 | Editor's note: The Fed's decision to raise interest rates is good news for U.S. stocks. And as Steve Sjuggerud explains in today's Masters Series essay – excerpted from his brand-new book – it's bullish for precious metals, too…  Higher Interest Rates Give Us a Fantastic Opportunity in Precious Metals By Steve Sjuggerud, editor, True Wealth Simple logic would tell you to sell precious metals when interest rates rise, not buy them. Logically, this "easy-money" policy should be pro-precious metals. Although the government can print money and lower interest rates, the supply of precious metals stays roughly stable. Owning precious metals doesn't pay you anything. When rates are near zero, there's no penalty for owning precious metals. When interest rates rise, on the other hand, you're giving up a potential yield on your money in order to hold precious metals. That yield should discourage precious metals demand and hurt precious metals prices. The problem is, markets don't always work based on simple logic. And in the case of gold and silver, Fed tightening actually gives us a fantastic opportunity. I looked at more than 40 years' worth of data – from 1973 to 2015. I looked at all the times the U.S. moved from a period of low or falling rates into a period of rising rates. The next tables show what gold and silver did during all periods when the Fed raised (or tightened) rates versus all periods when the Fed lowered (or eased) rates. Take a look…
As you can see, both gold and silver perform better during periods of tightening than periods of easing. And it's not just for the entire period of Fed tightening. Gold and silver also outperform just as the Fed begins tightening… like we'll see when the Fed raises rates. The next tables show what gold and silver did during the three-month and one-year periods when the Fed first started easing or tightening. Take a look…
In the three months after tightening begins, gold returns 7.1% and silver returns 10.6% (based on median gains). That's incredible when you consider the typical three-month return for both metals is well below 1%. Even a year later, these metals beat the historical returns. It seems crazy… but owning gold and silver as the Fed begins tightening is exactly what we want to do! The data is clear. We want to own precious metals when the Fed begins tightening… and during the entire period of tightening. On top of that, there is another catalyst for gold and silver in our favor… It helped drive gold and silver's bull market during the 2000s. And it isn't going away any time soon… One Driver of the Precious Metals Bull Market Gold increased 2.5% in 2001. That was the first positive annual gain in gold prices in five years. Gold hadn't had a winning year since 1995. But that meager 2001 rise kicked off a massive bull market. As you probably know, gold prices increased every year from 2001 to 2012. Silver prices were more volatile, but on the whole, they increased over the same 12 years. Take a look…
As you can see, gold and silver averaged 17% and 20% annual gains during this massive bull market. But after more than a decade of gains, things came to a screeching halt in 2013. Gold fell 28% in 2013. Silver plunged 36%. And it continued in 2014… gold fell 2% and silver fell 19%. By mid-2015, no one was interested in gold. Most folks had given up on gold and silver. But what they didn't realize was the catalyst that propelled these precious metals higher over the previous decade was still present in 2015… If you look back at history, gold and silver's major bull markets all have one key distinction… they happened during periods of negative real interest rates. Let me explain what that means… The real interest rate is the risk-free return on money after inflation. It's what you can earn on cash in the bank after inflation lowers your purchasing power. You calculate this number by taking the inflation rate (the Consumer Price Index, or CPI) and subtracting short-term interest rates (in this case, the Federal Funds Rate). When inflation is lower than interest rates, the real interest rate is positive. But when inflation is higher than interest rates, the real rate is negative. And precious metals thrive during periods of negative real interest rates. You can see this in action in the next chart. It shows gold prices versus the two major periods of negative real interest rates (in gray). Take a look…  As you can see, both of gold's major bull markets occurred during periods of negative real interest rates. When real interest rates were positive, gold went nowhere. Silver is the same story…  Once again, silver prices soar when real interest rates are negative. The numbers back up what the charts show… From 1970 to 2015, gold returned roughly 8% a year. And silver was up just 6% a year. But buying in times of only negative real interest rates led to much better returns. Take a look…
Gold's one-year negative real rate return of 11.9% is more than four times better than its positive real rate return of just 2.8%. And that relationship holds over most time frames, as the table shows. The same is true for silver.
