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The Global Investor Newsletter - Summer 2014

Welcome to the Summer 2014 edition of Euro Pacific Capital's The Global Investor Newsletter. Our investment consultants are standing by to answer any questions you have.  Call (800) 727-7922 today!

First Half Performance Review - Inflation Trumps Grwoth
By: Jim Nelson, Director of Euro Pacific Asset Management

Neighborhood Bully - America Recklessly Throws its Weight Around
By: Peter Schiff, CEO and Chief Global Strategist

The Russian Wild Card - Backed into a Corner, Putin Makes Plans
By: John Browne, Senior Economic Consultant

The Strange Case of German Gold - An Interview with Peter Boehringer
By: Andrew Schiff, Director of Communications and Marketing

Abenomics Update: Consumers Pay the Price
By: Peter Schiff, CEO and Chief Global Strategist

Sector Watch - The Robots are Coming

Argentine Debt Tangle
By: David Echeverria, Investment Consultant, Los Angeles

The Global Investor Newsletter - Summer 2014

First Half Performance Review - Inflation Trumps Growth

By: Jim Nelson, Director of Euro Pacific Asset Management

During the second quarter of 2014 the S&P 500 continued to post new all-time highs while volatility remained remarkably low. Such a combination can potentially lead to complacency. Already a rotation toward more defensive positions is underway. For example, through the first half of the year, total return for the Russell 2000 (a barometer for domestic growth) was just 3.3% (IWM) while total returns for defensive assets like the Treasury Bonds (TLT) and the S&P 500 Utilities sector (XLU), were 12.9% and 18.5%, respectively. See Figure 1.

Internal market dynamics also suggest that inflation expectations are on the rise. During the first half of 2014, the CRB Commodity Index (CRY) and Gold (GLD) were each up over 10%. Again, this compares with the domestic equities, represented by the Russell 2000, returning just 3.3% (IWM). Given that our strategies are designed to outperform in an environment of slowing U.S. growth and rising inflation, we saw solid results in the first half of the year. 

Figure 1 - 1st Half 2014 Comparable Total Returns  

Growth - Cyclical Spring, Secular Fall

In 2013, GDP grew sequentially in each of the first three quarters reaching 4.2% in 3Q13, which was the second highest level since 2006. (BEA, Jan 30, 2014). This momentum was cut short in the first quarter of 2014, which was confirmed when BEA reported annualized 1Q14 GDP at negative 2.9%.[1], the weakest quarter since the end of the Great Recession in 2009. For historical reference, a decline of over 2.5% has been associated with every recession since WW2. While most pundits blamed the surprisingly weak performance on severe winter weather, our research suggests that the unusual cold and snow would be expected to knock just 2% of annualized growth off of GDP. Instead the results were fully six points below earlier expectations that first quarter growth would approach positive 3%.

Despite the dismal first quarter miss, consensus remains that the economy will get right back up on its feet and is on the verge of hitting “escape velocity.” The bullish forecasters base this view on optimistic forecasts for housing, capital investment, and employment. While we do not claim to have an edge on making near-term economic calls, we are somewhat skeptical of all three of these factors.


In 2012 and 2013, the U.S. housing market improved considerably, but this was from historically depressed levels following the Great Recession. From the 2006 peak into early 2012, the Case-Shiller Price Index declined by 35%, which provided an attractive buying opportunity for 1) investors flush with cash (i.e. private equity investors), and 2) households able to borrow at historically low mortgage rates (2012 average 30-yr rate 3.7% vs prior 5-yr avg. 5.3%)[2].  As a result, between 2012 and 2013, existing home sales increased 30% and house prices gained 25%.[3] 

Now, it appears those “easy gains” have ended as 1) cash investors are no longer buying and actually starting to sell, and 2) mortgage rates are set to rise as the Fed continues to Taper its QE program.[4] The impact of these trends is already showing in the data. Since ex-Fed Chairman Bernanke first hinted about Taper in the summer of 2013, mortgage rates have risen almost 100bps (30% increase). Over this same time, MBA Mortgage applications have fallen by 60%, existing home sales have declined 15% and house price gains have slowed.  While another near-term bounce is possible, we believe a sustainable recovery is less likely. Household balance sheets remain stretched, income growth is barely keeping pace with inflation, and affordability is declining (higher house prices plus rising interest rates).

Capital Investment

In 2009, Gross Private Investment collapsed to almost 12% of GDP, which was the lowest level in the post WW2 period and compares with a median level of 19% in the three decades prior to the Great Recession.  Since 2009, Gross Investment has rebounded and is now 16% of GDP. Many growth bulls expect this level to rise over the next few years, noting that the average age of U.S. capital stock (i.e. plant/equipment) is at record highs and needs to be upgraded.  Recently, this view has gained traction with improvements in forward-looking surveys, like the Purchasing Managers Index (PMI).  In the near-term, we do expect a modest bounce in capital investment to make up from weather related disruptions earlier in the year, but we are more skeptical about a multi-year boom. 

First, we believe much of the recovery in private Investment was supported by bonus deprecation tax benefits (initiated during the recession) that enticed many corporations to accelerate investments in 2010-13. These incentives ended on Dec 31, 2013, so businesses have less reason for new investment. For companies to increase investment without government support, sales levels need to increase, which will remain difficult as household balance sheets and incomes remain under pressure. As a note, the current level of private investment (16% of GDP) is below median levels during the thirty years prior to the Great Recession (19% GDP), but it is consistent with the thirty year period following WW2 (17% GDP).

