Correction on the dollar, bonds and metals

After many weeks of safe haven assets increases, there has been some rebound. Firstly, yield on 10-year U.S. bonds increased from 1.45 to 1.78%, which resulted in a decrease of the ETF price for these bonds . This ETF is marked in red on the graph.

Secondly, the dollar index decreased slightly (pink) and gold lost almost 3,5%, while silver fell by 7%.

Of course, changes in the bond and the dollar index are not big, because these assets are characterized by low volatility.

It is worth noting, however, that it was another week when the metals behaved like a dollar, which is a kind of anomaly.

Where has the capital been flowing in recent days? Mainly to stocks. Both, the U.S. stock market and emerging markets have been rising. In our opinion, the increases were caused by two factors. First, shares were short-term cheap compared to bonds or precious metals. Secondly, central banks carried out further actions to supposedly improve the situation in the global economy. Bank of China has decided to further reduce the level of minimum reserves (i.e. funds which banks must hold for security reasons). In case of the U.S, shares were rather rising due to verbal interventions - recent statements by the Fed chairman convinced the market that they are heading towards another interest rate cut.

Perhaps, this market optimism will last for some time, but we are inclined to the thesis that in the perspective of a few weeks, the U.S. bonds in relation to shares will start strengthening again. First, investors will head towards bonds due to the worsening economic conditions. Secondly, American bonds look good in comparison to stock dividends. Take a look at the table below. It shows that American stock dividends are on average only 0.4% higher than bonds interest. It looks like it is about assets with a similar level of security, and yet it is not - if the need arises, the Fed will allow stock prices to fall, in order to save the bonds.

Meanwhile, in other countries, average dividends are higher than the interest on bonds. In fact, in some cases there is no interest from bonds.

Of course, someone could say: "why there is such an optimism around bonds, if they pay only 1.5%?". In general, this is a valid, logical observation. Unfortunately, with a weakening economy, potential interest does not count as much as capital protection. On the other hand, with major turbulences, central banks will literally do everything to stop the fall in bond prices. Ultimately, we are talking about debt market, the largest and most important market in the world, which condition depends on the further functioning of the financial system.

One more word about metals - increases in previous weeks were stronger, which is why it is difficult to forecast anything. We would like to point out, however, that subsequent central bank decisions (loosening monetary policy in various ways) will favor metals. So you can suspect that gold and silver drops will not last long.

 

Australia will fight 'online extremism'

As a result of an attack on a mosque in Christchurch, New Zealand, the Australian government introduced a new law to combat online extremism. Now it has been used for the first time - Australian officials ordered five parties to remove recordings, such as the video of a Christchurch bomber or recordings showing Scandinavian tourists being decapitated in Morocco. If site administrators will not show obedience, they will face problems.

Under the new law, social media owners, authors of traditional websites, or even Internet service providers can be fined up to 10% of their revenue if they will not remove prohibited material. In turn, the executive director may face a prison sentence.

Representative of the Australian eSafety Commission announced that three out of five websites removed the recordings very quickly. In her opinion, such a reaction shows that the new law can be effective.

The problem with the described law is bigger than you might think. Why? Only in recent years we have repeatedly described on the blog the attacks that were falsely attributed to specific groups or leaders of certain countries. Often, the assessment of the situation was possible thanks to recordings from the place of the assassination, where corpses on the ground were visible. It was only possible due to video materials where we could state that something was wrong with the official narrative presented in the media.

If in the following years more governments will follow the footsteps of Australia, then soon we will learn about world events only from ready statements of individual governments. This is another case where politicians allegedly care about our security, but in fact only restrict freedom (in this case cutting us off from access to information).

By the way, we wonder ... How is it that a social media representative may be at risk of imprisonment for publishing a recording of a murder, while people from the largest banks have nothing to be afraid of, even if they scam into tens of billions of dollars? For example, HSBC bank helped cartels to launder money estimated at several dozen billion dollars and no one was imprisoned.

 

Former Fed chairman: Investors treat gold as protection for their assets

Regardless of the recent correction on metals, this year's gold result can still be considered very good. From 1 January, the ore gained in value around 18%.

In one of his recent interviews, Alan Greenspan (former president of the FED) referred to the market behaviour of precious metals, especially gold. He noted that investors decide to buy gold (especially in the long term) because they know that "it is an asset that will maintain value for them for the next 20 or 30 years".

Even if Greenspan did not mean it, he drew attention to the high rate of currency devaluation. It's no secret that for one dollar people can buy less and less products or services. This is clearly confirmed by the graphic below, showing a decrease in the purchasing power of the dollar since 1913, when the Federal Reserve was created (a decrease of 97% in 106 years).

Unfortunately, most people usually underestimate the role of inflation, which acts like a hidden tax. It is inflation that reduces the purchasing power of currencies. Meanwhile, gold allows us to protect our assets (in the new book by Trader21 there will be some data on this subject). This is a very important feature of the bullion, especially when someone does not want to enter the stock, bond or real estate market, and at the same time does not intend to keep savings in currency and see how their savings are melting.

Let us remind you that even before taking the office of the Federal Reserve President, Greenspan pointed to the fact that gold is the only way to defend against inflation. In the 1960s he wrote the famous words:

" The financial policy of the welfare state requires that there be no way for the owners of wealth to protect themselves. This is the shabby secret of the welfare statists' tirades against gold. Deficit spending is simply a scheme for the confiscation of wealth. Gold stands in the way of this insidious process. It stands as a protector of property rights. If one grasps this, one has no difficulty in understanding the statists' antagonism toward the gold standard."

Later, Greenspan as the president of the Fed first of all had to worry about the condition of the dollar, and therefore could not afford excessive sincerity.

 

How does the trade war translate into macroeconomic data?

Until now, we have written about the trade war mainly in the context of politics and changing moods on the stock exchanges. However, this does not change the fact that the duties imposed by both sides translate into weaker economic data.

An example is China. China's exports fell by 1% in August compared to last year. Nothing big. It is worth noting, however, that exports to the U.S. have fallen by as much as 16% on an annual basis! And we are talking about the trade exchange of the two largest economic powers.

At the same time, Chinese imports from the U.S. fell by 22.4%.

Further duties mean that economic exchange between countries is limited (some products simply do not pay for importing). Production becomes more expensive, as do service prices. This must result in decreasing demand, which will be manifested in the form of increasingly worsening corporate results in the coming months. This translates into the stock exchange. It is hard to expect over-valued U.S. companies to delight in their results over the next year. Therefore, the remaining main impulse for growth will be buybacks (purchase of own shares by enterprises) and possible intervention of central banks.

 

Independent Trader Team