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Tuesday, November 1, 2011

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Activision Defends Its Base

Posted: 01 Nov 2011 05:04 AM PDT

By Shaun Halder:

Sometimes we are our own worst enemy. Last week, Activision (ATVI) took steps to defend its stranglehold on the MMO market from a rival within. Amidst speculation that Activision's upcoming dark-fantasy RPG, Diablo III, could cannibalize the WoW player base, Activision decided to make Diablo III free to WoW players who commit to a yearlong WoW subscription (details here).

The promotion effectively makes Diablo III free to a key demographic, literally millions of gamers, who collectively were just too eager to hand over cash and firstborns just to be included in the beta. Given the recent decline in WoW's subscribership, the promo was a costly, but perhaps necessary insurance policy.

Global WoW Subscribers
Q1 Q2 Q3 Q4
2011 11.4m 11.1m
2010 11.5m 11.5m >12m >12m

For Activision, World of Warcraft is bedrock. The game, originally launched in 2004, is a perennial billion-dollar free cash flow for Activision, and accounts for


Complete Story »

Welcome To The Third World, Part 2: Real Lives

Posted: 01 Nov 2011 05:02 AM PDT

Yesterday's Wall Street Journal devoted an entire page to the differences between today's economy and a typical recovery:

Slow Recovery Feels Like Recession
Americans are two years into a recovery that doesn't feel much different to many of them from life during the most bruising recession in seven decades. Scenes of the long haul back from the slump show a nation struggling to rebuild after a battering that crossed ages, regions and occupations.

A sobering set of economic statistics is at the heart of tales of Americans moving in with relatives, switching careers and dialing back on spending to cope with straitened circumstances amid the fitful rebound.

One benchmark, income of the median household—meaning the one in the very middle of the middle—declined 3.2% to $53,518 during the 2007-2009 recession and fell a further 6.7% to $49,909 between June 2009 and June 2011, according to an analysis of monthly Census Bureau numbers. According to a study done by former Bureau staffer Gordon Green and others at data-crunching firm Sentier Research, the income of the typical American household, adjusted for inflation and in 2011 dollars, has dropped well below the January 2000 level ($55,836).

Other data paint a similarly bleak picture. No recession since the Great Depression was deeper or longer than the most recent. It has taken two years for the nation's total output of goods and services to return to pre-recession levels, longer than after any recession since World War II. And on a per-capita basis, the Commerce Department said Thursday, output remains 3% lower than it was at the end of 2007.

Since the recession's end in mid-2009, the economy has been expanding but it isn't adding jobs at a fast-enough pace—at least 150,000 a month—to absorb the growing population. The unemployment rate stands at 9.1%, and nearly half the unemployed have been out of work for six months or more. Housing, the most fragile sector, has yet to rebound. As of June, home prices were 10.1% below mid-2009 levels. One in five mortgage borrowers has a loan bigger than the value of the underlying home.

Education, once a reliable means to employment and earning power, has been no insurance against declining incomes during the recovery. Between June 2009 and June 2011, the median income of households led by high school graduates fell 8.2%, Sentier estimates. Households led by people with two-year associates degrees saw incomes fall even more: 11.2%. And even those led by individuals with bachelor's degrees were squeezed: down 5.9%.

The Journal then illustrated this point with some real-world examples:

Retrenching After Earnings Decline
Groundhog Day, Feb. 2, 2010, isn't a day that Tanya Ross-Lane of Akron, Ohio, wants to relive.

After 13 years helping workers at Diebold Inc., a maker of ATMs and security systems, update their job skills through training programs, she was laid off from her job, which paid $55,000 a year.

At the time, her husband, Michael Lane, also was unemployed, having lost his job with a home contractor, where he was earning $15 to $20 an hour pouring concrete and installing cabinets and floors. The couple sold her 10-year-old Saab, kept their 2003 Jeep, and worked out a lower interest rate on their mortgage. "We keep things modest. We don't go out much. We cut off the lights and don't buy steak," Mr. Lane said.

Ms. Ross-Lane, 54 years old, took a six-week job with the Census Bureau. She also joined a local church's Community Job Club to keep her spirits up and network. Through Diebold connections, she learned of an opening: the Portage Lakes Career Center, a technical school in Uniontown, Ohio, needed a Human Resource Development Coordinator to design classes to help workers update skills. Ms. Ross-Lane started Nov. 1, 2010, earning $40,000 a year.

In May 2010, Mr. Lane, 58, landed work through a temporary agency, earning $9.50 an hour with a window-installation company. At first, business was good. Last year, when homeowners were receiving tax credits for new energy-efficient windows, he was working 70 hours a week. The company promised full-time employment after 120 days, but 16 months in, Mr. Lane is still a temp—now working 40 hours a week.

As Jobs Vanish, Sticking to Knitting
Shelby Stofle graduated in December from the University of California at Berkeley with $10,250 in student-loan debt—and no job offers from a dozen applications.

The 24-year-old had hoped to work in environmental conservation or sustainable agriculture but struck out even at a grocery store near her rural hometown of Suisun City, Calif.

"It wasn't what everybody tells you is going to happen when you graduate," said Ms. Stofle, who studied abroad in Ghana while in college, raises chickens in her backyard and dyes wool as a hobby.

Discouraged, she shifted gears and signed up in January for a free state-run training program near Suisun City. Over several months, she learned how to install solar panels and other skills, but nothing translated into a job.

In March, Ms. Stofle was hired to tend and sell plants for a nursery. But her hours have been cut and she now works part-time, taking home about $1,200 a month after taxes.

"You hear you're going to get into a career, and it's going to start paying a lot—that's why you go to school," she said. "But I make as much now as my 17-year-old co-worker. I took the time and spent the money to go to school. Did it mean anything?"

Her husband, Greg King, a 29-year-old student at California State University at Sacramento, brings in $700 after taxes each month as a part-time food clerk and bookkeeper at grocery chain Safeway.

That leaves the couple scraping to pay their monthly bills, including $525 in rent, a $300 car payment, and Ms. Stofle's student-loan payment of $110. Their expenses will increase when Mr. King graduates in December with $30,000 in student loans.

Ms. Stofle just learned that the nursery won't need her after the busy season ends in November—although she may be asked back in February, when business ramps up. With many employment options exhausted, she said she feels her best shot is to set up her own business, selling her hand-made scarves at craft fairs and farmers' markets. Meanwhile, Mr. King, who is studying for his bachelor's degree in criminal justice, said he "didn't want to put all my eggs in one basket" so he also is training to be an emergency medical technician and pursuing an electrician's apprenticeship.

Restaurant Gives Way to Food Truck
When Cupertino Cid came to the U.S. in 1988, the Mexican immigrant brought an expertise in preparing barbacoa, a goat-meat specialty that is slow-cooked overnight. "I always hoped to make a living from barbacoa," he said.

After 15 years managing pizza parlors in Los Angeles, Mr. Cid, 51 years old, realized his dream. He opened a small restaurant—12 stools around a counter—and an outdoor stall at the Alameda Swap Meet, a market frequented by fellow immigrants.

In 2007, he employed four full-time workers. Each weekend, sales topped $7,000; he grilled 18 goats to make enough barbacoa tacos, burritos and sandwiches to meet demand. "There were lines going back farther than you could see," Mr. Cid recalled.

When the economy began to sputter, the swap meet lost customers—and Mr. Cid's establishments began to lose money. Two years ago, he closed the restaurant and stall. He bought a food truck, which he parks Saturdays and Sundays on the edge of the swap meet.

