uk housing reflationary policy 2008 sep

8/14/2019 Uk Housing Reflationary Policy 2008 Sep

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The Denver Gold Forum 2008

Gold Has it run into trouble?Dr. Martin MurenbeeldSeptember 9, 2008


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The work of economists requires accuracy and

good judgment!


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Gold Price Scenarios

2007-avg 2007-end 2008-avg

Scenario A: p.=.10% $661 $630 $587

Scenario B: p.=.60% $679 $736 $790Scenario C: p.=.30% $698 $832 $968___________________________________________

Probability-Weighted: $683 $754 $823

Actual: $695 $836 $???

(Jan-Aug 2008 average: $906)

Last Years Forecast at this Breakfast:

(Aug-Sep 07 average: $689!)


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1. While we anticipated some monetary

easing:The US housing sector could forcemonetary easing in the near term

2. we did not anticipate the full-blowncredit

market crisisaround the world.3. Our forecast looked spot-on before

central banks started pumpingliquidityinto

the system 4. But thats why we use Scenarios when

we forecast!

What Happened?

Our forecast was not aggressive enough


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Last date: March 23, 2007

$638

R2=.98

Overview

Gold reacted sharply to the crisis

200

300

400

500

600

700

800

900

1000

1100

01 02 03 04 05 06 07 08

Friday dataLast date: September 5, 2008

CyclicalTurning Point

BasicUptre

nd(1)

Credit crisis begins:

ECB pumps 95bn intoeurozone banking system

Basic

Uptre

nd(2)

Bear StearnsFreddie MacFannie Mae


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Overview

but has since returned to its basic uptrend!

350

400

450

500

550

600

650

700

750

800

850900

950

1000

1050

05 06 07 08

Daily p.m. fixLast date: September 5, 2008

200-daymovingaverage50-day

movingaverage

May 12,06 high not exceeded until Sep 19,07Thats 16 months!!!

BasicU

ptrend(

2)

Bear Stearns

Freddie MacFannie Mae


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Overview:

Remember, gold always corrects in its long cycle

0

200

400

600

800

1000

1200

1400

1600

1800 1825 1850 1875 1900 1925 1950 1975 2000

Shortest bull-cycle 10 years

10-year MA

Real Gold Price - 2007$/oz

Several yearsof counter-

trenddevelopments


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1. Monetary reflation is on the short-medium-long termhorizon

2. The dollar must decline against Asian, OPEC,Russian currencies

3. Excessive dollar reserves are part of the global

financial problem diversification is likely4. Gold remains cheap on a relative basis

5. Gold supply remains constrained

6. Gold investment demand is in a long-run uptrend andphysical demand responds when prices drop

7. Commodity cycles last many years

8. The geopolitical/financial environment favors gold

Our Eight Bullish Arguments:


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There are only three ways to stimulate an

economy:1. Ease monetary policy cut interest rates

print more money

2. Increase government spending enlargethe budget deficit cut taxes

3. Devalue the currency boost exports

dampen imports

Thereafter tariffs and trade wars !

(1) Monetary Reflation

Monetary reflation is the key for gold


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US rates are low, foreign rates will follow

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-4

-3

-2

-1

0

1

2

3

4

90 91 92 93 94 95 96 97 98 99 00 01 02 03 04 05 06 07 08

Last month: August 2008

When above 2%not positive for gold

US real short terminterest rate

When below zerovery positive for gold


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10

-500

-400

-300

-200

-100

0

100

200

300

400

500

600

700

70 72 74 76 78 80 82 84 86 88 90 92 94 96 98 00 02 04 06 08

Last month: July 2008

US Job Creation3-month MA 000s

Mid-Cycle Slowdown

US recession

Recession?


