Gold: worth its weight?

4th December 2014

A decade ago, when Alan Greenspan was chairman of the mighty Federal Reserve, he was infamous for delivering ambiguous, Delphic speeches that nobody could understand. No longer. I recently had a chance to interview Greenspan, 88, at the Council of Foreign Relations, regarding an updated version of his latest book.
These days the retired Greenspan speaks so clearly that some of his words are still ricocheting around the blogosphere. For what he revealed on the CFR platform was that he harbours considerable doubts about whether recent western monetary policy experiments have actually helped economic growth. He also fears that such experiments have been so wild that it will be very hard to exit from these policies in the future – in the US or anywhere else – without sparking huge market volatility. Indeed, Greenspan is so worried about future turbulence that he apparently sympathises with investors (and central banks) who are currently stocking up on gold.
‘Why do central banks put money into an asset which has no rate of return, but (has) cost of storage and insurance and everything else like that? Why are they doing that?’ he asked rhetorically – before offering his own explanation. ‘Gold is a currency. It is still, by all evidence, a premier currency. No fait currency, including the dollar, can match it.’
Now, by many standards, this is a remarkable comment. In his youth Greenspan was fascinated by gold (not least because he also liked the writings of Ayn Rand, the libertarian). But for much of his career as chairman of the Fed, he was charged with defending the value of fiat currencies (to use the technical word for money backed by promises from a central bank, rather than a gold standard). So it is striking – if not counter-intuitive – that he now considers gold a viable currency, let alone an attractive investment bet. This is a bit like a (retired) turkey giving a treatise on the value of Christmas.
Unsurprisingly, Greenspan’s comments have sparked considerable scorn from some of his former and current colleagues in the western central bank world. As one pointed out to me this week, Greenspan did not actually cover himself in glory during the great financial crisis. ’If you had followed Greenspan’s advice, you would have lost money this year,’ another tartly remarked, pointing out that if you look at recent gold price trends there doesn’t not seem to be a crisis of confidence in fiat currency at all. (The gold price has tumbled sharply this year, even as the Federal Reserve has rowed back from quantitative easing.)
But though Greenspan’s comments might make other central bankers wince, it would be foolish to ignore them. For whatever you think of his track record, I suspect that his current views on monetary policy – and gold – capture the sentiments of many ordinary investors pretty accurately; indeed more accurately than any of the official statements emanating from the current crop of central bank governors.
Take a look, for example, at Switzerland. Later this month the Swiss are due to vote on a referendum about whether the country’s central bank should repatriate all of its overseas gold holdings and significantly increase its ownership of the commodity. Until recently, it was widely assumed that the idea would be shot down (not least because the Swiss National Bank is vehemently opposed). But recent polls indicate that almost half the population supports the idea, suggesting it could possibly be passed.
Meanwhile, on the other side of the Atlantic, the recent midterm elections have strengthened the Republican party and cast a new spotlight on key figures such as Rand Paul, the Republican senator. Paul has made it clear that he favours greater use of gold; and this – coupled with the looming Swiss vote – has set the community of gold bugs buzzing with new vigour.
Why? Economics undoubtedly explains some of the allure. As Greenspan himself points out, the sheer scale of recent monetary policy experiments has raised concerns about a future outbreak of inflation (which typically raises the relative value of gold). Politics is also important: the right wing in America (and, to a lesser extent, Europe) is so vehemently distrustful of government that they want to break any bureaucratic control over currency.
But there is a third, more subtle psychological issue as well. Most ordinary people have no idea what central banks are really doing, with their trillion-dollar experiments. They are unnerved about how money works in a bottomless cyber space. But the beauty of gold is that it seems tangible, clear and finite. It also seems timeless, creating an impression of permanent, intrinsic value.
Of course, this image is – ironically – also an illusion. You cannot actually do anything practical with gold (as you can, say, with a lump of coal). Its value, like that of fiat currency, depends on social convention. But culture, as Greenspan now recognises, is a very powerful thing – especially in a world of finance that is rushing more deeply into ethereal cyber space every day.

Written by Gillian Tett, Columnist of the year on behalf of FT.COM/MAGAZINE

Enjoying the UK recovery while it lasts because it may not last very long ~ Stephen King’s latest article for The Times added 27th August 2014

