Why the falling price of gold may be cause for optimism




Johan Rewilak, University of Huddersfield

Gold prices have tumbled to a five-year low. As a tradeable commodity, the price of gold is largely linked to supply and demand. While supply remains fairly fixed, demand is shaped by the state of the global economy and investor perceptions of gold’s value as an asset – this is in turn shaped by the strength of the US dollar.

The intrinsic value of gold has long made this precious metal a useful resource in the absence of legal or reliable money. The ease at which gold may substitute for currency means that during turbulent economic times gold is a valuable asset to hold.

The love affair with gold as a financial instrument can be traced back for centuries. A more recent example which offers lessons in the relationship between the commodity’s value and the US dollar is the Bretton Woods System, the monetary order which governed international currency relations between 1944 and 1971. With the growth of international trade after World War II, many countries were happy to hold US dollars in reserve, given they were convertible into gold at a rate of US$35 an ounce. And, with the US owning three-quarters of all gold reserves at the time, a US dollar was as good as gold.

An inverse relationship

The demise of the Bretton system was inherently a liquidity problem. As the growth of international trade outpaced that of US gold mining activities, the demand for international reserves (US dollars) outpaced US gold reserves. In essence, gold was not mined fast enough, making it a scarce resource – and so its true value exceeded US$35 per ounce. Effectively, the failure of Bretton Woods was a simple supply-and-demand problem, where the demand for US reserves (or, crudely, gold) was far greater than its supply, leading to what should have been, a higher price of gold.

History tells us that, in general, there is an inverse relationship with the US dollar and gold. As the dollar strengthens, the price of gold falls, and vice versa. In the example above, it was effectively a weakening dollar (which at the time was overvalued) that should have raised the price of gold.

Moving forward into the 21st century, a boom in commodities such as oil and iron led to an increase in prices including those of precious metals such as gold. Despite the sharp slump coinciding with the financial crisis of 2007, metals in particular witnessed high price increases in the subsequent years.

Gold hit an all-time price high in September 2011 (more than US$1,900 an ounce, and silver was priced at US$49 an ounce in April 2011. While platinum peaked in March 2008, in May 2011 it was priced at just under US$1,880 an ounce, a five-year high. The falling prices we are now seeing in gold and other metals too has some speculating this is the end of the commodity bubble – though this certainly a very pessimistic take on the matter.

EPA/Shawn Thew

US Federal Reserve chair, Janet Yellen, has said interest rates are likely to rise in the near future.

Light at the end of the tunnel

Ever the optimist, I would like to think that the falling prices in commodities (including gold) is because we are beginning to see light at the end of tunnel of what has been the largest financial crisis since the Great Depression. It is a well-known fact that when the financial system collapses and the economy becomes increasingly turbulent the demand for commodities, including gold rises. Look no further than the Bolivian hyperinflation where tin-ore became the commodity of choice (and when needed was exchanged for US dollars) to tackle a peso that was losing value by the hour. With short-term interest rates cut close to zero and quantitative easing reducing longer-term rates, present-day investors have avoided losing out on interest payments by holding gold.

But, with a mooted rise in interest rates in the near future and signs of economic recovery in spite of the eurozone crisis, it is inevitable that investors are looking to substitute back from commodities to other financial instruments. With interest rates unmoved at present, it could be that investors are pulling out while the price is high, which is contributing to the current falling price of gold. The data further shows that the US dollar is gaining strength vis-à-vis the euro and if interest rates do rise, then this may continue. Again this links back to the inverse relationship between the US dollar and the price of gold.

Will the price of gold keep falling in the future? While this is a possibility, I would exercise extreme caution. The economic recovery in the US has been uneven at best, so more swings are possible – and other forces should not be ignored. Although the current cracks in the eurozone have been papered over, the longer-term problems associated with the region are far from resolved.

Not only that, but with the demand for commodities (gold included) likely to increase in emerging markets when their economies recover, there is every possibility gold prices may start to rise again. Whereas most of the above has focused on the demand for gold, ultimately the mines that supply this resource will also have an important role to play.

The ConversationJohan Rewilak is Lecturer in Economics at University of Huddersfield.

This article was originally published on The Conversation.
Read the original article.

Northwest Makes Top 25 Portland Business Journal Money Management List

Northwest Investment Counselors is pleased to share that we have been named one of the Portland Business Journal’s top 25 money management firms for its 2015 Wealth Management and Financial Services Guide publication.*  “We are pleased to have been honored by the Portland Business Journal,” said Mark Scarlett, Principal and Co-founder of Northwest.  “I want to thank our clients for the trust they have placed in us and the hard work and dedication of our employees.  As a result, we have grown by over $150 million in the last 10 years, ” he added.