US economy is in recession


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12

40

60

80

100

120

140

160

180

200

US JP Can UK GE FR IT Spain Switz

HOUSE PRICE-TO-RENT RATIOLong Term average = 100

Source: OECD Economic Outlook June 2008


But house prices abroad also high


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Last quarter: 2007-Q4


Debt has risen sharply in US (and the world)

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130

140

150

160

170

180

190

200

210

220

230

52 56 60 64 68 72 76 80 84 88 92 96 00 04 08

-1.5

0.0

1.5

3.0

4.5

6.0

7.5

9.0

10.5

12.0

13.5

15.0

Total OutstandingU.S. Domestic Debt

% of GDP

Last quarter:Debt 2008-Q1

Savings 2008-Q2Savings Rate

% of PDI


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The US CongressionalBudget Office estimatesthat federal governmentspending as a % of GDPwill rise beyond 30% incoming years on the

back of entitlementprograms.

But it isnt only the USthat will see risingentitlement payments!

Source: WSJ, April 3, 2008


Baby-boomer entitlements will stress budgets


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-1000

-800

-600

-400

-200

0

200

400

70 72 74 76 78 80 82 84 86 88 90 92 94 96 98 00 02 04 06 08

-10

-8

-6

-4

-2

0

2

4

Last quarter: 2008-Q2

US recessionBudget deficit

(billion $)

Budget deficit(percent of GDP)


US deficits are already rising dramatically

What will F&F doto the deficit?

And will the Fedbuy debt?


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Government Choices:Renege on promises

Cut other servicesRaise taxes

Print more money


and choices for debt reduction are limited


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Print more money:

If the Fed can monetize Bear Stearns securities to prevent a "crisis," whatis to prevent it from monetizing the U.S. Treasury's outstanding debt asit is doing constantly on a small scale anyway when Social Security andMedicare costs overwhelm the federal budget? The Fed has always ALWAYS been subservient to the Treasury. So when some futureExecutive with his agreeable Congress must fund burgeoning SocialSecurity payments, and pressures the Fed to keep interest rates "low" sothat the Treasury can market new securities to pay Social Securitybenefits, what will a pliant FOMC reply if it has the precedent of BearStearns in 2008? Will it say, "No, Mr. President; we cannot buy any moresecurities right now. That would cause inflation, and violate our pledge to

keep the dollar stable?"

CATO Institute: The Imperial Fed: Does it Have Enough Power?

April 14, 2008


Do we really mean print more money?


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Global liquidity drives gold

-36

-24

-12

0

12

24

36

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60

82 85 88 91 94 97 00 03 06

-14

-7

0

7

14

21

28

35

42

Global Liquidityyoy%

Goldyoy%

correlation =.57

Latest month:Gold: Aug 2008Liquidity: Jun 2008

Global Liquidity: FX Reserves + US MBaseSource: IMF, Federal Reserve


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$638

R2=.98

(2) US Dollar

The Dollar peaked in 2002 and bottomed in 2008?

70

75

80

85

90

95

100

105

110

115

120

96 97 98 99 00 01 02 03 04 05 06 07 08

Friday dataLast date: August 29, 2008

Dollar Index: Euro, Yen,Pound, CDN Dollar(Jan 1999=100)

January 25, 2002

March 14, 2008Bear Stearns


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$638

R2=.98

(2) US Dollar

Gold moves inversely with the Dollar/Euro

1.18

1.21

1.24

1.27

1.30

1.33

1.36

1.39

1.42

1.45

1.481.51

1.54

1.57

1.60

500

540

580

620

660

700

740

780

820

860

900940

980

1020

1060

Daily dataLast date: September 2, 2008

Gold

2006 2007 2008

The US Dollar in Euros

Correlation

2006: .75

Correlation

2007: .94

Correlation

2008: .50


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$638

R2=.98

(2) US Dollar

But it is time to shift our Dollar frame-of-reference

70

75

80

85

90

95

100

105

110

115

120

96 97 98 99 00 01 02 03 04 05 06 07 08

Friday dataLast date: August 29, 2008

Dollar Index: Euro, Yen,Pound, CDN, Aus,Rupee, Yuan, SF(Jan 1999=100)