Second, companies have recently been more inclined to acquire rather than try to grow organically.  In the first half of 2014, total U.S. M&A deals were over $750B, which was up 50% from the same period in 2013 and on pace to hit annual levels not seen since 2006-2007.[5] Also, almost 95% of recent deals have been strategic (companies, not private equity, are buying other companies) which compares with just 75% in 2006-07. If companies saw organic opportunities then this cash would be invested in new plant and equipment instead of paying premiums for existing firms. With easy access to relatively cheap capital, we expect the M&A spree to continue, noting that this will actually result in job losses (vs. capital spending that drives job gains). 

Finally, companies that have not found attractive M&A opportunities have been using cash to raise dividends and buy back stock. In the first quarter of 2014, U.S. share buybacks and dividends hit a record level of $241 billion.[6]  Returning excess cash to shareholders is normal when growth prospects are dismal, but the recent trend has been exacerbated by activist investors that are pressuring companies to use leverage to return cash. As a result of this, combined with M&A activity discussed above, business (non-financial) leverage is at record levels.


In the first half of 2014, new job additions totaled 1.4 million (BLS establishment survey), which was the largest six-month increase since 2006.[7] At the end of June 2014, the unemployment was 6.1%, down from 7.0% at the start of the year[8]. The economy has now regained all jobs lost in the Great Recession. But this is strictly a measure of quantity not quality. It is widely understood that low paying and part time jobs have replaced higher paying full time jobs. But even the raw number of jobs has failed to keep pace with population growth. At the end of June, the employment to population ratio was 59%, essentially flat since 2010. This compares with a median level of 62% in the thirty years prior to 2006. To get back to that level, the economy would need to add another 10 million jobs. Assuming the current pace of job gains (using average of Jan-June 2014 gains in the Household survey) and trend growth in the working-age population, it would take another five years for the employment to population ratio to reach that level.

The combination of low employment to population and low labor force participation means that 41% of the working age population is not employed, which compares with pre-Great Recession levels closer to 35%. That means that roughly 100 million people or one-third of the entire U.S. population is not working, hardly a sign of a solid labor market. Further, we expect the level of non-working persons in the U.S. to continue rising as Baby Boomers retire.

In other words, the consensus is making a pile of assumptions about an imminent recovery that just doesn’t hold a tremendous amount of water.

Inflation - Showing life, but Still Dead to the Fed

But while growth is failing to materialize, inflation is on the rise. Back in January of 2012, Fed Chairman Ben Bernanke did something that no Fed Chairman had done before: He publicly set a 2% inflation target. Well, apparently, the Fed is not nearly so impotent as I had believed as it only took 2 and ½ years to achieve this goal (this is if you give full credence to their statistics). The latest CPI report for June 2014 came in at 2.1% year over year. This follows very similar numbers in April and May. More importantly the inflation shows signs of heating up more recently. The last four months of data (March - June) show average annualized month over month changes at 3.2%. Finally, the Fed has rescued us from the abyss.

Figure 2 - 2 year CPI Chart

Not only have they rescued us, but they hit the sweet spot. According to modern day Keynesian theories, with 2% inflation achieved and 0% interest rates, the economy should be humming right along. But the theory is not translating into practice.

Companies are starting to feel the price squeeze and are passing on rising input costs in a variety of ways, in a variety of industries. Hershey just announced an 8% increase on chocolate across the board. Then Mars Candy followed suit by raising their chocolate prices 7%. Starbucks has raised prices between 5 and 20 cents per drink. Chipotle has raised prices between 4% - 12.5% depending on location. The hits keep coming: Adult tickets at Disneyland (4.3%), Netflix (12.5% for new customers), SeaWorld (3.3%), Nike (11%-20%). Food prices have also really picked up recently. Even the federal government (USDA) thinks that prices for fruits and vegetables will rise 6% in the next few months. The Food CPI index over the last four months is ominous, up 4.2% annualized. Beef prices also continue to be at all-time highs. Unfortunately these increases have risen faster than incomes.

Admittedly, short-term changes in inflation are very hard to predict, but we know that the Fed is determined to push inflation much higher (as is every other central bank in the world). The fact that Janet Yellen sees current inflation data as just “noise” implies she does not view inflation as a current risk and that near-term monetary policy decisions will be based solely on the labor market outlook. As discussed in the previous section, we believe underlying trends in the labor market are weaker than headline numbers would imply. Should the Fed agree, then it is unlikely that monetary policy begins to normalize in early 2015 as consensus now expects.


Recent economic data (and asset price movements) indicate U.S. growth is slowing while inflation is rising. Should these trends continue through the year, we expect our portfolios will outperform. That said, with growth and inflation levels already at historically low levels, even minor hiccups can have an outsized influence on their movements in either direction. We view these moves as short-term and we remain focused on our long-term investment thesis and strategy. As such, 2014 may or may not prove to be the year that U.S. growth inflects lower while inflation moves decidedly higher, however our portfolios are well positioned for when it eventually does. In the meantime, we continue to focus our time on managing diversified portfolios comprised of securities that we view as high quality and undervalued.

[1] Bureau of Economic Analysis (BEA), June 25, 2014

[2] Bankrate.com, Bloomberg accessed July 4, 2014

[3] National Association of Realtors (NAR) and Case-Shiller Index, Bloomberg accessed July 3, 2014.

[4] New York Times, DealBook “Investors Who Bought Foreclosed Homes in Bulk Look to Sell”, June 27, 2014.

