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You Need Gold As Insurance Against A Financial System Crash

Precious metals have had an awful period recently.

The Federal Reserve is threatening to withdraw quantitative easing (QE). That’utes been bad news for precious metals for two reasons.

Firstly, the end of cash printing removes one of the more widely-cited factors for holding precious metals. Secondly, the actual resulting strong US dollar tends to batter the commodities and precious metals sectors, because they are all by and large priced in dollars.

At MoneyWeek, we’ve moved from holding gold as an investment, in order to owning it as portfolio insurance. However is it even worth holding as insurance anymore?

I believe so, for reasons I’ll outline below. And if you’lso are a trader, now might even be considered a good time to take a little punt on gold…

The Financial System is Being Rebuilt – Hold on to Your own Insurance

As long-term readers of MoneyWeek will know, we’ng been suggesting people should own gold since the bull market took off in the early 2000s. Gold was clearly cheap. It was – not hated (as it is in some quarters now) – so much as defeated. The worst thing you could say about gold is that it wasn’t actually despised. It just wasn’t on the radar.

Of course, it increased and up through the credit bubble of the 2000s. It then peaked in late summer time 2011 at around $1,900 an oz. If there’s one thing a person could say about gold without a doubt, it was no longer cheap. This wasn’t necessarily massively overvalued either – however it was hardly off the radar. It was widely loved – and widely detested.

Later that 12 months, my colleague Merryn Somerset Webb noted that they was taking some profits on her behalf gold. Since then, we’ve seen gold as portfolio insurance, rather than a value investment. Have about 5-10% of your portfolio inside it. If everything goes horribly wrong with the global economic climate, it’ll go up. That’ll be some consolation as anything else in your portfolio goes down.

If everything goes wonderfully right with the global financial system, your gold will go down in value. But you shouldn’capital t be too bothered, since the rest of your portfolio – your Japanese stocks, your inexpensive eurozone stuff, your US-exposed UK blue chips, and all the other stuff we’ve suggested you buy – will be going up.

To cut a long story short, that’s still our look at. Insurance is insurance after just about all. You have it because you can’t forecast the future.

That said, I most likely wouldn’t feel as comfortable about having even a small holding in gold, if not for the fact that I think the threat of a nasty financial surprise remains very high. I’m keeping this insurance for a reason at the end of the day.

The global financial system is a rickety old factor. We need a new version. And en route, it’s likely to get chaotic and a bit frightening.

I’ll explain what I mean. We spent yesterday at the ” cable ” Money conference (if you don’capital t know, Wired is a glossy monthly magazine about technology. If you’re even remotely geeky – as I am – I thoroughly recommend it).

Most from the speakers were talking about ways to cut the middleman out of transactions – ‘peer-to-peer’ being the buzzword. Companies like Zopa, which enable you to definitely lend money to individuals directly, without going through a bank. Or TransferWise – a really clever currency exchange service, that lets you swap your pounds with regard to euros (or whatever) without being ripped off by banks or bureaux de change.

A lot of the help sounded great. There were lots of idealistic – but successful – entrepreneurs talking about how to make financial services which are focused on making the consumer’utes life better, rather than tearing them off in the name of boosting profits. If I was managing a bank, I’d be worried.

But what really struck me was that more and more people are asking yourself the very nature of money. A few speakers grappled with the role which trust plays in acquiring credit, or services. Others speculated on how the huge processing power we now have could feasibly make it possible to return to a barter economic climate, as trades can be so effortlessly matched to one another.

It’s not only ‘cutting edge’ thinkers. You may or may not have noticed, but there’s been a rash of publications recently, trying to explain what money is, and how it came to be.

The point is, our faith in the monetary system has been badly shaken. As a whole, our society understands that what it thought would be a solid, reliable system, is actually built on very unstable foundations and riven with special interests. We’re also realising that it doesn’t necessarily have to be like this. At some level, we’lso are groping towards a redefinition of money.

The thing is, gold has a long history of being involved in the monetary system. I’m not saying for any minute that we’ll go back to a gold standard. That system had a lot of flaws too.

But cycles tend to be messy things. So for as long as the nature of money and the financial system are being questioned as well as redesigned, I’m happy to suspend on to an object that people possess a long history of trusting because ‘money’.

A Trading Opportunity in Gold

So that’s my view on the actual long-term for gold. What about short term?

Well, I’m no investor, so I wouldn’t normally trouble bringing this up. As well as let me be clear – this is individual to holding gold as insurance. This is for someone who fancies a short-term punt that might turn a fast profit.

But in the short term at least, I’m sure my colleague John D Burford (who is a long-term gold bear) might be right in suggesting that a substantial ‘bottom’ is either in, or almost in, for gold.

You can see the piece yourself. However in short, John looked at the way in which investors are positioned in the market, and mentioned that investors were fairly much as bearish last week as they had been bullish at gold’s This year peak. So a contrarian would bet that the bears may have just about exhausted themselves.

Looking in the papers and internet over the past weekend, I’d say he’s right. Sentiment in the media is a very tricky aspect to gauge. But I think it’s fair to say that there was a ‘beargasm’ about gold at the weekend break – lots of quotes about it being in freefall, plenty of reports of ‘bloodbaths’ – even as the cost started to recover.

John Stepek
Contributing Editor, Money Morning

This post first appeared in Money Week upon 2 July, 2013

January 30, 2016
Why High Yielding Bonds will Cause the Next Market Meltdown

Have you heard of Carl Icahn?

You should have.

The Wall Street veteran made his multibillion dollar fortune buying controlling stakes in companies and then selling off their assets to settle the debt he used to purchase them.

As a broker on Wall Road since 1961, he knows an undervalued company when he views it. He also understands putting on a costume financial details to make a company look better than it is.

Corporate raider may be the nickname for Icahn.

The point Im attempting to make is, Icahn has been around. Hes seen it all before.

And lately the price of high yielding bonds is troubling him.

So much so, that he just released the 15 minute video known as danger ahead. In it he explains which falling commodity prices are just part of the problem.

Thats not new information to most market watchers. But Icahn reckons the real danger is based on these high yielding bonds. Or junk bonds, as he loves to call them.

High yield really stands for junk bonds. People are purchasing these not really understanding what they’re buying. If you look at the numbers, they are amazingly risky. You will find US$2.2 trillion ($3.15 billion) in junk bonds, upward a trillion dollars in five years.

On the other side of this theres information site Barrons.com. They think Icahns video is nothing more than scaremongering.

Despite fear-mongering through?Carl Icahn, the junk-bond market is starting to look appealing.?

Icahn even showed the cartoon in the video of Federal Reserve Chair Janet Yellen as well as BlackRock CEO Larry Fink pushing the bus full of retail investors to the edge of a high cliff.

His concerns, however, look over-stated. While there are troubled areas in the junk market, mainly in energy and mining-company bonds, most industries are in decent shape

The average energy issue yields more than 10% now, and alloys and mining, nearly 15%.

The post then explains that these so called junk bonds Icahn is talking about are coming back around 8% per annum.

Theres a reason why Icahn is drawing attention to higher yielding bonds. He reckons they’ll catch out retail investors in the next market crash.

The problem in Icahns opinion is that mum & dad investors look to higher yielding exchange traded funds (ETFs) investing in junk bonds. While the come back is high, the risk of default is much higher.

He says that traders have a false sense of security about these products. Too many regular investors reckon theyre a safe investment, and easy to sell in a market downturn.

The reality is very different. Because Icahn told Business Insider:

It’s like a movie theatre and somebody yells fire. There is only one little exit door. The exit door is fine when things are Okay but when they yell fireplace, they can’t get through the exit doorand there’s nobody to purchase those junk bonds.