The median six-month and one-year gains when buying during positive real rates is NEGATIVE for silver. Just about all our gains come during periods of negative real interest rates. From 2013 to 2015, gold and silver prices fell despite negative real interest rates. But that doesn't change the facts… Gold and silver historically perform best when real interest rates are negative instead of positive… and negative real rates aren't going anywhere anytime soon… As of mid-2015, inflation is 0%. But analysts expect inflation to rise above 2% by 2016. The Fed's own estimates put interest rates at just 1.25% in 2016 and 2.75% at the end of 2017. That means we'll likely see negative real interest rates through 2017, at least. And that gives you a great historical opportunity in precious metals. In short, precious metals should do well over the next few years. We've got two powerful historical winds at our back…
Good investing, Steve Sjuggerud | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
SUZI Q'S ESTATE FINDS
Sunday, January 31, 2016
Higher Interest Rates Give Us a Fantastic Opportunity in Precious Metals
Wednesday, January 27, 2016
Legend Richard Russell Not Only Warned This Global Carnage Was Coming, He Also Warned How Terrifying It Will Become
Legend Richard Russell not only warned this global carnage was coming, but he also warned how terrifying the financial destruction will become.
Devastating Bear Market To Correct Gains Since 1932Richard Russell: “My thinking is that this is the big bear market that will correct the entire rise from the 1932 low. In all my years of writing since 1958 I have never allowed my subscribers to stay invested through a primary bear market. I have kept my subscribers out of common stocks (except gold). For most of this bear market, we will stay on the sidelines, until I have evidence the bear market has ended.
Nobody knows how low this bear market will go, but I see it as the great adventure of the next few years. It’s been many generations since Americans have seen hard times. I rest on the old axiom “prepare for the worst, and hope for best.”
Russell also warned that countries were preparing for a massive global collapse:
Richard Russell: “The word out of China is that China is selling massive quantities of US Treasury bonds. At the same time China has been a huge buyer of gold. My thought is that China wants to back the yuan with gold and thus the yuan will be the world’s only gold-backed currency.
Countries Preparing For A Collapse In Global Fiat CurrenciesIn this way, China wants to be on an economic par with the US. Russia is also buying physical gold, as are most of the central banks. They may be preparing for a collapse in fiat currencies. I advise my subscribers to buy as much bullion gold as they can. It seems that the central banks don’t trust the garbage money that they themselves have created.
Many veterans are now afraid to store money with banks or even with the government. They are buying small quantities of silver and gold because these items always represent wealth and will not decline in the bear market.
The trash of fiat money will disappear, and silver and gold will take their rightful place in the world monetary system. As the old system is destroyed, a better and finer monetary system will grow out of the ashes.”
And finally, the legend warned about the destruction of currencies and capitalism itself:
Richard Russell: “The end of capitalism will be due to the unbelievable amount of debt that is currently being created. This will create monster inflation that will destroy every currency. The only currency that cannot be destroyed is gold. When investors realize this, we’ll have the makings of the greatest bull market in gold ever seen. My blessings to all my faithful subscribers.”
Tuesday, January 26, 2016
Comex Snaps: Gold Dilution Hits Record 542 Oz For Every Ounce Of Physical
There had been an eerie silence at the Comex in recent weeks, where after registered gold tumbled to a record 120K ounces in early December nothing much had changed, an in fact the total amount of physical deliverable aka "registered" gold, had stayed practically unchanged at 275K ounces all throughout January.
Until today, when in the latest update from the Comex vault, we learn that a whopping 201,345 ounces of Registered gold had been de-warranted at the owner's request, and shifted into the Eligible category, reducing the total mount of Comex Registered gold by 73%, from 275K to just 74K overnight.
This took place as a result of adjustments at vaults belonging to Scotia Mocatta (-95K ounces), HSBC (-85K ounces), and Brink's (-21K ounces).
Meanwhile, the aggregate gold open interest remained largely unchanged, at just about 40 million ounces.
This means that the ratio which we have been carefully tracking since August 2015 when it first blew out, namely the "coverage ratio" that shows the total number of gold claims relative to the physical gold that "backs" such potential delivery requests, - or simply said physical-to-paper gold dilution - just exploded.
As the chart below shows - which is disturbing without any further context - the 40 million ounces of gold open interest and the record low 74 thousand ounces of registered gold imply that as of Monday's close there was a whopping 542 ounces in potential paper claims to every ounces of physical gold. Call it a 0.2% dilution factor.
