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Wednesday, June 6, 2012

Gold World News Flash

Gold World News Flash

Gold Flag Flies At Half Mast

Posted: 05 Jun 2012 04:31 PM PDT

Graceland Update


Eurobomb Ticking Down, II

Posted: 05 Jun 2012 04:30 PM PDT

The Gold Speculator


MF Global Lawsuit Puts Pressure on JP Morgan: Bullish Signs for Silver As COMEX Re-hypothecation Exposed?

Posted: 05 Jun 2012 03:45 PM PDT

from Silver Vigilante:

Mainstream pundits are doing what they can to cover for JP Morgan & Chase. Over recent weeks, in an attempt to make JP Morgan appear as the good guy in the MF Global theft, reports that the bank has returned client funds, which would be certain to contribute to the banks collateral problems, have circulated the web. But, would JP Morgan & Chase, a bank that has historically displayed a well-developed instinct for self-preservation, make things right with anything other than negligible amounts of money? Probably not. And, in light of this, the bank could be facing further legal action against it. This legal action could be bring to light the banks unconscionable position in the silver market as it comes to light the bank inherited gold and silver from MF Global after customer accounts were settled in cash and closed out at, basically, the market price of MF Global and JPMorgan's choosing.

Read More @ Silver Vigilante

Gold Remains Bearish Below May High

Posted: 05 Jun 2012 03:43 PM PDT

courtesy of DailyFX.com June 05, 2012 02:34 PM Daily Bars Prepared by Jamie Saettele, CMT Gold went crazy at the end of last week but has run into resistance from former support. Notice that RSI has exceeded previous peaks yet the series of lower highs in price is still in place. This is exactly what you should be looking for in the EURUSD, AUDUSD, etc. as the correction unfolds. Additional resistance comes in at 1644. A pop into there may complete a flat correction from the 5/16 low. LEVELS: 1522.50 1545 1585 1630 1645 1671...


On Capital Markets, Confidence Tricks, And Criminals

Posted: 05 Jun 2012 03:36 PM PDT

The ascendency of behavioral economics over its "Classical" cousin is one of the more notable effects of the market turmoil of the last five years.  Simple constructs like "Every marginal dollar has utility" have given way to more nuanced explanations that incorporate how human beings really make decisions about the tradeoffs between money and deeply held emotions and beliefs. But even with this realization, academia still seems to have a choke hold on the studies that expand our knowledge of this new discipline.  Nic Colas, of ConvergEx, adds to the discipline's canon with some examples of common street scams around the world.  While the modern study of psychology and its interplay with economic choices is barely 100 years old, hustlers the world over have been perfecting their art for millennia.  So if you've ever "Accidently" jostled someone into dropping their glasses or a bag of food, you can take comfort that you're actually part of a long tradition of pragmatic field study in the topic of behavioral finance.

 

Nic Colas, ConvergEx: Taking It to the Streets

I have the good fortune to have been born and raised in Manhattan before it first became a largely gentrified and now extremely wealthy city.  Back in the 1960s and 70s, people with money fled to the suburbs rather than subject their families to garbage strikes, dangerous subways, and crime-ridden streets.  One advantage to this upbringing, however, was that you learned at an early age that "Street smarts" were a necessary part of a portfolio of urban-dwelling skills.  And the first commandment of this rulebook is: "No one has any business talking to you on the streets of Gotham."  If they addressed you in any way other than (perhaps) "Hey, that bus mirror is going to hit you, idiot" they probably wanted to hustle you.  And you learned that the guys with the soft-voiced anthem of "Smoke, smoke, smoke" were just peddling oregano they had lifted from the local pizzeria.  But we digress…

What I find gratifying about these childhood lessons is that they were excellent training for the now-voguish topic of behavioral finance.  The economic and financial meltdowns of the last five years – and the next five, most likely – have put many chinks in the armor of the "Classical" economics, with its claimed formulaic certainties and neatly drawn supply/demand graphs.  Now, the study of how humans really make financial decisions, with all their biases, faults and even biological limitations, is the coin of the academic realm.  Legions of grad students spend their time designing studies and experiments to show that humans make decisions that stray wildly from the "Optimal" solutions suggested by classical economics.

I would suggest, however, that you can witness a useful cross section of this up-and-coming academic discipline by just keeping an eye out for the myriad of scams run by con men and women on the streets of any major city.  Further, the lessons of these scams should ring the proverbial bell for those market participants who want to understand the sources of many common investment pitfalls.  The easiest way to expand on this thought is through several examples:

Example #1 – The Valuable Book.  A man walks into a bar during the middle of the afternoon, long after the lunch rush but before the after-work crowd appears.  He has a hardcover book with him, which he sets down at the bar.  He orders a drink from the barkeep, and tells him that he needs to hit the ATM next door.  He leaves the book behind to mark his spot.

 

A few minutes later, two well-dressed men enter the bar.  The notice the book and ask the bartender if it his.  He says it belongs to a fellow who is next door for a minute.  The two men look through the book, and grow increasingly agitated.  "This is a first edition of The Great Gatsby, with the original dust jacket!"   That's nice, says the bartender, how much is it worth?  The well-dressed men respond, "At least $20,000.  If they owner wants to sell it, let us know."  They hand the barkeep a card walk out.

 

The owner of the book walks back in.  The bartender nonchalantly asks about the book.  "Oh, it was my mother's.  She just passed away, poor dear."  The bartender professes a great admiration for Fitzgerald and says "Gee, I love old hardbacks – would you sell it?"  After professing a reluctance to sell something so near and dear to old Mama, the man gives it up for $500.

 

The book turns out to be a fifth printing with a photoshopped cover.  Real value: $1.75.  The same scam has been run with violins and even mutts from the pound, all anchored around the same storyline.

The lesson: humans use a variety of heuristics – mental shortcuts, essentially – to make judgments.  One of them is to rely on "Experts." In this particular example, the wealth of television shows that feature experts revealing that someone's old knickknack is really a hidden treasure also gives rise to a "Recency Effect" – recalling something you've seen in the near past and attributing more value to it.