Founded in 1998, Northwest manages over $260 million for families and foundations, primarily in individual stocks and fixed income securities.  Our financial guidance can be summed up by three key attributes that make Northwest’s wealth management distinct and valuable. We put our clients’ needs first rather than products or quotas. Our wealth management team draws upon a wide breadth of experience, education, and credentials to develop portfolios that fit the unique needs of our clients. And the in-house and rigorous nature of our investment process, which has produced tax-efficient investment results with below average volatility, is directed by a team of portfolio managers, all of whom have earned the Chartered Financial Analyst (CFA) designation.**


* The list was created by totaling the assets under management for Oregon and Clark County, Washington clients as of the second quarter of 2015. See Portland Business Journal.

**To learn more about the CFA charter, visit CFA Institute.


Wealth Manager Wisdom

NWIC_logo 4Here at Northwest, each new client often brings a unique financial situation, but that doesn’t mean we have to re-create the wheel each time. Given the broad experience of our Wealth and Portfolio Managers (and over 17 years in business), we have dealt with a wide range of financial issues. We want to share the stories of some of these clients and how we helped them simplify and get their financial house in order.

For confidentiality purposes, let’s call these clients the Smiths.  You may find some or all of these issues familiar. If so, we encourage you to contact one of our Wealth Managers for a review of your portfolio and financial situation.smith original

The Smiths had accounts at too many custodians. They came to us with six accounts spread amongst mutual fund companies and brokers. We helped them consolidate IRA accounts and taxable accounts to simplify their holdings. We helped them with the allocation of a couple 529 plans for their children and conducted a comprehensive financial assessment to cover college expenses and plan for their retirement.

The first chart to the right displays their original allocation at the time the Smiths became clients. While cash can be a beneficial or important holding, we concluded they had too much given their substantial liquidity and long-term investment horizon. We considered all their financial positions, even some we don’t yet manage in their 401(k)s.

The second chart below right displays the allocation of the assets we currently manage for them. smith currentOverall, we have increased their diversification, put their cash to work for them, and increased their fixed income investments to increase the stability of their portfolio and generate income.

On the estate planning side, we reviewed all of their estate planning documents, recommending they explore some changes with an attorney. We also electronically secured and stored the documents in one place should anything happen to the Smiths. Additionally, we referred them to an insurance specialist to explore long-term care insurance.

The work doesn’t stop there. In addition to managing a large portion of their overall investments in individual stocks and bonds, we meet with them a few times a year to make sure we are still on track to meet their goals.




The information contained in this site is for general guidance on matters of interest only. The application and impact of laws can vary widely based on the specific facts involved. Given the changing nature of laws, rules and regulations, and the inherent hazards of electronic communication, there may be delays, omissions or inaccuracies in information contained in this site. Accordingly, the information on this site is provided with the understanding that the authors and publishers are not herein engaged in rendering legal, accounting, tax, or other professional advice and services. As such, it should not be used as a substitute for consultation with professional accounting, tax, legal or other competent advisers.

Explainer: what’s the turmoil in the Chinese stock market all about?





Michele Geraci, University of Nottingham

The Chinese stock markets have experienced significant turmoil in recent weeks, with the Shanghai Composite Index – the country’s major reference – falling by 32% since June 12. But this fall was preceded by an equally sharp rise of 150% over the previous nine months. In the 20 years since I have been working in finance, I’ve never seen anything like this. So what is going on with the Chinese stock market?

There are several reasons for this unusual behaviour: firstly, when I teach stock market investment to my Chinese students, I always remind them that the Shanghai stock exchange should be thought of more as a casino, rather than as a proper stock market. In normal stock markets, share prices are – or, at least, should be – linked to the economic performance of the underlying companies. Not so in China, where the popularity of the stock market directly correlated with the fall in casino popularity.

Stocks and casinos

In China, given the low credibility of the financial statements published by listed companies, investors need to rely on other tools to predict share price performance. These tools include a heavy reliance on technical analysis and charts – a method that tends to predict future share price based purely on the company’s past performance, with no regards to its fundamentals. Even the name of the company is often neglected; all that matters is the historic price performance.

While this technique is also used in Western markets, my experience in China is that it is the predominant method for investment. Hence the disconnect between a share’s price movements and economic fundamentals.

