Sunday, November 16, 2014

Mish's Global Economic Trend Analysis

Mish's Global Economic Trend Analysis


Swiss Gold Referendum in Perspective

Posted: 16 Nov 2014 05:54 PM PST

A number of readers have asked me to comment on the Swiss Gold Referendum and what it may mean for the price of gold.

Let's start with a recap of the three primary points that citizens in Switzerland will vote on.

Switzerland Gold Initiative

  1. Halt all Swiss National Bank (SNB) gold sales
  2. Repatriate Swiss gold held in foreign vaults (UK and Canada)
  3. Establishes minimum 20% level of SNB Assets in gold

Of course, central bankers everywhere are horrified by the idea they should have to do anything, especially hold sound assets.

And in a flurry of fearmongering by the central bank and inflationists in every corner, it appears the initiative is headed towards defeat.

What If?

Polls aside, let's play a bit of "What If?"

Specifically, what would happen to the price of gold if the referendum passes?

Spanner in the Works

Variant Perception says Swiss Gold Referendum: A Spanner in the Works.
As polls continue to swing around ahead of the Swiss gold referendum on 30th November, we expect increased volatility in the FX and gold market.

After the implementation of the EURCHF floor, gold's share of the SNB balance sheet has fallen to 7.5% from around 30% in 2007 (top chart) [SNB Balance Sheet]. The SNB has already pointed out the untenable nature of the peg should the referendum pass, but the impact on the gold market would also be significant.

Taking the current balance sheet of 522bn CHF and spot gold prices, the requirement to hold at least 20% of assets in gold would necessitate buying 1,800 tonnes of gold over 5 years. Total global production in 2013 was 2,982 tonnes, thus the SNB would need to buy at least 10% of the annual production every year for the next 5 years.

The bottom chart [SNB Reserves] shows the latest composition of the SNB's FX reserves. The requirement to buy gold will necessitate selling reserves, mainly EUR (which makes up 45% of all reserves). Should these euro selling flows come to pass, it will weigh heavily on the currency.
SNB Balance Sheet



SNB Reserves



Missing the Boat

I am a fan of research by Variant Perception, but I believe they may have missed the boat here.

Specifically, I question if gold production is much of a factor at all. That may sound strange since the referendum would require Switzerland to purchase a big percentage of all future gold mining over the course of 5 years.

However, mining is not the only supply. Nearly all of the gold ever mined is available for a price. It's reasonable to exclude gold in museums, historic items, rare coins and the like, but in aggregate there may be over 170,000 tons or so of gold supply.

A few charts courtesy of Nico at Sharelynx Gold will explain.

Annual Gold Production



Cumulative Gold Production Since 1835



Central Bank Holdings vs Cumulative Production



Of the 2013 total (a bit higher now), central banks hold about 31,877 tons.

SNB Purchases Irrelevant

One must exclude central bank holdings from the amount of gold available for central banks to buy. And as stated earlier, one can subtract various other items like rare coins, but the overall numbers show that it's safe to conclude "buying 1,800 tonnes of gold over 5 years" is essentially irrelevant from a "gold available" for purchase standpoint.

That said, one must also factor in gold psychology. It is entirely possible that SNB purchases could significantly alter perceptions on the desirability of holding gold.

From that aspect, Variant Perception may indeed be correct on their assertion of the importance of the referendum should it indeed pass.

Most Gold Analysis Wrong

Many gold analysts point out gold production vs. jewelry demand. It's essentially the same miss-analysis. Jewelry demand is of little meaning in and of itself as a factor in price.

Someone has to hold every ounce of gold ever produced. It's that demand for gold, all 170,000 tons of it, that determines the current price, not production.

I discussed this previously in Truly Inane Bloomberg Analysis On Gold

By the way, 170,000 tons of gold would fit into a cube about 67 feet wide, high, and deep. It does not take a lot of space to hold a fortune in gold.

What the Future Holds

I do not know the future price of gold, nor does anyone else.

But I do know the fundamental drivers as well as the reasons to hold gold. And neither of those has changed.