[5] Business Insider, “2014 Is On Track to Become The Second Biggest Year for M&A in History”, June 30, 2014

[6] Financial Times, “US Share Buybacks and Dividends Hit Record”, June 8, 2014.

[7] Bureau of Labor Statistics (BLS), Establishment Survey, July 3, 2014

[8] BLS, Household Survey, July 3, 2014

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Neighborhood Bully - America Recklessly Throws its Weight Around

By: Peter Schiff, CEO and Chief Global Strategist

On June 30, U.S. authorities announced a stunning $9 billion fine on French bank BNP Paribas for violations of financial sanctions laws that the United States had imposed on Iran, Sudan and Cuba. In essence, BNP had surreptitiously conducted business with countries that the United States had sought to isolate diplomatically (sometimes unilaterally in the case of Cuba). Although BNP is not technically under the jurisdiction of American regulators, and the bank had apparently not broken any laws of its home country, the fine was one of the largest ever issued by the United States and the largest ever levied on a non-U.S. firm. The Treasury Department and the Federal Reserve made clear that unless BNP forks over the $9 billion (equivalent to one year's of the company's total earnings), the U.S. will prevent the bank from engaging in dollar-based international transactions. For an institution that makes its living through such transactions, that penalty is the financial equivalent of a death sentence. The fine will be paid.

It is widely rumored that Germany's Commerzbank will be the next European institution to face Washington's wrath. It is rumored that it will face a penalty of at least $500 million, an amount that is roughly equivalent to one year of the bank's income. 

As if choreographed by a financial god with a wicked sense of humor, the very next day marked the official implementation of the Foreign Account Tax Compliance Act (FATCA), a new set of laws that will require all foreign financial institutions to routinely and regularly report to the U.S. Internal Revenue Service all the financial activities of their American customers. The law also requires that institutions report on all their non-American customers who have ever worked in the U.S. or those persons who have a "substantial" connection to the U.S. (Inconveniently the law fails to fully define what "substantial" means). Failure to report will trigger 30% IRS withholding taxes on any dollar-based transactions made by clients who the U.S. has determined to be American...either by birth, marriage, or simply association.

Given that the United States is one of only two nations in the world (the other being Eritrea) that taxes its citizens on any income received, regardless of where that income was earned and where the tax payer lived when they earned it, the FATCA laws are an attempt to extend American tax authority and jurisdiction (by unilateral dictate) to the four corners of the Earth. The Economist magazine, which is not known for alarmist reporting, described FATCA as "a piece of extraterritoriality stunning even by Washington standards." (For those of you who did not pay attention during world history class, "extraterritoriality" is an attempt by one country to enforce its own laws outside of its own borders).

What's worse is that many accountants and analysts have estimated that the compliance costs that the United States has imposed on these non-constituent banks (which have limited ability to lobby or influence U.S. lawmakers) will far outweigh the $800 million in annual revenue that the law's backers optimistically estimated. In a June 28th article, The Economist quotes an international tax lawyer saying that FATCA is about "putting private-sector assets on a bonfire so that government can collect the ashes." The laws are particularly irksome to many because the United States typically refuses to subject itself to the same standards it requires of others. When foreign governments ask Washington for financial information from its citizens, the U.S. government hypocritically trots out privacy laws and poses on the altar of civil liberties. In fact, despite its war on foreign tax havens, for non-Americans the United States is by far the world's largest tax haven.

But as is the case with BNP, the foreign banks will have little choice but to comply. Given the importance that U.S. dollar-based transactions play in daily banking operations, U.S. authorities call the tune to which everyone must dance. However, the complexity and opacity of the laws have at least generated some mercy from the U.S. which has allowed foreign banks more time to implement compliance procedures. In many ways this is similar to how the Obama administration has extended Obamacare mandates to a persistently confused and overwhelmed public. This is cold comfort.

The FATCA and the BNP developments have occurred just a few months after the U.S. has finished tightening the screws on a variety of Swiss banks that had attempted to follow the bank privacy laws that exist in their home country. Through heavy-handed tactics, U.S. authorities made it impossible for the Swiss banks to transact business internationally unless they played ball with Washington and turned over all information the banks possessed on U.S. customers. Not surprisingly, the U.S. prevailed. Additionally, June marked the end of Germany's farcical campaign to repatriate the hundreds of tons of gold that are supposedly on deposit at the Federal Reserve Bank of New York. After asking for its gold back two years ago, and after having only received the smallest fraction of that amount over the ensuing years, the Germans have decided to make a virtue of necessity and drop its demands to receive its gold. (see Interview with Peter Boehringer)

But the fate of BNP appeared to kick up a storm that went beyond the usual grumblings that American financial muscle-flexing usually inspires. A few days after the fine was announced, French Finance Minister Michel Sapin questioned its legality by pointing out that the offending transactions were not illegal under French law. (The Obama Administration reportedly ignored requests by French President François Hollande to reduce the fine). Going further, Sapin appeared to bring into question the entire monetary regime that has granted the U.S. its unique unilateral power: "We have to consider...the consequences of pricing things in dollars when it means that American law applies outside the U.S.....Shouldn't the euro be more important in the global economy?" (Bloomberg, 7/5/14) Politicians, French or otherwise, rarely deliver such explicit statements.

As if on cue, a few days later Christophe de Margerie, the CEO of French national energy company Total SA, raised eyebrows when he made repeated comments at a conference in France that the euro should be used more often in international oil transactions, saying "Nothing prevents anyone from paying for oil in euros." Perhaps these are the opening salvos in what may be a long war.