There has been, however, a strong correlation between the stock market’s performance and the revenues of the casinos in Macau. While gambling revenues were growing at a fast pace in Macau, people largely ignored the stock market – whose performance was, largely, uninteresting for a number of years. But since China’s president, Xi Jinping, launched a campaign against corruption, gambling activity has started to decline. This was when the stock market started to move up. Coincidence?

Real estate

The other reason why the stock market experienced a sharp increase between September 2014 and June 2015 relates to the Chinese real estate market. In recent years, investment in real estate has been the only way for ordinary citizens to get returns higher than the paltry 3% offered by bank deposits (yes, 3% is paltry in an economy that grows at more than 10% a year in nominal terms). But high capital requirements and growing regulations on the purchase of real estate has meant that benefiting from this growing market has been increasingly difficult for ordinary citizens.

Macau: the traditional home of Chinese gambling.

Commercial banks therefore – in an effort to mimic real-estate returns – started to offer so-called “wealth management products”, which are basically funds that invest in the real estate market. These funds were then repackaged and resold in the retail market. Chinese individuals would take their savings out of current accounts and placed them into these wealth management products and achieve returns similar to those available to buyers of real estate.

This was the modus operandi until the beginning of 2014, at which point the economy and the real estate markets started to show signs of weakness. The once-easy money coming from the property market started to disappear and people with wealth management products started to get into financial trouble and some of them even defaulted on their payments (the government bailed them out, so no individual was at a loss).

Monetary policy

From November 2014 the Chinese central bank, worried about the slowing economy, decided to institute an aggressive monetary policy to rapidly lower interest rates with the aim of stimulating the economy, which also caused current account rates to decline. This created a perverse scenario where individuals who were already seeking returns higher than those offered by current accounts were then denied the opportunity to get them through real estate because of the falling market. As a result, deposit rates were cut further and the return on current accounts became even more dissatisfying. Commercial banks found themselves in a quandary.

The Shanghai Composite Index’s growth and decline in recent months.
Yahoo finance

With the casino route closed and real estate off the table, what was left? The Shanghai and Shenzhen stock markets: the two main stock markets that had remained dormant for years.

Banks then turned the old real estate wealth management products into investment vehicles to purchase shares directly on the stock markets. A large portion of customer deposits were then directly invested in the stock market, which then surged on the back of that demand.

An empty bubble?

Meanwhile, however, nothing happened to the earnings forecasts of the underlying companies. In fact, if anything, they should have been revised down because of the deteriorating macroeconomic condition of the Chinese domestic economy. But of course, as we said before, no one really looks at earnings and price ratios.

Due to the desire to maximise returns, many individuals then used leverage so that the inflow of money in the stock market was even higher. For example, if someone wishes to purchase shares for a total value of 100RMB, but only has available cash in his deposit account of, say, 60RMB, he could borrow the remaining 40RMB from the brokerage house. By doing this, the original source of 60RMB was turned into an upward push of the stock price equivalent to the full 100RMB. This drove strong share price growth between September 2014 and June 12 2015.

What happened on June 12 2015? Nothing. Just some smarter investors (generally large institutional investors, which represent 20% of all market volumes) started to sell and the rest of the market followed suit. Fear got hold of small investors (who represent 80% of the market) and selling accelerated, with margin calls making those selling do so even faster, and here we are today – a 32% drop and counting since the peak of mid-June.

In the past few days, the Chinese government has adopted a number of measures to try to mitigate this crash. The market finally reacted positively to a relaxation of restrictions on margin requirements. But this measure simply transfers the risks from investors to brokerage houses – it does not change the fact that the market has increased by 70% over the last year. The bubble, if it is a bubble, still has a long way to go.

The ConversationMichele Geraci is Head of China Economic Policy Programme, Assistant Professor in Finance at University of Nottingham.

This article was originally published on The Conversation.
Read the original article.

It’s All Greek to Me

yieldsHere at Northwest we build our portfolios from the bottom up, focusing on companies that generate attractive long-term returns on capital and have sound management teams. We don’t give much credence to the short-term fluctuations and headlines that cause less experienced investors to panic and change course. The low volatility of our composites is a testament to this time tested practice. Nevertheless, we will closely watch the situation in Greece, Europe, and more recently China, for broader market implications. The following is why we are not overly concerned with what is happening in Greece.

In 2010 there was widespread financial exposure to Greek debt among mutual funds, money market funds, and banks either directly or through counterparty risk. Today, the vast majority of Greek debt is held by government agencies and international organizations such as the IMF and ECB, making a Greek default more of a political issue than a financial one, with the greatest repercussions to the European taxpayers.