January 25, 2002

March 14, 2008Bear Stearns

Euro + CDN = 51%Yuan + Yen = 37%


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-28

-26

-24

-22

-20

-18

-16-14

-12

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-8

-6

-4

-2

0

2

96 97 98 99 00 01 02 03 04 05 06 07 08

-280

-260

-240

-220

-200

-180

-160-140

-120

-100

-80

-60

-40

-20

0

20

12-month totalBillion$

US Trade Balance - Chinamonthly total

Last month: June 2008

(2) US Dollar

US trade deficit with China is unsustainable


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2

3

4

5

6

7

8

9

10

86 87 88 89 90 91 92 93 94 95 96 97 98 99 00 01 02 03 04 05 06 07 08 09

0

250

500

750

1000

1250

1500

1750

2000

The Chinese RMB was devaluedat year-end 1993 by 34%!

RMB/US$

FX reservesApril 2008: $1.76 trn

(2) US Dollar

The RMB and Asian currencies need to rise

Source: IMF


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Country Current* Estimate** Changecurrency/$ currency/$ %

China 6.850 5.450 25.7%

India 43.88 37.10 18.3%

Japan 108.8 90.10 20.8%Malaysia 3.393 2.470 59.2%

Canada 106.2 102.0 4.9%

Euro*** 1.467 147.0 0.2%Russia 24.65 23.50 4.9%S Arabia 3.751 3.410 10.0%* Aug 29,08** July 2008*** Inverse rate

(2) US Dollar

The Peterson Inst. For Intl. Econ. estimates how much:


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-12

0

12

24

36

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60

72

84

69 73 77 81 85 89 93 97 01 05

-1.0

0.0

1.0

2.0

3.0

4.0

5.0

6.0

7.0

Global FX ReservesTrillion$

(3) US Dollar Reserves

Foreign exchange reserves have exploded

Global FX Reserves% change yoy

Source: IMF

65-70% of FXReserves are in

US$!!


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18 countries hold a collective $6.0 trillion

Source: IMF - IFS June 08

bn$ bn$

China 1779.1 Algeria 133.2

Japan 973.8 Malaysia 124.4

OPEC 527.0 Thailand 103.0Russia 554.1 Mexico 93.0

India 302.3 Libya 88.6

Taiwan 291.4 Poland 79.2

Korea 257.7 Turkey 75.5Brazil 199.8 Indonesia 55.1

Singapore 176.7

Hong Kong 158.9 Total 5973.0

Foreign Exchange Reserves(countries over $50 bn)


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0

100

200

300

400

500

600

700

69 74 79 84 89 94 99 04

-140

-70

0

70

140

210

280

350

Gold$/oz

OPEC Current Account Balance$bn


OPECs current account balance rising again


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0

250

500

750

1000

1250

1500

1750

70 72 74 76 78 80 82 84 86 88 90 92 94 96 98 00 08 08 08 08

Gold: Real Average price $602(2008-Q2$)

Gold: Nominal average price $334

(4) Gold is cheap

Gold cheap in constant DollarsLast date: 2008-Q2

Gold peak of$850 translatesinto $2300 intodays money!


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0

7

14

21

28

35

42

49

70 72 74 76 78 80 82 84 86 88 90 92 94 96 98 00 02 04 06 08

Barrels of oil per ounce of gold

Last quarter: 2008-Q2Maximum 44.47

Minimum 6.95

Average 16.781 St. Dev. (7.06)