Retrenching has been painful for Mr. Cid, his wife, Maria, and their four children. Debts have mounted and the family sometimes is behind the $1,500 monthly rent on their three-bedroom apartment, he said.

Corporate Safety Net Slips Away
Terry Sullivan spent more than a decade at Verizon Communications Inc., working his way up to become a marketing director at the telecom giant.

But when it came to marketing himself, Mr. Sullivan's initial efforts fell flat. After being laid off in December 2009—among about 26,000 workers let go by Verizon—Mr. Sullivan spent six months at home in Flower Mound, Texas, applying for jobs online.

When his applications got no response—despite experience such as overseeing a $105 million annual budget and more than 1,000 employees and contractors in his most recent post—the 56-year-old realized, "My resumes were falling into a sinkhole," and changed tack.

He began attending a Dallas-area support group for job seekers and setting up events for his local chapter of the American Marketing Association, and helping other job seekers update their resumes and online profiles. In late 2010, Mr. Sullivan's networking efforts brought him to a presentation given by Mark Bourg, who runs MarketCision, a Dallas-area marketing firm. Impressed, Mr. Sullivan approached Mr. Bourg after his talk. The relationship resulted in a consulting gig. He is still looking for full-time work.

These days, instead of family trips to the movies and restaurant dinners, the Sullivan family will spend evenings helping mom, Cydney, decorate the purses she sells at local craft fairs.

The Sullivans have had to raid the college money they had set aside for their son and daughter—a high school senior and junior, respectively.

"It's very disappointing because for my entire career, I've always set aside money every time I get paid," Mr. Sullivan said. "I just kind of had the rug pulled out from under me."

Some thoughts
Each of these stories has the same downward trajectory: A life that once seemed either secure or clearly within reach simply evaporates, with no obvious way to get it back. A restaurant becomes a food truck; a degree in a hot field becomes a minimum wage job with a big student loan payment; an executive position becomes a zero-security consulting gig. A high-status/high satisfaction middle class life becomes a struggle to survive. Life in America starts to look like life in most of the rest of the world.

Each story also shares the same ultimate cause, which is excessive debt. We're paying interest that would otherwise have gone to restaurant meals or vacations, or to hiring environmental engineers or cops or teachers. Our remaining disposable income can't support all the jobs that used to exist.

This isn't going to end painlessly on its own. In a typical recession the seeds of recovery are planted quickly and clearly: the Fed lowers interest rates and the government spends more and/or cuts taxes, and people start borrowing and buying. But that's been tried in the most extreme form ever during the past couple of years, without effect. Our debts have overwhelmed even zero interest rates and trillion-dollar deficits.

So, what now? Inaction isn't an option, for a couple of reasons. First, unless growth returns with a vengeance very soon, the financial system will be crushed by all the bad paper now hiding on bank and pension fund balance sheets. Second, elections are coming up in the US and Europe, and voters, as they always do in late-stage decadent empires, will choose whichever candidate promises the quickest pain-free fix. So the US, Europe and probably Japan will try again in 2012, with bigger deficits and more debt monetization. QE3 or its equivalent is coming soon.

Gold and Silver Currency Tactics

Posted: 01 Nov 2011 04:36 AM PDT

14 Dividend Stocks Ready To Boost Your Retirement Portfolio, Part II

Posted: 01 Nov 2011 04:33 AM PDT

By Osman Gulseven:

<< Return to Part I

Here are the last eight stocks from CNBC's " 14 Stocks For a Boomer's Retirement Portfolio " l ist, along with my opinions about them. The O-Metrix Grading System is applied where possible, as well.

Data obtained from Finviz/Morningstar, and is current as of October 28 close. You can download the O-Metrix calculator here .

It seems that Peruvian workers of Freeport-McMoRan (FCX) may have to return to work in mid-November. The copper company was trading at a P/E ratio of 7.3, and a forward P/E ratio of 8.3, as of October 28. Analysts estimate a 7.0% annual EPS growth for the next five years. With a profit margin of 25.1%, it pays a 2.34% dividend.

The stock is currently trading 29.08% lower than its 52-week high, while it returned -11.1% in a year. O-Metrix score is 5.98, and its target price implies a 26.1% upside potential. While SMA50


Complete Story »

Online Retailing Didn't Kill The American Shopping Mall

Posted: 01 Nov 2011 04:26 AM PDT

By Seth Mason:

A recent trip to the local mall, my first in more than 5 years, was an eye-opening experience as to the state of shopping malls in this country. I'd estimate that more than a third of the storefronts were empty. Even with the anchor stores hanging on, a good 10-15% of the total retail space was vacant. Of the stores that were open, nearly half catered to the lower-rung of the socio-economic ladder. Stores with names such as "Phlava Cutz" and "Urban Gold Connection" stood where Crate and Barrel and Brookstone used to do business. It was like driving through a neighborhood that had "really gone downhill". Walking through the mall on a weekday afternoon, I encountered exactly 6 shoppers. This is the same mall that, just 10 years ago, was as bustling as Grand Central Station.

Real estate analysts have been noticing a steep decline in American shopping malls


Complete Story »

WATCH: Malcolm Gissen talks with Daniela Cambone

Posted: 01 Nov 2011 04:03 AM PDT

From Kitco News, Malcolm Gissen talks Gold with Danilea Cambone.

~TVR

Last Chance to Buy Gold and Silver At a Discount

Posted: 01 Nov 2011 02:12 AM PDT

Investing Advice

WATCH: Barbara Kolm talks with James Turk

Posted: 01 Nov 2011 02:09 AM PDT

Barbara Kolm, of the Hayek Institute, and James Turk, Director of the GoldMoney Foundation, talk about the work of the Austrian Economic Center and the Friedrich August v. Hayek Institute to bring the teachings of the Austrian school of economics back to Austria and the rest of the world. After 10 years of warning about the crisis that we are now living through, Austrians are starting to get more attention, although academia is still dominated by Keynesian and Monetarist ideas.

Barbara explains the importance of innovation and economic growth for the material wellbeing of humanity. Barbara talks about the student competition that they are organising as well as their soon-to-come media lecture program. She talks about their mobile-based Austrian economics dictionary available in many languages on Blackberry, i-Phone and Android platforms. She also talks about the Free Market Roadshow. Barbara explains how the Austrian school teaches individual freedom and individual responsibility, and that these are fundamental for prosperity. This interview was recorded on September 30th 2011 in Vienna.

~TVR

Silver Price Surge Means Bigger Profits for Mining Companies

Posted: 01 Nov 2011 02:02 AM PDT

From Gold Money:
In 2010 the production costs of the world's 30 largest silver producers averaged $5.16 per ounce. Since 2002, silver-mining production costs have almost doubled. However, during that same time period the silver price has surged by around 650%, so that despite rising production costs, mining profits have been increasing. This year the global silver supply will probably exceed one million ounces for the first time in history, mainly owing to Chinese production; In 2010, Chinese silver production reached 102.7 million ounces and accounted for 16% of global silver production. Last year China became the world's third largest silver producer, after Mexico and Peru.

In 2010 the US Mint sold around 34.7 million ounces of silver. According to the 2011 Silver Yearbook by CPM Group, this accounts for approximately 46% of worldwide sales. Therefore, the US Mint continues to be the world's largest mint, and its Silver Eagle the world's favourite silver coin – followed by the Austrian Mint (Münze Österreich), which sold 11.4 million ounces of its famous Philharmonik silver coin last year. In comparison to 2009 Münze Österreich saw a 26% sales-increase.

