That pause you hear in the war on cash? That’s your enemy reloading with the next volley. Swiss bank UBS has warned its private clients that it may cost them to hold cash with the bank. That is not a misprint. It’s the world we live in, where banks charge you money on your savings.
You can’t blame the bank’s CEO Sergio Ermotti for being in a bad mood. He was forced to report to shareholders that the bank’s profits fell 64% in the first quarter. Then, perhaps with rancor, he said the bank could pass on negative rates to depositors, ‘Or we will have to demand payment for services that were previously free — with the possibility that additional fee adjustments in the future will also be necessary.’
And you wonder why banking is under pressure. Incidentally, the report said the wealth management unit saw the lowest transaction volumes ever, which didn’t help earnings. It could be that private clients fear future crackdowns on off-shore tax havens. Or it could be that wealth management units aren’t worth paying for in a low interest rate, low return world. Or a world with robo-advisors.
But back to negative rates. The Swiss National Bank has set its deposit rate at minus 0.75%. It’s been there for over a year. Its main goal is to weaken the Swiss franc and help the Swiss economy remain competitive. Its main side-effect, so far, is that negative rates have been passed on to corporate and institutional borrowers.
Passing on negative rates to retail investors like you is effectively a tax on your savings. Raising prices on your customers (or punishing them for being customers) is not the kind of move to inspire confidence. How long would you keep your money in the bank if you had to pay for the privilege? Assuming you can still get cash, would you rather put it under your mattress?
It shows you that the endgame of the low interest rate era is still ahead. It will end. But are we in for 20 years of Japan-like stagnation and central bank mismanagement? Or will it end more quickly and violently? Hold that thought, and have a look at the chart below.
The gold price, measured in Aussie dollars, has twice rallied to $1,750 this year. That shows you that when countries engage in currency wars — or drive interest rates down (and negative) in misguided attempts to promote growth — nature’s currency (gold) tends to react.
Gold’s Aussie dollar high was $1,806 in 2011. It’s not that far off. And it might not be long before it makes a new high. Why?
The Reserve Bank of Australia (RBA) may take official Aussie interest rates negative, says BT Investment Management. If you missed it last week, the RBA cut its cash rate to 1.75% last week. Australia hasn’t had a technical recession in 25 years. But inflation is low and growth is low.
It’s a tough spot for the RBA. The Aussie dollar rode the three phases of the mining/commodities/China boom to well past parity with the US dollar. You had a massive increase in commodity prices when growth in Chinese demand caught supply short (phase one). You had an investment boom which created jobs and led to huge capital flows into the country (phase two). And you had a production boom when new capacity came on stream and generated cash flows even at lower commodity prices (phase three).
Now you have China saddled with massive debts. You have Europe which can’t seem to grow. And you have a world mired in ‘emergency’ low interest rates that aren’t doing much. Australia finds itself on the wrong end of all of that.
The RBA will do what it can do. But it can’t do much. It can’t liquidate China’s debts. It can’t create demand for commodities. It can’t lower Aussie household debt levels. And it can’t diversify Australia’s economy so it’s not so dependent on rising house prices.
But it can lower interest rates. And if that’s all you can do, it’s probably what you’ll do. ‘To a man with a hammer, everything looks like a nail,’ as the saying goes. And thus the cycle of currency devaluation continues. It’s playing out pretty much like Jim Rickards said it would.
Split views on gold
Does it make sense for British savers and investors to own gold? Yes. But not everyone agrees with that. I’ll get to Goldman Sachs in a moment. First, hedge fund manager Paul Singer says gold’s stellar first quarter (up 16% in USD terms, the best Q1 in 30 years) is a sign of better things to come. He told clients in a letter:
‘It makes a great deal of sense to own gold. Other investors may be finally starting to agree… Investors have increasingly started processing the fact that the world’s central bankers are completely focused on debasing their currencies. If confidence in their judgment continues to weaken, the effect on gold could be very powerful. We believe the March quarter’s price action could represent something closer to the beginning of such a move than to the end.’
The price action is starting to attract investment flows. Assets held by bullion-backed funds are at their highest levels since 2013, according to Bloomberg. The yellow metal is up 20% year-to-date. Goldman Sachs managed to have it both ways on gold. It raised its 3-, 6-, and 12-month targets on gold based on an ‘expected’ slower pace of Federal Reserve rate hikes. But it said the Fed would hike eventually, the dollar would strengthen, and gold would suffer accordingly.
Osborne brandishes carrot AND stick
Finally, Chancellor George Osborne has signalled the ‘fear’ campaign on Brexit is entering a new phase. First, he warned that leaving the EU could cost Britain 285,000 jobs. Using chancellor maths, he said 100,000 were direct job losses that would result from damage to the City. The other 185,000 were indirect.
Those are some precise and confident numbers. They’re also at odds with the constant claim that the UK shouldn’t leave because we have no idea what will happen. ‘We have no idea what will happen…except that we’ll lose 285,000 jobs!’ Hmm.
But there’s good news, according to Osborne. If the UK remains in the EU, a lot of pent up investment will flood these shores and trigger an investment boom. That money’s been withheld as firms wait on the outcome of the vote. Once the vote is over and Britain stays in, it’s boom times, baby.
It’s not a bad tactic, playing good cop and bad cop at the same time. And if you think about it clinically, you’d have to assume there’s a massive bias for the status quo. It’s generally true for human beings. Change doesn’t always promote survival. Doing the same thing does. It takes extreme optimism or extreme pessimism for people to take a big risk at the ballot box. The odds are that ‘remain’ will win comfortably.
But there are still 42 days to go before the vote!
Contributing Editor, Money Morning
Ed note: Long time readers will remember Dan Denning, former Publisher of Money Morning. Dan has now gone on to the UK, where he writes for our friends at Capital and Conflict. The above article is an edited extract from that publication.
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