To be sure, skeptics have suggested that depending on how one reads the delivery contract, the Comex can simply yank from the pool of eligible gold and use it to satisfy delivery requests despite the explicit permission (or lack thereof) of the gold's owner.
Still, the reality that there are just two tons of gold to satisfy delivery requsts based on accepted protocols should in itself be troubling, ignoring the latent question why so many owners of physical gold are de-warranting their holdings.
Considering there are now less than 74,000 ounces of Registered gold at the Comex, or just over 2 tonnes, we may be about to find out how right, or wrong, the skeptics are, because at this rate the combined Registered vault gold could be depleted as soon as the next delivery request is satisfied. Or isn't.
Monday, January 25, 2016
Why is J.P. Morgan accumulating the biggest physical silver stock in history?
Why has J.P. Morgan accumulated more than 60 million ounces physical silver in their Comex vault? Only 4 years ago they had 5 million ounces silver. And they keep accumulating although they lose money. In this epical rise the price of silver declined from $30 to $14 per ounce. What do they know?
Someone at J.P. Morgan must know that all this silver will shine one day. Maybe it’s CEO Jamie Dimon himself? Remember what Dimon said last year:
“Some things never change. There will always be another crisis. And its impact will be felt by the financial market. The trigger to the next crisis will not be the same as to the last one, but there will always be another crisis.”
So we’ve got the CEO from one of America’s biggest investment banks that believes there will be another crisis. And that same investment bank buys enormous amounts of silver to store in their vaults while the price of silver declines. This only makes sense when silver will play an important role during the next crisis.
April last year J.P. Morgan accumulated 8.3 million ounces silver in only 2 weeks. A 15% increase to 55 million ounces. 16 month prior to this buying spree their vault barely changed. During the last 9 month the bank bought a couple of million ounces more. At this moment they have 68,379,949 ounces physical silver in their Comex vault.
Physical silver news: market is broken
So maybe J.P. Morgan knows something we don’t know. Maybe they know why the silver market is broken.
US silver import surged last year. The reason the U.S. imports so much silver is due to its large industrial silver manufacturing industry. The United States has been the most consistent largest importer of silver in the world. Furthermore, the U.S. Mint has produced more Silver Eagles each year.
During the first 9 months of 2015 import increased by 798 tons BUT industrial silver demand is down considerably, 29% to be precisely.
When this trend continues in the 4th quarter, the United States would have imported more than 6.000 tons of silver while industrial demand is down. The last time the U.S. imported that much silver was in 2011.
So, for whatever reason… there is more silver coming into the U.S. than the market dictates. Someone or some large entities must be acquiring silver off the radar. Maybe J.P. Morgan know something we don’t know?
Over the past few years, JP Morgan has been accumulating enormous amounts of physical silver. Nobody has ever seen anything quite like this ever before. Could it be possible that JP Morgan Chase is anticipating another great economic crisis?
JP Morgan certainly seems to be preparing for a worst case scenario.
What about you?
This Ticking Time-Bomb Now Threatens The Entire Global Financial System
With continued uncertainty in global markets, today King World News is featuring a powerful interview with one of the greats in the business that exposes the ticking time-bomb that now threatens the entire global financial system.
James Turk: “There has been a big change at the Federal Reserve, Eric, and it is one that has profound implications for the US dollar. Unfortunately, it is not a change for the better…
This change worsens the outlook for the dollar, and it has received little if any attention in the mainstream media. Take a look at this remarkable chart (see below).
The Fed’s capital plummeted overnight from $58.7 billion to $39.5 billion. The Fed has lost $19.2 billion of its equity. Here are snapshots of the Fed’s “Before & After” balance sheets so KWN viewers can see the comparison.
As a result of this change, the Fed’s leverage ratio – in other words, its liabilities divided by its capital – has soared from an already high 75.6 to a jaw-dropping 112.6.
Fed’s Leverage Now Equals LTCM’s Before It Went BankruptTo put this number into perspective, that’s similar to the leverage ratio of Long Term Capital Management before it went belly up. The Fed’s leverage is so high that it makes other over-leveraged central banks like the ECB look prudent by comparison.
The Fed is now the most highly leveraged it has ever been, and probably is the most highly leveraged bank on the planet. It is an alarming development. It means that if the value of the Fed’s assets declines by a minuscule 0.88%, the Fed’s book capital will be wiped out, making the Fed as insolvent as some of the banks it is trying to keep afloat.