The report also states that last year Mexico, Australia, China and Argentina raised their silver production, while the US, Canada and Peru reduced their silver production. In Peru this reduction was mainly due to miner-strikes, which have continued to hamper production this year. Other South American states such as Bolivia, Ecuador and Chile have also been affected by strikes. Miners are fighting for higher wages and improved healthcare. Another obstacle for the mining industry is that the population seems to be increasingly opposed to new mining projects. The inhabitants of the affected regions usually accuse the foreign mining companies of generating profits at the environment's expense. This local opposition has already led to the cancellation of some mining projects.

According to official data, the only countries that are currently holding silver stocks are the US, Mexico and India. All three countries together hold an estimate of 55 million ounces of silver. These silver stocks only account for 5.6% of today's global silver demand. Back in 1970 governments around the globe still held a total of approximately 355 million ounces of silver. During the last 40 years this volume has been drastically reduced, after the US Treasury decided in the 1960s to issuing silver coins as legal tenders. Most other governments have done likewise, reducing the need for silver stocks as monetary reserves.

Read more @ GoldMoney.com

What are Special Drawing Rights or SDRs?

Posted: 01 Nov 2011 01:59 AM PDT

Special Drawing Rights (SDRs) are supplementary foreign exchange reserve assets defined and maintained by the International Monetary Fund (IMF).

Not a currency, SDRs instead represent a claim to currency held by IMF member countries for which they may be exchanged.

They can only be exchanged for Euros, Japanese yen, UK pounds, or US dollars,[imf 1] SDRs may actually represent a potential claim on IMF member countries' nongold foreign exchange reserve assets, which are usually held in those currencies. While they may appear to have a far more important part to play, or, perhaps, an important future role, being the unit of account for the IMF has long been the main function of the SDR.
Created in 1969 to supplement a shortfall of preferred foreign exchange reserve assets, namely gold and the US dollar, the SDR's value is defined by a weighted currency basket of four major currencies: the Euro, the US dollar, the British pound, and the Japanese yen.[1] SDRs are denoted with the ISO 4217 currency code XDR.

~TVR

Gold Daily and Silver Weekly Charts - The Golden Bowl

Posted: 01 Nov 2011 01:51 AM PDT

An outrageous new scandal could bring on a "Lehman 2.0" collapse

Posted: 01 Nov 2011 12:59 AM PDT

From The Daily Capitalist:

The strangely-named MF Global is now the subject of the lead article of the online NYT, with the title Regulators Investigating MF Global for Missing Money. Here's the lede:

Federal regulators have discovered that hundreds of millions of dollars in customer money has gone missing from MF Global in recent days, prompting an investigation into the brokerage firm, which is run by Jon S. Corzine, the former New Jersey governor, several people briefed on the matter said on Monday.

The recognition that money was missing scuttled at the 11th hour an agreement to sell a major part of MF Global to a rival brokerage firm. MF Global had staked its survival on completing the deal. Instead, the New York-based firm filed for bankruptcy on Monday.

One of the reasons for the stock market crash after Lehman is...

Read full article...

More on fraud:

The euro crisis has claimed its first U.S. casualty

How the Fannie and Freddie mortgage boondoggle actually works

The man who brought down Madoff has identified another HUGE fraud

Royal Canadian Mint's new gold ETRs program challenges gold ETFs

Posted: 01 Nov 2011 12:17 AM PDT

Royal Canadian Mint's new gold ETRs program challenges gold ETFs

The Royal Canadian Mint is taking the gold ETFs head-on with the introduction of the new Canadian Reserves gold ETR program aimed at eliminating the middleman in direct gold ownership.

Author: Dorothy Kosich
Posted: Tuesday , 01 Nov 2011

RENO, NV -
Investors will soon be able to invest in gold from the Royal Canadian Mint and keep their bullion in the Mint's vault in Ottawa.

The Royal Canadian Mint has announced the IPO of Exchange Traded Receipts (ETRs) under the Mint's new Canadian Reserves program, an expansion of the Mint's core bullion and refinery business.

The net proceeds of the IPO will be used to purchase gold on behalf of the purchasers of ETRs at the London PM fix price on the closing date of the offering. Subject to market conditions, the issue price per ETR will be CAD$20 or the U.S. dollar equivalent.

The purchaser of an ETR owns the actual gold rather than a unit or share in an entity that owns the gold. Subject to certain restrictions, ETR holders will be will be able to redeem their ETRs for physical gold products in the form of 99.99% pure gold bars or coins, or for cash based on the future gold price or market price of the ETRs.

Ian E. Bennett, CEO of the Royal Canadian Mint said, "With the introduction of the Canadian Gold Reserves ETR program, we hope that investors will see this as a convenient, efficient and secure method for investing in and owning physical gold."

The ETRs will be listed on the TSX in both Canadian and U.S. dollars and may be traded in either currency. However, the ETRs will not be registered under the U.S. Securities Act of 1933 and may be not offer or sold in the U.S.

Closing is expected to occur late this month.

The Mint has selected a syndicate of investments dealers led by TD Securities and National Bank Financial, and including BMO Nesbitt Burns, CIBC World Markets, RBC Dominion Securities, Canaccord Genuity Corp., Cormack Securities, MGI Securities and Raymond James Ltd.

The Mint will compete with private sector gold ETFs. John Moore, executive director of the Mint's bullion and refinery business, told the Financial Post the ETRs are unique because they give investors direct beneficial ownership in gold without a third party between the investor and the Royal Canadian Mint.

http://www.mineweb.com/mineweb/view/...tail&id=92730

Last Chance To Buy Gold &amp; Silver At A Discount

Posted: 31 Oct 2011 11:58 PM PDT

From investingadvicebygeorge:
Last Thursday, October 20th, all was right in the world. We had rallied past every key technical indicator; Europe had announced that they had come to an agreement to save the default of Greece and Spain, and Italy and Portugal. Peace and prosperity would once aging reign in the land of Leonardo da Vinci, and the home of the greatest art ever created. The food is not too bad either.

Last Friday I think everyone took the day off as there was such relief from the news out of Europe that no one wanted to jinks it by showing up. Anyway it was Friday, Europe would be saved and we had a one month closing higher in the markets than we had in 40 years. We deserved a rest and Friday was the day.

Well what a difference a day makes. Last week's passage of the Eurozone financial rescue plan impacted the markets as traders continue to evaluate its worth. The markets are also whispering and watching the Fed for any news about a QE3 initiative but the Feds steadfastly deny any such plan.

Initial relief over Europe's latest attempt to end its debt crisis faded fast yesterday (Monday) as investors fretted about the plan's lack of detail and grew more skeptical about Italy's turnaround effort.

One day after European leaders announced a series of measures aimed in part at enticing investors back to the region's debt markets, bond buyers demanded higher yields on Italian and Spanish debt. An auction of new Italian bonds was met with weak demand, forcing the nation to pay higher interest rates than in previous sales.

The response from bond markets underscores how challenging it will be for European leaders to convince financial markets that last Thursday's broad agreement is sweeping enough to enable troubled countries such as Italy and Spain to work their way out from mountains of debt. The plan calls for beefing up the region's bailout fund, recapitalizing banks and reducing Greece's debt burden. At this point, it's pretty obvious that this recovery is fake.

Read more @ investingadvicebygeorge.blogspot.com

Nathan Lewis QandA (Part 1 of 2)

Posted: 31 Oct 2011 11:15 PM PDT

Nathan Lewis is the host of the website NewWorldEconomics, and the author of Gold: The Once and Future Money. Nathan has provided much analysis of many of the key macroeconomic issues confronting the ...

