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Davos: Green Swans and Inequality

24 January 2020

Precious Metals Commentary

A very slow and steady week for precious metals with gold tracking sideways to USD$1,560 and silver falling back to $17.80 at time of writing. Platinum pulled back to $1,000 an ounce with palladium remaining the most volatile of the metals having some wild swings, with spreads on platforms blowing out in response to the volatility.

There is news getting around about the shortage of physical palladium and rumours of a few defaults on delivery as the market remains in a severe deficit. The body charged with overseeing London’s palladium market warned its members this week to ensure trading still functions as it should, as there were reports of premiums on the metal available for immediate delivery being priced at over $200 an ounce higher than the price of futures expiring in March 2020, the widest spread in at least 20 years.

Being a critical ingredient in catalytic convertors for petrol and hybrid cars, the 80% rally has lead to a squeeze in margins for many car manufacturers which analysts at Citi Bank believe has impacted the industry by $18 billion in 2019.

The recent move in the palladium market is a good example of the potential price action of any precious metal that typically has little to no above ground stockpiles. Unlike gold, palladium and platinum have very low levels of above ground stockpiles and are primary used up in industry. Platinum shares many similarities with palladium and can also be used as a substitute for the higher priced metal in catalytic converters, but it would take some time for car manufacturers to make the switch across to a platinum based alternative.

Forbes notes it may be time soon for platinum to ‘play catch up’ soon and we have been commenting on the increasingly bullish setup for platinum for some months now but it could take around 12 months to gain momentum. There are no major manufactures announcing a switch to platinum as yet, but given the huge discount that platinum is now trading at, it would make sense for that market to try to claw back and save on the $18 billion shrink to margins in 2019. If we do hear of any talk of a potential switch we will surely see platinum prices react quickly. Palladium and platinum prices from December 2019 are charted below.

Palladium
Palladium Chart
 
Platinum
Platinum Chart

Hot off the press is our Monthly Technical and Precious Metals Positioning Report by Nicholas Frappell, covering gold, palladium, AUD/USD and other markets here.
 

Elite Meet at “Green” Davos

The annual World Economic Forum meeting at Davos, Switzerland, was held this week.

Ursula von der Leyen, the new President of the EU Commission, celebrated 50 years of Davos by saying that she was “convinced that a more just and sustainable economic system is possible. For too long, humanity took away resources from the environment and in exchange produced waste and pollution”.

More than one commentator noted that such environmental concerns were at odds with the hundreds of private jets flying the elite in. But not to worry as Bloomberg reported that the private jets at Davos could lower their CO2 emissions by 18% with so-called sustainable aviation fuel available at Zurich airport.

Would it be cynical of us to consider sustainable fuel, along with organisers “discouraging” single-use plastic, promoting protein alternatives to meat and transport by train and bus as mere window dressing?

Central bankers are jumping on the environmental bandwagon with the International Monetary Fund (IMF) warning that global warming is now a major financial risk. The Bank for International Settlements (BIS) agrees, arguing that central banks have a role to play in avoiding “green swan” risks.

We note the Sydney Morning Herald’s take on the IMF and BIS comments was that the RBA was being told to “mobilise all the forces needed” to save the economy from climate change.
 

God Complex

If central bankers did not already have a “god complex” from being perceived as the only ones who can save the economy from recessions, this is only going to make it worse.

The BIS draws a long bow, in our opinion, by saying that climate change events could severely affect the financial health of the banking and insurance sectors – forcing central banks to intervene and “buy a large set of carbon-intensive assets” such as coal mines and fossil-fuel power stations.

The conceit behind these claims is that only the enlightened bureaucrats within central banks can know what to do and are much smarter than the financial markets which value these assets and the bankers which decide how much money to loan to operators of those assets. 

Maybe it is quaint these days to believe that free markets can assess risk and price accordingly.

The best example of central bankers’ god complex comes from comments BIS general manager Agustín Carstens made in December. Noting that a country’s monetary system is founded on trust in its currency, he gives the impression that it is all reliant on central bankers, saying that trust “is something that only the central bank can provide” and that “a dollar bill, it represents the promise of the Federal Reserve to provide the bearer with one dollar. From that basic promise, all other promises in the economy follow”.

Ignoring the nonsense statement that a dollar represents a promise to provide a dollar, this idea that trust in money relies on central bank wilfully ignores the fact that over 95% of money is issued (created) by private banks, as the RBA itself acknowledges in this speech detailing that of the $2,000 billion worth of money in Australia, only $75 billion is in the form of physical currency.