A death by a thousand cuts

Dont for a 2nd think Icahns video is scaremongering.

There is definitely an imbalance in the economy, and junk bonds will be the next reason for a market meltdown.

Most market viewers in Australia are busy commenting on the falling mineral and metal prices. Yet theyve overlooked the long term effects of a slipping oil price for Aussies.

However, if Jim Rickards, the strategist behind Strategic Intelligence, is right, energy prices particularly oil are set to cripple the worldwide markets.

As I explained to subscribers last week, Jims had energy junk bonds on his radar since The month of january this year.

The way he views it, theres trillions of bucks in energy related debt that cant be paid.

The result is the $14 trillion pile of company debt that cannot possibly be repaid or rolled over below current economic conditions. Not all of this debt will default, but a lot of it will. Most of the power related debt was released in the expectation that essential oil would remain in the $80 to $130 dollar per barrel range.

Energy-sector debt has been called into question because of the collapse of oil prices. And rising markets debt has been called into question because of a global growth slowdown, global deflation, and also the strong dollar.

Jim reckons we are taking a look at a much larger debt problem than subprime. He reckons if default rates are only 10% something he or she considers a conservative estimate it would be six times bigger than the subprime losses in 07.

The magnitude of this crash will like the subprime one leave the actual regulators completely unprepared.

The great news for investors is that this disaster will not happen overnight. It will require a year or two to experience out. The panic associated with September 1998 started last year, in Thailand in June 1997. The panic of Sept 2008 also started last year, in August 2007.

This new junk debt fiasco going in the summer of 2014 but will not really reach its peak until 2016 or later.

As Jim points out, market crashes dont happen immediately. If anything, the looming meltdown will be a death by a 1000 cuts.

Regards,

Shae Russell,

Editor, Strategic Intelligence

From the Port Phillip Publishing Library

Special Report: The End of Australia Vern Gowdies new book is known as The End of Australia: The Real Story Behind Australias Economic Fall and What You Can do to Survive It. We’re mailing free copies of this book to anyone who requests 1 online. It does not make for pleasant reading. But the idea is that youll be safer (and much wealthier) in 10 years time through receiving a more sober and realistic analysis of whats heading onwhat happens nextand what you should be doing about it now (more)

January 30, 2016
Sell Your Property and Buy Resource Stocks

A financial crash is coming to a house near you.

While we’re not there yet, the property market is fast approaching bubble territory.

On this topic, I know that some of my colleagues (Phil Anderson, Terence Duffy as well as Callum Newman) over at Cycles, Trends and Forecasts will disagree with me! The team associated with property bulls do make some solid arguments, pointing towards an additional 15-year rally in property costs. If you ask them, we’re nowhere near the top in real estate.

Admittedly, they could be right. This is why I don’t ignore what they have to say. Nor should you. I suggest checking out what they are saying here.

That said, getting done my research on the property sector, I’m not going to run out and buy an investment property.

Here’s why…

Australia’s property market now worth $6 trillion!

A good place to begin is questioning whether home has already peaked. In some Australian states, it appears so.

Looking from Perth, in a clear sign that the mining boom is over, the actual June REIWA figures show that the actual medium house price rests around $530,000. Prices have crashed by $20,000 typically in the last six months.

While you don’t want to hold Perth property, it’s another story over in Sydney and Victoria. The average house price has now reached the $1 million mark in both states. And, based on the Australian, the good times may be more than:

‘Amid booming prices in Sydney and Melbourne, regulators possess in the past year grown increasingly concerned that lending standards are slipping, as banking institutions battle to lend and purchasers take advantage of record low interest rates.

‘In December, the Australian Prudential Regulation Expert stepped in and told banks to limit financing growth to property investors in order to 10 per cent a year…

‘Despite the banks constant shrill of super-safe housing, APRA have comprehensively dismissed this given the main banks all failed the APRA November 2014 mortgage stress assessments. And in May APRA highlighted severe deficiencies in bank housing financing credit underwriting standards.’

Indeed, the brakes take presctiption with bank lending. Which is a cause for concern.

The whole property market is built on the premise that the lending and leverage will continue forever.

Unfortunately, it’s unrealistic to expect debt to develop forever.

Eventually, the system requires a major restructuring to grow again. This isn’t rocket science. The editors from Port Phillip Publishing have contended for years that the increasing worldwide debt load is totally not sustainable.

With limited economic growth and deflationary conditions, it’s likely that the debt cycle will blow up soon. So when the overleveraged system goes down the actual drain, this won’t be good news for property prices.

The Reserve Bank of Australia’s Governor, Glenn Stevens, is also concerned. He said?that he was ‘concerned regarding Sydney‘ house prices,?which he described as ‘crazy‘ in June.?This week he backed up his view through saying that ‘dwelling prices continue to increase strongly in Sydney‘. And that the actual RBA is working to?’assess and include risks that may arise in the housing market‘.

Given the extraordinary financial debt levels, authorities are even starting to look at regulating negative gearing. Doctor Luci?Ellis, the?RBA’s?head of monetary stability,?told a United states senate economics committee inquiry in to home ownership on Tuesday,

‘The combination of negative gearing and concessional taxation of funds gains creates an incentive that makes people more comfortable about dealing with leverage… It’s worthy of a holistic review.’

At the end of the day, it’s really easy…

Increasing regulation and slowing financing growth are ominous indicators for the housing sector. And if these measures go ahead, the actual knife will be put to the property bubble.

And if you didn’t know, 60% associated with Aussie wealth is associated with the property sector. This comes even close to the global average of 45%. Then when, and not if, property costs crash, household wealth will require a huge hit.

The property peak is approaching

We’re also facing the biggest financial crash of our life time — the sovereign debt crisis. This is the real trigger for the collapse in property prices. Don’t merely take my word for this…

Doug Casey, from Casey Research, has been saying this for years now. Martin Armstrong, Chairman of Princeton Economics International, started warning about the coming ‘Big Bang’ back in 1985! And our founder, Bill Bonner, has been warning about financial systems defects and faults since, well, before I was born!

The unfortunate fact is that no one listens.

Unfortunately they will hear it when the relationship bubble pops…and the majority associated with overleveraged products collapse. And this includes home prices.

Don’t be the last one standing

Already, the actual smart money is getting out…

Billionaire Wayne Packer just sold his mansion for $70 million, breaking the all-time record. This kind of activity typically occurs at the top of the market.

And my close friend’s dad, a multi-millionaire in the Melbourne property development space, is going to sell all his properties. When the smart money is escaping . like this, you don’t want to be the last one standing.

You need to look after yourself.

The best way to do this is by moving your money into quality resource stocks. Compared to property, they are dirt cheap. And when resources come back, as I’m sure they will, a person stand to make a tidy revenue. But you have to play your cards right, buying in to the right sectors…at the right time.

If you want more information on how to best play these markets, you can start here.

Regards,

Jason Stevenson,

Resources Expert, Resource Speculator

From the Port Phillip Publishing Library

Special Report: Nitro Stocks Completely unknown to most Aussie investors, there is a special type of ASX expense that can generate more cash per week than most people earn in a year! They’re called ‘Nitro stocks’ and they can cram 20 or 3 decades of market profits into just a few months. Sam Volkering states, ‘It’s like taking a slow-moving bluechip and pumping it full of steroids!‘ Sam’s noticed three stocks on the verge of striking their ‘Nitro-phase’. And if you want within, you’d better hurry!

January 30, 2016
There is No New Way to Go Broke

That however is just the beginning. We suspect that this is the oncoming of a long, slow and painful loosen up of the excesses of the last five years.

Along with decompression comes a tick up in defaults, and we anticipate those to increase in 2016 and 2017.

