Gold is in an interesting investment these days, and not many people seem to notice what is going on.
In many ways, the Great Recession was the last nail in the coffin of the old Bretton Woods international currency system.
This system, which started forming in the smoldering height of World War II about ten months before VE Day, guaranteed convertibility between the U.S. dollar and gold.
A natural inverse correlation was created. The stronger the dollar, the les you needed to buy a set amount of gold, thus driving gold prices down.
This deal lasted until 1971 when Nixon abandoned it, but long-term economic inertia allowed it to persist.
Over time, it gradually weakened. These days, correlation is almost completely gone.
Here is a look at the value of the dollar and gold with a chart of correlation above it. Look at how it has been bouncing back and forth.
If a strong inverse correlation still existed, it would rarely, if ever stray beyond the bottom -1 level. Instead we see periods of high correlation quite frequently.
The dollar doesn’t matter nearly as much as it used to for gold prices. As such, the same goes for U.S. interest rates.
It took a long time for this to change, but international central banks finally figured this out.
Last year, central bank gold purchases totaled 477 tonnes, 17% more than in 2013. This was second only to 2012’s 544 tonnes in the last 50 years.
Russia led the pack, and is rebounding from economic sanctions enforced by the EU (euro) and U.S.A. (dollar) with the biggest gold purchase in six months in April.
And this only accounts for purchases we can know. China has been the largest importer of gold for years, and the figures don’t come anywhere close to estimates of private consumption.
Recent estimates from Bloomberg Intelligence suggest China has tripled gold holdings since the last update.
This is a slow, slow story, but it is one that strongly supports maintaining a position in gold.
Pick your own portfolio percentage allocation, but don’t ignore it. Anyone who scoffs at people who buy gold, yet holds none is just as much of a zealot.
Buying pressure, average all-in costs of production near parity with current gold prices, and a slew of geopolitical issues support bullish gold positions — whether it is bullion, paper, or investments that double the gains seen in gold prices.
Don’t let short-term noise distract you from the long-term story that no one in the media wants to cover.