27th August 2014

There’s been much excitement about Britain’s return to the top of the international growth league. Its economy was 3.2 per cent bigger in the second quarter of 2014 than it had been a year earlier. Over the same period, Germany was up 1.3 per cent, France a measly 0.1 per cent and Italy down 0.3 per cent. Even the supposedly dynamic US economy was unable to keep up with the UK, posting a 2.4 per cent gain. Japan was totally stagnant. From Britain’s point of view, this all sounds rather wonderful. An economy that had been on the ropes for many years is coming out fighting, stronger than all the other leading industrialised nations but not, it should be noted, the strongest in Europe: both Latvia and Hungary are doing better.
Many a sin, however, can be disguised through the misleading use of statistics. Yes, Britain is doing better than it was. Yes, it is growing more quickly than some of its key competitors. Yet the UK economy today is only a tiny bit bigger than it was in 2008, just before it was engulfed in its bespoke version of the global financial crisis. The American and German economies, in contrast, are now much larger than they were then. Even if the present league position is encouraging, people up and down the country will be wondering why their wage packets are still shrinking, at least when allowance is made for inflation. Perhaps, in time, these problems will go away — after all, continued economic expansion at current rates would make most people better off — but growing this quickly when other countries are struggling to expand will be no easy task. The problem is peculiarly British. It’s called the balance of payments. It’s not impossible for a country to grow more quickly than others without eventually sucking in imports at a ferocious rate. Rapid productivity growth — more outputs from given inputs, the alchemy of economic progress — will do the trick. Countries lucky enough to experience rapid productivity gains may not only be able to raise living standards at home but also, via strong, technology-led export gains, living standards abroad. In the 1960s and 1970s, both Japan and Germany pulled off this trick. More recently, China has managed much the same. In all three cases, rapid gains in living standards were associated more often than not with balance of payments surpluses.
Postwar Britain has not been quite so lucky. All too often its position at the top of the growth league has been fleeting, not so much because the economy eventually has drowned in a sea of inflation but, instead, because rapid expansion has been associated with an equally rapid deterioration in the UK’s balance of payments position.
We may be approaching one of those unfortunate moments now. The recovery so far has been associated with a hopeless productivity performance, while the deficit on the balance of payments is already running at a disturbingly large £20 billion per quarter, or thereabouts. Relative to the size of the British economy, it’s not far off the biggest on record.
Some argue that none of this needs matter. Ben Broadbent, deputy governor of the Bank of England, suggested in a speech at Chatham House last month that the balance of payments deficit didn’t pose any kind of “independent, existential threat to UK growth”. His view is based on the observation that the payments we have to make to our foreign creditors typically are lower than the receipts we receive on our own investments overseas. Put another way, the UK is acting like a giant version of a successful hedge fund: it raises funds cheaply from its creditors and re-invests some of that money in much higher returning assets elsewhere. The remainder can be spent on imports. On this basis, apparently we can live beyond our means forever.
It’s hardly a novel argument. Many American economists made similar claims about their economy before the onset of the sub-prime crisis. Yet the argument has its flaws. If growth elsewhere in the world is persistently lower than in Britain, it’s difficult to believe that those foreign assets will continue to deliver superior returns. It’s equally difficult to believe that foreign creditors will continue to pour their money into the UK if we are unable ultimately to turn that money into productive investments that will lead to higher exports. Without the support of foreign creditors, we simply won’t be able to support our addiction to cheap imports.
At this point, it’s worth thinking about Britain’s export performance compared with its nearest competitors. It doesn’t make for happy reading. Despite a huge fall in sterling in 2008, British exports have struggled to make headway. One oft-quoted explanation is our dependence on exports to the eurozone. That, however, hardly explains why our export performance has been so miserable. Germany and France have done better, even though they, too, are intimately tied to the eurozone. And as for our ambitions in the emerging world, they have hardly been met: since the beginning of the 1990s, our exports to the most dynamic parts of the world have made a lot less headway than those of our leading European competitors.
The UK’s recovery would be a lot more encouraging if, first, there was clear evidence of a sustained pickup in productivity and, second, if our exports were even close to matching those of our peers. In reality, we are neither productive nor, it seems, particularly export-focused.
Enjoy the recovery while it lasts. There’s a good chance that, like previous periods of economic outperformance, eventually we’ll find ourselves succumbing to a balance of payments crisis. It’s one British tradition that we seem unable to shake off.

Written by Stephen King is Global Head of Economics and Asset Allocation HSBC Bank plc

The Turning Tide

6th August 2014

By Neil Woodford

“You only find out who is swimming naked when the tide goes out.” – Warren Buffett, Letter to Berkshire Hathaway Shareholders, February 2002

The last five years have been great for financial assets. UK equities have enjoyed a prolonged bull run, as have equities more generally across the developed world. It isn’t just equities that have risen however; returns across practically any asset class you care to look at have had a terrific run – bonds, real estate, gold, fine art. It has been an unusually broad-based bull market.

Why? It’s a direct result of the unprecedented monetary policy that has been in place since the financial crisis, in my view. Quantitative Easing (QE) was explicitly designed to raise asset prices and, in this, it has succeeded. The policy has helped divert the course of the economies that have pursued it away from what may have become a full-blown depression towards something somewhat less severe. This has, by no means, been a benign economic environment, but not as bad as it could have been.

