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Sunday, October 21, 2012

Gold World News Flash

Gold World News Flash

Possibilities, Probabilities & Projections

Posted: 20 Oct 2012 10:24 PM PDT

The following should be reviewed in conjunction with the "Trends in Motion" post below for complete technical background information. Possibilities More than two weeks ago, I discussed with my partner the technical conditions in Gold, Silver and XAU as well as the daclynay[df][pb200!b50!f][ilk14!la12,26,9]"][FONT=arial][COLOR=#3d85c6][B][FONT=Arial][COLOR=#3d85c6][FONT=Arial][/FONT][/COLOR][B]daclynay[df][pb200!b50!f][ilk14!la12,26,9]"]XAU/Gold ratio[/B][/FONT][/FONT][/B][/COLOR]. [COLOR=#3d85c6][B][FONT=Arial]This detailed discussion included an observation that all these markets had:[/FONT][/B][/COLOR] [LIST] [*]A bullish double bottom [*]A bullish head and shoulders bottom [*]A possible bullish cup and handle formation [*]A possible bullish flag formation in development [/LIST] For additional chart reference, Dan Norcini has a picture of a possible flag formation in the weekly HUI [COLOR=#3d85c6][FONT=Arial][B]here. This is confirmed in numerous leading stocks as we...


Guest Post: The Mechanics Of Transitioning To The Gold Standard... And Why It Won't Happen

Posted: 20 Oct 2012 10:07 PM PDT

Submitted by Martin Sibileau from A View From The Trenches

The Mechanics Of Transitioning To The Gold Standard... And Why It Won't Happen (pdf)

Today we retake the discussion left two weeks ago, on a return to the gold standard. We had divided the discussion in two parts: The first part (here) was based on an historical perspective. Today, we will deal with the technical one. As a summary of the first part, we left with two important conclusions: a) A gold standard will fail if the banking system is allowed to survive with a reserve requirement below 100%, and b) Establishing a  gold standard does not require that gold be confiscated. The question before us today is: How do we transition from this:

To this:

Note that the in the second chart, there is no central bank. And note that in none of the charts, we make reference to the shadow banking structure that exists and is well alive today. While including it makes matters more complicated, excluding it does not affect the analysis at all. We will write why this is so, further below.

In the first chart, we see a stylized version of the consolidated balance sheets of a central bank, commercial banks and their relation to the money stock. The reserve ratio is the ratio of demand deposits to reserves. If this ratio was 100%, no loans would be made from demand deposits. In this case, we would have a system with no aggregate leverage. Leverage, at the firm or individual level would still be possible. However, for someone to raise debt, there would have to be someone else saving no less than the same amount.

From the first chart too, it is clear that it is not only the private sector that has leverage. The leverage of the public sector is very significant, since all the liabilities of the central bank (reserves and currency) are fully backed by sovereign debt (US Treasuries). The first chart is reproduced from Laura Davidson's "The Causes of Price Inflation and Deflation", 2011.

In what follows, we will examine the adjustment process necessary to shift from a system with fiat money and a reserve ratio below 1 (reserve requirement under 100%). Let's begin clarifying that this proposed delevering process is an ideal situation, applicable if one had the luxury of planning the shift. There is not always time to do so and, if we ever had any, we're running out of it pretty fast.

The adjustment process below could only be done very gradually, by adjusting the reserve requirement and gold holdings by the central bank a few bps every year (say 200bps). The ultra-necessary condition here is that the nation undergoing this process be able to generate an equivalent fiscal surplus, in percentage terms. For instance, the process could demand to cover 2% per year of the gap in the reserve ratio to reach 1 (50 years long!!!). This means that if the reserve ratio is 10%, the gap is 90% and narrowing it over 50 years would require to increase reserves by 1.8% every year (90%/50).

Because the delevering process should be accompanied by a pari passu reduction in the fiscal deficit and sovereign debt, that 2% annual adjustment, in the US, this would require a surplus of $324BN every year, over 50 years ($16.2 trillion in national debt x 2%). In 2012 terms, spending would have to be cut by $1.52 trillion ($324 billion + $1.2 trillion annual deficit), if the numbers we have are correct. We suspect they are not: The situation is even worse. But, the bottom line is that, once you see these numbers, you realize that going back to a world of no leverage is politically impossible. Even though it is technically feasible, just like the European Monetary Union was planned and built over decades, it is still politically impossible.

(If you are still interested in the mechanics of this fictional process, you are welcome to keep reading. Otherwise, please, accept our apologies for the time we took from you. But if you ask us, learning how fiction works, in the end, always helps to cope with reality)

Now, if the delevering cannot be planned, and if the amounts involved are so colossal, you can have a very good picture of how painful it will be when liquidation eventually happens and how overvalued the US dollar is today. Below, we present you the aggregate, sectorial, balance sheets represented in the first chart:

It is completely out of the question that to delever the public sector, the private sector must generate equal savings, and they would have to come from exports. This would require political stability, capitalism, free trade and privatization of public services, among other things. In this rare context, this is what the accounting side of the story would look like:

Deleverage of the public sector

Above, we show one of the two delevering processes required to transition to a commodity-based standard, with a 100% reserve requirement: That of the public sector.