Financial contagion related to Greek debt is still a source of concern, but unlike the beginning of the European debt crisis, borrowing costs for countries also considered at risk are not rising like they did in 2010 and 2011. In the chart we see sovereign yields for other Eurozone countries with elevated debt levels relative to their GDPs. Although yields have risen somewhat lately, they have moved with the broader market, unlike Greece’s ballooning borrowing costs.

Direct U.S. exposure to the Greek debt crisis is quite low. U.S. banks have mostly unloaded paper tied to Greece and exports to Greece make up all of 0.05% of our total exports. American taxpayers are technically somewhat on the hook based on the role of the United States as a shareholder in the IMF, but less so than our European counterparts.

Will markets remain somewhat volatile for investors? Yes. Will the Federal Reserve hold off on raising interest rates due to Greece? Maybe, but don’t expect any major adjustments to Fed policy. If anything, rates might stay low for one meeting longer than planned, which the stock market would likely applaud. Greece’s debt issues warrant our attention in the short-term due to the potential spillover from temporary Eurozone economic disruption. In the long-term, Greece will be more of a canary in the coal mine, or lesson, for how markets will cope with issuers that have high debt loads and how those issues will effect bond market liquidity.

Please feel free to reach out to us concerning current economic events or portfolio specific questions you may have.

Summer Fun with Northwest

Join us for Summer Fun at the city of Lake Oswego Sounds of Summer Concert Series featuring Curtis Salgado on Wednesday, July 22nd from 7 PM to 9 PM at Foothills Park on the Willamette River. As a sponsor of the event, we will have a limited number of reserved seats available, please contact your Wealth Manager if you are interested in joining us.

For more information: Curtis Salgado

For location map: Foothills Park

Curtis Salgado

Retire.Ready: Spotlight on the Bond Ladder

Clients near or in their retirement years consistently express three primary financial concerns:

  1. Do I have enough money?
  2. Is my cash flow predictable?
  3. What if I have an emergency?

Our Retire.Ready solution addresses these concerns. We believe those nearing retirement should transition from a pure total-return approach to a hybrid total-return and liability matching strategy to reduce risk while managing retirement cash flow. The Retire.Ready solution consists of three important components:

  1. In-depth financial assessment that creates a retirement budget
  2. Social Security optimization
  3. Portfolio divided into three financial buckets including unique 10-year bond ladder to match future cash flow needs (see diagram)

Just like our long-standing, traditionalbuckets portfolios Retire.Ready utilizes high-quality bonds. Uncovering attractive yields is always an important goal, but safety and predictability are the cornerstones of the Retire.Ready bond ladder. It takes a prudent investor to know when to pass up the siren call of even slightly more yield in favor of capital preservation. This is a tradeoff we take to the next level.

Our traditional total return portfolios that incorporate our intermediate fixed income securities are designed to be extremely safe, but also maintain a manageable amount of risk, to increase income responsibly. In our intermediate fixed income composite, we have the flexibility to target an array of credit ratings across either a range of maturities or a more consolidated timeline, as long as we feel comfortable with the overall diversification, yield, and safety. Our in-house research points us towards companies with wide economic moats and strong balance sheets, but also towards companies whose competitive advantage is based more on economies of scale in competitive, low barrier industries. We prefer companies with strong management teams and high cash flow generation, but our research allows us the flexibility to favor unusual credit metrics over others, such as a company’s ability to tap the credit markets, cut large historic dividend payments, or divest less profitable business lines. Our internal, rigorous, and evolving due diligence is our advantage in finding individual bonds that we feel confident will mature at par, all while providing higher than general market yields to maturity.

Retire.Ready takes a slightly different approach. The typical bond portfolio risks, be it interest rate risk, reinvestment risk, or headline risk have been reduced by a bond ladder designed to match our clients’ upcoming liabilities. The bonds in the ladder won’t always be the highest yielding bonds in a particular credit sector, due to our prioritizing of safety, and will in most cases be held to maturity. Though we plan to hold bonds to maturity, this is not a “set it and forget it” portfolio or high priced annuity. We continue to monitor the portfolio, be it corporate or municipal bonds, to ensure the persistent high standard of credit quality we recognized when the bonds were purchased. Retire.Ready bonds will benefit from institutional pricing and also the nimble nature of our bond desk to find mispriced “odd-lot” bonds when appropriate. The Retire.Ready portfolio will make use of corporate, agency, and municipal bonds to find the right mix of credit quality, tax-efficiency, and income. Please contact us to learn more about what goes into the Retire.Ready portfolio and how it may help you to be and feel more secure financially.