In reality the Fed probably is already insolvent using generally accepted accounting principles that mark its assets to their market value. We know that the Fed still has a lot of paper on its balance sheet that it bought from insolvent banks in the 2008 financial crisis that in a liquidation sale won’t be worth the book value at which the Fed records it. Also, with interest rates rising, it is likely that the mark-to-market value of the long term bonds the Fed holds has been declining, but the Fed does not record these losses in book value.
For these reasons, it seems safe to assume that the value of the Fed’s assets is already less – perhaps even far less – then the 99.12% of their face value they need to be to keep the Fed solvent.
Huge Risks Being Imposed On The U.S. DollarWhat happened to the Fed here, Eric, is imposing huge risks on the dollar, and more generally, the whole financial system, including the banks. So it is important to understand why the Fed’s capital plummeted.
Every year the Fed pays a dividend to the banks that own it. This dividend aims to compensate the banks for the capital they have invested in the Fed. After that dividend payment, any residual profit earned by the Fed is then paid to the US government.
In 2015, the Fed paid $97.7 billion to the federal government, which by the way was a new record topping the previous $96.9 billion record that the Fed paid to the U.S. government in 2014. These huge payouts were possible because the Fed’s balance sheet has never been this big before, enabling it to earn record profits.
But last year’s huge payout was not enough for the federal government. They wanted more, so the politicians in D.C. tacked a little-known provision to the Fixing America’s Surface Transportation Act, which President Obama signed into law on December 4th.
The politicians wanted to fund this $305 billion five-year spending bill without increasing taxes, which would not only squeeze consumer budgets even more, but would also further impair economic activity if consumers had to send more taxes to D.C. So instead, the politicians scraped together these funds from other sources, wherever they could find some.
It is important to recognise that the $19.3 billion of capital they took from the Fed is a trifling amount compared to the federal government’s $18.9 trillion of debt and over $100 trillion of other liabilities for which it is on the hook because of financial promises politicians have made. In other words, while $19.3 billion is huge in absolute terms, it is tiny compared to the big picture of the federal government’s total debt. So the way this new law was funded is giving us a critical message, Eric. It shows how hard-pressed the federal government’s financial position really is.
Ticking Time-Bomb Now Threatens The Entire Global Financial System
The US government’s financial position is in such dire straits it has to look for money wherever it can find it. So the money it took from the Fed is sort of like looking for like nickles-and-dimes that were hidden under the cushions of the living room sofa, given that the $19.3 billion it found is so small compared to the debt mountain the federal government has built for itself.
Ticking Time-Bomb Now Threatens The Entire Global Financial SystemThe US government’s financial position is in such dire straits it has to look for money wherever it can find it. So the money it took from the Fed is sort of like looking for like nickles-and-dimes that were hidden under the cushions of the living room sofa, given that the $19.3 billion it found is so small compared to the debt mountain the federal government has built for itself.
So the bottom-line, Eric, is that while the Fed talks about normalizing its balance sheet and hints at bringing its total assets back to the $850 billion level that existed prior to the 2008 financial crisis, the reality is quite different. The Fed has done nothing to reduce its total assets, and this huge nosedive in its total capital makes its balance sheet even more abnormal and therefore more worrying. It is no wonder that gold and silver are having a great start to the New Year.”
Sunday, January 24, 2016
ALERT: Legend Warns Panic Is Coming But Exposes What Is Really Terrifying
On the heels of another wild trading week in global markets, today the man who has become legendary for his predictions on QE, historic moves in currencies, and major global events, warned we have not yet seen panic in global markets but he exposed what is really terrifying.
Egon von Greyerz: “Eric, the current deflationary implosion that we are seeing in markets and commodities is soon going to turn into a hyperinflationary explosion. The chaos that is happening now is no surprise to the followers of KWN.
Downside Is IncreasingDraghi gave a clear signal this week that the ECB will need to review their monetary policy by the next meeting in March. As Draghi said, ‘Downside risk is increasing and inflation is significantly lower than the December outlook.’…
Banking Crisis Accelerates In Europe But Who Is In Trouble?…
Egon von Greyerz continues: “Let’s face it, Eric, central banks always get their forecasts wrong. The southern European economy is collapsing and so is the financial system, especially banks in Italy, Greece, Portugal and Spain. Italy now has non-performing loans that total 17 percent of GDP. That figure is absolutely enormous and cannot be sustained.