Example #2 – The Broken Glasses.  You are walking down the street, talking on the phone or listening to music.  You think you are paying attention, but somehow you miss the person who is just removing their glasses.  They fall to the ground and appear to shatter.  You realize the wearer has a subtle but now-obvious mental challenge.  They begin to cry and say their Mom is going to kill them for being so careless with their glasses.  People around you begin to stare at you.  One or two even stop to try to comfort the obviously distressed owner of the now-broken glasses.  You feel like a jerk and hand over $100-200 to make up for your clumsiness and to show the bystanders that you aren't actually jerk.

 

As you might guess, the glasses were never broken and the bystanders were accomplices meant to make sure you felt as guilty as possible.  The whole scam takes 2-5 minutes from start to end and can be repeated – in different parts of town – 10/15 times in a day.  I have seen it done at least a dozen times – usually to obviously affluent tourists in midtown Manhattan – with glasses or a bag of food from a takeout deli. It works every time.  The only way out of this situation, which is the one I have personally used, is to claim that you have no money on you but that your cousin, who is a policeman at a nearby precinct, will lend you the cash.  The con artists don't especially want to walk into a police station and let the matter drop pretty quickly.

The lesson: social pressure is a powerful force in negotiations.  You aren't paying for the broken glasses.  You are paying society to not think you are a careless jerk. This is a Harvard Business School case study-worthy example of "Know what business you are REALLY in."  The scam artist knows you are buying social standing.

Example #3 - Put Your Money with My Money. You are approached on the street by a man wearing clerical garb with a seemingly sad looking fellow in tow.  The "Priest" explains that the other man has just been the victim of a robbery, and only has $5,000 in cash to his name.  Leary of accepting help from anyone – he is a native of a country where the police are corrupt – he approached the "Cleric" looking for help getting to a local bank.  They show you a paper back stuffed with $20s and $50s.  Would you help by walking it across the street to a quite visible bank branch while the priest tries to hail a police car and convince the other man to explain what happened?  Oh, and would you mind stuffing a few dollars into the bag as well, just to show that you are affluent enough to be trusted?  When you drop your $100 into the sac, the switch occurs.  You end up at the bank with a bag of paper, while the con men walk away with the real one.

The lesson: The term "Confidence Game" stems from the fact that the criminal appears to give you their confidence.  Not that you give over yours.  This act essentially makes you, the mark, pliable and open to suggestion.  This is, I think, one of the most underexplored areas of behavioral finance.   There are plenty of studies about the importance of trust, and there is even a "Trust Game" variant of the "Ultimatum Game" that is the bedrock of the discipline.  See more here:  http://wiki.dickinson.edu/index.php/Behavioral_Economics_and_Game_Theory).  But the power to manipulate human action by "Giving" someone your confidence in the hopes of eliciting a response that is patently bad for them may fall beyond the walls of proper science.

I assume that the comparisons to recent events in the capital markets are fairly obvious, whether they be failed IPOs or the strategies used by weaker sovereign nations to negotiate with stronger ones.  The point here is not to call out anyone as inherent 'Criminal.'  There are plenty of laws – and diligent regulators - surrounding the capital markets, after all.  Rather, the examples here are simply a lens that allows us to examine the nuances of human behavior with greater understanding.  As the old saying goes,'The proper study of mankind is man.'  Even when it is a con man.  And in the case of behavioral economics, perhaps especially so. 


Have we just seen the SILVER bottom?

Posted: 05 Jun 2012 03:03 PM PDT

from silverguru:

Does Gold?s ?purchasing-power-protection? Price History Suggest Gold is Over-priced?

Posted: 05 Jun 2012 02:00 PM PDT

The spectacular rally in the gold price over recent years [has] many observers asking if the precious metal has not moved ahead of its fundamentals…[and if it] has not entered speculative bubble territory.*[To address that concern] I have*calculated*the purchasing-power-protection price of gold for the 43 years from 1970 to 2012 and compared it to the average market price for gold in every year [along with some background of events unfolding over each decade during that time period which should prove] useful as a framework for how to think about the [current]*dollar-price of gold.*[I think you will find it most enlightening. Take a look.] Words: 3973 So says Detlev Schlichter ([url]http://papermoneycollapse.com[/url]) in edited excerpts from his original article*. [INDENT]Lorimer Wilson, editor of [B][COLOR=#0000ff]www.munKNEE.com (Your Key to Making Money!), has edited the article below for length and clarity – see Editor's Note at the bottom of the page. This, and the precedi...


In a Gold Standard, How Are Interest Rates Set?

Posted: 05 Jun 2012 01:52 PM PDT

The marginal saver sets the floor under the rate of interest. It cannot fall below his preference or else he will vote with his gold. His preference has real teeth (unlike today). Read More...



Gold Price Closed $1,615.20 Next Move is Up Breaking Through $1,630

Posted: 05 Jun 2012 01:13 PM PDT

Gold Price Close Today : 1615.20
Change : 3.00 or 0.19%

Silver Price Close Today : 2839.0
Change : 39.8 or 1.42%

Gold Silver Ratio Today : 56.893
Change : -0.702 or -1.22%

Silver Gold Ratio Today : 0.01758
Change : 0.000214 or 1.23%

Platinum Price Close Today : 1439.00
Change : 13.20 or 0.93%

Palladium Price Close Today : 618.05
Change : 5.80 or 0.95%

S&P 500 : 1,285.50
Change : 7.32 or 0.57%

Dow In GOLD$ : $155.22
Change : $ 0.07 or 0.04%

Dow in GOLD oz : 7.509
Change : 0.003 or 0.04%

Dow in SILVER oz : 427.19
Change : -5.13 or -1.19%

Dow Industrial : 12,127.95
Change : 26.48 or 0.22%

US Dollar Index : 82.80
Change : 0.408 or 0.50%

The GOLD PRICE has flatlined for two days, holding always above $1,610. Look closer at the flat-line and you'll see a series of corrective waves and a long narrow triangle. Range narrowed today to $1,622 - $1,612.35. Next move is UP, breaking through $1,620 - $1,630, and likely at a single bound. You will know I am wrong and swimming up to my eyebrows in hogwash if gold closes below $1,608.

Today GOLD PRICE shut down Comex at $1,615.20, up a small but respectable $3.00.

Once again for perspective's sake, gold is hugging up to its 50 dma ($1,623.98). Once it punctures that paper ceiling at $1,630, 'twill run brave and quick for $1,682.

