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Currency debasement to drive gold price to $2300 in 12 months – Goldman Sachs – Kitco NEWS



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(Kitco News) – A fear of rising inflation, growing government debt and concerns that the U.S. dollar is embarking on a new downtrend are all factors that will push gold much higher, according to commodity analysts at Goldman Sachs.

In a report Tuesday, analysts at the financial firm reiterated their view that gold will be the currency of last resort; they also increased their forecast for the precious metal.

The bank now sees gold prices pushing to $2,300 an ounce within 12 months and silver prices rising to $30 an ounce, up from the previous forecast of $2000 and $22, respectively. The comments come as momentum in the gold market has slowed slightly after its historic run to a new all-time high. August gold futures last traded at $1,932.60 an ounce relatively unchanged on the day.

The analysts see the potential for higher inflation as governments debase their currencies to deal with burgeoning debt. The bank’s gold forecast is also in line with its inflation expectations for five-year treasury inflation protection securities (TIPS) falling to -2%.

“This relentless decline in real interest rates against nominal rates bounded by the US Fed has caused inflation breakevens to rise in an environment that would ordinarily be viewed as deflationary,” the analysts said. “Ironically, the greater the deflationary concerns that policymakers must fight today, the greater the debt build up and the higher the inflationary risks are in the future.

Although gold is not the great hedge against inflation compared to other commodities like oil and base metals, the Goldman Sachs analysts said that it is the best asset in the current environment because it appears that inflation will be driven by currency debasement.

“When discussing the drivers of investment demand for gold and commodities, it is important to distinguish between debasement and inflation. The key is that the current debasement and debt accumulation sows the seeds for future inflationary risks despite inflationary risks remaining low today,” the analysts said.

Goldman expects that investment demand in developed markets (DM) will continue to drive prices. Although physical demand in emerging markets (EM) will remain muted, they said that they expect it to eventually pick up from current low levels.

“EM consumers are being squeezed out of the market as opposed to opting out,” the analysts said. “We will likely see this demand materialize when price stabilizes somewhat and DM investment purchases slow down, creating more room for EM consumers. We feel that for now, investors should not be concerned by weak EM demand prints.”

The bank is also bullish on silver, seeing prices push to $30 an ounce next year. The analysts said that they expect higher gold prices and improved industrial demand to drive silver higher with the gold-silver ratio falling back to within historical norms.

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CMHC CEO's letter a bit 'extreme and alarmist': Ex-RBC CEO Nixon –



Canada Mortgage and Housing Corporation CEO Evan Siddall’s recent letter to lenders urging them to avoid risky mortgages is a bit “extreme and alarmist,” according to former Royal Bank of Canada CEO Gord Nixon.

In a three-page letter dated Aug.10, Siddall warned excessive borrowing will worsen the economic pain triggered by the COVID-19 pandemic.

“I must say I was a little surprised. I don’t think I’ve ever seen or received a letter like that,” Nixon told BNN Bloomberg’s Amber Kanwar in a television interview Thursday.

“I think the intent and concern is certainly real,” he added, noting Siddall has been bearish on the Canadian housing market “for quite some time.”

In his letter, which came a little more than a month after CMHC tightened its underwriting standards, Siddall said there’s a “dark economic underbelly in this business that I want to expose.”

Nixon said that while Siddall’s concerns are valid, the Canadian mortgage market has always been a very responsible.

Despite continued signs of strength in the country’s hottest real estate markets, the CMHC has warned average prices could fall as much as 18 per cent from pre-pandemic levels.

“There’s obviously different views on the market,” Nixon said. “And CMHC competitors are certainly being more aggressive. And [Siddall is] raising a concern that if there is a significant downturn, it will have an impact on borrowers.”

Nixon said the unemployment rate, which is currently 10.9 per cent, is the most important factor when it comes to mortgage defaults and deferrals.

“I would say the letter was probably a little bit extreme and alarmist but having said that, who knows what the impact of COVID is going to be a year out from now,” he said.

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Canada's mortgage 'stress test' level falls for 3rd time since pandemic began –



The bar at which the finances of Canadian mortgage borrowers gets tested has just been lowered, making it easier for would-be home buyers to reach.

Five-year posted mortgage rates at Canada’s big banks have inched lower in recent weeks, enough to compel the Bank of Canada to formally lower the average rate they base their calculations on to 4.74 per cent.

That’s significant because that’s the level the so-called stress test is based on. Announced in 2017, the test was designed to cool the overheated housing market of the time by making sure borrowers would be able to pay back their loans if rates were to suddenly rise.

Even if a borrower could get a mortgage at, for example, three per cent, that person’s lender was obligated to crunch the numbers as though the rate was higher — at around five per cent, for example — to make sure the loan wouldn’t be too onerous for the borrower to pay back at their income level if rates were to suddenly rise. If the borrower failed the test at the higher rate, the lender wasn’t allowed to lend to them, even if they wanted to.

That testing rate has already been lowered twice in this pandemic, first in mid-March when it dropped 15 points from 5.19 per cent to 5.04, and then again in May when it dropped another 10 points to 4.94 per cent.

This week’s 15-point cut comes on top of that and theoretically means qualified borrowers can now be approved for a slightly bigger mortgage than they could last week, even if their income is still the same.

Rate comparison portal calculates that the change could increase the purchasing power for qualified borrowers by about 1.5 per cent.

Numbers show what that means in reality. At the old level, a borrower who earns $100,000 a year and has a 10 per cent down payment would have been stress tested at 4.94 per cent and be approved for a loan on a home valued at up to $523,410.