Egon von Greyerz continues: “Let’s face it, Eric, central banks always get their forecasts wrong. The southern European economy is collapsing and so is the financial system, especially banks in Italy, Greece, Portugal and Spain. Italy now has non-performing loans that total 17 percent of GDP. That figure is absolutely enormous and cannot be sustained.
Among Others – Deutsche BankBut the European banking system has never recovered since the 2007 – 2009 crisis. Deutsche Bank, for example, has $97 trillion in derivatives exposure, which is 20-times greater than German GDP. And the German stock market has fallen 20 percent since November 2015, so we will have to keep an eye on Deutsche Bank.
The downturn in global markets is now having a major impact on confidence, as fear is coming back into the European economy. This trend is going to accelerate and I would be surprised if the ECB waits until March to launch another stimulus package. It’s absolutely amazing to think of how totally out of synch these central banks are.
But what the Fed did is even stronger proof that central banks don’t know what is happening. The timing of the rate hike could not have been worse. They should have increased rates 2 – 3 years ago in order to choke off the spectacular bonanza in asset markets. Instead, the Fed waited until the economy turned down to increase rates.
But as I said in December, right after the Fed raised rates, there won’t be any further increases in coming months. Instead, there will be a rate reduction very soon, accompanied by QE, and the Fed is likely to join the ECB with negative rates in coming months.
Fed & ECB To Launch Massive QE ProgramsSo we will see the ECB and the Fed join the central banks of Japan and China with massive money printing programs. The Bank of England and the IMF will also join in, and during 2016 we are likely to see the biggest money printing program in history. Remember that global debt has gone up 10-times since the early 1990s to $230 trillion. The QE that we will see in 2016 and beyond will be at least of that magnitude and probably even higher as the $1.5 quadrillion derivatives bubble bursts.
The problem is that this time the QE won’t have any lasting effect. To pile a few hundred trillion dollars of debt onto a world that can neither finance nor repay the existing debt can only exacerbate the inevitable implosion. But before that the world will experience the most incredible hyperinflation. This will of course have nothing to do with demand for goods and services, but only with collapsing currencies.
In my KWN article last week, I showed that hyperinflation is already on its way in many countries such as Argentina, Brazil and Russia. When the dollar soon collapses, we will see the same thing happening in the United States as well as many other countries. In the last 20 years, central banks have exploded their balance sheets 10-times by printing $20 trillion. But in coming years their balance sheets will expand much more than 10-times and the world will drown under its own debt.
Panic Is Coming But Here Is What Is Really TerrifyingWe have not yet seen panic in markets but that is likely to happen this year and it will be on a much larger scale than 2007 – 2009. What is really terrifying this time is that we will have large-scale social unrest and civil war in many countries.
I believe that most followers of KWN know that physical gold and silver will be one of the ways to protect assets from total destruction. It’s irrelevant whether or not gold briefly hits a new low or not. What is critical is that precious metals are the most important insurance to hold during the global financial meltdown that is already under way.”
Friday, January 22, 2016
This Is What The Death Of A Nation Looks Like: Venezuela Prepares For 720% Hyperinflation
For citizens of Nicolas Maduro's socialist paradise the news is terrible, and getting worse with every passing day.
Yesterday, we reported that one year after our November 2014 forecast, Barclays has decided that Venezuela is now past the "point of no return", and a bankruptcy in 2016 will be "difficult to avoid." But while some may have thought that this dramatic impact, while welcome by the rest of OPEC and oil bulls around the globe, would only impact the government, the reality is that this latest hit means a total disintegration of the economy and will take the country's already staggering hyperinflation to previously unprecedented levels.
According to the latest IMF estimate, Venezuela’s consumer inflation, already the world’s highest, will triple this year to a level above all estimates from economists surveyed by Bloomberg.
This is because the IMF, which until recently had predicted "only" 204% inflation for Venezuela, already higher than the 140% consensus, revised its numbers and now sees a mindblowing 750% hyperinflation in 2016: this means that the average price of products and services will increase over eight times over the span of the next 12 months.
Bloomberg reports that inflation will surge to 720 percent in 2016 from 275 percent last year, according to a note published by the IMF’s Western Hemisphere Director, Alejandro Werner. That’s nearly quadruple the median 184 percent estimate from 12 economists surveyed by Bloomberg, and exceeding the highest forecast of 700 percent from Nomura Securities.
