At a time of crisis people look for what are considered to be safe havens. I say considered to be because this subject has been a regular feature on here in the credit crunch era and we have observed some ch-ch-changes in behaviour. For example we have seen investors be willing to take a loss by buying bonds with a negative yield suggesting that fear of losses elsewhere may be so high that a small one is preferable. Or that you expect to gain so much from that particular currency ( Euro, Swiss Franc or Yen) that the yield loss is minor.
Gold
This is a traditional if not the traditional safe haven and in a reversal of the trend above one of the costs of holding it has fallen substantially recently. If we look at it in terms of the world’s main currency the US Dollar the interest-rate cost has fallen to nearly 0%. The effective Federal Funds rate if 0.05%. Of course some currencies via negative interest-rates have for this area meant that you get a small annual gain from holding Gold although of course there are other costs.
That leaves gold, the traditional safe haven, whose supply is largely fixed, with annual production a modest proportion of the infinitely durable stock. Gold production in 2019 fell slightly to 3,464 metric tonnes, the first fall in 10 years according to the World Gold Council, as ore grades in the world’s major mines declined and mining costs rose. The year’s higher prices increased recycling, so total supply increased, but only modestly, by 2%.
That was from Reuters Breaking Views at the end of March and leaves us with a view of something with a fixed supply. There is a shuffle there from a fixed stock which does not get a mention although maybe the supply could change.
A major and prolonged price rise would increase production, but with mines having a high capital cost and a four or five year lead time, this would not happen quickly. Ultra-low interest rates, yet more global liquidity and fewer opportunities elsewhere should thus lead to a surge in investment demand and prices. Already, the price of Comex near-term futures has risen one-quarter in a year, to around $1,620 an ounce. The equivalent in today’s dollars of the January 1980 peak, though, is $2,826. There is further to go.
There has been a change since because as I type this the price of the June future is US $1770 per ounce. According to economo.co.uk there is a fair bit going on.
On the New York commodity market, gold has risen 17% since the beginning of the year, 10% less than the record set in 2011. During today’s trading, gold futures reached a price of 1,785 USD per ounce, its high level since October 2012.
When I looked at this before I noted some problems in the market so let me point out that between the June future and spot gold there is a gap of US $47. So taking that forwards would mean in simple terms a price some US $282 higher over a year or 16% which seems rather rich to me. There are costs to holding it such as storage and security but are they really that high?
For newer readers these are numbers I used to calculate for a living although not usually Gold. The reason why I have looked at a near month ( June) is that it is the most liquid one because as you go further out in time markets get less liquid and sometimes completely illiquid. But as you can see something looks wrong and in fact we are where we should not be.
The basis cannot theoretically exceed the carrying charge (the lion’s share of which is interest, usually calculated on the basis of LIBOR). If it did, speculators would be able to pocket risk-free profits in buying the cash gold and selling the futures contract against it. This arbitrage would quickly push the basis back to the level of carrying charge. ( Gold Standards Institute in 2012)
Oh Well! As Fleetwood Mac would say. We do have two of our buzzwords in play as I note this from the LBMA.
Gold Market “Resilient”
Gold’s Q1 2020 price rise included a brief period of exceptional volatility. In the eight trading days 6th – 17th March, the gold price fell 12.7% from a high of $1,687.00 per oz to a low of $1,472.35 oz before resuming its steady upward trend. “The gold market continues to be resilient….”
Ah resilient and of course the problems with getting hold of physical Gold were supposed to be temporary! As Lyndsey Buckingham would say.
I should run on the double
I think I’m in trouble,
I think I’m in trouble.
Swiss Franc
This is an issue that has persisted throughout the credit crunch era and if you are unfamiliar you might like to look at my articles on the Currency Twins and the Carry Trade. The Swiss National Bank has tried to punish those looking to buy the Swiss Franc via negative interest-rates ( presently -0.75%) and through what it called for a while “unlimited” foreign-exchange intervention. It had to abandon the latter in January 2020 due to.
Pressure pushing down on me
Pressing down on you, no man ask for
Under pressure that burns a building down
Splits a family in two
Puts people on streets ( Queen)
Well like The Terminator it is back as I noted this morning as the sight deposits in Switzerland rose.