The SILVER PRICE chart mirrors gold, mostly. Made a low yesterday at 2799c, and a mite higher low today at 2808c. Still, it pushed against that upper boundary at 2860 (high came at 2857). Once it pierces 2860c, it will rapidly reach escape velocity. Rose today 39.8 cents to 2839c.

Spain complained today that markets are slamming the credit door in its face and Europe needs to bail out its banks. Europe received that suggestion with something less than gay enthusiasm. Half Spain's workers under 25 are unemployed. Once they explode, they will be hard to force Spain back into Bank Bail-out Mode.

Shocked! I was shocked when I looked at the chart of the Dow in Gold Dollars today. Not only did it gap down on 17 May and 18 May, but again Friday, leaving a massive gap behind. Fell from G$163.72 (7.92 oz) to G$158.14 (7.650 oz), then tumbled again Monday and today to close today at G$155.22 (7.509 oz). Dow in Silver has seen much the same trouncing, falling from 466.54 oz on 16 May to 427.19 today.

I can't stand people who say "I told you so," and am thus prevented from reminding y'all that the Dow in Gold Dollars charts had been warning that stocks were about to crash against gold.

The pleas for help coming from Spain kidney punched the euro today. It fell 0.34% to $1.2454. Just for sight-seeing's sake, y'all might jot down that the Euro's last low (Friday) was at $1.2288. If it dares to breach that mark, 'twill capsize like a scuttled garbage scow and won't surface again until some depth below $1.2000.

The yen last week gapped up, traded higher, and left what looks suspiciously like an island reversal. Another gap down, isolating that island, forewarns that the yen will again plumb the depths. Closed at 126.98 c (Y78.75/US$1), down 0.52%.

Picking one of these scrofulous fiat currencies over another is like visiting a sleazy all-night dance hall and trying to pick which partner will leave you with the fewest contagious diseases. US dollar index today rose 40.8 basis points (0.52%) to end at 82.798. That's pretty, but doesn't say anything of substance. Dollar must better its Friday high (83.54) to turn upward, and close below 81.78 (January high) to tell us something unambiguous.

STOCKS today were pitiful, like watching a hopelessly unfunny comedian telling a joke. It's embarrassing. Charts for today look like washrags blowing on a clothes line, no real direction but the Dow did manage to steal 26.48 points (0.22%) somewhere for a 12,127.95 close. S&P500 gained more proportionally, 7.32 points (0.57%) to cap the day at 1,285.50.

Put this into perspective: S&P500 closed today plumb on its 200 day moving average (1,285.68), after falling through it on Friday. Dow is taking on even more water, way below its 200 DMA at $12,263.45. As I explained Friday, both have broken down thru the neckline of Head and Shoulders formations, both have punched through support at the November highs, and both look as sick and green as a ten-year old boy smoking cheap cigars. Y'all had best protect yourselves by selling stocks and putting the proceeds into silver and gold.

"What! Moneychanger, you mean I should sell even the stocks in my IRA? Even though they're below water?" Naww, I don't mean that, I think you should hold on to them until they recover, in, oh, say, 2035. OF COURSE I mean that, I mean sell those stocks so fast it'll make your broker's head swim and his secretary's, too.

On that black day 5 June 1933 Franklin Delano Roosevelt took the United States off the gold standard. Many warned that it would be the end of American civilization, but they were wrong. That already happened when silver was demonetized in 1873 and the South was invaded in 1861.

HOUSEKEEPING:

Tomorrow, Thursday, and Friday I will be travelling and so will not be publishing any commentaries. God willing, I will return on Monday.

My dear wife Susan ascertained for certain today that she will very soon have to undergo surgery to replace her [big] heart's mitral valve. She had a mitral valve repair nearly 4 years ago. She's not much worried about it, but I'll be holding my breath for six months after the surgery. Would y'all do me the gracious favor of praying for a successful surgery for Susan and a speedy recovery? And pray that God would give me grace not to lose my mind entirely.

Argentum et aurum comparenda sunt -- -- Gold and silver must be bought.

- Franklin Sanders, The Moneychanger
The-MoneyChanger.com
1-888-218-9226
10:00am-5:00pm CST, Monday-Friday

© 2012, The Moneychanger. May not be republished in any form, including electronically, without our express permission.

To avoid confusion, please remember that the comments above have a very short time horizon. Always invest with the primary trend. Gold's primary trend is up, targeting at least $3,130.00; silver's primary is up targeting 16:1 gold/silver ratio or $195.66; stocks' primary trend is down, targeting Dow under 2,900 and worth only one ounce of gold; US$ or US$-denominated assets, primary trend down; real estate bubble has burst, primary trend down.

WARNING AND DISCLAIMER. Be advised and warned:

Do NOT use these commentaries to trade futures contracts. I don't intend them for that or write them with that short term trading outlook. I write them for long-term investors in physical metals. Take them as entertainment, but not as a timing service for futures.

NOR do I recommend investing in gold or silver Exchange Trade Funds (ETFs). Those are NOT physical metal and I fear one day one or another may go up in smoke. Unless you can breathe smoke, stay away. Call me paranoid, but the surviving rabbit is wary of traps.

NOR do I recommend trading futures options or other leveraged paper gold and silver products. These are not for the inexperienced.

NOR do I recommend buying gold and silver on margin or with debt.

What DO I recommend? Physical gold and silver coins and bars in your own hands.

One final warning: NEVER insert a 747 Jumbo Jet up your nose. No, I don't.

Spain asks for bailout help/Iran imports huge tonnage of gold

Posted: 05 Jun 2012 12:40 PM PDT

by Harvey Organ, HarveyOrgan.Blogspot.ca:

Good evening Ladies and Gentlemen:

Gold closed down today up by $3.30 to $1615230. Silver on the other hand rose by a bigger margin 40 cents to $28.39. The big news today came from Spain which have asked for a bailout. The Pan European PMI again disappointed investors as Europe seems to be heading into a deep recession. German factory orders were dismal falling to minus 1.9 from minus 1.2. Bridgewater reports that the Italian banks LTRO funds have now run dry and thus it will be impossible for these banks to purchase sovereign Italian bonds. The big news on the physical front was the huge importing of physical gold into Iran. Thus in two days, we have witnessed massive importing of gold into China and Iran. We will cover all of these stories but first let us now head over to the comex and assess trading today.