Bank of America Merrill Lynch Credit Analysis, September 2015

(Along with my emphasis)

There is no brand new way to go broke. It is always too much debt.

This has been the case since the development of money and credit. Be lent more than you can service, and you and your creditors have a problem.

This is exactly what happened in 2007 along with subprime borrowers. When the honeymoon curiosity period was over, they quickly learned their incomes could not service the debt costs. Default.

On a daily basis the financial press is full of trees and shrubs. The dietary plan of detail is fine if you want to trade the market. And quite frankly, by the time its in the paper, the inside money has already been there and done that.

For the rest of us, who’re looking to protect or market our capital, we have to remain back and see the woodland.

The world is sitting on top of an official debt pile associated with US$200 trillion and counting. Because the GFC, global debt has increased by around US$60 trillion.

Low interest rates facilitated this six-year long debt binge.

Corporates chasing cash (to fund reveal buy-backs, triggering hefty executive bonuses) and investors chasing cash, were a perfect match. Company borrowers offering a % or two above the cash rate or a swap rate were swamped with dollars from investors eager to get some return on their capital.

Its long been my personal contention the next and far stronger GFC will come from a credit fall behind on such a scale that all the Feds horses and men will not put the system together again.

The US$60 trillion in post GFC debt that poured into the worldwide economy was a masking broker. It looks like genuine economic activity however it was nothing more than a stimulant with no lasting productive worth.

Now that investors are drawn on out or not stupid enough to give cash to junk bond rated corporates offering pennies the game of finding a larger fool to give you money is ending.

The credit squeeze is influencing business revenues lower prices mean more sales are needed to create the revenue required to meet costs. The more prices fall, the greater sales needed. The problem is: there is only so much demand. Creating more doesnt necessarily translate into product sales. But over-production does lead to a deflationary spiral.

Heavily indebted corporates think Glencore are rushing to shore up their own balance sheets with assets sales and capital increasing.

What happens when more corporates start to have the revenue pinch? More asset sales and more capital increasing? Good luck with that.

Distressed sellers hardly ever if ever manage to extract a reasonable price for assets. Much less indebted competitors will be snapping up bargains.

When your solvency is questionable only lotto winning idiots would participate in the capital raising.

When you cant lower your debt to a level your revenue can service, you default or you ask for a financial debt restructure.

According to Bank of the usa the level of defaults in 2016C17 are expected to increase.

The Bank of America Merrill Lynch statement describes the current situation in the US as a slow moving train wreck that seems to be speeding up.

At present investors in company debt are probably going to hang in therethey need the return on their money.

But there will be a tipping stage when investors switch their own investment priority from return on their money to return of their money. So when they do it will be a stampede.

A fortunate few might get out. But most will be trampled in the rush to the exits. Most investors, through greed or the fear of missing out, leave the Im outa here decision until a minute too late. The tipping point can come very quickly.

Imagine a packed auditorium of a handful of thousand people, and one individual leaves. No one takes much notice. If that one person is actually followed by five others, individuals might start to wonder whats going on. If those five are suddenly followed by another Ten people in a hurried method, the crowd becomes a little worried. Itll only take another 20 people to scurry out and pretty soon the crowd is on its ft rushing the exits. It takes only around 2% to panic the rest of the 98%.

When the panic sets in, industry will be crowded with troubled corporates desperately selling assets to remain afloat. Cashed up traders are going to be able to buy property at deeply discounted amounts.

Yes that right, cashed up investors you know those silly investors who were told by the investment industry that cash is trash; cash is dead money; cash is not really an asset. The ones who refused to be pushed into playing the central lenders chase the higher yield game.

While cashed up investors are having the time of their lives selecting and choosing from the bargain box, bond holders will be in a world of hurt. They wont get their much needed interest payments and can only sit and wonder how much, if any, of their capital will be returned to them in the years to comeafter the lawyers have feasted on the corporate carcass.

This folks, may be the bigger picture. Bank of America put it succinctly with this commentary (emphasis is actually mine):

The weakness in high yield credit is to all of us not just a commodity story; it is about highly indebted borrowers can not grow, an investor base that can’t digest more risk, a market that has usually struggled along with liquidity and an economy that refuses to rise above mediocrity.

I can assure you there will be nothing mediocre about the next GFC.

The implosion of a few hundred billion dollars of subprime debt delivered us the GFC in 2008a time period that at the time drew comparisons with The Great Depression.

Pray let me know what is it going to be like when trillions of dollars within corporate and sovereign debt is destroyed?

There is no new way to go shattered. And with US$200 trillion in debt available Ill bet were going to see some very spectacular blow-ups in the next couple of years.

The destruction of wealth which awaits us is going to make the losses of the past couple of months seem like pocket change.

The Greater Depression is comingeven Wall Street is beginning to sound the caution bells.

Regards,

Vern Gowdie,

Editor, The Gowdie Letter

Editors Note: The above article was originally published within The Daily Reckoning.

January 30, 2016
Bet You Didn’t Think the Rule of 72 Worked Like This

If you read Fridays Money Morning, youll know about a disturbing speech given by the Bank of Englands chief economist, Andrew Haldane.

Heres the key quote from the speech:

One interesting solution, then, would be to maintain the principle of a government-backed currency, however have it issued in an digital rather than paper form. This could preserve the social convention of a state-issued unit of accounts and medium of exchange, albeit with currency right now held in digital rather than physical wallets. But it would allow unfavorable interest rates to be levied upon currency easily and quickly, so relaxing the ZLB restriction.

Its a cold and wordy statement in the central bank official.

The last sentence really made our mouth drop.

But theres even more to it compared to that

Were sure you know what Mr Haldane means by negative interest rates.

If not, its quite simple. When you have money in the bank, youll generate interest. Until a few years ago, you could earn between 4C7% interest.

Today, youre fortunate if you can get a rate that starts with a two.

If a positive interest rate means that you earn interest on your savings, were sure you know what this means to have negative interest rates. Thats correct, rather than the bank paying you interest, the bank would deduct interest from your savings.

How lengthy to halve your money

A 2% positive interest rate on $10,000 would earn a person $200. That would leave you with $10,200.

A 2% negative rate of interest on $10,000 would cost a person $200. That would leave you with $9,800.

Got which? Right now, central bankers are looking for more ways to take money out of your pocket in order to give it to government authorities, vested interests, and monetary elites.

Interestingly, if youve heard of the Rule associated with 72, you should know that it works with unfavorable interest rates too. The Guideline of 72 is simple. This shows you how long it takes in order to double your money with a constant interest rate.

You take 72 after which divide it by the interest rate.

If the interest rate is 6%, it will take you 12 years to double your money. 72 divided by six is actually 12. Easy.

If the interest rate is 2%, it will take you 36 years to dual your money. 72 divided by two is 36. Simple.

But when it comes to negative interest rates, youre not working out how long it will take to double your money. You need to know how long it will take to halve your money. In this case, the formula is the same.

You take 72 and then divide this by the negative interest rate.

So, when the negative interest rate is -3%, it will lead you 24 years to cut in half your money. 72 divided through -3 is 24. (Its actually -24, but we can ignore the minus sign.)

If the negative interest rate is actually -2%, it will take you 36 years in order to halve your money. 72 divided by -2 is 36 in this instance.

If the negative interest rate is actually -5%, it will take you just over 14 many years to halve your money. Seventy two divided by -5 is Fourteen.4.

You get the drift.

This isnt nearly super, its about all your savings

The challenge with most mainstream Keynesian economists is that they spend so much time knee deep in statistics, spreadsheets, and numbers, that they forget what economics is all about.

Economics isnt theory. As the Austrian School economists say, economics is all about human motion and interaction. But popular economists dont see that.