Recent poll : 44% of likely voters favor returning to the gold standard, 28% opposed.

Posted: 31 Oct 2011 10:00 PM PDT

Confidence Moves Markets

Posted: 31 Oct 2011 09:54 PM PDT

Roger Wiegand looks at the markets as of October 27 and give comments on the direction he sees coming.

Dow Jones Industrial Average: Closed at 12208.55 +339.51 after a "half-baked credit solution" was pronounced from Europe including a -50% haircut on Greek bonds. This was a bad joke but the markets bought it as they wanted to hang their collective hats on something to pump stocks. While numerous markets were on the cusp of disaster, this pronouncement today did the trick. Stocks rallied hard, the US Dollar sank two points and precious metals and their shares rallied along with crude oil and other commodities. It's all about confidence and confidence stroked these markets on this Thursday, of 10-27-11. New resistance is 12250 and support is 11,950 on normal volume and rising momentum. The close was above all moving averages. Expect stocks to rally to the close on Friday.

S&P 500 Index: Closed at 1284.59 +42.59 on rising momentum and normal volume. The close was above all moving averages. The close landed in the top 1/3rd of today's trading range just like the Dow, signaling more buying tomorrow on Friday. New support is 1275 and resistance is1285, almost on the close. We forecast buying to at least 1300 and potentially 1350 to close out the high for this trading year for the funds.

S&P 100 Index: Closed at 577.30 +17.86 on rising momentum and normal volume. Resistance is 580 and support is 565.00. Price is above moving averages and this signals more buying on Friday. Since these stocks are larger companies, this means the big funds are in for the last quarter to close them out on highs for the year. Over the next few trading sessions we forecast the 100 Index to touch a 600 high or better with interim resistance at 590. Look for more buying on Friday and into next week.

Nasdaq 100 Index: Closed at 2399.83 +65.04, which is the 6th hit on the top at major resistance. Since this market is the leading indicator and is faster than the others, the price might go into chop and congestion between 2400 and 2450. The close today hit 2400 resistance. Tomorrow, on Friday, there might be some profit-taking as today's move left a price gap on its way up that could retrace to fill next week. Then, we would expect more buying taking this market to a double top and maybe even a triple top before selling off at the year end. Expect more buying next week.

30-Year Bonds: Closed at 135.41 -2.89 on falling momentum and price skidding lower to 135.00 support. The bonds had produced a bearish double top in September and October. Price is beneath the 20 and 50 day moving averages but above the 200-day at 130.90. Next lower support is 135.00, 134.50 and 132.50. The large sell-off in bonds today took the price to a chart -50% retracement at 135.50. The selling should slow down as long as stocks do not rise too much more in rallies. However, considering cycle time remaining and the buying pressure on shares, we would forecast a long bond price at 130.90 on the 200-day moving average within the next week or so. There should be more selling ahead albeit at a slower pace.

GDXJ Junior Gold Miners And XAU: Closed at 32.44 on the GDXJ after a full five wave rally. Price is above the 20 and 50 day moving averages but just under the 200-day average at 34.36. Momentum is rising and the volume is normal. These miner indexes are slower to move in new rallies than the broader stock markets. However, we expect silver and gold to continue in rallies and these indexes should have more buying power until at least the middle of November. Then, there is a normal holiday pause with new buying resuming after Christmas and New Years. Expect the GDXJ index to rise from today's close at 32.44 to 34.36 resistance on the 200-day moving average. This should happen over the next two trading weeks and price has a chance at moving above the 200-day to 37.50 and then 38.00-38.50. The trend is up with metals prices.

The XAU Index closed at 203.36 +5.70 moving up even faster than the GDXJ. The XAU touched the 200-day moving average and resisted and stalled. It also hit a down-sloping channel line causing resistance. The XAU seems to move faster in both directions in both rallies and selling. However, the metal to shares ratio, a 90% accurate signal, is only very mildly turning up. Considering the recent XAU rally, the ratio moved very little saying tepid buying for metals junior shares is ahead for now. Yet, momentum is up and the closing price is above all moving averages. The 200-day was 203.26 so you can say the close was on that number as new support and resistance. The junior shares are slower but the trend is up.

Gold: Closed at 1743.50 +23.30 on based and rising momentum. Gold was over-sold and is now in a new rally moving up and out of a continuation triangle with a close above all moving averages. We are generally in cyclic rallies from now through the end of this year interspersed with normal corrections. The 2012 rallies normally begin after a low at the end of January continuing until May, 2012. On this day, we touched intermediate resistance on gold at 1748.50 per our forecast. Next, we expect the standard ABC mild correction followed by the following new rally. There is a chance for a double top at 1923.50 yet this year. There may be an outside chance at $2,000 before January 1st but we think that one would land sometime in the first quarter of 2012. Expect more buying for the next two trading weeks with selling near mid-November.

Silver: Closed at 35.08 +1.63 after stalling for days in chop between $32-$33 on the price. Momentum has based and turned up. The close was above all moving averages and several nearby trading resistance prices. Silver was slammed in the $49 to $33 sell-off and it takes some recovery time after a smash like that one. Silver dropped at the beginning of May, recovered and then sold again from $42-$43 back to $30 support. To begin the latest rally, silver had to plow through five hard price resistance levels and the three moving averages; this is why it was stuck trading sideways for nearly six weeks. If today's new rally trading action can hold the price above $34, we should see $38.85 resistance within the next few days.

US Dollar: Closed at 74.97 -1.22 as bonds and the dollar sold down together in the face of hard –charging, rising stock markets. The dollar closed about one point beneath all three moving averages to find support and resistance on 75.00; dollar index. If there should be further selling and there certainly could be, next lower support is 74.50-74.00 on a lower supporting channel line. The chart low since last October was near 72.50. The annual dollar trading cycle for the next week or so is to sell-off. We might sell down to 73.50-72.50 support before the dollar recovers; bases and finds new support for buying.  Much depends on Euro trading, which is the dollar's inverse trade in Euro-land. The Euro had a relief rally today.

Crude Oil: Closed at 90.87 -1.65 after opening at 93.93 on the December futures this morning and closing out at 93.97 at the end of the session. The quoted close is cash and the other numbers are December futures so we can expect higher prices for at least the next ten trading sessions. Oil's close was very near the 200-day average at $90.57, which you can call support and resistance for the price. The other moving averages are back at $85 and $86 for 20 and 50 day averages. Oil reserves have been drawn down to normal and we are in the new heating season. While price is pausing for a break after the recent 4-5 week rally, expect higher prices all the way to February 1st when heating oil prices peak out in mid-winter. Momentum is up and we see a first quarter 2012 high of $108, down considerably from our old 120.00 price. Expect higher prices for most all fuels over the next ten trading sessions.

CRB Index: Closed at 324.27 +8.12 on rising momentum and higher volumes. The CRB has been selling down gradually in a sinking, trading channel since the first of May, 2011. Near October 1st, price hit the basement at 295 and then began a rebound on grains, metals and crude oil. Price is above the 20-day and 50-day averages but remains beneath the 200-day at 327.21, which is now hard upper resistance. Since crude oil is half of the CRB, we see new highs over the next 7-10 trading days on higher oil prices. Grains are about done for the year and other CRB markets are soft or not buying. Watch for the price to touch 327.21 and pause, followed by new buying to top out at 330 resistance before a normal correction.  -Traderrog


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Gold&#039;s Fall Amid Yen&#039;s Devaluation is More Evidence of Manipulation: John Embry

Posted: 31 Oct 2011 09:17 PM PDT

¤ Yesterday in Gold and Silver

Well, it was a pretty quiet opening in the gold market in the Far East on their Monday morning.  But all that changed the moment that Japan intervened in the currency markets to drive down the value of the yen.