Read More @ HarveyOrgan.Blogspot.ca

Here Comes The Hilsenrath Leak: "Fed Considers More Action"

Posted: 05 Jun 2012 11:29 AM PDT

Three months ago, just when things looked like they were about to turn south, the Fed's trusty mouthpiece, Jon Hilsenrath, made it clear that the market can stop falling as the Fed was "considering" sterilized QE, or more Twist, something we explained later would be impossible in the current format as the Fed would run out of sub 3 Year paper by the end of August. It did however halt the drop in stocks for a month or two until Europe became permanently unfixed. Hilsenrath then cralwed back into his WSJ cubicle. Until today: two weeks before the all critical June 20 FOMC meeting, the faithful Fed scribe has been charged with his latest leak commission: "Fed Considers More Action Amid New Recovery Doubts." And as it has been leaked (now that people have actually done the appropriate math), so it shall be.

From the WSJ:

Disappointing U.S. economic data, new strains in financial markets and deepening worries about Europe's fiscal crisis have prompted a shift at the Federal Reserve, putting back on the table the possibility of action to spur the recovery.

 

Such action seemed highly unlikely at the central bank's April meeting, when forecasts for growth and employment were brightening. At their policy meeting this month, Fed officials will weigh whether the U.S. economic outlook is deteriorating enough to justify new measures to boost growth, according to interviews and Fed speeches.

 

The Fed's next meeting, June 19 and 20, could be too soon for conclusive decisions. Fed policy makers have many unanswered questions and have had trouble forming a consensus in the past. Top Fed officials have said that they would support new measures if they became convinced the U.S. wasn't making progress on bringing down unemployment. Recent disappointing employment reports have raised this possibility, but the data might be a temporary blip. Moreover, the Fed's options for more easing are sure to stir internal resistance at the central bank if they are considered.

 

Their options include doing nothing and continuing to assess the economic outlook—or more strongly signaling a willingness to act later if the outlook more clearly worsens. Fed policy makers could take a small precautionary measure, like extending for a short period its "Operation Twist" program—in which the Fed is selling short-term securities and using the proceeds to buy long-term securities. Or, policy makers could take bolder action such as launching another large round of bond purchases if they become convinced of a significant slowdown.

Another question: does Twist end in 25 days, or will the market have a violent revulsion to a world without constant central-planner artificial "flow" creation (because as first noted here months ago, only Nobel prize-winning economists still think "stock" is even remotely relevant).

Mr. Bernanke must decide whether to let the program end. The Fed has enough short-term securities left to extend it for a few months [ZH: good to see that Hilsenrath is finally doing the math that refuted his own articles 3 months ago] as a precaution while it watches how the economy develops. If officials become more convinced about a growth slowdown they could expand the Twist program or launch another round of securities purchases—an approach known as quantitative easing—to try to boost growth.

But the most important question: with the 10 Year already at the idiotic 1.50% level, does anyone seriously believe that more risk taking will be provoked by pushing yields to 1.40%, or 1.30%? Or how about 0.00%? In fact, why doesn't Bernanke just pull a Bank of Japan, and stop beating around the bush, instead buying up all the SPY, and REITs he can find. One ETF he doesn't have to buy will be GLD: that one will go up on its own. Very, very fast.

Finally, as Zero Hedge explained patiently last night, while the economists, pundits, and sellsiders all have their self-serving theories, the bond market, at least for now, has spoken, and sees not more LSAP but a simple expansion of Twist from 0-3 to 0-4 year maturity sales: an outcome which to the market will be the worst of all worlds.


Gold: Historical Perspective

Posted: 05 Jun 2012 11:25 AM PDT

Gold Historical Perspective...


EU treaty talk calms markets

Posted: 05 Jun 2012 11:20 AM PDT

from, Gold Money:

Precious metals had a quiet day yesterday, with gold and silver both consolidating following Friday's rally. Gold continues to face resistance at $1,625, while $28.50 remains a point of selling pressure for silver – as has been the case now for the best part of the last month.

James Turk sums up Friday's gold and silver strength in a new King World News interview: "even though stock markets around the world the past few weeks have generally been in a nosedive, gold, silver and the mining shares are climbing higher. Independent strength like this is normally very bullish, and it bodes well for the precious metals and mining shares in the weeks and months ahead. It also suggests that, like last year, this summer is going to be another good one for the precious metals."

Read More @ GoldMoney.com

The CBO Will Need A Bigger Chart To Forecast Exponentially-Rising US Debt

Posted: 05 Jun 2012 10:33 AM PDT

Courtesy of previous Zero Hedge disclosures, namely that the CBO has been in the past both perpetually and grossly overoptimstic (their 2001 forecast of 2011 public debt was negative $2.4 trillion; instead the real number was positive $10.4 trillion, a delta of only $12.8 trillion) as well as explicitly biased by political and financial interests as exposed by whistleblowers, are two things most of our readers are well aware of. What they however may not know, is that when it comes to the most recent forecast of US public debt as released hours ago, the CBO has officially run out of charting space. As can be seen on the graphc below, sometime in 2042 the CBO will need a bigger chart to represent US public debt as per the Extended Alternative Fiscal Scenario, which the CBO itself admits "
is more representative of the fiscal policies that are now (or have recently been) in effect than is the extended baseline scenario." And it is to this off-the-chart line that Keynesian lunatics want to add MORE debt? Actually why not, it is not as if the US will ever repay any of these exponentially-rising obligations.

Here is how the CBO presents the only somewhat realistic outlook:

The Extended Alternative Fiscal Scenario

 

The budget outlook is much bleaker under the extended alternative fiscal scenario because of the changes in law that are assumed to take place. The changes under this scenario would result in much lower revenues and higher outlays than would occur under the extended baseline scenario.