In step 1 we see the generation of savings that is needed to pay off the sovereign debt. Assets produced by the private sector are sold to the rest of the world in exchange of foreign currency. In step 2, the private sector sells the foreign exchange to the central bank, for currency. In step 3, the private sector uses that currency to cancel taxes due to the public sector and to purchase government-owned assets, via privatizations. In step 4, the government applies the currency received from the private sector to repay debt (i.e. Treasuries). In this last transaction, the currency  that was initially issued against foreign exchange is withdrawn by the central bank, leaving the monetary base unchanged, but backed by foreign exchange. This is, of course, preferable to allowing the government to cancel its debt with the central bank. Initially, it is more painful, but the result is more desirable…

Deleverage of the private sector

Simultaneously with the delevering of the public sector, the leverage ex-nihilo in the private sector has to be eliminated, to slowly reduce the risk of further systemic liquidity runs. To reach a reserve ratio of 1, the loans from demand deposits must be cancelled. Just like the deleverage of the public sector, this would have to be done over 50 years (yes, yes, we know…but note that the European Monetary Union took about thirty years and it was way more complex than this simple rule of increasing reserves by 2% every January 1st ). The chart below shows how it would be accounted for:

Once again, the source of savings for this delevering process will stem from exports. In step 1, we show the assets produced by the private sector, which are sold to the rest of the world in exchange of foreign currency. In step 2, the private sector sells the foreign exchange to the central bank, for currency. In step 3, the private sector uses the currency to repay the loans originated from demand deposits (2% of total, every year). In step 4, the banks apply that currency to reserves at the central bank. The result is an increase in the level of reserves and, pari passu, of the monetary base. This marginal change is entirely backed by foreign exchange.

Commoditization of the monetary base

Simultaneous with the delevering of the public and private sectors, the central bank should every year, convert 2% of the foreign exchange holdings into gold. This transaction is represented below:

The immediate result is a devaluation of the foreign exchange vs. gold. As the local currency is incrementally backed by gold, it appreciates vs. the foreign exchange held by the central bank, albeit at a lower pace. This appreciation would generate a virtuous cycle, because based on the expectations of a 2% annual commoditization of the local currency, foreign savings would fund local investments and real interest rates would slowly decrease to a Wicksellian, natural level. This is counterintuitive to Keynesians. Keynesians would maintain that this steady appreciation of the currency would damage the local competitiveness and exports. However, IF THE PUBLIC SECTOR HONOURS ITS DELEVERING GOAL, the rest of the world will export capital to the country, lowering real rates and financing growth (i.e. productivity gains). If the public sector does not honour its delivering targets, the whole exercise will have been utterly useless.

Aggregated balance sheets at the end

Once the two delevering processes and the commoditization of the monetary base are finalized, in the new system loans will only be made from time deposits (i.e. real savings) and demand deposits will be fully backed by reserves. The public sector will have no debt and the non-financial private sector will have realized capital gains from the privatized assets and productivity increases.

Restructuring of the financial system:

Only at this stage one could restructure the financial system. Banks could spin-off themselves into gold-backed note-issuing banks and investment banks. As the central bank is unwound, the note banks will need to join a clearinghouse to minimize counterparty risk, with all notes denominated in gold (i.e. interchangeable). The market will sort out which ones are the most liquid, based on the liquidity services provided by the each bank, rather than repayment risk. Further below, we show the possible revenue model for such banks.

Some would argue that this revenue model is not viable and that these banks would not be profitable. We disagree, although we can only speculate here. For the City of Amsterdam, the Bank of Amsterdam of the 17th century was profitable and in general, senioriage, has been a good business. Even more so under a 100% reserve ratio, because it is stable and grows in volume with time. Cash management and fx services would naturally be ancillary businesses for these institutions. The resulting investment banks would be simple brokers between those interested in saving in credit products and those raising funds via debt. The net interest income would be their main revenue driver.

Revenue sources of a note bank

As we mentioned in the beginning, we have not considered the role of shadow banking in our discussion. Why not? Simply because the whole structure, since it is levered, also rests upon the existence of a central bank as lender of last resort. Otherwise, these players would be swallowed either by the investment banks that we just described or by the public debt market.

If there wasn't a central bank, re-hypothecation would not be tolerated and economies of scale would dictate that only the investment banks end up capturing savings, along with the private and public equity and debt markets. But this, of course, is pure speculation and at this time, is nothing else than an intellectual exercise of dubious utility. Hence, we leave the matter aside…

Ron Paul's Proposal

What we just described is not the only transition possible. Since 2010, Ron Paul has been publicly suggesting that a transition to gold-backed money be simply enabled by allowing gold to be used as money (i.e. capital gains not taxed). In other words, Ron Paul suggested what the US Constitution clearly dictates: …No State shall (…) coin Money; emit Bills of Credit; make any Thing but gold and silver Coin a Tender in Payment of Debts…" (Section 10 - Powers prohibited of States).

We commented about this idea in our "Open Letter to Ron Paul" (Dec/10). We still think that this proposal would unnecessarily lead to hyperinflation and the discredit of the libertarian movement, without solving anything and giving others the excuse to return to the status quo.