The anger is particularly acute in Germany where the United States has already come under criticism for a series of surveillance and espionage revelations, including illegally tapping Chancellor Merkel's cell phone, and planting spies in the upper echelons of Germany's military. Bloomberg recently compiled a selection of frustration with the United States' actions from Germany's leading newspapers. Among the highlights: 

  • "The EU should think about introducing similar senseless rules and then punishing U.S. companies for violating them" (Frankfurter Allgemeine Zeituing).   
  • "The United States is not really our friend. Friends treat each other with respect, the way Russia and Germany treat each other, and they do not try to order each other about" (Handelsblatt).

When Germans hold up Russia as a better ally than America, you realize how fundamentally the world is changing. And as we know, Vladimir Putin is doing all that he can to construct a post-dollar financial system (see related article).  

These types of frictions should be expected now that America finds its economic and diplomatic influence to be waning. The failures of the American military to create stability in Afghanistan and Iraq, of American diplomacy in heading off crises in Syria, the Ukraine and Palestine, and most importantly the culpability of the American financial system in bringing the world to the brink of financial ruin in 2008, have left the United States with few good options with which to exert her influence. The predominance of the dollar and its reserve status around the world provides the leverage that America's other failed institutions no longer can. 

This power is magnified by the ridiculous Keynesian notion that a strong currency is a liability and a weak currency is necessary for a healthy economy. This means that every bad move by the Federal Reserve needs to be matched by its counterpart bank in Frankfort and London. As such, America can debase its currency and serially acquire debt while avoiding the consequences that lesser countries would inevitably encounter. 

For the moment the backlash against these laws has been limited to those Americans living abroad who are increasingly finding themselves to be financial lepers. Many local banks and mortgage companies are seeking to avoid the heavy hand of the IRS and FATCA by simply closing their doors to Americans. Even non-financial firms abroad have shown increasing reluctance to hire Americans as a result of the tax complications. As a result, it is well documented that the number of Americans renouncing their citizenship has skyrocketed in recent years. 

The real danger of course is that the United States overplays its hand and arrogantly goes too far. While many would believe that that milestone has come and gone, the truth is that the U.S. has yet to pay a price broadly for its actions. The dollar's reserve status is as yet intact, and U.S. Treasury debt is being sold at generationally low yields. But the longer this goes on, the greater the danger becomes. 

Arrogance breeds contempt. The more reckless the United States becomes in throwing its weight around, the greater the temptation will become for the rest of the world to jettison the dollar like an unwanted house guest. If that happens, the value of U.S. dollar-based investments, and the living standards of all Americans, will pay a very heavy price. 

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The Russian Wild Card - Backed into a Corner, Putin Makes Plans

By: Andrew Schiff, Director of Communications and Marketing

While the United States continues to throw its weight around diplomatic summits and global financial markets, Vladimir Putin has emerged as the most visible and active proponent of a post-dollar world.

A few months ago Putin had risked becoming a global pariah when his aggressive stance towards the Ukraine looked like it could unleash the second coming of the First World War. But when the U.S. failed to galvanize Western European opposition (in Germany in particular), and with the crisis failing to spread outside of a few flash points in eastern Ukraine, international attention soon drifted to other hotspots (Iraq, Israel).

But the tragic downing of the Malaysian airliner, more likely than not to be a mistaken attack by Ukrainian separatists, significantly complicates the situation for Putin and Russia, and further galvanized Western interests against him. However, the speed with which conclusions have been drawn about Putin's culpability, despite conflicting evidence, may catalyze the convergence on non-western interests as well. Time Magazine highlighted this, quoting an official Chinese source as saying:

"The Western rush to judge Russia is not based on evidence or logic. Russia had no motive to

bring down MH17; doing so would only narrow its political and moral space to operate in the Ukrainian crisis. The tragedy has no political benefit for Ukrainian rebel forces, either. Russia has been back-footed, forced into a passive stance by Western reaction. It is yet another example of the power of Western opinion as a political tool."

Putin, a former KGB colonel, is seeking to use the crisis to take the offensive against his old American nemesis. In particular, he has unveiled a series of concrete steps that he hopes will lead to the emergence of a Eurasian economic bloc that could operate outside of U.S. dollar-based control. The bounce-back in Russian equity markets since the steep Ukraine-related sell off in February and March, and the large U.S fines imposed on BNP Paribas, have provided him with some leverage.

In May, a monster $400 billion energy supply deal was announced that would keep oil and gas flowing from Russia to China for years to come. As the deal was largely symbolic, many in the Western media took great pains to point out that it did not dictate that payment for the energy would be in currencies other than the dollar. But recent statements appear to be setting the stage for just that. On June 26, The Financial Times reported that Gazprom, Russia's largest natural gas provider, announced that it would be considering issuing bonds in Asian markets denominated in RNB or Singapore dollars and listing shares on the Hong Kong Exchange. When explaining these moves, Gazprom's chief financial officer Andrei Kruglov unsurprisingly characterized them as an effort to attract more Asian investors. However, he used the opportunity to say that "As for settlements in renmimbi or rubles, we are ready for this and we think it's quite normal."

The FT went on to report that other Russian companies, including Norilsk Nickel, have stepped up talks on settling contracts and raising debt in currencies other than the dollar. In addition, Reuters reported on June 24 that Moscow is considering barring state-owned companies and other enterprises deemed to be "strategically important" from holding accounts at foreign-owned banks.Theoretically, this could protect Russian assets from the types of fines and penalties that the U.S. has been imposing around the world.    