Of course the U.S. dollar skyrocketed...and gold 'fell'.  Once the trading stops were tripped, it fed on itself...and in about two hours, the gold price was down about two percent.  A smallish recovery got sold off shortly before 1:00 p.m. Hong Kong time...with the absolute low coming in a spike down shortly after London opened for trading at 8:00 a.m. BST.

From there the gold price made a gradual recovery until Comex trading began at 8:20 a.m. Eastern time...and then traded sideways until 3:00 p.m. in the New York Access Market.  Then gold got sold off about ten bucks going into the close of electronic trading at 5:15 p.m. Eastern.

The gold price finished the day at $1,715.10 spot...down $28.30 on the day.  Net volume was around 115,000 contracts, with a bit more than half of that volume having been traded by the time that London opened.

Silver, as usual, really got it in the neck...and in about two hours was down over three percent to around $34.25 spot.  From that point, every time it made an attempt to break through the $34.50 spot, there was a willing seller at the ready to make sure that didn't happen.

Silver closed at $34.20 spot...down $1.05 on the day.  Surprisingly, silver's volume was very light...only around 23,000 contracts net...and the other surprising thing was that only 6,000 of those contracts had traded by the London open...about 25% of the total net volume.  In gold, more than 50% of Monday's volume had traded by that time.

I would guess that there weren't that many longs to liquidate at these prices, as virtually all the tech funds are still twiddling their thumbs waiting for silver to break through it's 50-day moving average, which it is now further away than ever.  And it's always possible that JPMorgan was aggressively covering it's 3,000 contract short position that it put on during the prior week's trading.  More on that further down.

Unless you were on some other planet on Monday, you're probably more than aware of Japan's intervention in the currency markets yesterday morning.  Here's the U.S. chart for Sunday night and yesterday.  The intervention started at 9:20 p.m. Eastern time on Sunday night...and the dollar is still climbing as of this writing.

The gold stocks gapped down...and stayed down for the entire trading day...closing close to their lows.  The HUI was down 2.85%...and I'm sure the lousy performance of the general equity market didn't help matters.  It could have been worse.

With silver down about three percent, it should come as no surprise that the silver shares did poorly as well.  Nick Laird's Silver Sentiment Index  was crushed to the tune of 5.50%.

(Click on image to enlarge)

For the second delivery day in November, the CME Daily Delivery Report showed that 16 gold and zero silver contracts were posted for delivery tomorrow.  I'm not surprised to see November deliveries fall off this quickly, because as I said in my Saturday column, November is not a regular delivery month for either metal...and there will be nothing of importance to report until the December, which is a huge delivery month for both gold and silver.

For the last day of October, there were no reported changes in either GLD or SLV.

The U.S. Mint had a very tiny sales report yesterday.  They sold 100,000 silver eagles and nothing else.  Unless they have a final October update tomorrow, month end sales for the mint stood at 50,000 ounces of gold eagles...12,500 one-ounce 24K gold buffaloes...and 3,064,000 silver eagles.  So far this year, gold bullion coin sales have been nothing special, but year-to-date silver eagles sales now total 36,475,500...with two months to go.  The forty million ounce mark in silver eagle sales pretty much looks like a slam dunk.

The Comex-approved depositories reported receiving 5,244 ounces of silver on Friday...and shipped 545,340 ounce of the stuff out the door.  The link to that action is here.

Reader William Gebhardt sent me Richard Russell's latest piece...and I borrowed the following few paragraphs for you...

"Gold-lovers are obsessed with the daily price of gold. This is a waste of time. The real question is how much of your assets are in gold? Gold is the one single universal test of wealth and purchasing power. At one time, a measure of wealth could be answered by "How much gold do you own?" At various intervals in history, fiat money wasn't considered wealth. This is all you have to know about gold. Periodically, there are times when only gold is considered wealth.

"At the bottom of the Great Depression in July, 1932, the Dow was selling at 41, down 89% from its 1929 high. But gold was selling at twenty dollars an ounce, and you could buy anything if you had enough gold. In 1932 people hated stocks, but they continued to lust for gold.

"Every minute of the day the world's central bankers print two million dollars worth of new currency, this in an effort to keep their own currency cheap and competitive. Writes Jim Grant — "Gold is an expression of the world's distrust of the way our central bankers conduct their affairs."

 While on the subject of 'borrowing' things from other people...silver analyst Ted Butler posted his weekly review on Saturday...and had more to say about the 3,000 contract short position that JPMorgan put on during the last reporting week.  Here's a small part of what he had to say on this subject.

"Many will be quick to conclude that this means that JPMorgan, with or without other big 4 participation, intends to smash the price of silver once again. Since that is at the heart of the silver manipulation that I have advanced for so many years, such a scenario can hardly be thrown out by me, but I have a different scenario in mind."

"This increase by JPMorgan in its short position is not unprecedented, nor is it assured it will result in lower prices. Back in March (please see the Weekly Review of March 5, in the archives), JPMorgan increased its silver short position by 6,000 contracts in the low 30-dollar price area after having substantially reduced it prior to that. As it turned out, JPM got crushed on that trade, largely buying it back in a panic into the highs of April and losing $10 to $15 an ounce, before re-gaining control of the silver market shortly thereafter. So it is not assured, based upon history, that JPMorgan will be successful in their latest attempt to manipulate the silver market."

"More important to me is the motivation behind JPMorgan's sharp increase in their manipulative silver short position at this particular time. Simply put, I think they had no choice. With the recent vote by the CFTC to establish position limits, I had felt that it was important for JPMorgan, along with other CME commercials, to make sure silver prices didn't surge in the days immediately surrounding the vote so as not to allow any observable connection between the vote and the silver manipulation. If we had exploded in price immediately following the vote, even the densest manipulation denier would have drawn the connection. That's why I was an agnostic about the short term price implications of the vote, while being convinced it would be profoundly bullish in the long term. I still feel that way, even more so as I contemplate JPM's increase in its silver short position."

Nothing has changed in the world of printing money.  Richard Russell's comments above are proven in these three charts that Nick Laird sent me yesterday.  They show the current M1, M2 and M3 money supply situations.  And as you can see, they continue to rise without a break...except for a short period with M3.

(Click on image to enlarge)

(Click on image to enlarge)

A stroll through Dubai's Gold Souk - Here's an excellent 2:22 video shot in Dubai's gold souk.  It's a far different place than any jewellery store in North America.  In this part of the world, they take gold very seriously.  This video is well worth your time...and the link is here.

Here's another video taken in the same place.  This one only runs 1:06...and is even more interesting.  The link to that video is here.

With the financial and monetary situation going to hell in a hand basket in Europe over the weekend, I have a fair number of stories for you today.  If you only read the first three or four paragraphs of each, at least you'll get the flavour of each story.

I'm sure 'da boyz' are not amused that these metals refuse to decline in the face of a dollar rally of this magnitude so far today.
Competitive devaluations will boost precious metals, Turk tells King World News. U.S Mint sells another 3.0 million silver eagles in October. Jon Corzine crashes and burns in 7th largest U.S. bankruptcy.

¤ Critical Reads

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Corzine's MF Global collapses under euro zone bets

Ted Butler says the MF Global was the largest volume clearing house on the NYMEX/COMEX...and number two or three on the CME.  This was a huge bankruptcy...the 7th largest in U.S. history.