Revolutions usually start in the least likely of all places

If the transitions we described today or the one proposed by Ron Paul are not politically possible, are there any chances that we may ever see a system without aggregate leverage? Such a system would have to challenge the financial establishment of the currency zone where it wants to blossom. Perhaps then, the best environment for its development is a place where any potential opposition is weak: A nation without capital markets or an established banking system. There are many examples of such places today: Argentina, Bolivia, Paraguay, in South America; a multitude more in Northern Africa and the Middle East.

Does this make sense? We think it does. There are parallels in history that won't disappoint you: Protestantism would have never flown in Rome or Spain. Those who opposed the status quo were expeditiously eliminated. However, when Protestantism surged in the Alps, far from the center of power, it was underestimated and allowed to flourish. By the time the status quo sought to quench it, it was too late. The same occurred with the  liberal revolutions of the 18th century. When the Americans declared their rebellion, they were underestimated. They were far from the centres of power. When the French declared theirs, they were suppressed. When communism began in Russia, it was unchallenged. When it tried to grow in Britain or the United States, it was immediately repelled. Revolutions then, apparently survive when they start in the backyard, rather than the front yard.

MUST WATCH: Extraordinary Popular Delusions And The Madness Of Markets

Posted: 20 Oct 2012 08:00 PM PDT

[Ed Note: This is an excellent piece in its entirety if you have the time. But if you want to get to the good stuff (bonds vs. gold) fast-forward to 11:00 and go from there. Enjoy.]

from Grant Williams :

My recent presentation at the Resource Investor's Forum and Mines & Money explores economic bubbles and the classic 'Bubble Wave' and takes a look at the twin bubbles of today: Government bonds (which are set to burst) and gold (which is getting ready to enter the mania phase).

Mike Kosares: Golden solution or golden folly?

Posted: 20 Oct 2012 07:55 PM PDT

9:55p ET Saturday, October 20, 2012

Dear Friend of GATA and Gold:

Mike Kosares of Centennial Precious Metals in Denver today heaps skepticism on the idea of using European central bank gold as some sort of collateral for government bonds. The gold is probably gone or otherwise hypothecated into oblivion already, Kosares notes. His commentary is headlined "Golden Solution or Golden Folly?" and it's posted at Centennial's Internet site, USAGold, here:

http://www.usagold.com/cpmforum/2012/10/20/golden-solution-or-golden-fol...

CHRIS POWELL, Secretary/Treasurer
Gold Anti-Trust Action Committee Inc.


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Opinion Around the World Is Changing
in Favor of Gold -- Find Out Why

When Deutschebank calls gold "good money" and paper "bad money". ...

http://www.gata.org/node/11765

When the president of the German central bank, the Bundesbank, pays tribute to gold as "a timeless classic". ...

http://www.forbes.com/sites/ralphbenko/2012/09/24/signs-of-the-gold-stan...

When a leading member of the policy committee of the People's Bank of China calls the gold standard "an excellent monetary system". ...

http://www.forbes.com/sites/ralphbenko/2012/10/01/signs-of-the-gold-stan...

When a CNN reporter writes in The China Post that the "gold commission" plank in the 2012 Republican platform will "reverberate around the world". ...

http://www.thegoldstandardnow.org/key-blogs/1563-china-post-the-gop-gold...

When the Subcommittee on Domestic Monetary Policy of the U.S. House of Representatives twice called on economist, historian, and gold standard advocate Lewis E. Lehrman to testify. ...

World opinion is changing in favor of gold.

How can you learn why and what it will mean to you?

Read the newly updated and expanded edition of Lehrman's book, "The True Gold Standard."

Financial journalist James Grant says of "The True Gold Standard": "If you have ever wondered how the world can get from here to there -- from the chaos of depreciating paper to a convertible currency worthy of our children and our grandchildren -- wonder no more. The answer, brilliantly expounded, is between these covers. America has long needed a modern Alexander Hamilton. In Lewis E. Lehrman she has finally found him."

To buy a copy of "The True Gold Standard," please visit:

http://www.thegoldstandardnow.com/publications/the-true-gold-standard

25% Of World’s Gold Buried Underneath The NY Fed?

Posted: 20 Oct 2012 07:30 PM PDT

from fromthetrenchesworldreport:

According to the government, 25% of the entire global supply of gold, approximately $355 billion, is buried six stories below ground, underneath the Federal Reserve Bank of New York building at 33 Liberty Street in downtown Manhattan. The same Federal Reserve Bank that was targeted today by an Al-Qaeda linked terrorist with a fake 1,000-pound bomb. Of course, until we audit the Fed, all claims of fortressed gold are just heresay. You can book a tour to see the bars for yourself. But in that case, seeing might be disbelieving.

"The closest thing to a real audit was last performed in 1953, but even that one had major problems. First, there were no independent outside parties involved, and second, only 5% of the gold was tested for purity."

Read More @ fromthetrenchesworldreport.com

The Other Silver War: Is Silver Being Used to Taint the Food Supply?