1 St. Dev. (-7.06)

(4) Gold is cheap

Gold is near an all-time low in terms of oil


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0

5

10

15

20

25

30

1870 1880 1890 1900 1910 1920 1930 1940 1950 1960 1970 1980 1990 2000 2010

Depression 1930-1933Gold revalued to $35 in 1934Gold revalued 5 years after peak

Ratio: S&P vs. Gold1871 = 1.00S&P Index: 1941-43=10.0

Recession 1973-1975Gold cut loose in 1971Gold cut 5 years after peak

gold =$6275 with1275 S&P

Peak - 2000

(4) Gold is cheap

Gold cheap in terms of financial assets

current

With gold =$800 then

S&P = 162


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700

1050

1400

1750

2100

2450

70 72 74 76 78 80 82 84 86 88 90 92 94 96 98 00 02 04 06 08 10 12

Actual Western

World MineOutput(Tonnes)

Source: GFMS

The Mine Production Model is based on

lagged gold prices and lagged production

Model Estimate

(5) Supply

Model suggests WW mine output decline


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tonnes

WORLD TOTAL 29770.2

Subject to CBGA 12471.3Unlikely to Sell 10319.4

US 8133.5

Japan 765.1

China 600.0Russia 463.1

India 357.7

Official Institutions 3343.2

IMF 3217.0

BIS 126.2

LEFT OVER 3636.4

Source IMF - Jun '08

Loose gold totalsabout 4000 tonnes

Some have sold

gold in the past But now want

more gold again,

i.e. Argentina

(5) Supply

Loose Central Bank gold is benign

Russiaisbuying

!


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Billion US$

(6) DemandConsumer demand solid through 2007

0

1

2

3

4

5

6

7

19 96 19 97 199 8 199 9 20 00 2 001 2 00 2 200 3 20 04 2 005 2 006 20 07

0

1

2

3

4

5

6

7

8

1 996 1 99 7 19 98 19 99 2 000 20 01 20 02 2 003 20 04 2005 200 6 20 07

0

10

20

30

40

50

60

70

1 996 1 997 19 98 19 99 2 000 200 1 2 002 200 3 20 04 2 005 2 006 20 070

3

6

9

12

15

18

1 996 1 997 19 98 19 99 2 000 200 1 20 02 200 3 2 00 4 2 005 2 00 6 20 07

World - $bn India - $bn

US - $bn China - $bn

Jewelry plus Net Retail Investment Demand

Source: World Gold Council, GFMS

Recession


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0

100

200

300

400

500

600

700

800

900

1000

Gold demand is alsostimulated by marketderegulation andimprovements in

distribution of goldproducts

and gold demand

benefits from theshift to commoditiesas an asset class

(6) Demand

Investment demand is stimulated by the ETFs

Last date: August 28/08

GOLD TONNAGE - ETF

2003 2005 20072004 2006 2008

80 tonne decline

30 tonne decline


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0

10

20

30

40

50

60

70

Equities Private Debt GovernmentDebt

ManagedAssets

ManagedCommodities

(6) Demand

Investment demand has a long way to grow!

Source: McKinsey & Company, IMF, Barclays

Global financial assetstotal $ 123 trillion

Managed assets$ 55 trillion

Managedcommodities$ 250 billion


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(7) Commodity Cycle

The shortest copper cycle lasted 16 years

50

100

150

200

250

300

350

400

450

500

550

600

1850 1875 1900 1925 1950 1975 2000

10-year MA

Real Copper Price2005 cents/lb

Shortest cycle 16 years


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(7) Commodity Cycle

The shortest wheat cycle is 13 years

0

5

10

15

20

25

30

35

40

1800 1825 1850 1875 1900 1925 1950 1975 2000

Real Wheat Price2005$/bushel

10-year MA

Data affected byRussian

shortages

Shortest cycle 13 years


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(8) Geopolitical

Iran had an impact the last time around

200

300

400

500

600

700

800

900

30-Jul-79 11-Oct-79 28-Dec-79 13-Mar-8030-May-8012-Aug-80 24-Oct-80 14-Jan-81 27-Mar-81

Gold Price: 1979-1980

Iranian hostage crisis /Russia in Afghanistan

Cyclical peak in goldabout $400

(or 100%)