Jon Corzine's bid to revive his Wall Street career crashed and burned on Monday when his futures brokerage MF Global Holdings Ltd filed for bankruptcy protection following bad bets on euro zone debt.

Corzine, 64, who once ran Goldman Sachs before becoming a U.S. senator and then governor of New Jersey, had been trying to turn the more than 200-year-old MF Global into a mini Goldman by taking on more risky trades.

But once regulators forced it to fully disclose the bets on debt issued by countries including Italy, Portugal and Spain, it rapidly unraveled with no buyers willing to step in.

MF Global's meltdown in less than a week made it the biggest U.S. casualty of Europe's debt crisis, and the seventh-largest bankruptcy by assets in U.S. history.

I thank Edmonton reader B.E.O. for this Reuters story...and the link is here.

View full GSD edition

Regulators Investigating MF Global for Missing Money

Federal regulators have discovered that hundreds of millions of dollars in customer money has gone missing from MF Global in recent days, prompting an investigation into the brokerage firm, which is run by Jon S. Corzine, the former New Jersey governor, several people briefed on the matter said on Monday.

The recognition that money was missing scuttled at the 11th hour an agreement to sell a major part of MF Global to a rival brokerage firm. MF Global had staked its survival on completing the deal. Instead, the New York-based firm filed for bankruptcy on Monday.

This story was in The New York Times yesterday...and is Roy Stephens first offering of the day.  The link is here.

View full GSD edition

MF Global's Collapse Exposes Prop-Trading Risk That Volcker Wants to Curb

Jon Corzine's risk appetite just provided Paul Volker with a demonstration of the dangers of Wall Street proprietary trading.

Volcker, a former Federal Reserve chairman who's advising the Obama administration, pushed for legislation to curb wagering by banks or financial companies that have federal guarantees or are so embedded in financial markets that they're deemed too big to fail. Regulators and the industry are wrestling over the fine print in the so-called Volcker rule, which takes effect in 2012. Now, three years after Lehman Brothers Holdings Inc. failed, MF Global's implosion may buttress the argument for tighter trading limits.

This Bloomberg story is courtesy of West Virginia reader Elliot Simon...and the link is here.

Tyler Durden over at zerohedge.com goes supernova on this one...and the link to that is here. [Thanks Roy!]

View full GSD edition

US Treasury Estimates It Will Have to Borrow More

The U.S. Treasury Department said on Monday it will sharply increase its estimated borrowing over the next two quarters due to expected lower receipts and higher outlays.

Treasury said it expects to issue $305 billion in net marketable debt for the October-December quarter, an increase of about $21 billion from estimates issued on Aug. 1.

Treasury said it expected to issue $541 billion in net marketable debt securities in the January-March 2012 quarter, marking the second-highest quarter on record.

More Treasury paper created out of thin air for the Fed to buy with money printed out of thin air.  I thank reader Bob Fitzwilson for this cnbc.com story...and the link is here.&

Japan intervenes again to tame soaring yen ahead of G20

Posted: 31 Oct 2011 09:17 PM PDT

Japan intervenes again to tame soaring yen ahead of G20

Japan sold an undisclosed amount of yen on the foreign-exchange market Monday, sending the U.S. dollar and the euro climbing sharply against the currency.

The dollar surged against the yen, trading as high as ¥79.53, according to FactSet Research data, compared to ¥75.77 in North American activity late Friday. The dollar came off of its earlier highs lately to buy ¥78.05 in recent activity.

That took the dollar back to its August level against the yen, the last time Japan intervened in currency markets.

Still, for the month of October, the dollar has lost ground against other major currencies amid worries about U.S. policy options.

read more

MF Global’s Collapse Exposes Prop-Trading Risk That Volcker Wants to Curb

Posted: 31 Oct 2011 09:17 PM PDT

MF Global's Collapse Exposes Prop-Trading Risk That Volcker Wants to Curb

Jon Corzine's risk appetite just provided Paul Volker with a demonstration of the dangers of Wall Street proprietary trading.

Volcker, a former Federal Reserve chairman who's advising the Obama administration, pushed for legislation to curb wagering by banks or financial companies that have federal guarantees or are so embedded in financial markets that they're deemed too big to fail. Regulators and the industry are wrestling over the fine print in the so-called Volcker rule, which takes effect in 2012. Now, three years after Lehman Brothers Holdings Inc. failed, MF Global's implosion may buttress the argument for tighter trading limits.

read more

Corzine&#039;s MF Global collapses under euro zone bets

Posted: 31 Oct 2011 09:17 PM PDT

Corzine's MF Global collapses under euro zone bets

Ted Butler says the MF Global was the largest volume clearing house on the NYMEX/COMEX...and number two or three on the CME.  This was a huge bankruptcy...the 7th largest in U.S. history.

Jon Corzine's bid to revive his Wall Street career crashed and burned on Monday when his futures brokerage MF Global Holdings Ltd filed for bankruptcy protection following bad bets on euro zone debt.

Corzine, 64, who once ran Goldman Sachs before becoming a U.S. senator and then governor of New Jersey, had been trying to turn the more than 200-year-old MF Global into a mini Goldman by taking on more risky trades.

read more

Gold&#039;s fall amid yen&#039;s devaluation is more evidence of manipulation, Embry says

Posted: 31 Oct 2011 09:17 PM PDT

Gold's fall amid yen's devaluation is more evidence of manipulation, Embry says

Sprott Asset Management's John Embry told King World News yesterday that gold's decline amid the devaluation of the Japanese yen is more evidence of intervention by central banks.

The link to the KWN blog that Eric has headlined "John Embry - Gold & Silver shares waiting to be unleashed" is here.

Silver Formation Projects Spike To $60 &#8211; $75 Level

Posted: 31 Oct 2011 08:54 PM PDT

From KWN:
With gold and silver consolidating, today King World News interviewed acclaimed money manager Stephen Leeb, Chairman & Chief Investment Officer of Leeb Capital Management. When asked about the tremendous pessimism in gold, Leeb responded, "You are right about the pessimism and I just wouldn't be surprised to find gold trading at $2,000 by the end of the year. I think the breakout is legitimate and the pullback is natural. I don't know where else to put money except for gold, silver and maybe a few other commodities. Even if gold doesn't follow through, as I expect it will, it doesn't mean a thing. There is no other currency out there that can even remotely replace gold."

Stephen Leeb continues:
"Resource scarcity implies one currency and that currency is gold. So don't get shaken out by the pessimism, I would take this pessimism as extremely bullish. If people are pessimistic in the face of a bull market that has continued for more than a decade, that's great! I want to be in that bull market because it's just starting. Gold's potential for price gains is enormous.

Continue reading @ King World News

LISTEN &#8211; Gold &amp; Silver Forecast 10.31.11

Posted: 31 Oct 2011 08:40 PM PDT

From The Korelin Economics Report

Gold and Silver Forcast
Daily precious metals and commodities update with Trader Rog 10.31.11.
Mr. Wiegand is the Editor and Publisher of Trader Tracks a Stocks, Futures and Commodities electronic newsletter publication for active traders. In addition, Roger writes a weekly column, "Rog's Corner," For J Taylor's Gold and Technology Stocks Newsletter.