Posted: 20 Oct 2012 07:00 PM PDT

from Silver Vigilante:

The war on silver which has gotten its due attention has been the manipulation of the price of silver via paper exchanges to which the physical metal is tied. Major banks such as JP Morgan and HSBC have been the focus of these complaints. But, there is a newer war in which silver is an agent instead of an object, and it is being led perhaps by Big Agriculture through the food supply: it is the other silver war. Increasingly found in agriculture under the guise of antimicrobial and insecticidal properties, engineered nanomaterials such as silver nanoparticles (Ag NPs) are being used to treat agricultural goods, thereby risking public health and the environment. For months and years scientific reports have been covering the public health risk posed by silver products, failing to pinpoint where the dangerous levels of silver were coming from, but now it has come out that silver is being found in dangerous concentrations for a particular reason: It is being actively added to the food supply.

The study in particular of which we speak focused on Pears. The contamination of Ag NPs in pears was detected and quantified via numerous methods, including transmission electron microscopy (TEM), scanning electron microscopy (SEM), energy dispersives spectrometer (EDS) and inductively coupled plasma optical emission spectrometry (ICP-OES).

Read More @ Silver Vigilante

More On the Spanish Straw That Will Break the Euro's Back

Posted: 20 Oct 2012 06:09 PM PDT

 

My prediction regarding the breakup of the EU was obviously way early.

 

However, the fact remains that the EU will break up in time. And it will likely be Spain that brings this about.

 

The reasons? Among other things:

 

  1. Spain’s private Debt to GDP is above 300%.
  2. A huge portion of Spain’s banking system (representing over 50% of mortgage loans AND deposits) was totally unregulated up until just a few years ago.
  3. Spanish banks are drawing over €400 billion from the ECB on a monthly basis (up from €377 in June) to fund their liquidity needs.
  4. Spanish banks are now net sellers of Spanish sovereign bonds (leaving the ECB as the only buyer in the market)
  5. Spain’s banking system has lost 18% of its deposits in the last 10 months due to a staggering bank run.
  6. The economy of Spain is a disaster with total unemployment over 25% and youth unemployment above 50%.
  7. Spain is now facing a constitutional crisis with various regions looking to secede if they don’t receive bailouts from the Federal Government “without conditions.”
  8. Spanish banks need to roll over (meaning renew terms on) more than 20% of their bonds this year.

 

So Spain will suffer a collapse, most likely of its banking system resulting in a sovereign default (barring a bailout). When this happens, some €1 trillion+ worth of collateral (still rated AAA by EU banks) will be sucked out of the system.

 

This in turn will spur margin and collateral calls on tens of trillions of Euros’ worth of derivative trades.

 

And the EU Financial System collapses.

 

This is reality, regardless of who wins the US election. It may take a few months before it hits… but it will hit.

 

On that note, if you’ve yet to prepare for Europe’s BIG collapse…we’ve recently published a report showing investors how to prepare for this. It’s called What Europe’s Collapse Means For You and it explains exactly how the coming Crisis will unfold as well as which investment (both direct and backdoor) you can make to profit from it.

 

This report is 100% FREE. You can pick up a copy today at:

 

http://gainspainscapital.com/eu-report/

 

 

Best Regards,

 

Graham Summers

 

We also offer a FREE Special Report detailing the threat of inflation as well as two investments that will explode higher as it seeps throughout the financial system. You can pick up a copy of this report at:

 

http://gainspainscapital.com/gpc-inflation/

 

 

 

 

 

 

Presenting All The US Debt That's Fit To Monetize

Posted: 20 Oct 2012 04:41 PM PDT

Over the past 4 years the Fed's strategy in response to the Second Great Depression has been a simple one: purchase record (and now open-ended) amounts of fixed income product (offset by releasing record amounts of reserves in the banking universe which in turn has converted every bank into a TBTF and Fed-backstopped hedge fund, as the concurrently shrinking Net Interest Margin no longer leads to the required ROA from legacy bank lending) to stabilize the bond market, and to crush yields in hopes of forcing every uninvested dollar to scramble for equities, primarily of the dividend paying kind now that dividend income is the only "fixed income" available.

So far the strategy has failed for the simple reason that the smart money instead of being "herded", has far more simply decided to just front-run the Fed thus generating risk-free returns, while the "dumb money", tired of the HFT and Fed-manipulated, and utterly broken casino market, has simply allocated residual capital either into deposits (M2 just hit a new all time record of $10.2 trillion) or into "return of capital" products such as taxable and non-taxable bonds. Alas none of the above means that the Fed will ever stop from the "strategy" it undertook nearly 4 years ago to the day with QE1 (as any change to a "strategy" of releasing up to $85 billion in flow per month will be immediately perceived as implicit tightening and crash the stock market). Instead, it will continue doing more of the same until the bitter end. But how much more is there? To answer this question, below we present the entire universe of marketable US debt, in one simple chart showing the average yield by product type on the Y-axis, and the total debt notional on the X.

The Fed, with the recent advent of QEternity, aka the incorrectly named 'QE 3',  is already engaged in the monetization of virtually everything to the right of Municipal debt (under the blue arrow in chart below). The reason why the Fed needs to continue buying up Treasurys in the 10Y+ interval is simple - in doing so it is funding the long-end of US deficit spending, aka everything that has a greater than zero duration in the age of ZIRP. However, that amount is merely enough to keep the status quo as is, in other words to keep the deficit government funded. Remember that the Fed's ultimate goal is to inflate the debt stock of both the US and the world. Which means that not even QEternity will be enough. It also means that very soon the Fed will be forced to shift its monetization appetite further to the left of the X-axis, and increasing buy up more and more higher yielding fixed income product, in a rerun of Japan, which the US has now become. Recall that the BOJ is also openly monetizing Corporate debt, as well as various equity-linked products.