Swiss Domestic Sight Deposits (CHF) Apr 10: 552.0B (prev 535.6B) Swiss Total Sight Deposits (CHF) Apr 10: 634.1B (prev 627.2B) ( @LiveSquawk )
For those unaware it is a proxy for the intervention undertaken and as you can see the SNB has been trying to put a lid on the Swissy. It is at a significant level because at 1.0545 versus the Euro it is pretty much where it went after the “unlimited” intervention pledge was abandoned and the Swiss Franc soared.
Regular readers will note that I previously referred to the SNB trying to do this with the Swissy at 1.06.
Hold the line, love isn’t always on time, oh oh oh
Hold the line, love isn’t always on time, oh oh oh ( Toto)
So in spite of a -0.75% interest-rate and intervention demand for the Swiss Franc continues.
Comment
There are some sub-plots to today’s story. For example with equity markets where they are now really there should be little or no demand for safe haven investments. After all the US S&P 500 index future has risen from 2220 to 2788 which is quite a bounce. Yet as we have noted it seems to be like a Pantomime with investors continuing to shout “Behind You.”
There are other safe havens I have not mentioned. At the moment the Japanese Yen is not in play because it is to some extent a Japanese issue. What I mean by that is rallies involve fear of the Japanese repatriating some or all of their large foreign investments and hence large Yen demand. Investors front-run the expected demand and the party starts. It also seems that the Carry Trade reversals in the Euro have stopped so it has faded from view. We also have something of an anti safe haven in the UK Pound £ which has been having a good run as the situation in equity markets has calmed down.
Next comes sovereign bonds which are now one of the most complex safe haven issues of all. Where is the safe haven in a negative yield as so many place have? After all we now live in a world where even US Treasury Bills have seen a negative yield. As to bonds we have a real ying and yang in play. Firstly we expect an enormous amount of bond issuance to pay for all the government spending. But then you may be able to sell to that nice central banker who keeps buying them and breaking the price discovery chain.
And if you don’t love me now
You will never love me again
I can still hear you saying
You would never break the chain (Never break the chain) ( Fleetwood Mac )
Podcast
Loads of questions arrived this week so I did a second one yesterday. Also I am now on Spotify after various requests to do so.
https://soundcloud.com/shaun-richards-53550081/notayesmanspodcast74
Notayesmanseconomics's Blog 
Shaun, thanks for covering these safe havens. Indeed there has been dislocation in the Gold markets. The “fire sale” in equity markets in March forced some asset managers to sell the precious metal depressing spot markets however there was a shortage of retail availability, exacerbated by reduction in travel and relocation of “trade” scale ingots. Years of depressed markets have hollowed out retail dealer credit and the problem with courier delivery further excercised the mania.
The volatility is as notable as is the real attempt to achieve actual market clearing prices, that are then subsequently CB supported and underwritten with vast money printing assurance. How any commodity is meant to find stability defeats me in these consciously “ponzi” times.
I am the opinion that should the markets get a sniff of lockdowns being lifted in any way, the bullion banks will pile shorts on the paper gold market(futures) and the price could drop a couple of hundred dollars.
“We also have something of an anti safe haven in the UK Pound £”
A rather amusing and polite way of saying even the deadest cat bounces a little?!
Hi Kevin
Well it has been quite a bounce from a bit over US $1.14 to a bit over US $1.26 this evening and from 0.95 to 0.87 against the Euro. Panic stations and the £ falls but a rally in equity markets and up we go again, so an anti safe haven works pretty well as a description. Although nothing is perfect as I recall us dipping back to US $1.17 on a day when markets were rallying.
Shaun,
I am actually surprised at the bounce the last week or so on equities, I saw the OBR V shaped recovery on twitter but find it hard to accept there will be a v shaped recovery after such damage to the world wide economy.
The borrowings will have to be paid back at some stage, many businesses are going to go but and the Joe Public will become poorer.
There will be a bounce when the restrictions come off but I question a full V shaped recovery. It is possible we will see a V then further along a decline.
As for safe havens Gold is for the wealthy speculators, the ordinary guy tends to get shafted in these situations.
Property is probably at risk now and buy to lets risky as many people will need to go on benefit and landlords will probably suffer a loss of rents due to non payments.
The current situation turning out to be worse than the banking crisis as its worldwide and many analysts are now suggesting its nearer the 1930’s depression.