They see the economy as something to fine-tune through shifting interest rates, printing money, and raising or cutting taxes. Its all about the numbers.

For 6 years, weve written about the Australian governments plans to grab private prosperity. We warned about it captured in the Exodus Initiative report.

But this just isnt about governments taking private super savings.

The truth is that many people already pay for items electronically. It wouldnt take a lot to make electronic payments the only form of legal tender. The government could outlaw financial institution notes and coins, using the ruse of counter-terrorism or the war on drugs as a way to justify it.

Then, the government would just decide which banks it would allow to hold this electronic currency. Once the government did that, it could outlaw all competing forms of electronic currency say goodbye to Bitcoin for a start.

Whenever we talk about this kind of thing, folks always state that its far-fetched. They say were part of the tinfoil hat brigade. Hey, thats fine with us. Were not interested in convincing everyone. We just want to tell as many people as possible, and then leave it up to them to decide.

If you think Andrew Haldanes plans for unfavorable interest rates and electronic foreign currencies could never happen, go about your business. If however, you think theres a chance it could happen, we suggest you read the Exodus Initiative and start placing some of the ideas into motion.

You can find out how to get hold of a copy here.

Cheers,

Kris

January 30, 2016
Thirteen Drivers of Silver in Today’s Financial World

Silver has been in a bear marketplace for some time now, being down an in-depth 27% this year and a whopping 55% from the maximum it reached in 2011.

Needless to say, this has been uncomfortable to the growing number of silver investors in the Western world. (To satisfy booming demand, silver gold coin production has surged at the world’s mints and global holdings in exchange-traded products stay near a record high exceeding 600 million ounces.)

With the [US] dollar recovering strength this year and an improving [US] stock market, you may ask ‘Should I continue to hold an investment in silver?’

Obviously, each person needs to make his or her own financial choices. In my view, the answer remains indeed and below I list the 13 main motorists I believe will drive the silver price greater in the years ahead.

1. Gold, a hybrid precious/industrial metal, is really a commodity play on global technical advancement. Silver was once extremely dependent on the film digital photography industry, which collapsed in to insignificance with the rise of the digital camera, a major reason for the metal’s weak price in the 1990s.

Today silver’s industrial demand is driven by brazing alloys and solders, growing electronic demand (smartphones, tablets, plasma panels as well as increasingly by new programs like silk-screened circuit paths and radio frequency ID tags) photovoltaics (solar panels) as well as new medical applications: silver is both biocidal and extremely conductive.

2. Silver moves with gold. Though the metal exhibits more price volatility than gold being an investment asset, silver offers been correlated more closely with gold than with anything else for 2 generations. Despite sometimes violent market swings, silver has kept pace with gold and has even outperformed it over a lot of the past decade. This is a return in order to normality, in my opinion, as the sister alloys moved in tandem for thousands associated with years, notwithstanding the historic interruption between the 1870s and the Nineteen thirties, caused by adoptions of the Gold Standard.

3. Being an investment metal, silver is much more precious, less industrial. Gold is significantly more correlated along with gold than with industrial metals, like copper, which means that the market regards it as more of a safe-haven rare metal than an economically sensitive commercial one. This was seen throughout the 2008 crisis: though gold declined, it outperformed collapsing stock markets and commodities by a wide margin. The exception was precious metal, which rose in that year.

4. Silver is rarer compared to gold in the investment globe today. Total aboveground silver of any type is worth approximately $800 billion, regarding one-tenth the value of the world’s precious metal.

Although there are 5 times more ounces associated with silver in the world, because gold is more than 50 times more expensive than its sister metal per ounce, the actual silver market is effectively smaller. Silver is becoming rarer every year due to annual unrecoverable loss of tons of silver in industrial actions. Throughout history, tens of billions of ounces of silver happen to be used up in industrial production. Compare this fact with gold, the vast majority of which remains around today.

5. Silver is a leading real asset for inflationary occasions. Sister metals gold and silver frequently outperform other real assets in times of significant monetary expansion (they each surged over 2,000 percent in the 1970s) because they have a relatively small fixed supply, are nonperishable, liquid (because investments), easily storable, and historically recognized as alternatives to government-issued cash.

Over the final decade, a time of dramatic monetary testing, silver has outperformed all actual assets (real estate, commodities – even gold) by a wide border, not to mention the stock and bond markets. It also surged during the inflationary 1960s and 1970s. However, all real assets (houses, commodities, precious metals) have investment trade-offs, and silver’s risks are essential to consider.

6. Government today is silver’s friend: Amidst global financial excess, unprecedented and extreme use of monetary tools is the only major policy our frontrunners have. To help the economy recover from the 2008 economic downturn, the worst since the Great Depression, global leaders assumed more debt than ever to boost the economy (with credit).

With bloated balance sheets, expansionary financial policy options at present are restricted and increased central financial institution money-printing, which is already being used all over the world as a major policy device, will be vital when the next recession arrives.

7. Large investment fund ownership of silver is in its infancy. Even though the metal has been one of the successful investments of this new hundred years, pension funds, insurance companies, and other large institutions managing tens of trillions in assets have largely ignored silver as a viable investment. Gold very recently was reincorporated into the financial system as the viable, respected financial asset it once was. In the scramble for scarce global real assets, institutional traders are likely to begin considering the investment merits of silver, which is highly correlated with gold.

8. The actual gold-silver ratio, a 3,000-year-old exchange rate, is out of historical balance. While gold is 8 times scarcer than silver (when it comes to total ounces produced yearly), its price is more than Fifty times higher than silver’s. For 3,000 years in which the exchange rate could be observed, gold was 9 to 16 times more expensive, making today’s level historically extreme.

Now that lots of the factors distorting the ratio possess disappeared, it seems logical that the market exchange rate between the two should begin to approximate the difference in scarcity of each steel, which points to silver becoming significantly undervalued.

9. Like precious metal, silver is an ‘anti-bond’ and ‘non-stock’ – meaning it’s one of the few investment automobiles allowing a person to completely eliminate wealth from the financial system. Traditional financial assets represent claims on other entities.

To preserve their own value, bonds require that a government or company make interest and principal repayments; stocks require dividend payments and/or which management deliver on revenue expectations; derivatives of many kinds can require financial belief at multiple levels; and ultimately, the financial system itself depends on trust that world economic leaders will keep markets functioning properly by meeting their ever-expanding financial commitments.

Gold as well as silver, inert metals recognized for thousands of years as stores of wealth in whose nature cannot be altered by individual error, have value away from financial system.

10. Growing global scarcity of safe assets that are not someone else’s liability. According to the Worldwide Monetary Fund, of the world’utes potentially safe investment assets, 89 percent are bonds associated with some kind – that is to say, someone else’s debt. For those believing that greatest financial safety should not involve lending money to a company or government (buying a bond), there’s only gold, the other Eleven percent. But given the scarcity of gold and other real assets that are not economically sensitive (just as real estate and major commodities are), silver is increasingly being regarded as a viable alternative to precious metal, which it was for most of human civilization.

11. Anyone anyplace can buy silver. Silver is an investment that can be made in any country by virtually any person – even just in countries where there is no stock exchange, where even apple, the fruit, is hard to find. An ounce of gold, presently worth in excess of $1,350, is an investment inaccessible to most people in the world, and represents a difficult financial decision for middle class families in the United States.

A $20 silver coin is one thing that can be bought by a large number of people almost on a whim, a small investment decision that chips aside at globally scarce supply. If expectations for long term inflation begin to rise – a concept that virtually any working adult understands – silver’s well-known positive sensitivity to raised prices in the economy and its very accessibility could make it an essential asset for many.