Said otherwise, the "smart money" is now loading up on those debt products, IG and HY debt, munis and non-agency MBS, which the Fed will sooner or later become the buyer of first, last and only resort. And just like Bill Gross was buying up MBS on record margin in February (as we showed) in advance of QE3, so now everyone else is once again merely preparing for the inevitable next step, as the Fed proceeds to monopolize the entire marketable debt universe.

Sadly for the Fed this also means that any incremental free money will simply continue to chase more fixed income product before the Fed starts buying it (thus providing an easy bid to sell into), instead of buying up already ridiculously overpriced equities (where record profit margins are about to slam into the immovable walls of soaring input and commodity costs crushing the "cheap" P/E illusion), which in turn will force Bernanke to one day in the near future, go full Japanese retard, and announce the Fed will as a matter of policy, as opposed to simply via the PPT and Citadel in times of desperation, commence buying equities. But that's a story for another day.

Examining the Case For (And Against) Gold

Posted: 20 Oct 2012 02:04 PM PDT

Since being shunned by traders last year after a series of margin increases, gold has enjoyed a worthy comeback since turning around this summer. The yellow metal rallied from a yearly low of $1,540 to a recent high of nearly $1,800. Read More...



Jim's Mailbox

Posted: 20 Oct 2012 02:03 PM PDT

Dear Jim,

In your opinion, has anyone tried to take on the gold banks in a significant way during this gold market?

CIGA Arlen S.

Dear Friend of many decades Arlen,

I witnessed two attempts close to each other. It was obvious that whomever this was had brought a knife to a gun fight.

Continue reading Jim's Mailbox

Got Gold?

Posted: 20 Oct 2012 01:51 PM PDT

Extraordinary Popular Delusions And The 'Madness' Of Bond And Gold Markets


Extraordinary Popular Delusions And The 'Madness' Of Bond And Gold Markets

Posted: 20 Oct 2012 12:55 PM PDT

Whether its new-fangled Japanese stocks, hi-tech internet company valuations, multi-colored flowers, or mansions made affordable by criminally lax lending standards, Grant Williams notes that a bubble is a bubble is a bubble; and citing Stein's Law: "If something cannot go on forever; it will stop." In this excellent summary of all things currently (and historically) bubblicious - whether greed-driven or fear-driven - Williams concludes it is never different this time as he addresses the four phases of the classic bubble-wave: smart-money, awareness, mania, blow-off (or crash) and explains how government bonds are set to burst and gold is only just about to enter its mania phase. This far-reaching and entirely accessible presentation is stunning in its clarity and as he notes, while bubbles are always easy to spot ex-ante, understanding how they come about and why they are popped gives the few an opportunity to profit at the expense of the madness of crowds. From tulips to tech-wrecks, and from inflation to insatiable stimulus, the bubble in 'safe-haven flows' that currently exists has all the characteristics of a popular delusion.

 

The first 9 minutes provide all the required background.

 

The next 10 minutes addresses the details of debt, government largesse, and why government bonds are 'peaking' and gold is about to explode - as the safe-haven 'tie' between the two is about to be smashed apart...

 

 

Gold Has Lost Its Glitter Again!

Posted: 20 Oct 2012 12:34 PM PDT

After experiencing a remarkable bull market run from $250 an ounce in 2001 to $1,900 an ounce last summer, gold has not had an easy time of it since. Three times it plunged as much as 19%, and rallied back, only to run into resistance each time at $1,800. It is potentially doing so again.


Canaccord Interview with a Great Canadian Billionaire – Frank Giustra – Says Get Gold

Posted: 20 Oct 2012 12:18 PM PDT

A very interesting article and Canaccord interview with Frank Giustra. He see's gold as a great investment, ie hard assets. He expects those in fixed income products getting wiped out.

For background he founded Silver Wheaton, Yorkton Securities and Lionsgate.

See article link here.
See Canaccord Resource Conference webcast (registration required) here.


Goldman Sachs' Ian Preston Surveys the Gold ETF vs Equity Battleground

Posted: 20 Oct 2012 11:53 AM PDT

Gold equities are in competition with gold ETFs for shareholder dollars. In this exclusive Gold Report interview, Goldman Sachs Managing Director Ian Preston discusses the steps gold companies must take to pull investors back from the ETF space and shares Goldman Sachs' outlook for the gold price over the next year or so. The Gold Report: Your recent commodity price research shows a gold price of around $1,811/ounce (oz) for 2013. Could you talk with us about how some of the macroeconomic issues influence that forecast?


Trumping Tricks with No Treats = Investor Opportunities

Posted: 20 Oct 2012 11:21 AM PDT

“I don’t see Silver going below $30…” David Morgan, Silver Guru Understandably so, David Morgan. Just a week ago 3.6 Million Ounces of Physical Silver were removed from the COMEX Registered Inventory – fully 17% of the Total Registered Inventory of Silver. There are Big Buyers of Physical Silver.