 

In particular:

  • Almost all expiring tax provisions are assumed to be extended through 2022. Specifically, for this scenario, CBO assumed that the cuts in individual income taxes enacted since 2001 and most recently extended in 2010, which are now scheduled to expire at the end of calendar year 2012, would be extended; relief from the AMT for many taxpayers, which expired at the end of 2011, would be extended; the 2012 parameters of the estate tax (adjusted for inflation) would continue to apply, preventing increases in rates and in the share of assets that is taxable; and all other expiring tax provisions (with the exception of the current reduction in the payroll tax rate for Social Security) would be extended.
  • After 2022, revenues under this scenario are assumed to remain at their 2022 level of 18.5 percent of GDP, just above the average of the past 40 years.
  • This scenario also incorporates assumptions that through 2022, lawmakers will act to prevent Medicare's payment rates for physicians from declining; that after 2022, lawmakers will not allow various restraints on the growth of Medicare costs and health insurance subsidies to exert their full effect; that the automatic reductions in spending required by the Budget Control Act will not occur (although the original caps on discretionary appropriations in that law are assumed to remain in place); and that, as a percentage of GDP, federal spending for activities other than Social Security, the major health care programs, and interest payments will return to its average level during the past two decades (rather  than fall significantly below that level, as it does under the extended baseline scenario).

Under those policies, federal debt would grow rapidly from its already high level, exceeding 90 percent of GDP in 2022. After that, the growing imbalance between revenues and spending, combined with spiraling interest payments, would swiftly push debt to higher and higher levels. Debt as a share of GDP would exceed its historical peak of 109 percent by 2026, and it would approach 200 percent in 2037.

 

Many budget analysts believe that the extended alternative fiscal scenario is more representative of the fiscal policies that are now (or have recently been) in effect than is the extended baseline scenario. The explosive path of federal debt under the alternative scenario underscores the need for large and timely policy changes to put the federal government on a sustainable fiscal course.

Luckily, even the CBO is now hedging its bets:

Catastrophic Events or Major Wars

 

Natural and manmade disasters occur fairly often, and even though they may have significant short-term effects on the national economy or long-term effects on certain regions or economic sectors, they rarely have a lasting impact on the national economy. However, an increased frequency of disasters or the occurrence of a catastrophic event could affect budgetary outcomes by reducing economic growth over a number of years or requiring massive additional federal spending, or both. For example, the country could experience more-frequent severe floods, hurricanes, tornadoes, and fires—as some models of climate change predict—or a single massive earthquake, a nuclear meltdown that rendered a large area of the country uninhabitable, or an asteroid strike. Other possibilities include an epidemic (whether on the scale of the 1918 pandemic flu, which killed roughly one out of every 150 people in the United States, or on the scale of the current AIDS epidemic in parts of Africa), a series of major terrorist attacks, a large war, or a number of smaller but sustained wars. Because estimates of future risk are generally based on experience and catastrophic events are extremely rare, estimating the probability of their future occurrence is very difficult.

Let's see here: "It was all World War III's fault".... wink wink.

Source: CBO

The Bottoms Debate

Posted: 05 Jun 2012 10:24 AM PDT

- With last Friday's historic largest single daily gain in gold on a COMEX close basis (up almost 4%), analysts are calling this the bottom for PMs. It's refreshing therefore to hear a contrarian (not bear) view on this. David Bond, editor of The Wallace Street Journal at silverminers.com, argues that We may well see $18 silver [...]


This posting includes an audio/video/photo media file: Download Now

From Negative 5Y5Y To $2200 Gold?

Posted: 05 Jun 2012 09:43 AM PDT

For the first time on record (based on Bloomberg's data) 5-year / 5-year forward inflation expectations turned negative today. This kind of deflationary impulse has occurred twice in recent years and each time has been accompanied by dramatic Federal Reserve easing. The anticipation of the move by the Fed has caused Gold each time to surge higher on yet more expectations of the fiat-fiasco unwinding. Given the 5Y5Y inflation print currently, we would expect action from the Fed and one could argue that this would cause the price of Gold to rise to $2200 per ounce as the deleveraging continues.

The red arrows show the deflationary impulse (5Y5Y inflation is inverted) and the orange curve arrow shows the reaction function post Fed reaction to the blue arrow levels of the deflationary impulse.

 

Chart: Bloomberg

Gold Daily and Silver Weekly Charts - Stayin' Alive

Posted: 05 Jun 2012 09:33 AM PDT


This posting includes an audio/video/photo media file: Download Now

Gold: Contagion

Posted: 05 Jun 2012 09:19 AM PDT

Despite the possible breakup of the EU, there's a certain degree of complacency and denial over the political gridlock and lack of leadership on both sides of the ocean. The respite in the euro-crisis lasted only a ... Read More...



The Silver Squeeze: Bank Runs Versus EU Short Covering?

Posted: 05 Jun 2012 09:16 AM PDT

According to Google Trends, the number of Internet searches for the phrase "bank run" has reached an all-time high, demonstrating just how concerned many intelligent people are becoming over the stability of the global banking system. Amid these troubling times for financial institutions, silver is continuing to shine as the "poor man's gold" that will provide a safe haven investment asset if paper currencies lose even more of their already tenuous credibility. Greek Bank Run Fears Grow as EU Exit Appears More Likely Reports surfaced recently that worries about an imminent Greek exit from the Eurozone have sparked the withdrawal of almost a billion Euros in cash over the past few weeks from Greek banks. Over the last couple of years, withdrawals of cash on deposit from Greek banks have averaged between 2 and 3 billion Euros per month. Nevertheless, January's withdrawals exceeded 5 billion Euros. Due to this growing loss of confidence in the banking system, Greek off...


Silver: A Tier 1 Asset for All

Posted: 05 Jun 2012 09:15 AM PDT

In recent years, precious metals, most notably silver and gold, have played an unusual dual role as both monetary and non-monetary commodities. That may be in the process of changing for major financial institutions to favor holding metals as collateral as the Basel Committee ponders allowing banks to use gold as a Tier 1 capital asset. Despite its well established and richly deserved safe haven status, gold is currently considered a Tier 3 asset. Ironically, this places the yellow metal lower on the asset totem pole than un-backed government bonds, which currently have low or even negative yields on an inflation-adjusted basis. Furthermore, gold is generally misunderstood and ignored, while silver is largely viewed as a commodity among investors and central bankers. In fact, Fed Chairman Ben Bernanke, in response to the question of why central banks hold gold, simply answered "Tradition". Precious Metals Rule Exter's Asset Class Pyramid This perspective contrasts s...