12. The Eighties and 1990s bear market for precious metals had powerful drivers that no longer exist. In the 80’s the world’s two richest families conspired to manipulate gold and inadvertently caused a crash – together with plenty of metal-fearing fallout. This was surely a singular moment in history.

Also contributing to an overall headwind for the metals, main banks dumped an average 10 million ounces of gold for each of 20 years ending in 2008. This likely-unrepeatable event pushed gold through being close to 50 percent of worldwide central bank reserves within 1980 to an all-time low of 14 percent in 2012.

Heavily weighted in dollar, euro, and yen reserves and fixed income securities, a number of central banks are diversifying back into gold. The 1990’s saw increased pressure on silver prices due to the collapse of film photography, the largest source of demand for the actual metal. But film photography is in silver’s past, a very small part of demand these days, and investment demand has become the key driver.

13. Silver is an important investment asset in Asia, where demand has remained strong more than thousands of years. Throughout Asia, however mostly in populous India and China silver, such as gold, is a key investment asset worn and stored as a wealth instrument by a great many people.

Every year, generally past due in the summer and into the drop, the silver and gold markets are deeply influenced by a major financial event–the Indian wedding period, which draws a substantial portion of the world’utes precious metals as part of an enduring millennial custom.

Silver’s Bottom in View?

In spite of present market conditions, this list helps us focus on the important drivers of silver for the years ahead that distinguish the metal from other investment choices.

Silver has the highest price sensitivity to inflation of any commodity or sector in the stock marketplace, by far – and it most certainly outperforms ties when the price level is rising in the economy.

If you believe – as I do – that the world’s monetary authorities will never allow deflation to take hold and that the odds of rising cost of living climbing to some degree in the years ahead are significant, it makes sense to possess some silver to diversify neglect the portfolio. (The right percentage to carry is something you should carefully consider with an investment advisor.)

Timing any investment properly is always a challenge, but silver’s price has fallen by half in the last two years and is beginning to show tentative signs of bottoming. Probably the worst has passed for silver.

Shayne McGuire
Contributing Writer, Money Morning

January 30, 2016
Here’s One Sector You Want to Keep a Close Eye On

You’ve probably heard plenty concerning the usual economic trends, such as the trend in business confidence or the trend in interest rates. I love to think of these as micro-trends.

What a person likely haven’t heard much — if anything — about are the macro-trends functioning above these micro-trends. Over in the US there are several macro-trends all converging into 1 sector. Making this particular field, one to watch.

Macro-trend number one is the ageing US population. According to data from the US Census Bureau, there are around Seventy six million baby boomers living in the united states today. That’s almost one fourth of the US population. It’s an extraordinary number to be coming into their own retirement years.

The second macro-trend is that many of the baby boomer generation don’t have enough in their retirement savings. This really is from a recent article within the New York Times:

‘On average, a typical working family in the anteroom of pension — headed by somebody 55 to 64 years old — only has about $104,000 in retirement funds, according to the Federal Reserve’s Survey associated with Consumer Finances.

That’s not nearly enough. And the situation is only going to grow worse.

‘The Center for Retirement Research at Boston College estimates that more than 1 / 2 of all American households?will not have enough retirement income?to maintain the living standards they were familiar with before retirement, even if the people in the household work until 65, two years longer than the average retirement today.’

The third macro-trend is rising property prices. While they may not have enough savings, many of these baby boomer retirees possess considerable equity locked in their houses.

Rising property prices, insufficient retirement funds and an ageing populace all converge to make manufactured home estates an appealing option to boomers who wish to downsize.

This sector offers a low cost real estate option in comparison to traditional homes. It allows residents to free up the locked equity within their home to spend on their retirement years.

I’ve mentioned manufactured real estate estates before. Called MHEs for brief, these are places where citizens, generally over the age of 55, personal their factory-made homes but spend a weekly site rent towards the owner-operator.

It is useful to look at the US market because in the US, manufactured home estates are a far more mature sector than in?Australia. Seeking to the US can give you a good indication of what lies ahead for this sector here in Australia.

In the US, the 2 major listed companies within this sector are Equity Lifestyle Qualities Inc. [NYSE:ELS] and Sun Communities Corporation. [NYSE:SUI].

Equity Lifestyle Properties is the largest operator. Here is the monthly chart for Equity Lifestyle Qualities.

Equity lifestyle properties monthly club chart

Source: Market Analyst

The chart tells you that the weight of money in the US suggests there’s a strong demand for this kind of housing. If you bring up the chart for Sun Communities, you’ll see a similar story.

You can see this stock bottomed out in The fall of 2008, months before the common market did in 03 2009, signaling this company was in a powerful position. Why?

The residents of those manufactured housing estates possessed their housing units outright. There were no unaffordable home loans purchasing an unaffordable property price. In this instance, there is no property to buy; it is leased in the operator. Can you see that these residents experienced none of the credit score exposure associated with the broader economy, such as sub-prime?

Profits for this company is determined by how cheaply they can buy land. As the GFC ran it’s course and land costs in the US continued to decline, the organization could make further acquisitions cheaply. This increased profitability, not to mention the share price quickly factors this in. From the GFC levels this company has been in a strong upward trend ever since.

Over at Cycles, Trends & Forecasts, this really is precisely what we show as well as teach you. How to identify this kind of megatrends and take advantage of them before these people happen. The biggest trends ALWAYS involve the economic rent — the largest which is land value. If you don’t understand this, you can find out more right here:

The US economy generally leads Australia, so this is one field you may want to follow closely right here. It’s why, at Cycles, Trends & Forecasts, we study the US first. And of course, Australia faces all the same problems as the US; an ageing population, baby boomers with insufficient funds to retire, and rising property costs.

But can you see why these properties are so appealing and reasonable for retirees? Sure the structures, built prefabricated in a manufacturing plant, are cheaper than a normal website built house. But that’utes only half the story.

When brand new residents buy into one of these properties they are buying the house only, not the land underneath. They pay that like a weekly site rent. Take away the huge hurdle of upfront land costs, replace it having a site rent and all of a sudden housing becomes much more inexpensive.

On the Australian stock exchange, we have several companies that are involved in this sector, including Ingenia Communities Group [ASX:INA], Lifestyle Communities Ltd [ASX:LIC], and Aspen Group[ASX:APZ]. Last month they were joined by a new player, Gateway Lifestyle Group [ASX:GTY], which is seeking to profit from this emerging trend and it is now the largest?player within the Aussie market. This is a company you can follow now to monitor the Aussie real estate cycle. We suggest you watch as this newly listed company continues an aggressive acquisition drive in order to capture and collect the rent.

According to chief executive 4 Ottawa, the business has been profitable through day one, with most residents receiving the age pension and rent assistance from the federal government. Guaranteed earnings for the company, in other words.

Another advantage for the operator is that the citizens own their homes, so the owner is not liable for any servicing.

The weight of money in the US is actually indicating this is a hot field. It looks like it also will become an appealing option to the first waves from the boomer generation here in Australia, a lot of whom have insufficient super funds to fall back on.

The just unknown factor for many is actually land price. Should land prices go higher, this real estate option will become ever more popular as retiring boomers unlock the actual land value in their home.

Land price is key to the cycle. Nobody ever teaches you to follow this. Except over at Cycles, Trends and Forecasts. It is so important for your own investing success to understand this particular. History clearly shows that the period unfolds in a predictable series and timing.

You can use which sequence and timing from the real estate cycle to your expense advantage. To learn more go here.

Regards,

Terence Duffy,

Contributing Editor, Money Morning

Editor’s Note: The above article had been originally published in The Daily Reckoning.