Much more @ KEReport

Rick Rule: Bet against the dollar as a store of value

Posted: 31 Oct 2011 05:30 PM PDT

The Lost Gold Mine of Venezuela

Posted: 31 Oct 2011 05:21 PM PDT

Satyajit Das – Europe’s Plan To End the Debt Crisis – Putting The “Con” in “Confidence” Part 1

Posted: 31 Oct 2011 05:19 PM PDT

By Satyajit Das, derivatives expert and the author of Extreme Money: The Masters of the Universe and the Cult of Risk Traders, Guns & Money: Knowns and Unknowns in the Dazzling World of Derivatives – Revised Edition (2006 and 2010)

The most recent summit failed to meet even the lowest expectations. Euro-Zone leaders displayed poor understanding of the problems, confused strategies, political bickering and infighting as well as inability to take decisive steps and stick to a course of actions. This summit follows the 21 July 2011 declaration of a definitive grand plan to solve the problem. Like the ones before it, the 26 October meeting yielded a plan to have a plan to have a plan etc. There's no reason to believe that this summit will be the last.

The actions need to try to stabilise the European debt crisis are well recognised. Countries like Greece need to restructure its debt to reduce the amount owed – an euphemism for default. Banks suffering large losses as a result of these debt write-downs need to be stabilised by injecting new capital and ensuring access to funding to avoid insolvency. A firewall needs to be erected to quarantine Spain and Italy as well as, increasingly, Belgium, France and Germany from the further spread of the debt crisis. Steps must be taken to return Europe to sustainable growth as soon as possible.

Even if all these measures could be implemented as soon as possible, success is not assured. But without them, the chance of a disorderly collapse is increasingly significant.

Haircuts…

Greece has an unsustainable level of debt. The only way that the country's solvency can be restored is by writing off a portion of this debt. On 27 October 2011, the Institute of International Finance ("IIF"), on behalf of the banks and investors holding Greek bonds, agreed to a 50% haircut.

At best, the reduction of Euro 100 billion is less than 30% of outstanding debt, as only private investors were covered. Greek bonds held by official institutions such as the ECB are excluded, to avoid embarrassingly large losses for the European Central Bank ("ECB"), which would then require an injection of capital into the institution.

Without the write-down, a leaked assessment by the"Troika" (The European Union ("EU"), ECB and International Monetary Fund ("IMF")) indicated that a 50% haircut reduces debt to 120% of GDP and funding requirements to Euro 114 billion through 2020. These forecasts are optimistic, assuming a return to growth by 2013.

While the write-downs were needed, it is unclear whether the quantum is sufficient and whether Greece's residual debt burden is sustainable. A debt to GDP ratio of around 60-80% may be more realistic. This would require further write-downs. History suggests that a write-down of debt for distressed borrowers is frequently followed by others.

People like us…

The EU, to date, has carefully confined discussions about debt restructuring to Greece. The attention of financial markets will inevitably turn to Ireland and Portugal.

Ireland's economy is improving with growth projections having been recently revised upwards. The country has implemented an aggressive austerity package, entailing tax and spending cuts equivalent to 20% of the country's GDP (around Euro 30 billion) over a 7 year period. Government finances have improved with the budget deficit likely to shrink to a still very large 10% of GDP, from 32% in 2010, with a target of 3% by 2015. Government debt is now expected to peak at around 120-125% of GDP in 2013.

The improvements in the economy have come at a cost. Output has shrunk by nearly 20%, unemployment is 14% and house prices have fallen 43%. Bailouts of Irish banks have cost around Euro 85 billion to date.

With domestic demand flat at best, Ireland is dependent on exports. The deteriorating global environment is a major risk, with the potential to reduce growth and making it harder to meet budget and debt targets prescribed by the bailout package. The need for further capital injections into the banks as the property market continues to weaken cannot be ruled out.

Portugal is in the midst of its deepest recession for 30 years, with the economy contracting by 5% this year. Unemployment is over 13%. Promised structural reforms are proving difficult to implement. A return to growth by 2013 looks ambitious.

Despite measures, such as a 27% cut to public sector pay, hidden debts of Euro 3.4 billion, including Euro 1.1 billion on the island of Madeira, have undermined efforts to regain control of public finances. The budget deficit this year will be around 7%. A reduction of Portugal's credit rating to "junk" or non-investment grade has also increased its cost of funds.

The Greek write-downs may create speculation for Ireland and Portugal to follow suit, especially if economic condition deteriorate.

Capital Top-Ups…

The EU plans calls for Euro 106 billion in recapitalisation of European banks, primarily to cover losses on holdings of sovereign debt such as Greece, by June 2012. The amount is at the low end of what is required. The amount of recapitalisation focuses on losses from holding of Greek bonds. Taking into account possible losses on Irish, Portuguese, Spanish and Italians bonds, the required recapitalisation is around Euro 200-250 billion.

In total, global banks have exposures around $2.2 trillion to Portuguese, Irish, Italian, Greek and Spanish debt. The exposure of German and French banks to troubled European countries is around $1 trillion.

According to the European Banking Authority stress tests conducted in July 2011, the 90 largest European banks have exposure to Greece of Euro 90 billion. These European banks have larger exposures to Spain (Euro 287 billion) and Italy (Euro 326 billion) as well as to France (Euro 215 billion). These banks also have large exposures to private sector debt in these countries, which would be affected by problems of the sovereign. For example, French banks hold around Euro 400 billion of Italian private debt.

In addition, the recapitalisation does not take into account "second order" effects. The write-offs, covering the cost of recapitalisation and the general de-leveraging (reduction in debt) is likely to reduce economic growth resulting in increasing credit losses that must be covered. This may increase the required recapitalisation by another Euro 100 billion bringing the total to Euro 300-350 billion.

It is not clear where the additional capital is coming from. Banks must try to raise the capital privately through equity raising or restructuring and conversion of existing instruments into equity. Banks should also reduce dividends and bonus payments to improve their capital position. If this is insufficient or unsuccessful, national governments are required to provide support. Recapitalisation funded via a loan from the European Financial Stability Fund ("EFSF"), the European bailout fund, is the last resort.

Reluctant to dilute existing shareholders, some large banks may choose to sell assets and stop new lending to meet capital targets. The EU and national regulators will prevent excessive "deleveraging" to ensure adequate flow of credit flow to the real economy to avoid slowing down growth. As much as $2 trillion of assets may be sold as part of the program to reach the new capital levels with an unknown effect of economic activity.

European banks, especially banks in weaker countries, have faced significant difficulties in raising long term money from financial markets to fund their activities. The EU proposal wants banks to reduce reliance on short-term funds but offers no concrete proposals, at this stage, for actions to improve the ability of banks to raise term money. If the states provide guarantees to support the banks, then this would affect the credit quality of the sovereign and increase its potential financial obligations.

Holey Fences…

An enhanced EFSF is the cornerstone of efforts to quarantine Spain and Italy as well as, increasingly, Belgium, France and Germany from the further spread of the debt crisis.

The EFSF will provide loans to or purchase bonds in order to support market access for Euro-Zone Member States faced with market pressures and to ensure that their cost of borrowing does not rise to levels that threatens solvency.

After accounting for existing commitments to Greece, Ireland and Portugal, the fund's available capacity is around Euro 200-250 billion. If it has to finance recapitalisation of banks in member states, then this capacity is further reduced.

The EFSF does not have adequate resources to perform its functions. The amount available can be compared to the financing requirements of beleaguered European countries.

In the period to the end of 2013, Ireland, Portugal, Spain, Italy and Belgium will need to raise about Euro 700 billion to finance their deficits and refinance maturing debt. In 2012, Spain faces maturing debt of around Euro 120 billion. Italy has debt maturities in 2012 of Euro 260 billion and another Euro 150 billion in 2013. Crucially, Italy faces debt maturities of around Euro 40 billion in February 2012.

Italy's total debt is Euro 1.9 trillion (118% of GDP), the fourth-largest debt in the world after the United States, Japan and Germany. Spain's total debt is above Euro 600 billion (61% of GDP).