It is easy to argue that we could have been worse off without QE, but are we any better off? Policymakers had hoped that by increasing asset prices, they could engineer some sort of “trickle-down” effect, whereby increased wealth would lead to increased spending, the creation of jobs, and rising business investment, and that a virtuous cycle would ensue. This hasn’t happened, primarily because the assets that have increased in value are not broadly held by all members of the economy.

The asset-rich have got richer, but the asset-poor have not. An unintended consequence of QE, therefore, has been for the distribution of wealth in the UK to become even more unbalanced.

Policymakers have rightly started to become more concerned about this redistributive side effect of QE, not to mention the risk of inflating asset price bubbles to an increasingly dangerous extent. This explains why we haven’t seen further QE from the Bank of England since the end of 2012, and the US Federal Reserve is now tapering its own QE programme. I expect the Fed to have completely withdrawn its extraordinary liquidity support by the end of this year.

The big question is, what will happen to financial markets without the support of QE? How will markets cope without the drug to which they have become addicted? I don’t know the answer, only time will tell, but I suspect that the gap that has opened up between valuations and fundamentals will start to close.

Over the last five years, the rising tide of QE has lifted all boats. It has been an unusually indiscriminate rally with the individual strengths and operational performance of companies largely being ignored. With the tide now turning, I would expect the market to become more discriminate with fundamentals playing a much more significant role in determining the performance of individual stocks. In other words, over the next five years, I expect to see a stock picker’s market – an environment which ought to favour a fundamental investment approach and a cautious investment strategy.

The views expressed in this article are those of the author at the date of publication and not necessarily those of Woodford Investment Management LLP. The contents of this article are not intended as investment advice and will not be updated after publication.


24th June 2014


24 June 2014, 14:29
Written by Neil Woodford

The Governor of the Bank of England, Mark Carney, got himself in a bit of a pickle with his policy of forward guidance. Originally introduced when he arrived from Canada in July 2013, the intention was to provide the market with greater clarity on the likely future path of interest rates and the conditions that would necessitate the start of policy tightening.

In February, however, with unemployment having fallen faster than anticipated, the policy was abandoned and Mark Carney today faced questions from the Treasury Select Committee about the continued confusion around the evolution of the UK’s monetary policy.

Mark Carney’s latest speech at the Mansion House on 12 June, led the market to expect that the first hike in interest rates would come much sooner than previously expected but I am not so sure. Admittedly, Carney’s remark, “There’s already great speculation about the exact timing of the first rate hike and this decision is becoming more balanced. It could happen sooner than markets currently expect”, does seem to vindicate the market’s viewpoint. However, this statement was followed immediately by the more nuanced, “But to be clear, the MPC has no pre-set course. The ultimate decision will be data-driven. At this point it is safest to conclude, as the MPC has, that there remains scope for spare capacity to be used up before policy is tightened and that a host of labour market, capacity utilisation and pricing indicators should be watched closely to determine how that slack is evolving.”

I believe the second half of this part of the speech has been largely overlooked by the market but it is really important. The Governor is pointing to three reasons why interest rates may not need to rise in the near term, or indeed for that matter, in the medium term.

Firstly, regarding the labour market, whilst the recent strength in employment figures has given some commentators the impression that an interest rate rise is now required, it has not yet resulted in a pick-up in wage inflation. If it were to do so, I would agree that an interest rate rise would become much more likely. However, I do not expect a pick-up in wage inflation because, as the chart below illustrates, much of the growth in UK employment has come from self-employed workers. Individuals in self-employment do not tend to have as much pricing power as employees of larger organisations or unionised work forces that can aggregate to improving their bargaining position. In fact, it is plausible that the growth in self-employment actually represents a workforce pricing itself back into work, rather than one that is strong enough to be on the verge of stimulating a rise in wage inflation.

2014 06 self-employed












Secondly, there is a degree of spare capacity in the labour market and elsewhere in the economy which reduces the need for an imminent increase in rates. Spare capacity is very difficult to measure accurately but economists have tended to use the unemployment rate or the labour market participation rate as a rough proxy. To do so in today’s context would ignore the fact that the shape of the labour market has changed. This is evident in the chart above and the chart below, showing the proportion of part-time workers seeking full-time employment. This figure increased significantly in the financial crisis and has thus far shown only tentative signs of retreating. This suggests that a proportion of the workforce is under-utilised and explains why productivity data for the UK economy has continued to disappoint. For example, the UK economy will produce more or less the same amount of output in this quarter as it did in the first quarter of 2008. However, it will employ around 1 million more people to do so. The Monetary Policy Committee (MPC) appears minded to see spare capacity absorbed by the economy before tightening monetary policy. This may take some time, depending on how productivity and real incomes perform going forward.