Golden solution or golden folly?

Posted: 20 Oct 2012 10:45 AM PDT

The Wall Street Journal ran an opinion piece this morning by Stephen Fidler titled "A Golden Solution for Europe's Sovereign-Debt Crisis." In it, Fidler first suggests using gold as collateral for nation state bond offerings then rejects the idea on three grounds:

1) Central banks not governments own the gold and "the ECB must agree to any transfers of gold to governments." He does not mention the governing document for this assertion, but we'll take his word for it.

2) A transfer of gold to governments "raises questions about whether such transfers breach the prohibition on central banks providing monetary finance to governments."

3) Most of the euro-zone central banks signed the Washington Agreement to limit their gold sales. "It is not clear," says Fidler, "whether using gold as collateral would be considered inside or outside the scope of this agreement."

All three assertions are very good reasons to believe that it would be difficult to mobilize the gold of European countries as bond collateral, but there are a few other reasons, beyond the political hang-ups and restrictions within the euro-zone that need to be considered.

1) Much of the gold under consideration has already been leased through the bullion banking system and the metal sits as a paper entry, usually referenced as a receivable, on central bank balance sheets. Pledging it as collateral would amount to pledging it twice.

2) There is some question as to whether or Portugal, which is mentioned in the article as a prime candidate in a gold-as-collateral bond scheme, has already deposited its gold with the Bank for International Settlements in some type of collateral arrangement.

3) Even if the gold were available (the amount of leased gold is in most instances a closely guarded secret) any nation state so encumbering its gold reserves would surely need to consider the loss of those reserves due to the depth and seeming intractability of the fiscal and debt problems in Europe. There is little doubt in my mind that savvy investors of all sorts, including other central banks and sovereign wealth funds, would jump at the opportunity to purchase gold-backed bonds. It represents a back-channel for unloading unwanted dollars and euros for a bond likely to default in due time (and possibly in short order) and result in the delivery of gold — an increasingly scarce monetary commodity in physical form.

Pledging gold as collateral under the current circumstances in Europe is short step away from being forced to sell it or ship it in the case of default. With Europe on the verge of a monetary collapse and economic breakdown any mobilization of gold would be considered by certain elements within those nation states as foolhardy. We recall that Greece added to its gold reserves at one point during its crisis precisely because it was considering the possibility of either being expelled from the European Union, or taking leave of its own accord. Under such circumstances, the more gold in the national treasury the better.

In a sidebar to the article, the Wall Street Journal attempts to make a case that gold-backed bonds would be bad for gold in that the metal would need to be sold if there were a default. I think the opposite, i.e., that this gold would never see the light of day, but go directly to the bond-holders in question and those bond-holders would likely be the strong hands of Asian nation states, mega-hedge funds and prominent investors who would welcome the delivery of gold to their coffers under what would undoubtedly be some very difficult economic circumstances globally. Their fear would not be that sales would depress the price but that they would actually receive the collateral hypothecated by the nation states.

For the nation states themselves there is more folly than wisdom in this scheme and more adding to their problems than arriving at a solution.

MK

__________

For those relatively new to the gold market, and even for gold market veterans looking for a refresher course on the subject, The ABCs of Gold Investing: How To Protect and Build Your Wealth With Gold, offers insights and reviews the fundamentals of gold coin and bullion ownership. The new Third Edition delves into some of the most acute problems facing the world economy and the role gold is likely to play within that context in the years to come. We welcome your interest at the link provided. Therein, you will find details.

How I Caused the 1987 Crash

Posted: 20 Oct 2012 10:37 AM PDT

 

I got a chuckle from the biz blogs and TV yesterday with the rehash of the 1987 stock crash. Twenty-five years is a very long time. I’d forgotten most of the events of that day.

 

I was at Drexel, and at that time, Drexel was a powerhouse. The firm had plenty of capital and huge capacity to borrow money to fund positions. Money was rolling in; risk taking was encouraged. I was working with a small group of people on one of the screwier sub-sets of the high yield bond market. It was referred to as LDC debt (Less Developed Country debt). These were the busted bank loans of all of the countries in South America.

 

You might wonder why anyone would spend time mucking around with the debts of Brazil, Mexico, Argentina and Chile. Actually, it was a great business. We were coining money. The key to our (and others) success was the ability to make a price on illiquid assets. If some regional bank needed to sell $25Mn of Brazilian debt, we would make a bid on the phone. If a company were in need of some Mexican debt that would be used in a debt for equity transaction, we would offer the paper to the buyer, even though we did not own it.

 

My old days of currency trading came in handy as some of the paper we traded was denominated in currencies other than the dollar . The fact that I had a “license” to trade currencies gave me the opportunity to speculate pretty freely, and I/we did. The shop that I worked in was no different than any other on Wall Street. We had a “book” of positions. Some were outright specs, others were hedges against commitments we had made. To hold this book together, we required equity (cash).

 

The Crash of 1987 happened on a Monday. But the crash really started the week before. The S&P tanked 9% on the week, Friday was a particularly bad day. The big move in stocks set things in motion over a very nervous weekend. I got the call from the controller’s office on Saturday. It went like this:

 

Controller:

Hi, Sorry to bother you, but we have some issues with our bank lenders (It was Bankers Trust that first pulled the plug on street liquidity). They are nervous, and want to cut back our funding lines. You are using a fair bit of capital in your trading book. Can you tell me what all this money is being used for?