Venezuela’s central bank published economic statistics Jan. 15 for the first time in a year, confirming that inflation had reached triple digits and closed the third quarter at 141.5 percent on an annual basis. As of December 2014, the last time data was released, inflation was 68.5 percent.
It has gotten so surreal, that the local central bank accused websites that track the dollar’s street value of “destroying prices” and installing a “savage” form of capitalism in the country, adding that 60 percent of inflation was the result of currency manipulation.
Whatever the cause, the reality is that real inflation is even worse, and when charted, this is what the death of a sovereign nation looks as follows (this does not assume a sovereign bankruptcy; when that happens the hyperinflation will really take off):
And when described with words:
Spiking prices and widespread shortages for even staples have driven discontent in Venezuela. That helped spur the opposition to gain control of Congress for the first time in a decade as President Nicolas Maduro attempts to turn the tide of what he has deemed an “economic emergency.”“A lack of hard currency has led to scarcity of intermediate goods and to widespread shortages of essential goods — including food — exacting a tragic toll,” Werner said. “Prices continue to spiral out of control.”
Actually, the hard currency exists, because while locals may not have access to dollars, they certainly could have converted their now totally worthless currency into gold, thus not only preserving but boosting their purchasing power relative to the local stock market which, as we showed previously, has also generated negative returns relative to the rampaging hyperinflation.
According to Bloomberg, Venezuela’s economy will shrink 8% this year following a 10% contraction last year, according to the IMF. While these forecasts are more pessimistic than economists’ median estimates for a contraction of 4.1%, in reality the Venezuela economy no longer exists, with all transactions now taking place in the gray or black markets, and the government apparatus effectively operating in a vacuum.
Which, as we noted yesterday, is good news for oil bulls: once the now inevitable sovereign bankruptcy hits, the resulting chaos and collapse in oil production in the political and power vacuum which may last for years, will serve as just the supply drop buffer the world oil market so desperately needs.
But while that may be good news for oil traders, there is no good news in any of the above for the long-suffering citizens of this "socialist paradise" which any minute now will be downgraded to its fair value of "socialist hell."
Attention Finally Turns To Saudi Arabia's "Secret" US Treasury Holdings
In November of 2014, we announced the quiet death of the petrodollar.
The system which underwrote decades of dollar dominance and kept a perpetual bid under USD assets met an untimely demise when the Saudis moved to bankrupt the US shale complex by deliberately suppressing oil prices.
The implications, we said, would be far-reaching.
For years, oil producing nations plowed their USD crude proceeds into USTs and other dollar assets in a virtuous loop both for the currency and for the nation that printed it. The “Great Accumulation” (as Deutsche Bank calls it) of USD FX reserves ended for good in early 2015 but no one noticed until China began to liquidate mountains of US paper in an attempt to manage a runaway devaluation effort.
By the start of September, all anyone wanted to talk about was the depletion of EM FX war chests as the world suddenly came to understand that the selling of FX reserves amounts to QE in reverse and might therefore serve to tighten global monetary conditions, drive up yields on core paper, and sap liquidity as traditional net exporters of capital suddenly stopped buying amid slumping commodity prices and the yuan fiasco. Some wondered if the reserve drawdowns would cause the Fed to delay liftoff as the FOMC would effectively be tightening into a tightening.
Against this backdrop we said that the most important chart in the world may well be one that depicts the combined FX reserves of Saudi Arabia and China.
Now that Saudi Arabia’s oil price gambit has backfired on the way to blowing a hole in the kingdom’s budget that amounted to 16% of GDP last year, the market is speculating that Riyadh’s vast SAMA reserves could disappear altogether - especially considering the added cost of funding the war in Yemen and maintaining the riyal peg.
As it stands, the Saudis have around $630 billion parked at SAMA. That's the third-largest rainy day fund on the planet.
How long the reserves will last given the myriad headwinds facing the kingdom is an open question, but here's a useful graphic from BofAML which endeavors to show how long Riyadh can hold out under various assumptions about oil prices and borrowing:
What’s interesting about Saudi Arabia’s UST reserves is that no one knows how “vast” they actually are.
For one thing, SAMA is a sovereign wealth fund, which means we can’t just look at the headline number and make assumptions about US paper because the fund’s holdings aren’t homogeneous.
