Example of the 'BullionVault Weekly Update'

BullionVault Weekly Update

Monday, 11 September 2017

In the markets this morning...

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Tick-Tock, Northern Rock

from Adrian Ash

Head of Research, BullionVault

EVEN a stopped clock tells the right time twice a day.

And 10 years ago this week, the minute-hand slowly turned towards a dark midnight which gloomy gold bugs like us had long predicted.

We like to flatter ourselves that we saw it coming. Mostly because we did.

But we take very little pride in it today. Because the coming of the 2007 credit crunch...and the global financial crisis it announced...was plain to see. If only you looked.

Such things form the ultimate fundamentals of the bullion price, most especially gold. From the lows of 1999-2001, it had tripled versus the Dollar...despite no major shift in supply or consumer demand, let alone European central-bank selling...even before the sub-prime crash began to make headlines. It soon caught up for UK, Euro and pretty much all other investors too.

Of course, central bankers and regulators would later claim in the aftermath of the financial crash that no one could predict it. But they couldn't even see the crisis when it was upon them!

On Wednesday 12 September 2007, for instance...more than a month after the global money markets froze in fright as the US sub-prime mortgage market tipped into a crash...the UK mortgage bank Northern Rock ran an advertisement across the front-page of Britain's Daily Telegraph newspaper.

It promised 6.30% interest on savings accounts...more than 2.50 percentage points above the average rate-of-return offered by UK banks that August...and the biggest incentive to keep your cash in a bank for nearly a decade.

We were all about to learn why.

Over the previous half-decade, Northern Rock had regularly topped the UK's 'Best Buy' tables for fixed-rate bonds and deposits. Yet customer savings accounted for only one third of its funding, needed to finance the UK's fastest-growing book of home loans.

Already the country's fifth-largest mortgage lender, Northern Rock grew its net lending to UK residents by 55% over the eight months to August 2007. Driving this break-neck growth was what the financial media politely termed "an alternative banking model": borrowing on the international money markets, rather than using customer deposits.

Northern Rock was far from alone in relying on the credit of strangers. Nor was this 'model' in itself new. Short-term money-market loans had helped giddy-up the Lawson Boom of the mid-to-late 1980s.

In the first decade of the 21st century however, this "footloose" finance meant that the gap bewteen UK bank deposits and UK bank lending surged to a massive £800bn at the top...fully 56% of the UK's entire annual GDP.

Northern Rock, in other words, was just the riskiest of many high-risk balance-sheets. And so it became, logically enough, the first major UK institution to fall.

But rescuing it therefore didn't make so much sense. Especially on-the-fly in a panicked press conference.

But then, the UK's chief finance minister himself did have a mortgage with NRK...if not a conflict of interest.

Naturally, Alistair Darling has since been ennobled. Outside the terrible two-some of Tony Blair and Gordon Brown, all the other great supporters and enablers of Britain's financial bubble and bust have received gongs as well: Mervyn King, Callum McCarthy, Adair Turner...

But the real prizes went of course to the banks...bailed out with taxpayers' cash by the very government and regulators who had fed and watered their reckless lending.

While it soon became fashionable to moan about "privatized profits but socialized losses" few people have noticed the other great transfer...again from banks, onto the shoulders of private individuals like you and me...following the financial crisis which broke 10 years ago:

Risk.

As that desperate advert from Northern Rock showed, any rate of return paid on cash savings means you are being compensated for taking some risk...whether of time, missed opportunity or possible capital loss.

Yes, that includes bank deposits, as first UK and then US, Icelandic and finally Eurozone savers learned between 2007 and 2013. And yes, the risk of capital loss...thanks to your bank failing...is what banking deposit insurance has sought to erase since the 1930s' Great Depression.

Governments everywhere responded to the dark midnight of 2007-2009 by confirming and proclaiming the safety of bank deposit insurance. Never again will widows, orphans or anyone else holding less than a pretty tidy sum...such as €100,000 say...have to fear any risk of their bank failing.

But with that risk eliminated by government diktat, the outcome for interest rates on your savings also now looks obvious in hindsight.

Zero risk = zero return. Which forces anyone and everyone hoping to grow or defend the real, inflation-adjusted value of their money to take risk elsewhere.