2014 06 part-time seeking












Thirdly, pricing indicators do not suggest an increase in increase in interest rates is warranted. At 1.5% Consumer Price Inflation (CPI) is below the Bank of England’s 2% target and the chart below suggests inflation continues to trend downwards.

2014 06 CPI












As far as I’m concerned, these are all reasons why interest rates may not rise in the near term. But the fact is, I do not know when interest rates will rise and neither does the MPC – Carney has effectively said as much.

But I do believe that the market is wrong to expect an imminent tightening of monetary policy and believe that it would be a mistake if interest rates were to rise. The UK economy is still struggling with a substantial consumer debt burden, and Mark Carney himself has recently acknowledged that, “a highly indebted private sector is particularly sensitive to interest rates.”

Increasing interest rates and, in turn, mortgage rates, reduces household disposable income. Darren Winder, a highly respected economist at the Lazarus Partnership, recently suggested that each 0.25% increase in the average mortgage rate would decrease the average household’s disposable income by about 1.25%. Such a policy move would potentially be very destabilising for the UK economy.

Given that the Bank of England these days has a dual mandate to promote financial as well as monetary stability, I therefore think it is highly unlikely that it would endanger the UK’s fragile economic recovery by increasing interest rates any time soon.

The views expressed in this article are those of the author at the date of publication and not necessarily those of Woodford Investment Management LLP. The contents of this article are not intended as investment advice and will not be updated after publication.

Avinash Vazirani – Indian election result is a ‘game changer’

22nd May 2014

By Mark Dampier

The sixteenth general election in India, the world’s biggest democracy, has produced a landslide victory for the conservative Bharatiya Janata Party (BJP). Narendra Modi is due to be sworn in as Prime Minister on Monday.

1984 was the last time one party won a clear majority. This is a clear mandate for change, driven by young voters (of 814m eligible to vote, more than 100m were first time voters, and they voted for the BJP in droves). (more…)

Market Distortions

20th May 2014

By James Ferguson

The original intention of Quantitative Easing (QE), as clearly outlined in Mervyn King’s speeches in the autumn of 2010, was to prevent the deflationary contraction of broad money supply. As such, QE’s second iteration two years later had an altogether bolder remit; no less than the artificial inflation of nominal GDP; and it appears to have worked. The UK is now widely lauded as a successful growth story, the strong man of Europe and (finally) well on the way back to full employment – despite the puzzling slump in productivity that had previously been attributed to the hoarding of labour during the recession.

But what if there’s a wholly different interpretation of what is responsible for the UK’s recent economic recovery? What if it’s all down to QE? (more…)

Positive outlook in the US offsets heightened geopolitical risk

20th May 2014

By John Chatfeild-Roberts

Western-developed equity and bond markets have been surprisingly stable this year, though the index numbers hide significant stock divergences.

This stability has been in spite of heightened geopolitical risk, most notably the annexation of Crimea by the Russian army, consolidating control of the strategically vital warm water port of Sevastopol for its navy.

Supportive data indicating continuing economic growth in western developed countries reassured investors, as did the expected reduction by the US Federal Reserve of its monthly purchase of bonds from $65bn to $55bn. (more…)

A tax on ignorance and inflation

20th May 2014

By Merryn Somerset Webb

I listened to BlackRock’s Larry Fink speak at the National Association of Pension Funds conference in Edinburgh this week.  He was very clear that everyone must save more; that his industry must somehow “communicate the urgency to save today” and that anyone who doesn’t act on this urgency faces a “miserable future”.

Of course, asset managers are always saying that.  They would. The more we save, the more money they rake off in ad valorem fees. And there’s a large group of people who are following Mr Fink’s advice already, but also face a miserable future – or at least, a miserable tax bill. Far from under-saving, they are over-saving.  Why? Because of something called the lifetime allowance.  The LTA was introduced eight years ago with little fanfare and has fluctuated all over the place since then.  It started at £1.4m, went to £1.8m and then fell back to £1.5m. And it’s about to change again: from April 6 it will be £1.25m. (more…)

An Undeclared Tax on Savers

20th May 2014

By Merryn Somerset Webb

This week saw a pretty depressing anniversary:  the UK base rate has now been at 0.5% for five long years. Five years is enough time for most people to get used to anything. So it is worth remembering how extraordinary this is. We have records of UK rates going back to the late 1600s, so we know that they have never been this low before.

Interest rates are at 300- year lows. There have been huge winners from this – anyone with a mortgage they shouldn’t really be able to afford, banks, big companies who can easily take out cheap debt, the government (which has been able to keep borrowing at very low rates), and holders of real assets (who have benefited as equity markets have soared). (more…)

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