Alchemy…

In order to enhance the capacity of the EFSF, the EU proposes to leverage the fund.

The EU proposes provision of credit enhancement to new debt issued by member states to reduce its funding costs. In the absence of details, it is widely assumed that this will entail the EFSF guaranteeing a certain percentage of the first losses on new bonds. Promoted by German insurer Allianz, the plan would entail investors in say Ireland, Portugal, Italy and Spain being protected against losses on bond holdings, up to an unconfirmed amount of around 20%.

The plan raises several issues:

1. The bondholders would still look to the issuer and assess its solvency and ability to meet its obligations.
2. If losses turn out to be above the insured first loss amount then the investor would be at risk. Losses on sovereign bonds are variable and difficult to predict.
3. Technical details such as the trigger of the payment, the loss determination and payment mechanism are complex.
4. The insurance would apply to new issues and may create a two-tier market – one for existing bonds and another for the new insured securities.
5. This risk insurance would be offered to private investors as an option when buying bonds in the primary market for a price. There are uncertainties about the price. It is also not clear that it would be preferable to alternatives already commercially available such as CDS.
6. The legal impact of such insurance on legal provisions of existing bonds, such as the negative pledge and pari passu clause which prevents the borrower from pledging its assets to prefer a particular group of creditors or change the ranking of investors.

To address some of these problems, the EU has proposed the issue of detachable insurance certificates that can be freely traded which would be available with new bonds. The price of this insurance would be reflected in the lower interest rates on such bonds. Following a default event, the certificate would entitle the holder to claim their entitlement for the loss suffered not in cash but in EFSF bonds.

In the absence of full details, it is difficult to assess the arrangements. Their complexity may create uncertainty.

The structure introduces unnecessary problems. If the certificates are regarded as derivative contracts then many investors may not be able to purchase them. The accounting treatment of these certificates, vital to ensuring protection against losses in financial statements, is uncertain. The structure also introduces exposure to the credit standing of the EFSF itself as the insurer.

It is unlikely that the insurance scheme will achieve its intended objectives to support market access for and the lowering of borrowing costs of countries like Spain and Italy.

The enhanced EFSF plan does not address fundamental problems of its structure. The EFSF in severally guaranteed by Euro-Zone member states (up to a stated amount). Major guarantors are Germany 29.07%, France 21.83%, Italy 19.18%, Spain 12.75%, Netherlands 6.12% and Belgium 3.75%. Given that Italy and Spain as well as others may need to avail themselves of the assistance of the EFSF, the circular nature of the scheme remains an issue with weakened nations undertaking to rescue themselves and their banks.

What's Chinese for Begging Bowl…

A second option proposed is to enhance the EFSF using resources from private and public financial institutions and investors through Special Purpose Vehicles ("SPV"). Few details are available currently.

The idea seems to be to raise money from emerging nations with large foreign exchange reserves, such as China, or sovereign wealth funds. The EFSF would provide the equity in the SPV with the investors providing senior debt to increase the funds capacity. The scheme appears reminiscent of leveraged investment vehicles such as collateralised debt obligations ("CDOs") and Structured Investment Vehicles ("SIVs").

Support for the idea amongst potential investors is uncertain. French President Sarkozy solicited Chinese support by a direct appeal to Chinese President Hu Jintao. China's position remains guarded in the absence of additional information. The Chinese position to date has been that Europe must get its house in order first and then China will assist. The current European position is different – China must give money to Europe to get its house in order.

China has considerable "skin in this game". Europe is China's biggest trading partner. China has around $800-1,000 billion invested in Euros and European government bonds. Continuation of the European debt problems will have serious effects on China's economy and its investments.

The Chinese leadership also has to consider the internal political reaction to increased investment in Europe. Chinese foreign investments, including in foreign financial institutions in 2007 and 2008, have incurred losses. China's leaders face criticism from a large section of population for having invested Chinese savings poorly. China's officials will not want to be seen to risk even more capital on a potentially lost cause. It is not clear that the EU proposal has sufficient chances of success to encourage China increasing its exposure to Europe, especially as relatively wealthy European countries, like Germany and France, are unwilling to put up more money and are seeking to limit their exposure.

China also faces domestic problems – inflation (partly as a result of the weak currency policies of the developed nations) and attendant wage pressures that are reducing its competitiveness, serious bad debt problems in their banking system and pressure to accommodate the economic aspirations of an increasingly restive population. China's flexibility to act may be limited.

But China seems desperate to be seen as a "global power". Ego might seduce them into committing more money.

Contributions from China and other emerging countries will not resolve the problems. China's contribution, expected to be around Euro 70 billion, is small relative to the total requirements. As its foreign exchange reserves have risen in recent years, China has purchased substantial volumes of euro-denominated assets, both directly and via bonds issued by the EFSF, without preventing peripheral European bond yields rising. The need for this special scheme is also not clear as the Chinese can presumably invest directly if they wish to and see value in doing so.

Any Chinese involvement would probably require additional support from the Euro-zone countries, which may be opposed by Germany and other nations. China is inherently risk averse and will seek to negotiate additional political concessions, such as reducing pressure on the revaluation of the Renminbi, trade and currency sanctions and criticism on human rights issues. It is not clear whether these will be acceptable.

The negotiating stance of China is evident from its desire to denominate any funding in Renminbi. The EFSF have not ruled this out. The idea is dangerous, as Europe would incur currency risk, becoming exposed to an appreciating Renminbi, adding to its long list of problems.

The entire proposal smacks of desperation and belief in a simple, quick solution where no such option exists.

Time will determine whether the plan creates "confidence" or is just a "con". Promoters of the first loss guarantee scheme seem to believe that just providing it will solve the crisis and the commitment will not be drawn upon. When the EFSF was originally instituted, EU policymakers also thought it would never be needed to be activated.

Forgotten Anniversary: One Hundred Years of Legal Tender

Posted: 31 Oct 2011 05:00 PM PDT

Gold University

Why Gold Mining Shares Are Lagging The Gold Price

Posted: 31 Oct 2011 01:24 PM PDT

I've got a post on the corporate blog referencing two articles on the divergence of mining shares to the gold price - and the conclusion is it isn't all the ETF's fault.

Negative Lease Rates

Posted: 31 Oct 2011 01:22 PM PDT

Very good two page analysis of negative lease rates by Pollitt & Co's John Paul Koning, including central bank activity in this market. Quote:

What sort of "non-banks" might be supplying leased gold to the market-making banks at these extremely negative rates? As we already pointed out, central banks seem willing to lend only at positive rates, which leaves only one other source: the investing public. ...

The public effectively lends gold to banks when they deposit their physical gold in unallocated form at a bank. ... The negative interest rate received by the borrowing bank is probably in the form of client fees or bid-ask spreads. ...

By serving as the cheapest source of lent gold, the investing public has effectively priced central banks out of the gold lending market.


The Perth Mint does a bit of leasing and certainly no one is paying us to borrow metal. However, unallocated accounts at bullion banks do attract an account keeping fee, as Koning notes, and this is effectively paying the bank to use your metal.

Another factor as to why investors may be prepared to pay people to borrow their metal is that it can be cheaper than the costs of storing it (ie Allocated). I do also think the derived negative rates are a theoretical interbank no counterparty risk rate. Once you add in a premium for the counterparty risk the actual rate is positive.

Finally, there is a mathematical relationship/arbitrage between the futures markets and GOFO (and thus lease rates) and this could also have an impact (not something I've been following too closely).
at

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