Bitcoin, high-yield junk, all-time record highs in the US stock market...none of these things rely on borrowed money today anything like the banking bubble did a decade ago.

That's because this bubbling financial-price boom isn't a debt bubble. It is a bubble in money itself...guaranteed safe by the government but therefore unable to attract any interest and so pushed out to seek risk like never before.

Quite where or when this will find its pin, I don't pretend to know. Maybe in China's $9 trillion bond market. Maybe in Australia's liars' loans of 2017. Maybe in the terrible financial (not to mention human) costs of Harvey and Irma. Or maybe when the City and Wall Street finally wake up to the threat of Korean nuclear war.

All anyone can guess for now is that this relentless bull run in the price of every 'asset' will crash in the end. Even precious metals are likely to suffer at first, thanks to the air gushing out of credit derivatives.

But when the profits people wished they had booked start to fly away...evaporating from crypto-currency, high-yield debt, real estate and equities...many will rush to lock their wealth into a big, heavy box somewhere safe behind a big heavy door in the form of physical, vaulted bullion.

They did a decade ago. They always do in a true financial crisis.

Acting early has tended to pay best. And believe me:

Not having to join the rush can make financial crises fun to watch.

Adrian Ash

Head of Research, BullionVault

Key data and market events, times in Greenwich Mean Time (CET-1, EDT+4):

  • Australia GDP accelerated to 1.8% per year in Q2 but corporate profits fell, current account deficit with rest of world doubled, exports then slipped more than imports in July...
  • Japan Q2 GDP revised down to 2.5% annual growth, 0.4% of it due to deflation in prices. Wages then slipped 0.3% per year in July (analysts forecast +0.5%), bank lending slowed to 3.2% growth in August...
  • China services sector much stronger than expected in August (Caixin PMI), inflation rose to 7-month high at 1.8%, trade surplus fell as exports +6.9% per year, imports +14.4%...
  • Eurozone Q2 GDP revised up to 2.3% growth but producer prices dead-flat in July from June, Germany's factory output + orders both missed forecasts, retail sales strong. Services sector then slower in August (outside Germany), investor confidence higher in Sept...
  • UK trade deficit shrank 1.5% in July as Pound held near record lows, construction sector slowest in 12 months in August (PMI survey) as commercial building offset housing boom. Retail sales stronger from last summer, house prices accelerate to 2.6% annualized inflation...
  • US trade deficit less awful than expected for July even as consumer credit jumped. Services sector expanded faster again in August, but new jobless benefit claims now jumping on hurricanes Harvey and Irma...
  • Canada building permits shrank 3.5% per year in June, business activity growth badly missed booming forecasts for August (Ivey PMI) but jobless rate ticked lower...
  • Central-bank watch Canada bucked the rate-cutting trend, raised 2nd time in 2 votes to 3.5% as Mauritius, Serbia + Brazil cut. No change from other 7 of 11 decisions last week, but Eurozone all set to decide on QE tapering next month. Unless, well, like, y'know...things...
  • Central banks this week 10 decisions due, with Thurs bringing Switzerland (last cut to -0.75%), Turkey (last raised to 8.0%) and the UK (last cut to 0.25%) plus major precious metal miners Chile + Peru. Then Russia (last cut to 9.0%) on Friday...
  • Already on Monday Japan machine-tool orders jump fastest in 3 years, Italy's industrial boom beats analysts again...
  • Later today India's trade deficit from August, plus Canada's new home-building after BoC's 1st rate hike, already slipping from spring's 10-year high...
  • Tuesday Australia business confidence, UK retail sales + inflation + official house price index, US business optimism (NFIB)...
  • Wednesday Japan domestic business cost prices, Germany + Spain inflation, UK jobs data, US producer prices + monthly Treasury deficit...
  • Thursday China retail sales, industrial output + urban investment, Japan industrial output, France + Italy inflation, US inflation, Canada new home prices...
  • Friday Germany wholesale prices, Eurozone trade surplus July, US retail sales + industrial output August...

PLEASE NOTE: This email is published to inform your thinking, not lead it. Only you can decide the best place for your money, and any decision you make will put your money at risk. Information or data included here may have already been overtaken by events - and must be verified elsewhere - should you choose to act on it.