What backs that privately created money are loans banks make to business and people (mostly mortgages) and thus trust in money is trust in the ability of businesses and people to repay those loans by producing goods and services of use to society.

The belief in the central role of central banks is what blinds the IMF in a special report on precious metals to dismiss gold and silver as “seem[ing] to have been buoyed at times by the (possibly irrational) fear of a collapse of major fiat currency systems”.

When over 95% of money is backed by loans, it is hardly irrational in our opinion during periods of financial excess for people to question whether bankers have been prudent in their lending and, as a result, question their trust in the ability of money to hold its value.

Would the IMF consider fund manager CrossBorder Capital irrational when they wrote in the Financial Times, that much of the new debt taken on since the 2008 financial crisis unlikely to be paid back but, more worryingly, it is compounding ever higher”.

Their advice: “remember what former Citigroup chief Chuck Prince said about “still dancing”, on the eve of the 2008 crash. Enjoy the party, yes. But dance near the door”.

Physical gold and silver are the pre-eminent hard assets for the average person seeking to protect themselves from such risks.

Understanding what money is and the role of gold and silver makes it clear what was driving (founder of the world’s largest hedge fund) Ray Dalio’s comment to CNBC on the sidelines of Davos that “cash is trash” and that “you have to have a certain amount of gold in your portfolio”.

Also at Davos, billionaire investor Paul Tudor Jones said that “we are just again in this craziest monetary and fiscal mix in history. It’s so explosive. It defies imagination” and was reminiscent of the latter stages of the bull market in 1999.
 

Inequality and Instability

In addition to climate change, the IMF is also concerned about inequality and financial sector instability.

In a speech prior to Davos, the IMF’s managing director noted that inequality has been on the rise and that “this troubling trend is reminiscent of the early part of the 20th century … the first Gilded Age, the Roaring Twenties, and, ultimately, financial disaster”.

She said that excessive inequality can hinder growth, erode trust within society and institutions and thus “it can fuel populism and political upheaval”.

We have certainly seen populism last year and economic and political analysis firm Verisk Maplecroft expects more to come, reporting that close to 40% of the world’s 195 countries will experience civil unrest during 2020.

Noting that government were caught by surprise by the “pent-up rage that has boiled over into street protests” they predict that 75 countries will see an increase in civil unrest during the next six months.

Relative increase in civil unrest 2019-Q1 to 2020-Q1 Chart

They say that government responses like limited concessions and security clampdowns do not deal with the underlying causes and with the grievances being deeply entrenched it will take years to address, meaning that investors “will have to learn to adapt and live with this ‘new normal’”.

Andrew McAuley, Chief Investment Officer for Credit Suisse Private Banking Australia, also picked up on this “new normal” by including “Angry Societies” as one of his five supertrends.

He identifies this supertrend as “a western middle class disenchanted with globalisation driven by lack of real wages growth”, which he says is not just global but also affects Australia given we have seen flat real wages growth while the cost of necessities remains high.

His recommendations: domestic manufacturers and brands, defence and security (cyber and conventional) companies.

To that we would add gold and silver of course. As David Rosenberg, chief economist and strategist at Rosenberg Research and Associates, said, gold is an insurance policy when things go wrong and that in this liquidity driven market “there’s no such thing as a no-brainer, but [gold] is close”.

Until next time,
 
John Feeney and Bron Suchecki
ABC Bullion
 
If you have any questions or feedback about this week’s report, we would love to hear from you. You can contact John Feeney (@JohnFeeney10) and Bron Suchecki (@bronsuchecki) directly on Twitter, otherwise please feel free to send us an email at comms@abcbullion.com.au, or call us during trading hours on 1300 361 261.

Disclaimer
This publication is for educational purposes only and should not be considered either general or personal advice. It does not consider any particular person’s investment objectives, financial situation or needs. Accordingly, no recommendation (expressed or implied) or other information contained in this report should be acted upon without the appropriateness of that information having regard to those factors. You should assess whether or not the information contained herein is appropriate to your individual financial circumstances and goals before making an investment decision, or seek the help the of a licensed financial adviser. Performance is historical, performance may vary, and past performance is not necessarily indicative of future performance. Any prices, quotes, or statistics included have been obtained from sources deemed to be reliable, but we do not guarantee their accuracy or completeness.