On a separate front, Russia has successfully exploited the disintegration of the fragile Iraqi state to further extend influence in the region. Moscow has long been the champion of the Shia governments in the Middle East (Syria and Iran) and has consistently opposed the interests of the U.S.-backed Sunni states of Saudi Arabia, Kuwait and Jordan. Russian power came into stark focus in Syria in 2012 when they were able to check Obama's attempt to oust the Assad regime over reports of chemical weapons use. With the Obama Administration withdrawing support of the hapless Maliki government, the desperate Shia leader has turned to the Kremlin in its struggle against ISIS insurgents. In a jaw-dropping development, Maliki agreed to buy a package of Russian jet fighters and ground attack aircraft. And as if to show the contrast with the famously slow delivery of the American F-16 aircraft that the U.S. sold to Iraq back in 2011, the Russian equipment began arriving almost immediately.

If, as appears increasingly likely, Iraq will disintegrate into Sunni and Shia dominated enclaves, it is not difficult to imagine that Russia will extend its power beyond Iran, straight into Shia Baghdad. The influence would have been bought and paid for by American blood and treasure.

In the lead up to the Second World War, the Western democracies foolishly took for granted that Russia could always be counted on to oppose Nazi Germany. But crafty German diplomacy resulted in the Hitler/Stalin Non-Aggression Pact of 1939, thereby shaking Russia loose from the Alliance. This blunder set the stage for a very different world order. (Only Hitler's unprovoked invasion of Russia in 1941 succeeded in bringing Stalin back to the Allies).

Today the roles are reversed. Germany is the swing vote in the new economic struggle. And as discussed in an earlier article in this newsletter, Germany is chafing in its role as a loyal soldier supporting U.S. interests. In a July opinion piece for Reuters, Ian Bremmer, the founder of the respected geopolitical risk consultancy firm Eurasia Group said, "Germany is alarmed by the United States' tendency to use its economic clout as an extension of its foreign policy, one that the Germans see as increasingly fickle, opaque and misaligned from their own." If Russia and China can manage to pull the increasingly frustrated Germans away from the dollar-based world of infinite monetary stimulus and heavy-handed financial enforcement, the United States will face a very difficult road ahead. Market watchers would be well-advised to keep a close watch on Vladimir Putin.

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The Strange Case of German Gold - An Interview with Peter Boehringer

By: Andrew Schiff, Director of Communications and Marketing

A June 23 Bloomberg News story entitled "German Gold Stays in New York in Rebuff to Euro Doubters" made the seemingly straight-forward case that the German authorities had decided to reverse course on a plan announced in 2012 to bring home some 300 tonnes of German gold that had been on deposit at the New York Federal Reserve since the 1960s. According to the article, German representatives had gone to New York, saw their gold, were convinced that it was in good hands, and decided that the hassle of putting it on a plane and sending it back to Germany was simply unnecessary. The article quoted a spokesman for Chancellor Merkel who said "the Americans are taking good care of our gold" and even quoted Peter Boehringer, one of the leading private advocates of the repatriation movement, as saying their campaign to pressure German authorities "is on hold."

When the Germans originally asked for their gold back, the Federal Reserve had countered with a painfully slow eight-year delivery period. This struck many as strange given that the total request only represented 5% of the gold reportedly held at the Fed's New York vaults. The delay severely whipped up concerns that long-held theories about imaginary gold were actually true. The Bloomberg article appeared to dismiss all these concerns and bring the case to a close. Or did it? Almost immediately,people close to the matter cried foul.

I caught up with none other than Peter Boehringer of the German Precious Metals Society for this exclusive interview.  

AS - The apparent reversal by the German government to no longer look to repatriate its gold from the United States failed to raise any interest in the American press or the financial establishment. Did the move create much of a stir in Germany? Are any mainstream politicians there actively picking up the issue.

PB - The "reversal" has indeed been only apparent - the Bundesbank has not in any way officially changed its repatriation plan that was announced in January 2013 (a plan that I believe was too slow and too little anyway-- 700 tonnes by end 2020 - of which. 300 tonnes from the New York Fed). The primary source for the confusion, especially in the non-German media, came from a factually wrong Bloomberg story. That story began with a completely unfounded headline "German gold stays in NY." I tried to set the record straight in the English-language press, but it is hard to fully "call back" wrong mainstream reports like that one.(via Bloomberg BusinessWeek on June 23, 2014)

Having said this, it is quite possible that the politicians cited in the story (such as Mr. Barthle, a Merkel spokesman) actually intended to "test the waters" of how the German public would react. In that respect, statements like "The Americans are taking good care of our gold. Objectively, there's absolutely no reason for mistrust." could indeed have some significance, as they might be intended as a first step towards stopping even the already painfully slow repatriation process of gold from the Fed. Still, Barthle, or Merkel for that matter, are not in charge of the gold, the Bundesbank is, and they have said nothing.

It is noteworthy that in 2013, a mere 5 tonnes were actually delivered from NY to Frankfurt. And even for these miniscule volumes there is no evidence, either by an external auditor or by video documentation, that real gold bars (allegedly untouched in the Fed´s vaults since the 1960s) have been moved across the Atlantic. Bundesbank has even melted down and allegedly re-cast these bars for no apparent reason! We have not received any audit report of this process, no report from the (unknown) performing smelter, and no bar lists from "old" or newly cast bars.

But to date, no mainstream politician has publicly questioned this strange behavior. It has been left to concerned private organizations like ours to press these concerns. Fortunately our national media has picked up on some of this which may have prompted Mr Barthle´s blind and unfounded "pledge of allegiance" to the U.S.