From the Port Phillip Publishing Library

Special Report: The Golden Age of Infrastructure China just unveiled a $100 billion international investment bank for a solitary mission: Rebuilding the 2000-year old Silk Road trading path. Why? Because the Middle Empire is determined to redraw the global financial map…and establish a new world order of trade. Therefore it is kick-starting what could be the biggest infrastructure boom in history…and handing you a once-in-a-lifetime value investing opportunity in two companies that could double within price once this new ‘Golden Age of Infrastructure’ dawns…

January 30, 2016
Why I Won’t Attack Negative Gearing

Central bankers seem to hate this.

Politicians don’t like it.

Social welfare do-gooders despise it.

A weird combo of mainstream and contrarian commentators train against it too.

And provided your editor’s stance on the Aussie property market, you may think all of us hate negative gearing too.

But we don’t. We’re not saying we love unfavorable gearing. Just that there’s no benefit to abolishing this…

Those who argue against negative gearing tend to do so for two reasons.

First, they say it’s causing a house price bubble.

Second, they say it isn’t right that one group of people is deserving of an ‘unfair’ tax break. They are saying that it means others are ‘paying’ for the negative gearing tax break.

Most think that both arguments are true. But they’re not.

Banning negative gearing will just be the start

As far because we’re aware, there is no proof that negative gearing pushes up house prices.

In fact, it is crazy to suggest it does. Investors only own one-third of Foreign housing. And not all of those qualities have mortgages.

Plus, to suggest which negative gearing pushes up house prices, suggests that investors have been in the game to buy every house in Australia.

That’s not true. Sure, there may be times where someone is actually bidding against an investor, but that doesn’t mean the investor has more money to spend than the owner-occupier.

Not that, but to be consistent, quarrelling against negative gearing for investment properties also means that folks ought to argue against tax breaks for borrowing against all investing and business purposes.

Want to get a loan to buy shares as well as offset the interest costs against your income? If they abolish unfavorable gearing, they’ll need to abolish margin lending for shares.

Want to gain access to money to buy some new equipment that will help grow your business? If they abolish negative gearing, they’ll need to abolish tax breaks on loans too.

The case against negative gearing is really an argument for taxes increases. And as we’ll clarify, anyone who thinks negative gearing is actually costing them money is a fool.

Negative gearing is simply a scapegoat

Folks say that it’s not fair they are funding the tax breaks associated with property investors.

They say the same thing about franking credits on shares.

These views must be music to the government’s ears. The social well being do-gooders spouted off the same case against super earlier this year.

It’s the idea that rich people are rorting the system and priced at everyone else more in income taxes.

The reality is that it’s not priced at others more in taxes at all. They assume that if the government abolished negative gearing, the government would get more in income taxes from property investors, and then might cut taxes elsewhere.

In fact, it’s more likely that the government would just keep any rise in tax revenues and improve spending. History tells us they would increase spending even more than they increased their tax consider. That would send the federal spending budget further into the red.

But whether or not the government did abolish unfavorable gearing, what would it mean with regard to government revenue?

Take this in the Sydney Morning Herald:

‘Australians would no longer be able to claim losses on their expense properties against their income, saving over $1 billion within federal revenue a year, within plan put to the federal government by the Australian Council of Sociable Service.‘

Wow! A one billion dollar saving each year. It sounds a lot, correct? However, we’ll just remind you that, as of final Friday, the federal debt was at $375.5 billion.

One million dollars would just about cover one month of the federal curiosity bill on its debt.

So, folks may not like unfavorable gearing, but you won’t hear your own editor railing against this. We’re all for it. We’re towards any method any buyer can use to reduce their tax bill.

And apart from, if you want to blame anyone for high house prices, blame the actual central banks. Low interest rates, money printing, and easy credit would be the real cause. Those in power are just using negative gearing as a scapegoat.

As all of us always say, your money is definitely better off in your hands than it is in the government’s hands.

Cheers,

Kris

PS: Whenever you see the government or social welfare groups arguing about a tax break, don’t take it at face value. More often than not, the real problem isn’t individuals allegedly ‘rorting’ the system. It’s usually the government and the central bank creating disturbances in the economy. Of course, this isn’t just happening in Australia. It’s occurring on a global scale. Visit here for details.

January 30, 2016
Warning: Central Banks Pushing for Financial Slavery

In the past people knew that the worlds leaders were.

They were Kings, Queens, Crown Princes, Presidents, Emperors, and Prime Ministers.

They lived (and still perform) in palaces, castles, as well as fancy homes.

But today, the titles of those running the planet have changed. Today, they have comparatively non-descript titles such as chairman and governor.

Todays world leaders are the chiefs of the worlds central banks. And based on recent comments from one of the worlds most effective central banks, they are set on achieving total world control.

If that sounds extreme, wait until here hear what they had to say…

This was in a speech given by Financial institution of England chief economist, Andrew Haldane, on 18 September:

One fascinating solution, then, would be to keep up with the principle of a government-backed currency, but have it issued in an digital rather than paper form. This could preserve the social convention of a state-issued unit of accounts and medium of trade, albeit with currency now held in digital rather than bodily wallets. But it would allow negative interest rates to be levied upon currency easily and quickly, so relaxing the ZLB constraint.

Like all central bank speeches, the aim is to confuse or hide the real message. But when you read it a couple of times, youll get the drift.

Well explain in clear language what hes saying in a moment. But first, heres the context.

For central bankers, this is better than inflation

One of the things that has annoyed central bankers is the fact that when interest rates are so reduced, there is no incentive for saving bed to keep money in the bank.

Thats especially so if savers are worried concerning the stability of the banking system.

If youre earning next to nothing on a financial institution deposit, why risk letting a bank look after your money? The folks in Greece realised this particular. Thats why they started pulling out cash and stashing it in fridges, medicine cabinets, and even vacuum cleaners!

Why is that a problem?

Its an issue because banks need to have a certain amount of capital on hand. This is usually in the form of deposits or financial debt issued by the bank, or government securities.

So if people pull away their savings from the bank, it affects the amount of capital the bank has on hand to cover the loans it has written.

The solution? Make it impossible for people to withdraw cash. And instead have the government issue money in electronic form, which must then be kept in a government-approved bank account.

To repeat Mr Haldanes comments:

This would preserve the social convention of a state-issued device of account and moderate of exchange, albeit along with currency now held in electronic rather than physical wallets. However it would allow negative interest rates to be levied on currency effortlessly and speedily, so calming the ZLB constraint.

Read the last phrase from the quote again: But it would allow negative interest rates to be levied on currency effortlessly and speedily.

Mr Haldane is saying that this would allow the central bank to confiscate money easily and speedily through savers. Because that is what main bankers mean by negative interest rates.

Hes also saying that plain seizure of savings by using unfavorable interest rates is a lot easier and faster than inflation. Inflation may take months or years to develop.

So, aside from assisting the banks, why else would a central bank want to do this?

Its confiscation by another name

One of the big frustrations for governments is that people arent spending enough cash.

They see that as the main cause of the current low levels of economic development. Thats why theyve told their central banks to print countless billions and trillions of dollars.

Its why in 2009 the Australian government sent cheques in the post, in order to get people to invest.

But when people are worried about the future, theyre less likely to spend. People are generally sensible. They want to set money aside, budget, and not end up being wasteful.

So, governments have gone additional into debt in order to counter this. Its why the Aussie government is now in debt to the tune of $391.4 billion.

Its why, according to the report from McKinsey & Co, government debt has grown faster than any other field. Global government debt is continuing to grow 9.3% each year from 07 to 2014. By contrast, household financial debt has only increased 2.8% each year.

Perhaps youre starting to get it. If the just form of money is electronic cash, its easy for the government to seize this through negative interest rates.

The only way the government cant seize your savings isif you dont have any savings. And you wont have any savings if you invest your money because youre afraid of the government taking it with negative interest rates.