(8) Fi i l


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250

275

300

325

350

375

400

425

450

475

500

525

02-Nov-81 09-Feb-82 14-May-82 17-Aug-82 17-Nov-82 23-Feb-83 31-May-83 31-Aug-83 30-Nov-83

Daily dataNovember 7, 1981 to December 30, 1983

(8) FinancialGold always rises when financial system at risk

Gold Price: 1981-1983

about $180(or 60%)

MexicanDebt Crisis

Penn SquareCollapse

B i h A


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1. Theeurocould decline further against the dollar

and $/euro correlation could remain high forlonger than we think

2. Recessionsreduce demand for commodities,reduce inflation pressures and gold often

suffers

3. The rest of the world may not be decoupled,weak growthin India and China couldhurt golddemand

4. USreal interest rates will risewhen the creditcrisis and recession ends

5. Dehedgingwill come to an end

Bearish Arguments

Unfortunately there are some strong ones:

(1) E T i P i t


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200

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400

500

600

700

800

900

1000

79 81 83 85 87 89 91 93 95 97 99 01 03 05 07

0.60

0.75

0.90

1.05

1.20

1.35

1.50

1.65

1.80

(1) Euro Turning Points

Will gold follow when the euro declines or ?


Euro in US dollars(Reconstructed prior to 1999)

Gold

Gold notcorrelated with

Euro

Goldcorrelatedwith Euro

(2) Recessions


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0

100

200

300

400

500

600

700

800

900

1000

70 72 74 76 78 80 82 84 86 88 90 92 94 96 98 00 02 04 06 08

US Recession

(2) Recessions

Gold often declines on back of US recessions

But gold didnt decline

during the lastrecession!


Probable USRecession

(2) The World May Not Decouple


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50

100

150

200

250

300

350

400

450

500

70 72 74 76 78 80 82 84 86 88 90 92 94 96 98 00 02 04 06 08

US Recession

(2) The World May Not Decouple

CRB index always declines during US recessions


Reuters-Jeffries CRB Index

(19 commodities)

Probable US

Recession

(3) Real Interest Rates


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(3) Real Interest RatesReal rates will rise again when the crises pass

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-2

-1

0

1

2

3

4

90 91 92 93 94 95 96 97 98 99 00 01 02 03 04 05 06 07 08


When below zero

very positive for gold

US real short terminterest rate

When above 2%

not positive for gold

(4) Dehedging Will End


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(4) Dehedging Will End

and gold will lose this demand componentHedging Dehedging

Year Net Year Net

1983 4 2000 -15

1984 38 2001 -1511985 62 2002 -412

1986 45 2003 -289

1987 149 2004 -438

1988 353 2005 -92

1989 178 2006 -410

1990 234 2007 -4461991 66 2008 -450 (e)

1992 135

1993 142

1994 105 ASSUMED

1995 475

1996 142 2009 -300

1997 504 2010 -200

1998 97 2011 -32

1999 506

Total 3235 Total -3235

source: GFM S, M urenbeeld estimates

A simple calculationsuggests that there

will only be about530 tonnes of goldleft to be dehedgedat the end of 2008!

The September 9th Forecast:


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Gold Price Scenarios

2008-avg 2008-end 2009-avg

Scenario A: p.=.15% $860 $738 $686

Scenario B: p.=.40% $876 $820 $823Scenario C: p.=.45% $897 $930 $1002___________________________________________

Probability-Weighted: $883 $869 $883(Jan-Aug 2008 average: $906)

The September 9thForecast:

Bearish factors given more weight


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Gold has run into short-term trouble.

Over the next several years gold must

depend on reflationary policies. We thinksuch policies willbe introduced to deal withweak economic growth and disinflation.

The gold market will be volatile in themeanwhile.

The long-run outlook remains positive!

THANK YOU

uk housing reflationary policy 2008 sep

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