AS - Is the issue something that is discussed or understood by the average German?

PB - These details are of course not being discussed by the "average German" - soccer seems to be far more important these days. But both the gold community, the financial community, and the international media are taking ever more notice of our continued struggle. A full two and a half years after the initiation of our campaign, I receive at least two interview requests per week.

The Fed´s unwillingness to provide information, Bundesbank's obvious evasions and obfuscations, and Bloomberg´s misleading article are leading to completely unintended reactions by the general public and the independent media: Rather than putting this issue to bed as these authorities may have hoped, we are seeing ever MORE questions being raised.

AS - Officially, at least, what was responsible for convincing German officials that their gold is safely stored and accounted for by the Federal Reserve?

PB - I can of course only speculate here. Given the decade-long mis-information by the Fed and the Bundesbank regarding our national gold, there is no apparent reason for these officials to now call this case "closed" - quite the opposite would be logical. We must therefore assume that the Fed is unwilling or unable to quickly put Germany´s gold at the Fed (1,500 tonnes) on a few planes, thereby sending our property to where it belongs (Frankfurt). It's become harder to not reach the conclusion that  our officials are not complicit in some kind of U.S. led cover-up. So far, due to our public responses, this approach has not worked but rather increased the pressure on Bundesbank to repatriate.

One reason that the gold was unavailable for quick delivery could be multiple ownerships of our bars at the Fed. Given today´s global fractional gold banking scheme, an (allegedly physically existing) bar in a central bank vault could have 10+ owners - and could thereby show up in 10+ central bank balance sheets as either "physical gold" or "gold claim". These two (completely different!) balance sheet items have not been properly differentiated for many decades now. We are potentially talking about non-existent physical bars at a magnitude of tens of thousands of tonnes!

Without proper physical audits, repatriations and allocated storage, no gold "owner" today can be certain that "his" bar in one of these unallocated gold storage vehicles is actually his exclusive property! Our campaign is therefore not only a "German" one - but could have international repercussions of unknown scale.

It is not by accident that since the launch of the first two campaigns in 2011/12 (Germany and Switzerland) - more than ten similar national initiatives have been launched all over the world. The responses of the arrogant central bankers are the same everywhere: Ignore them, call them "conspiracy theorists", insist that "everything is in order with the gold", but give not a shred of evidence (bar lists, audit reports, bar transport to owners). And act only if public pressure forces you to...

AS - How did the Bloomberg article, which is really the only story published by a mainstream American outlet about the reversal, quote you incorrectly or out of context? Has the reporter explained his actions?

PB - I had a friendly 30+ minute conversation with the Bloomberg reporter, explaining all I could. But the only so-called "quotation" of mine which was ultimately used (published months later!) was "Right now, our campaign is on hold". Of course, I never said this sentence. All I did is (truthfully) explain that, unfortunately, nobody in Germany -including our campaign- can legally ENFORCE the dissemination of information from Bundesbank or a quicker repatriation of our gold. When the interview was conducted in May, we had no opportunity for putting even more pressure on BuBa (which we had done several times opportunistically and partly successfully since 2011). The Bloomberg hack somehow twisted this to mean that we were satisfied and that we were no longer pressing the issue.

In hindsight, I however have to THANK  the reporter for involuntarily opening up this new and great opportunity for spreading our message. Since the Bloomberg piece, I am giving interviews on a daily basis - now even to international radio and TV broadcasters with millions of listeners. This gold issue will not go away.

Gold is money. And central bank gold is a potential cornerstone of future currencies which might well HAVE TO be (partially) gold-backed, especially if there is a crash of today´s un-backed paper-currencies. The central banks all over the world therefore have to quickly become much more transparent and have to audit and repatriate their / OUR gold!

Peter Boehringer is the founder and president of "German Precious Metal Society" (est. 2006) - an NGO dedicated to spreading independent information on the relevance of gold and silver as both investment vehicles and as basis for sound money and in turn a sound society. Mr. Boehringer is one of the main initiators of the German public's "Repatriate our Gold" campaign, which is being supported by many prominent signatories as well as by 15,000+ national and international activists. Peter has been writing Germany´s most popular (German language) gold blog since 2003 with a focus both on economic and political implications of gold and silver prices. He is a book author, speaker at liberal and economic conferences, and a frequent writer of articles critical towards the current, credit-based monetary system and its negative implications. He is a fellow of the liberal "Hayek-Society".

Neither Mr. Boehringer nor German Precious Metal Society is affiliated with Euro Pacific Capital or any of its affiliates.  The opinions expressed above are those of the writer and may or may not reflect those held by Euro Pacific Capital.

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Abenomics Update: Consumers Pay the Price

By: Peter Schiff, CEO and Chief Global Strategist

Since the December 2012 election of Shinzo Abe as prime minister, Japan has become the world's most visible petri dish for Keynesian economic principles. Abe assumed office with a radical plan to implement all the major policy tools that Keynesians like Paul Krugman have advocated. His "Abenomics" agenda involved "three arrows" to slay Japan's decades-long economic torpor. The first involved a fiscal stimulus through greater deficit spending, the second was a massive quantitative easing campaign specifically designed to create at least two percent annual inflation, and the third (currently being implemented) is a series of regulatory reforms designed to lower barriers for businesses (this arrow is not particularly Keynesian). 18 months into the experiment, Abe has scored a clear victory, at least among the mainstream press, which has declared Abenomics to be an unbridled success. However,  the actual situation faced by Japanese consumers is universally awful. The numbers, if you care to notice them, speak for themselves.