 

BK:

Sure. We have a matched book of longs and shorts on the prop trading side. We also have some open currency positions. We have an inventory of hedges against open client positions. We also have some naked longs.

 

Controller:

Ah, can you be more specific?

 

BK:

Sure. We are long Brazil, Mexico and Chile; we are short Ecuador, Peru and Venezuela. We are naked short the USDHK$ and have $60Mn of Cuban bonds in inventory.

 

Controller:

You’re shitting me! What is that junk? Is any of this liquid? Can you sell this book of crap?

 

BK:

I might be able to run things down a bit. How much time do I have?

 

Controller:

Cut it in half by Monday night.

 

And that is how the crash of 87 happened.

 

Sunday night October 19, at the opening in Tokyo the HK$ position was closed off (at a loss of course). I got up at 2am and started the calls to London where there was a market for LDC paper. I was hitting bids on anything I could. The prices for the long assets were getting clobbered. There was no liquidity in the markets I was short. It was about minimizing losses and cutting a book. There was no finesse about it.

 

Of course I was not alone in those early morning hours. Hundreds of players from NYC were on the phone hitting bids on all sorts of squirrely assets. The folks who make markets in London were never dopes. When their phones lit up with Americans looking to lighten up, they voted with their feet. Bids for everything dropped like a stone. By eight o’clock in NY everyone knew that wholesale liquidations were going on, and that stocks were going to get beat to a pulp when the market opened up.

 

I think I stood all of that day. The phones rang and rang. Both buy and sell side clients were panicked. Most were sellers; the buyers went on strike. Prices were dropping without any trading taking place. The brokers were all, “offered without the bid”. It was next to impossible to get trades off.

 

Some where’s around 2pm NY time, the Cuban paper got sold (more losses). There was not much more that could be done. So I sat down and watched the Reuters screen and the Dow tape for the rest of the day. I’d had next to no sleep, drank a ton of coffee and smoked too many cigarettes. I'd sweated all day, and stank. I left before the 4pm close.

 

To me, there are today many similarities to the market conditions that triggered the 87 crash. These two ring a bell:

 

In 87 I bet on Cuban paper. The rumor at the time was that Castro was sick. The thinking was that when he died, the bonds would increase in value. I’d bought the bonds at around 5 cents on the dollar. Exactly the same bet, for the same reason, is being made today:

 

 

The Hong Kong dollar was pegged to the USD in 1983. Four years later guys like me were betting that the central bank could not hold the peg. Money was flowing into Hong Kong; the central bank was forced to intervene in the market to keep the lid on the HK$. This same trade is popular today:

 

 

The most important comparison has not yet shown up yet in 2012. In 1987, over the course of a weekend (and many panicky phone calls), market liquidity and the ability to finance off-the-run assets dried up. It started at the bottom of the rung of asset quality, by the end of the day it had spread to the most liquid stocks.

 

On Thursday, October 15, 1987, the farthest thing from my mind was a squeeze on the equity capital I was using to support a book of business. If anything, I was (everyone was) being encouraged to put more money to work. That vaporized in hours. It was one giant “risk off” event.

 

There were no external factors of significance that led to the 87 crash. The market did itself in on that day. All it took was a few calls that said, “I want you to cut back at open”.

 

The repo markets that fund the zillions of assets (good and bad) in 2012 are exponentially larger and more complex than in 1987. If anything, that market is more vulnerable today to the call that says, “Cut it back”.

 

Note:

Of course I didn't really start the 87 crash. I was a small cog in a very big wheel. There were thousands of folks who were scrambling on that day.

On Monday night, 10/19/87 the Fed (Greenspan) called the heads of the big banks and told them to open the spigots. The Repo markets were flush with cash on Tuesday morning.

From my perspective, it was much ado about nothing.

 

 

 

On the Edge with Lars Schall and Germany's Gold

Posted: 20 Oct 2012 10:31 AM PDT

A Silver Lining on the 25th Anniversary of the '87 Crash (Part-I)

Posted: 20 Oct 2012 10:08 AM PDT

25-years ago on October 19, 1987 - the stock market had its largest single day decline ever. Prior to this crash, Elaine Garzarelli's claim to fame was predicting that calamitous event. Read More...



This Past Week in Gold

Posted: 20 Oct 2012 09:37 AM PDT

Summary: Long term - on major sell signal. Short term - on sell signals. A multi week correction is in progress. Read More...



[KR356] Keiser Report: Washington's Choco Moat

Posted: 20 Oct 2012 09:35 AM PDT

We discuss the fudge and candy moat surrounding Washington DC, protecting its inhabitants from the plunge in economic freedom for the citizens outside the Swiss chocolate moat. Meanwhile, in Europe, the Swiss prepare for refugees from financial collapse while the … Continue reading →


Trader Dan on the King World News Metals Wrap

Posted: 20 Oct 2012 09:35 AM PDT

[url]http://www.traderdannorcini.blogspot.com/[/url] [url]http://www.fortwealth.com/[/url] Please click on the following link to listen in to my regular weekly radio interview with Eric King on the KWN Weekly Metals Wrap where we discuss this week's action in the gold and silver markets as well as the mining shares. [URL]http://tinyurl.com/8wyjjx6[/URL] ...