They are starting to ease restrictions in Europe which could cause a second wave of the virus but I suspect most economies worried about their economies collapsing due to extended lock-downs.
The IMF has today warned of a severe hit to the world economy and does not rule out a much severe outcome than its predictions.
SKY news:
IMF warn of greatest recession since 1920s
The International Monetary Fund (IMF) has warned that the world could experience the worst economic slump since the Great Depression.
In its latest forecasts for the world economy, the IMF’s Gita Gopinath said that the world economy would shrink by 3% this year – a bigger contraction than the -0.1% shrink in 2009.
Ms Gopinath said the economy could bounce back in 2021, but that “much worse growth outcomes are possible and maybe even likely.”
Comment:
I have to say I thought early on when the virus started to grow rapidly it was going to cause much more damage than the 2008 banking crisis, and just didn’t accept the leaders and bankers waffling on at the time in the UK and the US that the banks and economies well able to sustain the damage.
Neither do I believe we will see a V shaped recovery and if we do see a V it will decline again later on.
What really angered me over the weekend was ARSENAL players refusing to take a 12% pay cut to save the club over 25 million, greed is still about when the poor are still getting poorer and there is so much suffering.
https://www.express.co.uk/sport/football/1268487/Arsenal-news-12-month-pay-cut-UK-coronavirus-Raul-Sanllehi-warning-Premier-League
“What really angered me over the weekend was ARSENAL players refusing to take a 12% pay cut to save the club over 25 million,”
yah , me too , of all people they should set an example – 35% GDP reduction and they think they’re worth it
refuse to pay for tickets I think
Forbin
forbin
Reading articles like this makes me vomit. We are all in this together says the Chancellor, and facing the worst recession since the 30s says the IMF. So if I was the Chancellor I would be seeking to relieve some of the rich of their assets one way or another.
The grim outlook is often seen by the OIL price which is collapsing again despite oil production cuts:
https://oilprice.com/Energy/Oil-Prices/Oil-Prices-Plunge-On-Grim-IMF-Economic-Forecast.html
Hello Peter,
the oil price will be way volatile over next 6 months . Storage will fill up – its almost there anyway. if there’s no demand for the excess then wells will be shut in . Those fields with t3rd level recover ( gas ) are not going to shut down and restart like normal wells – there will be certain “damage ” to them by doing that – ie less recovered
we’re looking ta KSA and Russia here
Tight oil isn’t much better – frack collapses are “difficult” to deal with.
So too much gets shut in then recovery afterwards will be smaller – less ……
Demand will most certainly out strip supply , and wobble again.
The World really may see Peak Oil ( don’t get too hung on the Doomsters predictions )
and we live in ” interesting times ”
eheheeheheh
Hello Shaun,
re : ” Firstly we expect an enormous amount of bond issuance to pay for all the government spending. But then you may be able to sell to that nice central banker who keeps buying them ”
thats because politics is in the fray – forget economics 101
governance of the people by the Banks for the Banks
Welcome our Banking Overlords …… pfft !
Forbin
PS: if it wasn’t for the economy I could have had a job , but now its a banning order from HMG , lock down. no chance ….
Hi Forbin
Firstly best of luck.
Also the oil price is on the decline again. Even you might consider oil at US $7 per barrel is cheap because that is what oil from Canada’s tar sands is selling for. Even WTI is US $20.68 as the OPEC deal that Bloomberg News were so keen on seems to be fading.
Danny Blanchflowers sees more of a “square root recovery” rather than a V shaped recovery:
Listening to the Chancellor on the podium late afternoon he refused to talk about taxation after a hopeful recovery, albeit he intimated once the virus was over we could seek growth to mitigate the damage.
The guys in dream world in my view. at least the former BOE governor was honest about a decade of austerity at the time of the last banking crisis.
Hi Peter
I think that for the IMF to publish forecasts to 0.1% at a time like this is spurious accuracy at best. As to the numbers there are some odd ones. For example Canada will see its resources sector hit hard so why is it forecast to do relatively well? Japan surely must grow in 2021? Actually I have just checked that and it is 3%.
Poor Italy to be ~9% lower than now. It is going to be a really grim 2020 for it. As to taxation we will only know once we are coming out the other side but yes it will be higher.