For further discussion, please see Plague of Gold Bears Now Say "Gold Unsafe at Any Price"; What's the Real Long-Term Driver for Gold?

Mike "Mish" Shedlock
http://globaleconomicanalysis.blogspot.com

Kiev Effectively Cedes East Ukraine to Separatists; Poroshenko Withdraws Hospital and School Funding, Bank Card Operations

Posted: 16 Nov 2014 11:46 AM PST

Scorched Earth Policy

Last week, the government in Ukraine cut off pensions benefits to residents of rebel-held areas until such time as these areas return to Ukrainian control.

Yesterday, in yet another scorched-earth policy move, president Petro Poroshenko announced Ukraine Rebel Areas to Lose State Services.
Ukraine's president has ordered the withdrawal of all state services, including funding for hospitals and schools, from rebel-held areas.

Mr Poroshenko's ruling says all state companies and institutions should end their work in the Donetsk and Luhansk regions within a week.

It also says Ukraine's central bank is to close down all banking services - including card operations - in some areas within a month.
Initial Thoughts

  1. Poroshenko just ceded major portions of Ukraine to rebels
  2. Expect a run on ATMs
  3. Russia will have to intervene for humanitarian reasons
  4. Western Ukraine will have a difficult time getting needed coal from the East

Point number two is happening already.

I picked this up from ZeroHedge Ukrainians Line Up to Withdraw Money from a Bank in Donetsk.



That's a small line now. I suspect it soon won't be.

Human Rights Violations

Here's some additional details on Poroshenko's Bank Servicing Decree.
"National bank of Ukraine [shall] adopt measures within one month to stop serving bank accounts, including card accounts, that belong to economic entities… and residents in the territories of anti-terror operation in Donetsk and Luhansk regions," the decree said.

Poroshenko asked the government Saturday to keep the Council of Europe informed on Kiev being forced to take steps violating the European Convention for the Protection of Human Rights in Donbas.

"To the Ministry of Foreign Affairs of Ukraine… together with the Ministry of Justice of Ukraine… to ensure that within a week in accordance with the article 15 of the [European] Convention for the Protection of Human Rights and Fundamental Freedoms… a statement on behalf of Ukraine about Kiev taking measures derogating from its obligations under the Convention for the Protection of Human Rights on the several territories of the area of special operation in Donetsk and Luhansk Regions, is sent to the Secretary General of the Council of Europe," the decree said.
Expect Major Rebel Advance

Reader Jacob Dreizin, a US citizen who speaks Russian and reads Ukrainian, offers these thoughts via email.
Hello Mish,

I am tentatively calling for the start of the rebel offensive for on or about Friday, November 21st.

I may be wrong on the "when", but I will be right on the "how".

I expect the rebel offensive will be similar to the one in late August to early September and it will proceed in a direction or directions unexpected by Kiev and its CIA handlers.

The outcome will be that Kiev will lose almost all of its remaining heavy weaponry.(Over half was already lost by early September, according to both the rebels and Poroshenko himself.)

Most of the major population centers of Ukraine's Donetsk and Lugansk provinces that have not yet come under rebel control, will come under their control. This will demoralize the remaining Ukrainian troops.

Once that happens, Kiev has no strategic reserve and nothing to stop the remaining areas of historic Novorossia from being overrun or simply breaking off on their own accord. So this will not be a "long retreat." Once the tension snaps, things will be decided very quickly.

Then there will be a slowdown for winter.  The winter will be so brutal for Ukraine that by the time spring comes, the rebels believe they will simply waltz into neighboring regions without much effort and be welcomed as liberators. On that point, we shall see.
Major Mistake?

To combat alleged terrorism, Kiev announced it can suspend article 15 of the Convention for the Protection of Human Rights and Fundamental Freedoms. Lovely.

If Ukraine was looking to give Russia a humanitarian reason to invade, it just did.

Is this a brilliant play by Poroshenko to trap Putin into invading, or was it just plain stupid?

Only the final outcome will tell. But one thing's for certain now:  Poroshenko stirred up major resentment against Kiev, not the rebels, with his decree.

Mike "Mish" Shedlock
http://globaleconomicanalysis.blogspot.com

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