NZ Dollar, RBNZ Announcement and Inflation

Gold Survival Gold Article Updates:

Apr. 24, 2014

This Week:

• Metals Prices versus Share Prices
• NZ Dollar, RBNZ Announcement and Inflation
• A Short History Lesson on Tax in NZ

Our apologies that we didn’t get a newsletter out last Thursday. Our website was unexpectedly down for part of that day so there was no point in sending something out when you wouldn’t be able to read the articles attached.

As a result there’s quite a list of articles and videos posted on the site for you to peruse. See down the page a bit for links and intros to all of them.

Given the lack of an email last week, today we’ll give the movements in price from 2 weeks ago instead…

Gold in NZ dollars is down $12.75 per ounce or .85% from 2 weeks ago. Sitting just below $1500 as we type at NZ$1495.75. 

While silver is down about the same percentage wise – 0.83% – or 19 cents from 2 weeks ago to NZ$22.67 per ounce.

After a steady rise since the start of April, USD gold plunged last week getting below $1300 in a hurry. This was caused by a half billion dollars of gold futures being dumped at the not particularly sensible time (i.e. suspicious) of 8.27am New York time.

Gold in both US dollars and NZ dollars has continued to edge lower since then. You can see in the chart below that in both currencies it may well be forming a double bottom around US$1280 and NZ$1500 respectively, and trying to eek out a higher low from those reached at the end of December.

Also of note today is that most precious metals mining shares are up a couple of percentage points, even in the face of the price of the actual metals being pretty stagnant.

This divergence is quite obvious in the chart below of the gold ETF GLD versus the mining index GDX. GLD (blue line) is barely changed from yesterday (Note: Chart is in US time so Wed 23rd is today), while the mining index GDX is up quite noticeably.

And the shares actually began rising on Monday while GLD dropped slightly.

As we’ve mentioned before the shares often lead the metals price both up and down. So this could be an indicator that gold will head higher in the coming days.

Like gold, silver also headed lower last week 

In fact with the kiwi dollar holding close to recent highs, silver in NZ Dollars has actually dipped just below the lows of December and March. 

You can now buy silver at prices not seen since February 2010

However like the gold mining shares, the silver miners might be indicating a move higher in silver also. Silver has been pretty flat for the past few days, while the SIL miners index has risen 5%.

NZ Dollar, RBNZ Announcement and Inflation

To be honest we get annoyed having to listen to the central bankers but their words continue to move markets, so we continue to listen like the rest, given it affects the NZ dollar and therefore the gold price.

The press release that accompanied RBNZ rate hike announcement to 3.00% this morning did not contain anything that significant. Guv Wheeler noted:

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“The speed and extent to which the OCR will be raised will depend on economic data and our continuing assessment of emerging inflationary pressures, including the extent to which the high exchange rate leads to lower inflationary pressure.”

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It is noteworthy that whole milk prices have fallen 20% in the past couple of months. Inflation also seems to be slowing as opposed to rising. The RBNZ raised its inflation projection at the time of the March OCR increase from 1.5% to 1.9%. But the March quarter CPI came in much below expectations (0.3% versus 0.5%) so the need for further rate hikes could be a somewhat less than most expect.

If this plays out we might well see the NZ dollar weaken from where it is. 

As mentioned earlier the kiwi dollar is holding fairly steady just down from the highs earlier this month. It did edge slightly higher following the rate increase this morning but is still down a cent from recent highs.

Likewise the dollar has still not yet breached or in fact reached the high from 2011 (show by the red circle in the chart below).

To our eye there seems to be more downside than upside risk to the dollar from here. But we’re not a bank economist so what would we know?

A Short History Lesson on Tax in NZ

With the financial year having just ended, with it comes the need to prepare tax returns to tell the government how much they can legally plunder from you this year. (if you’re an employee then you just get it stolen from you every pay packet of course so the pain is somewhat dulled when by not handing it over in such a big lump) So we thought you might be interested to see the changes that have occurred in income tax over the past century in NZ.

You have likely come across the fact that income tax arrived in the USA “temporarily” in 1913 to help fund the 1st World War. (Co-incidentally(?) also the year that the Federal Reserve act was enacted.) Income taxes were also enacted during periods of the 1800’s in various forms but 1913 was the year federal laws were enacted. 

Source. 

However you might not know that just like being first to give women the vote, and being first to enact Bank Bail-in provisions, New Zealand also beat the USA to having permanent income taxes. 

You see, income tax was first introduced in New Zealand in 1891.

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“For income tax, individuals were exempt if they earned less than £300 per annum ($50,000 in 2008). This was most of the population. The top tax rate was 5%. Companies paid 5% on profits. Dividends (payments by public companies to their shareholders) were not taxed…

By 1900 tax revenues had increased from 6.4% to 8% of GDP. The tax system and the size of the state were very different from modern times. Before the First World War the top rate of income tax was 6.65%.”

Source.

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My, how things have changed! Back in 1891, no one earning under $50,000 (in 2008 dollars equivalent) paid any tax. And at most you paid just 5%.

This recent NBR article runs through how this changed over the rest of last century.

That might make you feel worse when you hand over your likely somewhere between 20-33% fee to the IRD this year. But it shows you the overall trend is unfortunately up for taxes.

Inflation low – but is it?

As mentioned already the inflation rate for the March quarter was 0.3% or 1.2% annualised. However of note were some of the contributors to this number. 

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“Housing and household utilities underpinned the annual lift in the inflation rate, with new housing prices up 5.1 percent, rentals up 2 percent, and property maintenance services increasing 5.1 percent. Dwelling insurance prices were up 21 percent in the year.

Energy prices rose 2.7 percent in the year, with a 2.9 percent increase in electricity prices and a 2.1 percent lift in gas prices.”

Source.

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Note that all these are expenses you have every year (well except buying a new house but then rates rise with house prices and you do pay these every year). Whereas consumer electronics, furniture and overseas holidays (all of which fell in price) aren’t necessarily regular purchases for most.

Just shows you how irrelevant CPI is to the average family.

Check out this article we wrote on this subject last year for more on the topic.

Here’s Why Not to Believe the NZ Government’s Inflation Statistics – Comparing Money Supply, Government Inflation Statistics, Property Prices, and Gold Prices for the Last 10 Years

Even if the government numbers try to lead us to believe that inflation is lower than it is, over the long term gold and silver are likely to be a decent hedge against this loss of purchasing power. Over the past 10 years that has been the case, odds are the next 10 will be too.

With silver in particular as cheap as it was 4 years ago, now looks like as good a time as any to get some financial insurance. Get in touch if you agree.

This Weeks Articles: 

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2014-04-14 20:27:44-04 It seems Chris Duane of Silver Bullet Silver Shield has done somewhat of an about-face on his theory of selling your gold to buy silver. As his latest video is entitled “Top 17 Reasons To Own Gold Right Now”. Previously he has certainly been very pro silver. In November last year we outlined why we […] read more… THE REAL PURPOSE OF QE

2014-04-15 20:18:48-04 Darryl Schoon gives his take on what the Fed has really been aiming for in its money printing programme. It’s not unemployment or financial stability or even inflation targeting. He also looks at where things might be heading and there’s a couple of shortish videos towards the end that are worth a look too, particularly […] read more… Doug Casey’s Coming Super-Bubble

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