Guest Post: The Pernicious Dynamics Of Debt, Deleveraging, And Deflation

Posted: 05 Jun 2012 09:09 AM PDT

Submitted by ChrisMartenson.com contributing editor Charles High Smith

The Pernicious Dynamics Of Debt, Deleveraging, and Deflation

At this moment, the news media is constantly clamoring about the "Three Ds" that are buffeting the markets: debt, deleveraging, and deflation. We intuitively sense that they're linked -- but how, exactly?

Understanding this linking is critical; as debt has fueled the global expansion, it will also dominate its contraction.

Debt and Deleveraging

To illustrate the forces of debt and deleveraging, let's consider a home mortgage.

Suppose a buyer of a $100,000 home qualifies for a mortgage that requires only a 3% down payment in cash. The buyer ponies up $3,000 in cash and obtains a $97,000 mortgage. The cash collateral is thus leveraged about 33-to-1: Each $1 in cash has been leveraged into $33 of borrowed money.

Let's say the owner wants to refinance at a later date, and to qualify for the new loan he must have 20% collateral for the new loan. (This is a simplified scenario; we will consider more complex examples later.) If the house value remains around $100,000, then the owner must boost collateral by paying down the mortgage $17,000. This boosts collateral to $20,000 (20%) while reducing the mortgage to $80,000.

The leverage has been slashed from 33-to-1 to 4-to-1: now each $1 of collateral leverages $4 of borrowed money. This is deleveraging.

Another common example is a margin stock-trading account. J.Q. Speculator can leverage his cash collateral 2-to-1 via margin: If he has $100,000 cash in his account, he can buy $200,000 of stocks. If (heaven forbid) the stocks he purchased decline in value by $50,000, then his collateral has shrunk to $50,000. Since margin accounts cannot exceed a 2-to-1 leverage, he must either sell enough of his portfolio to return the leverage to 2-to-1 (that is, $50,000 in cash value and $100,000 in stocks), or he must deposit another $25,000 in cash (that is, $75,000 in cash/cash value) to collateralize the $150,000 in stocks he owns.

When credit is cheap and abundant, prices of assets tend to rise in self-reinforcing bubbles. If J.Q. Speculator's portfolio of $200,000 rises by 50% to $300,000, then his collateral increases to $200,000. This expansion of collateral enables him to buy another $100,000 of stocks, as $200,000 in cash value can leverage $400,000 in stocks.

The same mechanism enabled home owners to leverage up their rising equity to buy additional homes.

When the debt cycle turns and asset bubbles pop, collateral declines and lenders are stuck with losses as over-extended borrowers hand the keys to underwater houses back to the lenders. These losses are subtracted right off the bank's own equity (cash reserves), which are typically a modest 4% of loans outstanding. That is, the bank leveraged each $1 of cash collateral into $25 of mortgages.

If mortgage losses eat away that 4% of cash, then the bank is technically insolvent. As a result, banks become wary of extending risky loans in eras of credit contraction: Their fiscal survival focuses their attention on dumping liabilities and building cash reserves (collateral). The credit spigot is turned off, and all those down the line who were counting on easy abundant credit to bankroll their leverage are left high and dry. As credit contracts, demand for assets and commodities contract, and a wave of selling begins as cash is desperately in demand.

Leverage and Derivatives

In an extreme example, if a bank has $1 million in outstanding loans and has suffered losses such that its cash has declined to $1, it is leveraged 1-to-1-million. It must liquidate enough liabilities and concurrently raise enough cash to restore its 1-to-25 leverage (i.e., 4% of the outstanding loans are in cash reserves). 

The problem is that liquidating liabilities requires the bank to absorb any losses generated by the sale/write-down of loans. If the bank sells a house for $50,000 that carried a $100,000 mortgage, the $50,000 loss is subtracted from its cash reserve.

The bank has a difficult mandate: Get rid of as many liabilities as possible without incurring losses that will bankrupt the bank. The alternative strategy is to sell unleveraged assets to raise cash or slowly build cash by earning interest.

To restore the 1-to-25 leverage of its $1 million in loans, the bank needs to raise at least $40,000 in cash. It has two basic ways to reach this goal: Either keep all of the impaired loans it owns on the books at full value—in other words, ignore the declining market value of the homes underlying the mortgages—and slowly accumulate cash from deposits and interest, or sell non-leveraged assets such as gold, bonds, or property it owns free and clear to raise the $40,000. (Again, this is a simplified example.)

If the bank's management is dominated by wise-guy "operators," then it might pursue another strategy, selling derivatives against assets it doesn't own. The derivatives are sold for cash and hedged against losses by buying derivatives covering the other side of the trade from another institution. The difference between the revenues from selling the derivative contract and the cost of the hedging contract is pure profit that bolsters the bank's collateral.

If the derivative contract expires or executes as planned, the cash earned from the sale of the derivatives is pure gravy.

If the derivative contracts trigger losses, then the bank turns to the other institution that it bought the hedge from to make good the losses. If that institution fails to make good, or the losses of the bank's derivatives are not fully covered by the hedge, then the bank must raise enough cash to pay the buyer of the derivative.

The need to raise cash by selling assets leads back to the original problem. Liquidating liabilities, such as mortgages, by selling the underlying assets (houses) forces the bank to book losses it is ill-prepared to absorb.

Deleveraging and Deflation

This example illustrates the pernicious dynamics of debt and deleveraging. The bank cannot declare the true value of its assets (houses that have fallen in value), nor can it sell the houses and take the resulting huge losses, as its cash reserve (collateral) is already at dangerously high levels of leverage (or even negative -- i.e., the bank has no real collateral at all and is insolvent).

Ascertaining the true collateral of any household or enterprise is straightforward. Sell all of the assets on the open market and pay off all of the liabilities. The cash remaining is the collateral.

In highly-leveraged households and enterprises, the impaired assets are held, as the sale of the underlying asset would force the entity to declare its insolvency. So homeowners who are "underwater," i.e., their mortgage exceeds the value of their home, continue paying the mortgage because selling the house would require them to come up with the difference between the value and the loan in cash. The alternative is to declare bankruptcy and give up any hope of leveraging future income into new loans.

The same basic mechanism is at work in companies and banks.

