Outlier economic outlook #27 . . . ready for the next legs
While we wait till world gold price to burst out of our target $1300 per ounce price area in December or January next year and the EP value (MYR equivalent price per gram) to be higher than base of MYR176.65 we had islightly increased our gold holdings on 12.10.18 and 28.11.18 to lower our average gold holding costs to MYR228.56 per gram.
In setting the pace for the next legs up in world gold prices we must be prudent that our next outlay observe the $1300 price threshold. Perhaps then the local gold price would be MYR171 per gram and above the spread of MYR5.00 of pending cash out quote of MYR166 (circa our last purchase cost).
In respect of our previous Outlier economic and bespoke investing outlook posting of 19.9.18:
The Ringgit continued to weaken against the greenback at 4.2210 but was comparatively stronger than the previous day 4.2400 rate. Otherwise the EP value of 167.01 would be about 95% of base MYR176.65. All currencies have improved after the US-China trade battle escalation was put on hold at the G20 Argentina summit meeting between Trump and Xi. Brent crude oil price also increased to around $62 per barrel, which was $85 per barrel at the end of October. Any further improvement of crude price would strengthen the Ringgit but the Dollar decline would affect Malaysia local gold price if world gold price increased only slightly as what happened on 4 December. Relative to 3 December, world gold price increased by 64.6 basis points but local gold price increased by only 42.3 basis points.
We had on 16.8.18 (Gold investing outlook #24) stated that the “Trump-Xi friendship” in resolving trade war tit-for-tat measures and threats would be called upon when needed. Indeed Beijing would revert to buying substantial amount of U.S. agricultural and energy products and to start purchasing agricultural products from U.S. farmers immediately.
The G20 summit also sealed a landmark deal on world trade reform. The UK parliament vote against Premier May’s brexit proposal would further contribute to a new world order. We wrote on 23.10.18 that with China’s cautious but clear bent on a new order for world trade and reserve currency we can look forward to world gold price above $1300 in December 2018.
On another front, France’s “Overthrow the bourgeoisie!”, anarchist sentiment culminated with a graffito on the Arc de Triomphe monument reading “Macron resign” on 2.12.18. The protesters were angry about the green taxes that have raised gasoline prices and they did not like the speed limits on French roads too. It points to a world where trade unions, church organizations and political parties are fading in importance. The yellow vest movement that didn’t exist a month ago became consolidated quickly because anger is one of the things that travels quickly on social media.
In a contemporary democracy if compromises do not occur in formal debates, such spontaneous anti-politics movements can easily be hijacked by people with darker agendas.
At end of November the U.S. Federal Reserve Chair Jerome Powell turned dovish albeit without political reference. Treasuries rallied hard to down 10-year yields at 2.99%. It appears that the Fed’s strong economy may not be as solid. The gap in interest rates between 2-year and 10-year Treasury securities dipped to 0.15% point.. The spread between the 3-year and 5-year notes dropped to negative 0.01 percentage point on 3.12.18, the first time that has happened since 2007. For gauging recession risk and weighing investor doubt about the future, an inversion of the yield curve is significant because it has preceded past recessions.
Factory orders in China are down. The Dow closed 25,826 points on 3.12.18, up 287 or 1.1% on the Monday after the weekend G20 summit. It had in early trading +440 points or around +1.7%. President Trump rebuke of interest rate hikes is becoming the new reality, not tired of winning!
In Malaysia although Brent crude price is way below $70 per barrel, a B10 program will increase local consumption of palm oil and help reduce surplus in the global market. A new rule will come into full force from February 2019 to phase in the B10 biodiesel mandate on truck manufacturers such as Scania and bus manufacturers assuring engine warranty extension with usage of B10 in Malaysia.
Foreign direct investment into Malaysia increased to MYR 3.95 billion in the third quarter of 2018 compared to MYR 2.84 billion in the previous period. This bodes well for the government three-year period to improve the economy because there must be continued rise in business investment.
Update 20 December 2018
Far from U.S. Federal Reserve Chair Jerome Powell turning dovish, the Fed signaled further gradual rate hikes and no break from cutting its massive bond portfolio. A first week December report had the U.S. global trade deficit in October jumped to a 10-year high and that the deficit with China surged 7.1% to a record $43.1 billion.
U.S. cash aid to farmers hit by China tariffs is about $12 billion. Together with the Administration’s tax cuts and now the Fed’s balance sheet bond reduction of $50 billion per month, shortage of dollars in the market will just mean that the U.S. Treasury will print more dollars. You can’t create gold at will, unlike paper cash. World gold price above $1300 in December or January next year will signal the next precious gold price legs up.
The situation in the EU too will support this trajectory. Italy and France budget deficits will exceed the EU commission’s guidelines and UK leaving the EU without a Brexit deal will leave a giant size financial hole in the commission’s coffers.
Does not Premier May remember that the EU had said that with a £40bn payoff a deal could be agreed? In August Greece warned it will need more financial aid from Brussels in a ‘no-deal’ Brexit scenario. The financial fallout from a no-deal Brexit could leave the country facing increased financial and political instability if there was a shortfall in the EU budget up to 2020. With a £10bn-a-year black hole in EU finances, let the EU rejoice in a no deal Brexit. We already wrote back in April that the Euro zone planned roller coaster quantitative easing rides would be painful options. A reformed world order in global reserve currency could finally take place with China slowly but surely dumping U.S. debt.