The trend is clear. Weve cautioned for more than six years that the government was planning to grab private superannuation wealth. But weve also warned that regular cost savings were at threat as well.

A new form of financial captivity is fast approaching. Your employer will pay your wages into the bank (as it does now). However in the near future, itll be a race to spend your wages as quickly as possible before the federal government swipes it all.

If you think this is far-out and whacky, thats fine. Just remember that central bankers dont say things that will make them look silly amongst their peers. Mr Haldane has published these views simply because its an idea that governments and central bankers are thinking about right now.

You ignore this risk at the peril.

Cheers,

Kris

PS: This is all proportional to what Vern Gowdie calls the Great Credit score Contraction. After decades of fast money and low interest rates, Vern says the worlds economy (including Australia) is on the verge of a Long Bust. It has stressing implications for all Australians. Find out more here.

January 30, 2016
Position Yourself for the Technological Gains to Come

Great technological change is coming and also you need to know where those gains will manifest. That’s the only way you can position yourself to make the most of it all.

One prime example: Tag Pivac and his company Fastbrick Robotics is positioned to redefine the global construction business by developing the first fully automated bricklaying robot. Until now bots have required an on-site contractor to assist with the operation.

Named Hadrian, this robot can work around the clock, day and night, laying 1,000 bricks per hour. That’s a new house each and every two days — something that takes its individual equivalent 4-6 weeks of back breaking work.

It’s all 3D computer aided and created. Hadrian calculates where each brick should go and scans and cuts the bricks when they need to be re-shaped. Mortar under pressure is applied towards the brick and no human contact is required. It can even leave areas for wiring and plumbing.

But here’s the main point, numerous articles commenting on this groundbreaking technology are suggesting the significant cost reductions in construction will assist in promoting real estate affordability. But as revolutionary as this technology is, this it cannot achieve.

Because it is not the cost of construction which could spiral out of control above the ability of wages to pay for it, but rather it is the land it rests on. And a better creating technology simply will not solve that problem.

Land, which is fixed within supply, will always sell at the red line — at what the economy can afford for that specific location. It doesn’t really matter if the building costs come down. Land will take increases eventually.

You must understand this. It will make you a better investor. You’lmost all start to see the huge potential increases that are coming for land prices, and you can then work on a way of taking advantage of it all.

In an associated story, last year a company in China called Winsun showed that it may build 10 3D imprinted houses?in just one day. The actual reported cost for each is simply US$5,000. This is an absolute sport changer for the cycle forward. The company has even demonstrated the ability to construct a five story apartment building.

More news from China; an entrepreneur by the name of Zhang Yue and his organization Broad Group are creating a revolution in building city office towers. What is surprising about it is the speed where his buildings are built.?Work towers shoot up at an uncommon three stories per day. Assembled from thousands of factory made steel modules, the whole thing is actually slotted together like a Meccano established. His 57 story office tower dubbed ‘Mini Sky City’ with 19 atriums, office space with regard to 4,000 people as well as 800 apartments, took only 19 days to build.

Once it becomes cheaper to build, people will pay a little more for the land element…and so they will. We are beginning to get an inkling of the great technical gains that are coming this particular cycle. Once you understand what pushes the cycle, you’ll stop listening to those talking of the property collapse, as many do, and start to focus on taking advantage of exactly what may be the biggest real estate growth of all time.

The advances in building technology promised during this period look be stupendous. You can be absolutely certain land price will begin to start to factor in those future gains and owners sets their expectations accordingly.

Companies such as Fastbrick, Winsun and Broad Group have been in various stages of development. But it is a sign of things to arrive, and this trend can only send land prices higher.

The property cycle is turning right in front individuals. This may be the biggest real estate period of all, dwarfing all others. Make sure you’lso are in a position to profit from it as well as time it all to your advantage.

Regards,

Terence Duffy,
Adding Editor, Money Morning

Ed Note: The above article was originally published within The Daily Reckoning.

From the Port Phillip Publishing Library

Special Report: The Golden Age of Infrastructure The far east just unveiled a $100 billion multinational investment bank for any single mission: Rebuilding the actual 2000-year old Silk Road trading route. Why? Because the Middle Kingdom is determined to redraw the global economic map…and establish a new world order of trade. So it’s kick-starting what could be the biggest infrastructure boom in history…and giving you a once-in-a-lifetime value investing opportunity in two companies that could dual in price once this new ‘Golden Age of Infrastructure’ dawns…

January 30, 2016
New Ways of Getting onto the Property Ladder

We hear a lot about how difficult it is to save for a deposit and get onto the property ladder. Well, according to an article through The Courier Mail last month, a 17-year-old woman from the Gold Coast might have come up with an ingenious solution. She’utes crowdfunding her house deposit to break into the Gold Coast home market.

She’s buying the home as an investment, not to live in. She wants to give herself the best start in life and set up her future.?She understands what she wants to buy and just how much she can borrow, and she or he is left with a $48,000 shortfall.

To make up the difference, she’s providing 70 weeks of holiday accommodation in her new home for anyone looking to have a holiday in the vacation funds of Australia, the Precious metal Coast. If enough people rent a week’s accommodation ahead of time, she will use the money to pay a deposit on her house.

The qualities she is looking at are 3 bedroom homes within Fifteen minutes of the beach and 10 to 20 minutes from the Gold Coastline amusement parks. Once the holiday accommodations have been completed, the house will be rented out

If she fails to enhance the money, the contributions she has received will be returned. However, if she does overcome the line, she may well be on the winner. According to a recent article from the Australian Financial Review, the coming property boom on the Gold Coast will see some properties triple in value, driven usually by Chinese investment and growing rapidly tourism numbers.

It’s an ingenious thought, crowd funding a deposit to purchase an investment property. That’s how 17 year olds think nowadays. But can you see the implications? There is potentially a whole new demographic to bid up Australian real estate that simply wasn’t presently there before.

Many don’t believe Australian property can go higher, however innovative ideas like this one ought to keep property prices humming together for now…and into the subsequent real estate peak.

Of course, there are many other ways that property will go higher.

Subdivision is something which continues to gain traction. It’s happening all around where I live. There are four subdivisions in my tiny little courtroom alone, and it alters the way property is viewed and valued. Blocks able to be subdivided come with an increased potential use worth, keeping asking prices high of these lots. It also allows elevated housing affordability by reducing the land costs.

A free standing home on a large block will most likely become a hurdle too high for many families. Like it or not, the days of kicking the footy in the backyard may be on borrowed period, as Australians settle for smaller sized lot sizes, like the English and Europeans already do.

Enormous infrastructure plans are going upon all around the world. Australia is no exclusion. Money spent on roads as well as rail lines can only perform one thing — bring higher home values.

Possibly the biggest factor in home prices is technology. The huge gains promised should provide great improvements in efficiency. For example, in the future we may observe 3D printing used to develop really cheap houses. A Chinese company is already carrying this out. They’re building 10 houses a day. Each small home takes minimal labour and costs as little as US$4,800. Now they are only basic structures. And also the technology has some way to go. However should this technology really take off, this will drive land costs higher.

Now you may have read some of the mainstream articles telling you which Australian housing is at in the past unaffordable levels and that an accident is imminent. This viewpoint is reached by evaluating the average adult wage to accommodate prices from generations ago. But this is a flawed assessment. The days of dad going off to work while mum is likely the children are long gone. It is now usually two incomes putting in a bid on Australian real estate. The data, in terms of combined household income, shows housing affordability has done nothing but keep up with wages for the last decade and more. This indicates the potential for property to go higher.

Another factor to keep property prices on the boil is just offshore wealth, particularly from cashed-up Chinese seeking a secure property legal rights system. Don’t expect this trend to slow in the near future. The lower Australian dollar can make Aussie property more appealing in order to overseas interests.