Ironically, perhaps, the process of raising cash by selling assets inevitably places a premium on unleveraged assets such as precious metals, collectibles, Grandma's house that is now owned free-and-clear by her heirs, etc. Everything that has been leveraged is held, lest its true value be disclosed by the market, while everything that has retained some measure of its cash value is unloaded to raise cash—either to pay the interest on debt or to recollateralize the entity's shaky finances.

The key point here is that the outstanding debts far exceed the cash value of the underlying asset; selling everything including the kitchen sink doesn't even come close to paying off the entire debt. Selling everything that isn't nailed down simply maintains the much-valued illusion of solvency and puts the reckoning off for another day. The hope of course is that assets will reinflate to their old bubble valuations, but the forces of deleveraging outlined above power relentless selling that eventually overwhelms supply.

The market "discovers" price as demand transparently interacts with supply. When supply exceeds demand, prices fall. And since price is set at the margin, even modest imbalances of supply and demand can lead to cascading declines in prices.

For example, the value of a neighborhood of 100 houses is not set by the sale of all 100 homes; it is set by the last few sales. Thus the last five sales determine the value of the other 95 homes.

Deflation is simple to define: Cash buys more real goods and services than it did last year. Cash is what's in demand, and assets that depend on credit are not in demand. Rather, they are being sold to raise cash. It's simple supply and demand: Cash rises in value as it's in demand, and assets decline as the demand is lower than the supply.

In Part II: The Deleveraging Pain Is Just Beginning, we look at how much longer the U.S. might need to recover from its long deleveraging hangover from multiple global asset bubbles, and why building cash (and cash equivalents) at this time is especially prudent.

Click here to access Part II of this report (free executive summary; paid enrollment required for full access). 

The Gold Problem Revisited

Posted: 05 Jun 2012 08:35 AM PDT

Antal E. Fekete The article The Gold Problem of Ludwig von Mises published 47 years ago in 1965, just six years before he died (the gold standard died with him in the same year) has some breath-taking thoughts, for example, "the gold standard alone can make the determination of money's purchasing power independent of the ambitions and machinations of governments, of dictators, of political parties, and of pressure groups", or: "the gold standard did not fail: governments deliberately sabotaged it, and still go on sabotaging it." But for all our admiration we would be amiss if we did not point out certain errors in his article. These are all errors of omission, and correcting them would hopefully make the Mises article even more helpful to the discriminating reader. Mises fails to answer his own question why gold is the best choice to serve as money. Indeed, why not another commodity, or a basket of commodities? The reason is that themarginal utility of gold is un...


Low Volume Melt-Ups Resume

Posted: 05 Jun 2012 08:31 AM PDT

Cash and Futures S&P 500 managed to close back above the 200DMA after a dismally low-volume melt-up supported by a reversion to fair-value in HYG but diverging from most other asset classes. Having pulled away from Treasuries, Gold, and the USD, stocks (led by financials) roamed higher on lower and lower comparable volumes to manage their best gain in a week with a generally low average trade size overall. Credit markets were quiet and reluctant to follow stocks but were reracked up (though IG underperformed HY's exuberance). However, the pop in JNK and HYG dragged them from the quite notably cheap levels they were at up to their intrinsic value and they anchored there (so not really a confirming strong rally). HY and HYG are in line also. Oil and Copper dropped early and then leaked back higher for the rest of the day as Silver and Gold end close to unch for the week - with the USD also close to unch as EURUSD round-tripped its gains from yesterday. Treasuries lagged the move in stocks but leaked higher in yield also in the afternoon - except notably 5Y which outperformed (reminding us of the 7Y outperformance aberration yesterday) as we suspect end-of-Twist is being priced in. After the day-session close, ES limped back towards VWAP on heavier volume and average trade size but didn't make it as we note VIX fell back below 25% (down 1.25 vols today) ending the day a little rich still to equity/credit fair-value. Lots of rumor-driven knee-jerks today but once the momentum had set in for stocks, we limped along to crack that 200DMA giving hope before Draghi's reality check tomorrow.

 

HYG (more than VXX and TLT) were very supportive of SPY today (as is clear in the upper right model) - but reverted back rapidly (to VWAP on heavy volume) from their now rich-to-intrinsics and rich-to-SPY level right at the close. Broad risk assets were not as exuberantly hopeful as stocks as the data hit this morning (upper right chart) but were dragged along as momentum lifted all boats in the afternoon. Correlations came and went (lower right chart) - most notably came back to relatively high levels by the close which portends a much more systemic move in markets (one way or the other). VIX (lower left) remains a little rich to equity/credit model's reality but round-tripped from some early weakness in risk assets by the close...

Comparatively - gold, treasuries, and the USD did little relative to the liftathon in stocks...

HYG certainly wanted to get back up to its fair-value today, extended the momentum beyond it in the late day, but snapped back to reality into the close. IG underperformed as maybe some pressure from cheap overlays remained but volumes were light so we suspect this was more reracks in HY than very active trading...

ES managed to regain the 200DMA but we note that (just as with JPM and MS) the closing VWAP level from Friday was very important...Look at where ES stalled today...

and for JPM, that closing VWAP seemed important too (same with MS, C, GS, XLF, and SPY)

and GS (just to show the seeming importance of the magical algos that levitate stocks wherever you wish them to go)...

Charts: Bloomberg and Capital Context

A Slowdown... and a Crackdown

Posted: 05 Jun 2012 08:26 AM PDT

June 5, 2012 [LIST] [*]Seriously? China bans Web searches for "Shanghai Composite Index" [*]Marc Faber, Frank Holmes, Chris Mayer all weigh in on the China slump... an update on the only three indicators that matter... and the best way to invest around the slowdown [*]No Westerners allowed: China and Russia plot their next moves to escape the U.S. dollar's clutches [*]An eye-popping gold chart... a reader's cautionary tale about capital controls... the "clash of generations" revisited... and more! [/LIST] For the moment, China's government has banned the search term "Shanghai Composite Index" from the country's popular microblogging sites. A search on Weibo, China's version of Twitter, turns up this message: "According to the relevant laws, regulations and policies, the results for this search term cannot be displayed." Yesterday was the anniversary of the Tiananmen Square crackdown on June 4, 1989. The Shanghai Composite fell precisely 64.89 points. Get it? 6......


