Following up on our piece earlier this week, the coming hours and days are pivotal for Cyprus. Whatever is decided will be bad. Choosing the right solution for Cyprus is like trying to pick the best horse in the glue factory.
The ECB has threatened to withdraw ELA from the Central Bank of Cyprus on Monday if a deal has not been reached. If this is the case, and the required two thirds of the ECB board vote to stop Cyprus’s ELA, then other eurozone banks will be ordered to cease the transfer of reserves to Cyprus, and not to recognize any reserves received from Cyprus as euros. Cyprus, at this point, will be the first country to leave the EMU.
Sterling remains one of our least favourite currencies. We have frequently highlighted the terrible state of the UK economy, and the baleful effects the heavy private and public debt loads are having on its long-term health. This places the burden on the external sector, eg exports and earnings from overseas investments, to revitalize the UK economy. A weaker currency is the easiest and quickest way to increase the competitiveness of the external sector.
In the aftermath of the Lehman bankruptcy, the Bank of England helped engineer a 25% weakening of sterling. But this was not enough, and the current account and trade deficit have shown no signs of a sustainable pick-up.
The UK government recently decided to transfer the coupon income from the Bank of England’s gilt buying program (Asset Purchase Facility (APF)) to the UK Treasury. This is not only an interesting development in itself, but is yet another marker in the slowly evolving relationship between the central banks of the struggling developed market economies and their governments.
Looking at the UK’s recent action, there are two main effects. First, it will reduce UK’s debt/GDP ratio. The transfer of £35bn initially and roughly £15bn each year after to the UK Treasury will have a material affect on the debt ratio, leaving it about 4% points lower in 2016 (all other things equal) than the IMF’s recent forecast (at 74%).
Yesterday’s Daily Telegraph contained an article that the Bundesbank withdrew two thirds of its gold holdings from the Bank of England in 2000 and 2001. Germany is the country with the second largest holding of gold in the world, 3396 tonnes. Much of this was moved abroad – to the Fed, the Bank of England, and the Bank of France – during the Cold War in case the USSR attacked.
So far, so prudent. What is truly surprising is the German Court of Auditors admission that the gold “had never been verified physically”. So the German government, with over 80% of its liquid reserves in gold, has not administered the basic good housekeeping to perform an inventory check on what amounts to almost $200 billion in assets. Dumbfounding.
Hinde Gold Fund owns considerably less gold than Germany. Nevertheless, Hinde Capital has a bar list, containing the bar number, purity and assayer, together giving a unique identifier for each bar of gold owned by the Fund. Furthermore, the CFO and one of the directors personally inspected the Fund’s gold where it is held, in the bank vault of a Swiss private bank in Zurich. An independent audit is performed twice each year, each bar identified and verified with our bar list (an excerpt of which is shown below).
Even the Germans it seems, with their reputation for efficiency and prudence, place blind faith in the global financial system. Complacency and naivety abound. We hope, at Hinde Capital, we have avoided these classic human errors, and have constructed our gold fund accordingly: a safe, secure investment, providing peace of mind for our clients.
Gold has been caught in a very tight range since the 16% rally at the start of the year and the subsequent sharp sell off in late February and March. Often when prices in any asset become compressed, they invariably break out of the range emphatically. With gold, the fundamentals remain supportive which suggests that gold should break out from its range to the upside.