The most glaring results of Abenomics thus far has been its outright "success" in pushing down the value of the yen and pushing up prices for everyday goods and services. Since Abe began his campaign the Japanese currency has fallen nearly 21% against the U.S. dollar. This has been music to the ears of the vast majority of economists who see a weak currency as the mainspring of economic growth.

In May, it was reported that prices for all items had risen at an annualized rate of 3.4%. This was up from the 3.2% annualized rate in April. Prices for goods (which are more sensitive than domestically-provided services to the falling Yen) have spiked up 5.2% from the previous year. The falling yen has been a big factor in pushing up prices for food and energy which in Japan are largely imported. In May, Japan reported year over year price increases of 11.4% in electricity, 9.6% in gasoline, and 14.3% in fresh seafood (it's a good thing the Japanese don't really like seafood).

For many years Japanese consumers had to deal with the apparent tragedy of price stability, which allowed them to maintain purchasing power despite a stagnant economy. Thank God those days are over! But Abe's policies have failed to work their magic on the broader economy. The Wall Street Journal reports that cash earnings and bonuses in wages rose just .8% year over year in May. Wages did even worse in May, up just .2%. Against a backdrop of surging inflation these tepid growth results mean that purchasing power has fallen 3.6% year over year in May.

The pain has been magnified by the recent hike of the consumption sales tax from five percent to eight percent. The move caused a temporary surge in spending earlier in the year when consumers scurried to make purchases before the tax came into effect. But more recently it has put spending into a deep freeze. In April, consumption fell a seasonally adjusted 13.4%. Those are big numbers.

To add insult to injury, the falling yen has done little to boost Japanese exports. In 2013, despite the decline in the yen, exports declined for the third consecutive year. What Abenomics has delivered, of course, is a surging stock market, driven in large part by zero percent interest rates and a wave of stock buybacks. But, as is the case in the U.S., these developments have delivered benefits primarily to the owners of financial assets. 

Yet, despite all of this, most media outlets in the U.S. and Europe still discuss Abe in heroic terms. How much longer they will be able to keep up the cheerleading is anyone's guess.

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Sector Watch: The Robots are Coming

The "robots are taking over the world" concept has been a staple of science fiction for generations. However, the reality of automated production lines and self-propelled disc vacuums has thus far proved much less intimidating. But the next generation of robots will likely be much more significant. And while we feel that financial markets remain highly distorted by excess liquidity, and that growth stocks always involve higher risk, it is undeniable that transformative innovations can present opportunities.

Recent moves by Google and Amazon highlight the wave in robotics. In 2013, Google purchased eight startups focused on robots, and this year it unveiled dramatic improvements to the driver-less car concept that it first introduced in 2012. Recently, Amazon made a big stir on "60 Minutes" by introducing an internet-controlled air drone delivery system. Although some dismissed it as a stunt, Amazon founder Jeff Bezos insisted that the project was for real.

With the costs to build and develop robots declining, more companies are looking to use robots wherever they can. This is especially true in high cost, high regulation economies like the United States where the costs and benefits of employing humans for routine tasks are becoming less and less compelling. If successful, popular moves to raise the minimum wage in this country to an unrealistic $15 dollars per hour could kick the robotic industry into a much higher gear. And why not? Robots are willing to work longer hours for no pay, and they don't goof off, take sick days or require health benefits.

Already, the fast food industry is experimenting with much greater automation, both in the cooking and in customer interaction. The day when a Big Mac can be produced with no human involvement may be much closer than most people realize. In June, The Netherlands said it plans to start testing driver-less trucks next year and it intends to have them on public roads within five years.

Last year, an all-time high of 179,000 robots were sold world-wide, a 12% increase over 2012, according to the International Federation of Robotics. Between 2008 and 2013, U.S. robot sales increased an average of 12% per year. In terms of annual sales, China is the biggest market, as well as the fastest growing. Japan is the second largest market as well as one of the biggest producers of robots. Currently, Japan has the most industrial robots in the world, more than 300,000.

The main drivers of growth are the automotive and metal industries. Between 2010 and 2013, both industries increased robot investments by an average of 22% per year. Military consumers are also leading early adopters.

Experts predict robots may eventually replace flesh-and-blood soldiers on the ground. Admittedly, the eyebrow-raising concepts introduced by many defense contractors do seem to be much closer to science fiction than to current reality. Apart from taking life, robots are also being designed to preserve it with some companies designing automated systems that can act as full-time caretakers for the aging population that predominates in advanced economies.

While we cannot offer specific advice on particular companies, the robotics sector may be one to look into.

Of course investors should not feel as if robotic companies are somehow responsible for displacing workers or causing unemployment. Labor saving devices, such as fork lifts and steam drills, have always been accused of putting people out of work, but instead they have just increased productivity and allowed workers to find jobs that are more suitable for humans. Remember, the job of an economy is not to create jobs, but to create stuff. If we could produce all that we needed to consume with no human labor, humanity would be much better off. Too bad economists can't figure that out. Maybe they should be replaced by robots.

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Argentine Debt Tangle

By: David Echeverria, Investment Consultant, Los Angeles

Twelve years ago Argentina sent shock waves throughout the international financial community by defaulting on nearly $100 billion US Dollar-denominated debt. Prior to that, Argentina had long been skating along the edge of financial catastrophe, but such a massive default by a country that boasted abundant natural resources and a heritage of wealth was a game-changing event. In order to resolve the crisis, the Argentine government then in power negotiated massive haircuts with the vast majority of its creditors. There were some investors, however, who refused the terms of these haircuts, and held out for more. They had to wait a very, very long time.