Niogold Mining Corp

Posted: 05 Jun 2012 08:23 AM PDT

Richard (Rick) Mills Ahead of the Herd As a general rule, the most successful man in life is the man who has the best information McWatters Mines acquired two major assets in the Val-d’Or/Malartic area from Placer Dome - the Sigma Mine and the Kiena Mine Complex. In 2004 McWatters went bankrupt - all their land became open for acquisition. Osisko Mining purchased the Canadian Malartic Project, Wesdome Gold Mines purchased the Kiena Mine Complex, and NioGold Mining Corp. TSX.V – NOX purchased (for $10,000 and right in the heart of the Val-d’Or/Malartic mining camp), three large claim blocks that were relatively underexplored compared to the rest of the area. Then, in early 2006, NioGold signed a deal with Aur Resources to acquire the other 50% interest in Marban it did not already own, and 100% interest in two other properties (First Canadian and Norlartic). Between these three properties (which include three past producing m...


Gold Seeker Closing Report: Gold and Silver End Mixed

Posted: 05 Jun 2012 08:18 AM PDT

Gold fell to $1612.72 in Asia before it rose to see a slight gain at $1622.36 at about 8:40AM EST and then fell to a new session low of $1612.65 in the next hour and a half of trade, but it then bounced back higher midday and ended with a loss of just 0.12%. Silver slipped to $28.101 in Asia, but it then rose to as high as $28.57 in New York and ended with a gain of 1.1%.


Caesar - Gold To Be Viewed As Risk Free Asset In This Chaos

Posted: 05 Jun 2012 08:17 AM PDT

With investors wondering where global markets are headed next, today King World News interviewed 25 year veteran Caesar Bryan.  Gabelli & Company has over $31 billion under management and Caesar Bryan has managed the gold fund since its inception in 1994.  Caesar told KWN that he expects central banks to be much more active going forward. Here is what Ceasar had to say about the ongoing crisis: "We are still seeing the effects of too much debt, and the authorities are coming to grips with how to deal with this phenomena. This is going to prove to be a very tough assignment."


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Commodities Sold on Eurozone Data But QE3 Bets May Spark Bounce

Posted: 05 Jun 2012 07:40 AM PDT

courtesy of DailyFX.com June 05, 2012 03:00 AM Commodities fell in European trade as soft Eurozone economic data weighed on risk appetite but a recovery may materialize if the US docket fuels QE3 bets. Talking Points [LIST] [*]Crude Oil, Copper Hurt by Eurozone Data But May Bounce with ISM Result [*]Gold and Silver May Rise if Another Soft US Data Point Boosts QE3 Outlook [/LIST] Commodity prices are under pressure in European trade as broadly soft economic data out of the Eurozone reminded investors that aside from sovereign risk and structural concerns (at least as it relates to Greece), the region is also sinking deeper into an economic slump that is weighing on global performance at large. Revised Eurozone PMI figures pointed to likely recession in the second quarter while German factory orders and region-wide retail sales figures disappointed expectations. Looking ahead, S&P 500 stock index futures have erased earlier gains and now point firmly lower, hinting continued sellin...


Gold COT (CFTC - Commitment of Traders) for Period 5/23-5/29/2012

Posted: 05 Jun 2012 07:39 AM PDT

Commercials sacrificed -2,542 longs in order to cover -7,431 shorts to end the week with 56.09% of all open interest almost .8% higher than last week, and now stand as a group at -13,070,900 ounces net short, another huge decrease of ... Read More...



A Financial Crisis that Repels Private Capital

Posted: 05 Jun 2012 07:30 AM PDT

"Capital & Crisis"… Those are the words our colleague, Chris Mayer, selected several years ago to launch the investment letter that still bears this same name. But Chris did not merely choose these two words, he bound them together into a masthead that defines the essence of capitalism (and therefore of his newsletter).

In other words, capitalism relies on both capital and crisis. It relies on a continuous cycle of capital destruction and formation. In fact, in the exact same moment that crisis destroys the capital of one party, it attracts the capital of a new party. As such, the "dumb money" perishes and the "smart money" multiplies.

During the last five years, a lot of dumb money has perished. A lot more of it would have perished were it not for the aggressive market manipulations by "even dumber" politicians and central bankers.

Thanks to their multi-trillion-dollar meddling, the Western World sits atop a crisis that is incapable of attracting fresh capital. Thanks to the "successes" of the Federal Reserve, US Treasury and European Central Bank, numerous financial firms that deserved to fail continue to operate and numerous governments that deserved to go bankrupt continue to hobble along.

By propping up failure, these professional meddlers also repel the fresh capital that would begin to heal what is broken. In other words, by propping up failure, the professional meddlers are preventing this particular crisis from producing the crisis-type pricing of assets that would attract a new generation of private capital.

At the same time, the meddlers have also "succeeded" in obliterating many of the laws and legal precedents that had guided the bankruptcy process in the US for more than 200 years.

The consequences aren't very pretty…as the chart below illustrates:

Percent Job Losses in Post-WWII Recessions, Aligned at Maximum Job Losses

In terms of employment, the current US growth trajectory is the most pathetic "recovery" of the post-WWII era. The reasons are obvious (except to the meddlers):

1) A crisis that does not permit crisis-pricing of assets will not attract new capital.
2) A crisis that discards the rule of law will not enable new capital to invest with confidence.

No new capital, no new employment.

Despite these stark realities, the meddlers seem to have no "Plan B," other than to continue implementing the same old "Plan A" that has failed repeatedly. Plan A, as we know, consists of three principal tactics: suppress interest rates, print money, provide bailouts to incompetent bankers and bloated governments.

Thus, last Friday's grim employment report goaded the Wall Street "sheeple" to resume their incessant bleating for "Mor-or-or-ore stimulus!…Mor-or-or-ore quantitative easing!"

No doubt, that's exactly what's coming our way…as gold's $65 bounce to the upside suggests. More stimulus, more QE, more ad hoc rule-changing, more bailouts, more of everything that forestalls crisis pricing and terrifies private capital.

Eric Fry
for The Daily Reckoning

A Financial Crisis that Repels Private Capital originally appeared in the Daily Reckoning. The Daily Reckoning, published by Agora Financial provides over 400,000 global readers economic news, market analysis, and contrarian investment ideas. Recently Agora Financial released a video titled "What Causes Gas Price to Increase?".
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