Then there is populace growth. The big swing improving our recent population growth estimates is net overseas migration. This from a recent post in the Australian Financial Review, under the title ‘Who will profit from Australia’s population boom?’

‘The ABS reviews that the share of Aussies born overseas recently arrived at a 120-year high. “Australia traditionally had a significant proportion of migrants, but we’ve now hit a peak not seen since the gold rushes of the late 1800s,” says the ABS’ Denise Carlton. This year China surpassed the United Kingdom because the primary source of permanent migrants and also, since that time China and India have continued to provide the largest number of brand new residents.’

Using the figures of the 2015 Intergenerational Report, and assuming overseas migration remains constant, then Australia’s human population is estimated to double to 47 million by 2055. That’s hugely beneficial for property costs.

And the final factor is helping to loosen credit. For now, mortgage credit is still quite tight and reasonably difficult to get. However, ought to credit standards loosen that will allow even more people to borrow in order to bid on property. This would be hugely beneficial for property prices.

Where in order to now for Aussie property?

At Cycles, Developments and Forecasts we get plenty of suggestions suggesting Australian property is on the verge of collapse. Some readers resist the idea of Australian property heading higher because wages are not increasing and the post-mining boom economic climate is stagnating. However, history indicates otherwise.

A 17 year old girl from the Gold Coast, regardless of whether she is successful or not, has given us a glimpse of exactly what might be achievable.

Innovations like this recommend this real estate cycle may have some way to go yet. In fact, if history is any guide we are only just starting out. Early indications suggest this particular cycle may well dwarf all others. The secret is to time it all to your benefit. Go here to find out how.

Regards,

Terence Duffy,

Contributing Publisher, Money Morning

From the Port Phillip Publishing Library

Special Report: The actual Golden Age of Infrastructure China simply unveiled a $100 billion multinational investment bank for a solitary mission: Rebuilding the 2000-year old Silk Road trading route. Why? Because the Middle Kingdom is determined to redraw the global financial map…and establish a ” new world ” order of trade. So it’s kick-starting what could be the biggest infrastructure growth in history…and handing a once-in-a-lifetime value investing opportunity in 2 companies that could double in price once this brand new ‘Golden Age of Infrastructure’ dawns…

January 30, 2016
The Two Things That Will Drive US Interest Rates

As it turns out, the decision by the Fed in the US not to raise rates last week was a pretty near call. Over the weekend, four from the 10 voting members that make up the government Open Market Committee (FOMC) said they still expect the cash rate to rise before the finish of the year.

Chair Janet Yellen gave two main reasons for the delay within liftoff, as theyre calling it right now. Firstly, the massive market unpredictability that hit global financial markets in August. And secondly, the potential impact on the US through the slowdown in the Chinese economy.

How these two factors flow into growth in the US economy, and also the inflation rate, will determine what the Fed will do from here.

We witnessed much of this market volatility within the huge daily swings within the Chinese stock market over the last couple of months. This affected all the major search engine spiders worldwide.

Similar to the role the RBA plays here in Australia, the Federal Reserve seeks full employment as one of its primary goals. The unemployment rate in america is currently 5.1% a level the Fed considers close to complete employment.

This satisfies one of the criteria for lifting rates back to more normalised levels.

By the way, if youre wondering what the normalised interest rate degree is, officials at the Fed put it at 3.75%. Although Yellen is softening the market upward by saying that it might take several years to reach this goal.

Another primary goal of the Fed is to achieve a desired inflation target about 2% per annum. Again much like the RBA here in Australia. Currently this sits at around 0.3% in the US nicely below their target degree.

Typically central banks lower the money rate to spur development in the economy. This can also increase inflation as extra money bids up the costs of goods as well as services. To curb extreme growth and inflation, main banks do the opposite and increase the cash rate.

Increasing rates at this time in the US seems to go against this economic theory. It could further dampen inflation just as they need it to get back to their focus on level.

However, the four dissenting members of the actual FOMC see the labour market because the biggest contributor to fixing the actual inflation problem.

The cost of labour impacts all goods and services throughout an economy. While joblessness is high there is little in the way of wages growth that will increase these costs. The employee offers little bargaining power.

With complete employment, though, this balance starts to move back into their own favour. With a tight work market, employers need to pay more to stop staff leaving for better paying jobs.

Its this particular rationale that those governors in favour of raising rates this year are banking on. That is, an increase in work costs should help pump motor the inflation rate back up to the desired 2% level.

Of course, any kind of downturn in the labour marketplace puts a hole in the theory. Thats why, according to Bloomberg, the futures market only points to a 20% probability that theyll raise rates in October.

This number improve to just under 50% for the December meeting. Although, this is the exact same number who thought theyd raise the cash rate last week.

In the meantime, the US has plenty of others giving them free guidance. Among them, the IMF and the World Bank.

Theyre worried that an increase in US rates will drag yield hungry capital from emerging markets and back into the US. This will further worsen the huge sell-offs that have smashed these types of markets and will drag the world economy down further.

Regardless, We still think theyll raise prices. Maybe not by October. Perhaps it will be in December or early next year.

Again though, I wont believe it until I see it.

The problem is this. If they didnt enhance the cash rate will complete employment and the markets buying and selling at all time highs, how will these people raise rates if the markets continue to tumble or unemployment starts ticking up?

Maybe theyve missed their own chance.

One thing the markets loathe is uncertainty. Jesse Yellen is scheduled to speak within Massachusetts on 24 Sept. Needless to say, the markets all over again will be hanging off the woman’s every word. So weve obtained that to look forward to.

Chinese traders dont want to play

While Janet Yellen and her posse of Federal Reserve officials try to guess whats happening in China, it seems even those on the floor there are still trying to work out whats going on.

The Chinese language government has been very energetic in trying to stem the rout that hit their markets after they peaked in June. You can see the run up within the following chart:

Shanghai Composite Index

Source: Google finance

The government is desperately trying to avoid the huge swings as well as volatility from the stock market flowing into the rest of the economy. It has been pumping what seems like an endless supply of money into the market to stem the flows.

The problem now, though, is that nobody has any idea how much the marketplace is being propped up by the government, or how much comes from real demand from long term traders.

The measures undertaken by the federal government were designed to lower volatility as well as restore liquidity to the market. However, it might now be having the opposite effect as traders time frames become even shorter.

There appears to be one trade in town that the most nimble investors are trying to profit from. Its trying to guess a level in which the Chinese government buying may enter the market, and slide in ahead of them.

As the buying might only last a day or two, of course, the short term investors try to jump out prior to the buying stops. It becomes a vicious circle, and all it does is scare more investors from the market.

Bloomberg puts the total trading volume in shares down by a staggering 75% over the last 4 months. At the same time, volatility has more than doubled. And the number of new investors entering the market offers dropped by over 80%.

The government has also intervened in the futures market, nearly bringing it to a stop. Short selling and margin lending have been severely limited as authorities hunt away those deemed responsible for getting the market to its knees.

30 day volatility chart of the main markets

Source: Bloomberg

The above 30 day volatility graph highlights just how wild the actual ride has been in China. Its certainly quite sobering when you compare it to our experience here. Im much less sure Id have the stomach to become wading into their market in the near future.

When will it all settle down? Thats what Yellen and her officials will be trying to work out. While speculators might dominate a market temporarily, the weight of real money money focussing on the fundamentals will determine when the market has bottomed.

Right now, still it seems like it has further to visit.

Regards

Matt Hibbard,

Editor, Total Income

Editors note: The above article is definitely an edited extract from Complete Income. To find out more about Matts strategy for income investing in a low-interest rate world, click here.

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January 30, 2016