At the new stress test level, that same borrower would be approved for a loan on a home costing up to $531,230. That’s a difference of $7,820.

“Over the last few years, rule changes have made it harder for Canadians to qualify, so the recent reductions in the benchmark qualifying rate is welcome news for first-time home buyers hoping to enter the housing market.,” said James Laird, co-founder of and president of mortgage brokerage CanWise Financial.

Ottawa had planned to change the way the stress test was calculated to begin with, announcing in February a plan to tinker with the formula starting in April. But those plans, like many others, were put on hold when the pandemic hit.

Good news for buyers

Sherry Cooper, chief economist at Dominion Lending Centres, said in an interview that move is good for buyers in that it will make it “a touch less difficult to qualify for a loan. People will be able to borrow a bit more money.”

She said she has observed that qualifying rate was quick to move on the way up, but has been much slower to come down even as interest rates have tumbled because of the pandemic, so it’s good to see the qualifying rate come down to something closer to what’s actually happening in reality.

“With record low interest rates, it’s hard to argue that housing hasn’t become more affordable,” she said.

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A financial iron curtain? China seen bracing for more US action –



A sharp escalation in tensions with the United States has stoked fears in China of a deepening financial war that could result in it being shut out of the global dollar system – a devastating prospect once considered far-fetched but now not impossible.

Chinese officials and economists have in recent months been unusually public in discussing worst-case scenarios under which China is blocked from dollar settlements, or Washington freezes or confiscates a portion of China’s huge US debt holdings.

Those concerns have galvanised some in Beijing to revive calls to bolster the yuan’s global clout as it looks to decrease reliance on the greenback.

Some economists even float the idea of settling exports of China-made COVID-19 vaccines in yuan, and are looking to bypass dollar settlement with a digital version of the currency.

“Yuan internationalisation was a good-to-have. It’s now becoming a must-have,” said Shuang Ding, head of Greater China economic research at London-based lender Standard Chartered and a former economist at the People’s Bank of China (PBOC), the country’s central bank.

The threat of China-US financial “decoupling” is becoming “clear and present”, Ding said.

Although a complete separation of the world’s two largest economies is unlikely, the administration of US President Donald Trump has been pushing for a partial decoupling in key areas related to trade, technology and financial activity.

Washington has unleashed a barrage of actions penalising China, including proposals to bar US listings of Chinese companies that fail to meet US accounting standards and bans on the Chinese-owned TikTok and WeChat apps. Further tension is expected in the run-up to US elections on November 3.

“A broad financial war has already started … the most lethal tactics have yet to be used,” Yu Yongding, an economist at the state-backed Chinese Academy of Social Sciences (CASS) who previously advised the PBOC, told Reuters.

Yu said the ultimate sanction would involve US seizures of China’s US assets – Beijing holds more than $1 trillion in US government debt – which would be difficult to implement and a self-inflicted wound for Washington.

But calling US leaders “extremists”, Yu said a decoupling is not impossible, so China should make preparations.

High stakes

The stakes are high. Any move by Washington to cut China off from the dollar system or retaliation by Beijing to sell a big chunk of US debt could roil financial markets and hurt the global economy, analysts said.

Fang Xinghai, a senior securities regulator, said China is vulnerable to US sanctions and should make “early” and “real” preparations. “Such things have already happened to many Russian businesses and financial institutions,” Fang told a forum in June organised by Chinese media outlet Caixin.

Guan Tao, former director of the international payments department of China’s State Administration of Foreign Exchange and now chief global economist at BOC International (China), also said Beijing should ready itself for decoupling.

“We have to mentally prepare that the United States could expel China from the dollar settlement system,” he told the Reuters news agency.

In a report he co-authored last month, Guan called for increased use of China’s yuan settlement system – the Cross-Border Interbank Payment System – in global trade. Most of China’s cross-border transactions are settled in dollars via the SWIFT system, which some say leaves it vulnerable.

Renewed push

After a five-year lull, Beijing is reviving its push to globalise the yuan.

The PBOC’s Shanghai head office last month urged financial institutions to expand yuan trade and prioritise local currency use in direct investment.

Central bank chief Yi Gang said in remarks published on Sunday that yuan internationalisation is proceeding well, with cross-border settlements growing 36.7 percent in the first half of 2020 from a year earlier.

Still, internationalisation is hampered by China’s own stringent capital controls. It could also face resistance from countries that have criticised China on matters ranging from the coronavirus to its clampdown on Hong Kong.

The yuan’s share of global foreign exchange reserves surpassed 2 percent in the first quarter, Yi said. It also beat the Swiss franc in June to be the fifth most-used currency for international payments, with a share of 1.76 percent, according to SWIFT.

One way to accelerate cross-border settlement would be to price some exports in renminbi, such as a possible coronavirus vaccine, suggested Tommy Xie, head of Greater China research at OCBC Bank in Singapore.

Another is to use a proposed digital yuan in cross-border transactions on the back of currency swaps between central banks, bypassing systems such as SWIFT, said Ding Jianping, finance professor at Shanghai University of Finance and Economics.

China has fast-tracked plans to develop a sovereign digital currency, while the PBOC has been busy signing currency swap deals with foreign counterparts.

Shuang Ding of Standard Chartered said Beijing has no choice but to prepare for Washington’s “nuclear option” of kicking China out of the dollar system.

“Beijing cannot afford to be thrown into disarray when sanctions indeed befall China,” he said.

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