Spending tomorrow’s money today

Spending tomorrow’s money today

Theresa May seems to have figured it out.

Today’s papers are full of trailers for her Big Brexit Speech later this month.

“Sources” have briefed the press that May will say Britain’s prepared to leave the single market if that’s what it takes to increase control of borders.

May’s figured out that it makes more political sense to promise something that’s in your power to deliver than something that relies on other parties’ agreement.

Walking away from the single market is a unilateral move. Staying in it on terms you find acceptable relies on others.

Actually, that reminds me. I finished off yesterday’s hard Brexit discussion by saying Tom Tragett has something on that in the pipeline.

I forgot to mention we’re running a special New Year offer for Tom’s Currency Wars Alert service. It’s a chance to take a no-obligation trial for a fraction of the initial outlay.

Launching in March last year, Tom’s service had made readers 2,481 pips by the time Santa was coming down your chimney.

I can’t guarantee it’ll be the same story this year. But people always want to know about a track record and so I’m passing it on, along with the clear warning that past performance is no guarantee of future results.

I’ll also add, as I’ve done previously in the DR, that having watched Tom up close for a number of years now I’m impressed with his dedication and diligence.

He’s been trading currencies for nigh on four decades now, and he brings that experience to bear.

Tom’s back on his beat and looking for his next trade. Follow this link to find out how you could join him on it.

This offer closes on Sunday, so don’t hang about.

OK plug over. Another day another positive bit of UK economic news.

This time it’s the purchasing managers’ index for services, which came in better-than-expected and suggests conditions in the UK service improved last month.

To complete the set, having mentioned the upbeat manufacturing PMI yesterday, I might as well note that the construction PMI also ticked higher, with new order growth climbing to an 11-month high.

Happy days.

I respect your privacy and will never pass on your email address to anyone else.

If you want to keep your feet on the ground, consider the fact that these happy stats come against a backdrop of increased borrowing.

The latest Bank of England data show consumer credit growth hit an 11-year high in November.

Various explanations are doing the rounds. Carney’s August rate cut is one. Another is that inflation fears mean people have brought spending forward to get ahead of higher prices. Yet another is that people are spending the perceived future gains of Brexit today.

Whatever reason you plump for, borrowers better hope that inflation does tick up this year – along with wage growth. Or else it’s hard to see how these consumption-led good times can be sustained.

In other news, gold continued its New Year rally overnight.

Is this a gold thing, or just a dollar thing?

Always remember that, when it comes to short-term moves, gold tends to do well (in all currencies) when the dollar softens, and vice versa.

I’m tempted to say it’s the dollar. The latest Federal Reserve minutes were out last night, and appear to show a bit of hesitation (quelle surprise) about this three-rate-hikes-in-2017 idea, as well as concerns about how dollar strength might impact the US economy.

“In a nutshell the Fed is admitting that they simply don’t know how fast the economy might move forward,” says Tom Tragett.

“Hence as you might expect just another central bankers’ classic exercise of shoving the telephone directory down the back of their trousers!”

As the dollar weakened overnight, other currencies gained. Add it to the scrapbook: China’s renminbi has now posted its biggest two-day gain on record.

“In regards to China,” says Tom, “I also note comments on the newswires this morning saying that a move into non-US assets by Chinese investors, namely bitcoin and gold is also in play just now.”

You’d expect a stronger Chinese currency to be good for gold.

China jostles with India for the position of world number one physical gold buyer. So the stronger the renminbi, the further Chinese money (and that of Chinese gold buyers) goes.

But before we get carried away, let’s remember we’re talking about a very short-term currency move here.

“I still see the US currency moving higher over time,” says Tom, noting that the dollar remains in an uptrend.

On the physical demand side, there are also reasons to be cautious.

Chinese authorities have been “spooked by the outflow of money needed to pay for gold imports ahead of this month’s key Chinese New Year shopping spree,” my old boss Adrian Ash wrote in an update to BullionVault users earlier this week.

“Inflows via Hong Kong fell to a 10-month low in November, helping spur the strong premium for gold landed in Shanghai now offered by what remains solid local demand.

“Word is that metal is finding its way into the ‘free trade zone’ of the city’s airport…awaiting clearance to enter the country and being heavily traded on the international section of the Shanghai Gold Exchange.

“But China remains a Communist one-party state, and if Beijing wants people to buy less gold, they might struggle to buy more, at least for a while.”

Precious metals consultancy Metals Focus also isn’t holding its breath for an epic resurgence in physical demand from India and China, the world’s top two gold-buying nations.

“2017 may remain challenging,” it says, “given the ongoing crackdown in India and the pessimistic mood seen across the Chinese jewellery trade.”

On a more positive note, though, it does see upside for gold this year despite these headwinds.

“This should not prevent gold from recovering on the back of
healthy investor interest,” it says.

What could buoy investor interest? Well, an uptick in US inflation would help, especially if the Fed does get cold feet about hiking interest rates.

You’d also expect to see increased safe haven demand if stock markets get a nosebleed and decide to throw a wobbler.

In tomorrow’s DR Jim Rickards brings you his outlook for gold. Tune in for that.