But there’s more to the ambiguity than that. “It’s a secret of the vast U.S. Treasury market, a holdover from an age of oil shortages and mighty petrodollars,” Bloomberg writes of Saudi Arabia’s US Treasury holdings. Put simply: there’s no way for the market to assess the impact of the SAMA drawdown because the composition of the portfolio is a state secret of both Saudi Arabia and the US.
“As a matter of policy, the Treasury has never disclosed the holdings of Saudi Arabia, long a key ally in the volatile Middle East, and instead groups it with 14 other mostly OPEC nations including Kuwait, the United Arab Emirates and Nigeria,” Bloomberg goes on to note, adding that the rules are different for almost everyone else. Although Saudi Arabia's "secret" is protected by "an unusual blackout by the U.S. Treasury Department," for more than a hundred other countries, from China to the Vatican, the Treasury provides a detailed breakdown of how much U.S. debt each holds.”
For his part, Edwin Truman (the former Treasury assistant secretary for international affairs during the late 1990s) doesn’t get it. “It’s mind-boggling they haven’t undone it,” he says, incredulous. “The Treasury didn’t want to offend OPEC [but] it’s hard to justify this special treatment at this point.”
So who does know how much US paper the Saudis are sitting on? Well, the Saudis of course, “a handful of Treasury officials,” and some bureaucrats at the Fed, Bloomberg says, noting that “for everyone else, it’s a guessing game.”
Yes, a “guessing game,” and one that may have profound consequences for markets and for geopolitics.
With Iranian supply set to flood an already overflowing oil market, Saudi Arabia’s finances are likely to deteriorate further. Especially if the conflict in Yemen continues to fester and the kingdom refuses to cede the riyal peg. That means that unless the Saudis are prepared to take on more debt (and the kingdom’s debt to GDP is already set to rise to 33% by 2020 from just 2% at the end of 2014), they’re going to be selling something from SAMA and the market has no way of knowing what ahead of time.
Politically all of this comes at an especially critical juncture. The US is pushing to reduce its dependence on foreign (read: Saudi) oil and Washington’s rapprochement with Tehran has ruffled more than a few feathers in Riyadh.
“Events in recent months, from President Barack Obama’s landmark nuclear deal with Iran to Saudi Arabia’s execution of a prominent Shiite cleric who challenged the royal family, underscore just how sensitive U.S.-Saudi relations have become, [but] whatever the political considerations, some analysts speculate Saudi Arabia may actually be trying to hold onto its Treasuries as part of a strategy to bulk up on dollar assets amid the deepening turmoil in global financial markets,” Bloomberg goes on to say. Here’s more:
“You need dollars if you’re an oil producer, you want to make sure you have dollars on your balance sheet,” said Sebastien Galy, Deutsche Bank’s director of foreign-exchange strategy, who suggests SAMA could be raising cash by liquidating riskier investments such as stocks, real estate and private equity. Holding dollars also makes sense as a hedge against the plummeting price of oil, which is priced in the U.S. currency.Figures from SAMA suggest the kingdom might be reallocating some of its reserves into short-term, liquid assets to help the finance ministry meet budget commitments and defend its 30-year-old currency peg of 3.75 riyals to the dollar.The central bank has increased foreign currencies and deposits held abroad by 7 percent in the first 11 months of 2015, while at the same time reducing foreign securities, consisting of equities and longer-term debt, by 20 percent.
If the Saudis are avoiding selling US paper for as long as they can, one wonders what it is they're selling instead to boost cash and deposits. As we noted last week, sovereign wealth funds are set to liquidate $75 billion in equities in 2016, an outflow which may or may not be covered by "dumb" money inflows from the retail crowd.
In any event, those hoping for an end to the "legacy" policy of keeping Saudi Arabia's UST holdings shrouded in secrecy shouldn't hold their breath. "They'll want to deal with it sooner or later," the abovementioned Edwin Truman says.
We'll close with a simple question: who would be the new patron saint of the US Treasury Department in the event the Saudis drawdown all of their reserves and decide to diversify away from USD assets once the tide turns for crude, red ink turns to black, and the kingdom once again becomes a net exporter of capital? Put differently, who will monetize the US deficit if relations between Washington and Riyadh hit the skids over Iran? It damn sure won’t be China, where authorities are selling USTs by the hundreds of billions.
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