Amongst these "holdouts" were a number of hedge funds that purchased the Argentine debt in the secondary market for pennies on the dollar. The hedge funds sensed a chance for victory and settled in for the long haul. Their hope was that their notes would be paid in full when Argentina finally became more financially solvent. This could happen through voluntary action by the government or by order of international courts. If they could prevail, a handsome profit could be reaped.

Fast forward to 2014 and the Argentine state, thanks in part to rising commodity prices, now has billions in reserves and is once again paying on its restructured debt. Not surprisingly, the holdouts have been clamoring for repayment alongside the owners of the restructured debt. Their request, however, was defiantly refused by the president of Argentina, Christina Fernandez de Kirchner, who even went so far as to refer to the holdouts as "vulture funds." Never mind that many of these funds are comprised of pension funds and individual investors, many of whom would not qualify as Masters of the Universe. These are real people to whom Argentina owes money. And unlike the holders of the restructured debt, these investors have never been paid.

The decade-long legal tango finally came to an end last month when the US Supreme Court refused to hear the case, thereby letting stand the decision by the lower U.S. court that demanded Argentina cough up the money. Although the Kirchner administration is looking to find a way out, no escape hatch appears to be at hand. As with other extensions of U.S. financial power, a world dominated by the U.S. offers few places to hide. 

Critics of the decision have said that obligating repayment of holdouts will discourage creditors in future cases from negotiating haircuts and thus make it more difficult for countries to resolve defaults. In other words, it'll make it more difficult for countries to avoid having to pay on their debts. Apparently these people have never heard of moral hazard. Can you imagine what the alternative would have been like had the U.S. courts not obligated repayment? This would have effectively allowed governments around the world to borrow, default, force creditors into some ridiculous "negotiated" haircut, wait a few years, and then do it all over again.

This also forgets the fact that the holdout creditors traded time for money. They could have received lesser payments years ago. Who knows what they could have done with that money and what kind of returns they could have generated had they invested it. So in a very large sense, they have paid a price.

If the courts had not stepped in to compel payment who in their right mind would ever buy sovereign debt knowing that it could simply be defaulted on with so little consequence? It is quite likely that lower credit nations would have faced nearly impossible hurdles with future debt raises had the legal decision not been reaffirmed. But if the various governments of the world have a problem with the recent ruling, I have a much simpler solution: JUST DON'T BORROW THE MONEY IN THE FIRST PLACE. I have yet to a see a news story with a hedge fund manager holding a gun to the head of some foreign government official forcing them to issue debt.  

Euro Pacific celebrates the U.S. Supreme Court's ruling. But we also don't want to wait a dozen years before being paid. As a result, we know that we are not absolved from taking responsibility for the debt we choose to purchase. Even with the court victory, it is far from certain that the holdout investors are happy to have ever purchased Argentine debt.

In general, when buying any kind of sovereign debt, it is crucial to look at basic metrics like GNP per capita, the higher the better. The political composition of the government is also an important factor. Countries with constitutional checks and balances and divisions of power amongst multiple parties are less likely to engage in reckless behavior (obviously this is all relative as the U.S. and EU have shown that the developing world does not have a monopoly on recklessness). Countries that have autocratic executives, entrenched trade unions, and a penchant for populist activism should be scrutinized. 

But it is also important to recognize the "default" can occur in many forms, the most insidious of which is through inflation. While not technically a default, nominal returns are meaningless if they occur in a currency that has been devalued. Thus it is vital to identify debt denominated in currencies where there is less "quantitative easing" and where there are positive real interest rates. While some investors take confidence when small countries issue dollar-denominated debt, the current drift of American fiscal and monetary irresponsibility argues against it. Another option is to find foreign debt where the coupon is indexed to the local inflation metric.

For Americans evaluating returns in terms of USD, it may be worth considering foreign debt denominated in a currency whose underlying value is backed by hard assets. If there is a commodity rise, these currencies may likely rise faster versus the USD. If commodities sink, however, the opposite is likely to occur. Most important in evaluating foreign sovereign debt is to use some common sense. If you watch the news at all, then you probably have a good idea of where you shouldn't be investing.

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Investing in foreign securities involves additional risks specific to international investing, such as currency fluctuation and political risks. Risks include an economic slowdown, or worse, which would adversely impact economic growth, profits, and investment flows; a terrorist attack; any developments impeding globalization (protectionism); and currency volatility/weakness. While every effort has been made to assure that the accuracy of the material contained in this report is correct, Euro Pacific cannot be held liable for errors, omissions or inaccuracies. This material is for private use of the subscriber; it may not be reprinted without permission. The opinions provided in these articles are not intended as individual investment advice.

This document has been prepared for the intended recipient only as an example of strategy consistent with our recommendations; it is not an offer to buy or sell or a solicitation of an offer to buy or sell any security or instrument or to participate in any particular investing strategy.  Dividend yields change as stock prices change, and companies may change or cancel dividend payments in the future.  All securities involve varying amounts of risk, and their values will fluctuate, and the fluctuation of foreign currency exchange rates will also impact your investment returns if measured in U.S. Dollars.  Past performance does not guarantee future returns, investments may increase or decrease in value and you may lose money.

Opinions expressed are those of the writer and may or may not reflect those held by Euro Pacific Capital, or its CEO, Peter Schiff.

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