PGS + PQE = Common Sense

As US 10-year Treasury yields flounder in 1.73% territory, UK 10-year around 1.69%,  as ultra high risk euro-sovereigns yield (ex-Greece & Portugal) and trade in the 6-7% universe (Spain c.6.7% Italy c.6%) , as monetarists stand by the taps to turn on the QE printing presses for the umteenth time there is one thing that everyone should be made aware of now. Well, two things actually but who’s counting in the scale of incalculable accounting inaccuracies everywhere.

It has been my studied belief for the last decade now that we are entering a period that monetarists and economists everywhere will in years to come call the ‘the second coming of the gold standard’ but actually I have coined a name for this phase that I think is more appropriate. We’re now in the “PGS” era or as I like to call it, “The Pseudo Gold Standard” period. Heck, if that eternal optimist from Goldman Sachs Economics team, Jim O’Neill (he’s being lined up for the Bank of England Governorship), can achieve eternal recognition, near immortality for coining the phrase “B R I C” (Brazil Russia India China in case anyone has missed it) then please give ME the credit for “PGS”. By the way whilst we’re at this game I may as well tell you that my friend Mr Finbar Taggit of http://www.fintag.com/ has already coined the abbreviation “P I I S” which I think takes into account the expected ejection of Greece (or is it a retreat?) from the “P I I G S” fiasco. Please don’t take exception to “P I I S”. I believe it stands for Portugal, Italy, Ireland and Spain who possibly are next up for a wee spot of bother although with Spanish banks currently in the doldrums I think Finbar could have chosen the more chronological “S I I P”, “S I P I” or perhaps “S P I I”. Anyway he’s taken the “P I I S” abbreviation and we must all live with it.”PGS” for the sake of asking is in fact the blatant recognition from ‘credit economies’ that they’d prefer to back their currencies with bullion whilst the US, UK and all of the old European powers prefer to trash their currencies and economies through the daft and persistent programs known as QE. Just recently the IMF reported the following gold bullion purchases ;- Philippines (32 tonnes), Sri Lanka (2), Turkey (29), Mexico (3), Kazakhstan (2) and Ukraine (1.4). Can anyone spot the anomaly here? No european super-powers and just Ceylon as the former colony. Or the curiosity? Just why would Turkey buy gold and still want to join the EU…..of boy! It seems the developing world understands basic global economics and sensible sovereign governance better than many of our own central bankers, politicians, economists, etc. I’d expect more of the same here for many years to come as (financial, social and military) stress seems to be the order of the day everywhere.

In reference to the titled equation at the top of this blog just what is “PQE” then? Well, it’s something else I’ve just coined. It’s called “Personal Quantative Easing” and it goes like this. If say Mervyn King thinks that future generations of Brits are having their jobs and incomes protected through QE then “PQE” may be a valid alternative for those fed up with QE and the lack of growth equating to job creation, etc. QE as we all know creates electronic money in order to buy gilts (UK gov debt) with the idea of injecting liquidity into the financial markets and eventual economy. It’s supposed to catalyse bank lending too but since there wasn’t any lending to SME’s before the crisis started in 2007 I don’t see how we can expect to have a banking system designed to stimulate business when actually it has been profiting from the very same businesses the banking industry is and was designed to support. Pretty well since the late ’80s all our commercial banks have traded against us not with us. This has been particularly true ironically of the financial services industry as we all know. That subject is for another day.

So if one has cash and one is concerned about the UK economy what does one do with it? Buying gilts has been and is a pointless exercise. They are all horrendously over-priced and only for the brave bar the odd index-linked variety. With official inflation today at c. 3% (from 5%) and possible real inflation (“pri” oh stop it!) nearer to 10% there is little scope for liquid asset protection. Banks are paying zero to a farthing on deposits and current accounts whilst higher risk building societies challenge the bank rate mechanics by offering HIGH RISK RATES without health warnings to countless unsuspecting depositors. Are these cash packages really protected by FSCS £80,000 threshold? Well, time will tell.

No, the extraordinary observation and opportunity is in “PQE”. Whilst tax payers annd ordinary citizens stand by to allow QE there is a market methodology all of its own that is being devised as I speak. Starting with the premise that Gold is cheap and going up (see countless sensible analysts and their arguments for this premise) then it is easy to assume that a bonanza in gold shares will ultimately follow. Meanwhile today one can take very little risk in capital markets by purchasing shares (is the risk really any different to government backed guarantees in an horrendous debt enforced environment?) in some of the large producers at rock bottom prices (p/e’s in low single digits). For example (note ALL gross yields before tax) Newmont yields 2.87%, Freeport McMoran 3.86%, Agnico Eagle 2.01%, Barrick Resources 2.00% (on LSE African Barrick yields 3.01%, Petropavlovsk 3.25% and Randgold 0.50% by comparison), GoldCorp 1.43% and there are countless others also paying out dividends on a more favourable basis than bank deposits and with the added bonus of a major pick up in prices in the foreseeable future. Much has been stated about the reason for the pricing anomaly but in essence it would appear that our old adversaries at JP Morgan and Goldman Sachs have been shorting gold shares for several years whilst going LONG the gold ETF market. It’s feasible that the hedging will get reversed quite soon with new sovereigns openly buying bullion positions. The IMF and UK  are just two powers that have virtually exhausted their gold reserves. I’d expect this to be reversed as the penny is indeed dropping. As an aside Newmont has stated that it’s dividend policy will reflect the gold price; so if Gold goes say to $3,000pto the dividend should increase pari passu. It’s mind boggling to consider though if Gold goes to the top end forecast of $60,000pto. Who said that Gold is NOT a credible investment (or currency) against a derivatives driven banking and capital markets universe? In addition if one’s a bull of the oil price similar attractive yields can be found in oil majors right now. Conoco Phillips yield 4.98%, Royal Dutch Shell 5.11%, Encana 3.84% with a host of others offering returns around 2 x (+) higher than current UK and US 10-year yields. DYOR.

So try a bit of “PQE” if you recognise “PGS”, you know it will one day make sense and may well get us all out of a rather large hole.

NOTE THIS BLOG IS NOT DEEMED TO BE AN INVESTMENT RECOMMENDATION FOR ANY COMMODITIES OR EQUITIES MENTIONED IN THE ARTICLE.

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