Despite the negative bond yield environment, political turmoil in a number of countries, a tumultuous US presidential election campaign, and uncertainty in the aftermath of the “Brexit” vote in June, gold and silver prices plummeted on Tuesday. Not to mention the current fragility of the global financial system.
In early trade on the US market of Comex, the price of gold fell to as low as $1,267.00 an ounce, down by around $40 an ounce or more than 2%, as two massive selling orders were executed. At the same time silver prices fell by more than 5% to trade below $18 an ounce.
Despite its relative significance, there was not much coverage by mainstream media of an event occurred over the weekend.
On the first of October, the International Monetary Fund included the Chinese Renminbi to its Special Drawing Rights or SDR basket of currencies. With this move by the IMF, the Chinese currency will take its place among the elite currencies of the world including the euro, yen, pound and dollar.
This international stamp of approval represents a significant milestone for China in its quest to cement its place among the globe’s economic elite. It also confers a measure of legitimacy on the yuan after a long effort by Beijing to internationalize its currency.
While some economists question the yuan’s inclusion—given Beijing’s tight controls over the exchange rate and cross-border capital movements—the IMF said it was a justifiable acknowledgement of the country’s development into a global economic powerhouse.
“It’s an irreversible path towards opening up, integrating into the global economy and playing the economic game by the rules,” said IMF Managing Director Christine Lagarde.
This stamp of approval could also potentially be the beginning of an important shift in how global business is done.
It’s no secret that several nations have already begun a move away from the dollar. Although the dollar remains the world’s reserve currency of choice, its status as such could eventually face a legitimate challenge from China.
Since 2008, China, has signed swap deals with nearly 30 countries with the biggest being the 400 billion yuan currency swap with Hong Kong in November 2014. According to a publication by the People’s Bank of China, these swap agreements were intended not only to “stabilise the international financial market,” but also to “facilitate bilateral trade and investment.”
Today, a third of China’s total cross-border trade is in the yuan. However, when comparing the yuan with other elite currencies one can see there are challenges that still lie ahead. China’s currency is used in only 1.86% of the world’s total payments—compared with 42.5% in the dollar, 30% in the euro and 7.5% in the pound.
Meanwhile, the United States government closed out the 2016 fiscal year that ended a few days ago on Friday September 30th with a debt level of $19,573,444,713,936.79…an increase of $1,422,827,047,452.46 over last year’s fiscal year close.
Last week, gold and silver prices received some support from renewed investor demand as concerns about Deutsche Bank AG’s finances spurred a selloff in equities and helped to underpin demand for a safe-haven.
Some investors are seeking safe-haven assets amid increased concern over the health of the financial industry. According to Bloomberg News, 10 hedge funds that do business with the German lender have pared their exposure. Shares of Deutsche Bank in the U.S. fell to a record low.
Problems at Deutsche Bank could have global ramifications. One way that could have devastating consequences for many global investors in Deutsche’s involvement in Exchange Traded Funds (ETF’s). Deutsche Bank sponsors (manages) more than 200 ETFs and ETNs listed on 10 stock exchanges globally, with more than $40 billion in total assets
You need to be sure – even if you’re far away from Germany – that your money isn’t collateral damage. If you own ETFs that are issued by Deutsche Bank, you’ll want to pay particularly close attention.
Demand for safe-haven assets has strengthened as the U.S. presidential election in November nears and after the Fed decided not to hike lending rates at its September policy meeting. In the lead up to the policy meeting, the Fed raised hopes of a near-term rate increase and when it didn’t raise rates, the dollar retreated against a basket of foreign rivals, thus making gold more appeal for foreign traders. Easy money in Europe and Asia due to a series of easing and weakness in bond markets because of low interest rates are also helping to support the price of gold.
Even though the price of these precious metals fell sharply on Tuesday, many analysts still expect prices of gold and silver to trend upward during the balance of 2016 and into early next year as more investors lose confidence in the current global financial and currency system.
The state of world affairs are dire, this according to Robert Vrijhof, founder of Swiss-based asset management firm WHVP and speaker at the Total Wealth Symposium. According to Vrijhof, the best asset for investors to hold right now is gold. “I don’t think you can be optimistic at the moment, I think we’re on very thin ice worldwide and I must say we’re in the worst position since WWII,” he told Kitco News at the event. “The only thing that I like at the moment is gold or Canadian gold or silver stocks.” Although Vrijhof said he wouldn’t be surprised to see a pullback in the yellow metal, he expects gold to move above $1,400 over the longer term. “We’ve got a currency war going on, so the only real currency we’ve got at the moment, in my eyes, is gold.”
Now is the time to buy assets that may potentially offer a meaningful hedge against such a scenario. Hard assets like physical gold and silver are the ideal vehicle for trying to protect your wealth.
Gold and silver have been considered a reliable store of wealth and value for thousands of years and are recognised and traded all over the world. They carry no counterparty risk and cannot default or go bankrupt. They may potentially appreciate in value while also potentially providing a hedge against numerous economic and geopolitical issues.
As an astute investor, you already understand that the need to own gold and silver becomes more pressing with each passing day. And as more and more individuals wise up to the irresponsible and reckless US (and worldwide) monetary policies of the major central banks, they will increasingly turn to gold and silver, which will make it much more difficult to acquire.
Courtesy: David Levenstein
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