We Don't Want Your Steenkin' $1, $5, And $10 Dollar Bills

Posted: 20 Oct 2012 09:12 AM PDT

Everyone knows that when it comes to US currency in circulation, the $2 and the $50 bills are rapidly approaching numismatic status due to either the government's unwillingness to print them in sufficient amounts or the general public's unwillingness to accept them as legal Federal Reserve Note tender. What people may not know is how other currency denominations have fared over the years. And as the charts below indicate, the historical government production of various currency denominations may tell us something about actual supply-driven intentions of the Fed and/or upcoming price levels. Because one thing is certain: judging by recent production patterns, the $1, $5 and $10 bills (aka Federal Reserve Notes), all of which saw their lowest production in 30 years in 2010, will soon suffer the fate of the dodo!

 

$1 bill production 1980-2010:

 

$5 bill production 1980-2010:

 

$10 bill production 1980-2010:

 

Why the collapse in production? Is it simply due to the increasing (forced?) migration to electronic, and other, forms of payment? Perhaps. We leave it up to readers to decide on their own.

One thing we do know is that the plunge in small-denomination bills is not uniform. In fact, when it comes to $100 bills, production has never been higher. Is the Fed hinting at something?

$100 bill production 1980-2010:

 

So, how long until we start seeing the face of Grover Cleveland much more often again? 

Source: Moneyfactory.gov

Jim Sinclair: Cartel Shorts Are a Managed Spread Position, Banks Flipping to Naked Long Will Propel Gold to $12,400!

Posted: 20 Oct 2012 09:05 AM PDT

The legendary Jim Sinclair has sent an email alert to subscribers in response to a reader inquiring why the bullion banks are short gold and silver. Sinclair responded with his most in-depth explanation to date stating that the majority of … Continue reading →


"The Clock Is Running, The Cash Is Almost Gone And Make-Believe Will No Longer Suffice"

Posted: 20 Oct 2012 08:56 AM PDT

From Mark Grant, author of Out Of The Box

This is the piece I wrote on Friday afternoon.

"I would say that we have entered the crisis stage of Europe now. We have a stand-off between France and the southern nations, the troubled countries, in one corner and Germany, Austria, Finland and the Netherlands in the other. The last summit yielded nothing and worse than nothing because the two camps are worlds apart and sharply divided. They couldn't agree on the banking supervision issue. They have no agreed upon path for Spain, for Greece, for Cyprus, for Ireland or for Portugal. Germany has drawn a line in the concrete concerning legacy sovereign issues, legacy bank issues and Ms. Merkel has stated quite dramatically that Germany will not allow the new ESM to be used for old problems and that the individual nations will have to foot the bill for them. The "Muddle" is over in my opinion and the "Crisis" has now begun. The long, long road of "put it off" has reached its conclusion and there is no agreement and no compromise on how to proceed. We have finally reached the "Danger Zone" and I advise you to note the change!"

Having had any number of questions since I wrote this I thought that it might be helpful to provide some further explanation. It is really a question of translation and some definition of "political-speak" because all of the wrangling in Europe now can get quite confusing and literal translations can lead you to incorrect conclusions.  In Europe the old adage is firmly in play; "appearances can be deceiving."

Grant's Dictionary

Let's start with the bank supervisor. Germany said no money for the banks without a European supervisor for the banks. France, Spain and the rest responded by saying fine then let's have a bank supervisor in place and functioning by January 2013. The German response was not so fast and maybe by 2014 and maybe the ECB is not the right instrument and maybe not for all of the banks. On the surface you might think that these points are all distinct and separate but if you do; you are incorrect. The translation here is that Germany does not want to fund the European banks and so has set up a road block, a diversion, to stand in between "we will not fund the banks directly" and the desires of France and the rest who want a harmonized Europe where every country pays for everything for all of them; a socialized Europe. You see, the diversion is the bank supervisor and it allows Germany to thwart the desires of the needy countries without having to address the problem directly. It is a head fake and an effective one and it is just one of the instances where we are getting a quite clear Northern European response; "We will not fund."

Did you think that Germany, Austria and the rest were going to just come right out and say, "We will not fund?" This is not the Simpsons you know and the politicians in Europe, think of them what you like, are not quite that stupid. As a matter of fact the only time the Germans have come right out and said "Nein" was concerning Eurobonds and that is because the stigma attached to them in Germany is so great that any German allowance of them would probably topple the government. Consequently, as in the case of the ECB and the "limitless" speech of Mr. Draghi; it is only limitless if the condition of EU approval is met and so if the condition never happens then there is no ECB bond buying at all. In each case there is a condition and Germany can manipulate the condition at will which prevents or stops the ECB bond purchasing or the direct funding of the European banks.

Please note that on the opposite side of the fence that the same type of strategy is in place. France, Spain, Italy, Cyprus and Greece are not going to come out and say, "We want the Germans to pick up the check for the financial difficulties of our countries" so that ask for Eurobonds, direct bank recapitalization, lines of credit from the ECB, bond buying by the ECB of their sovereign debt and all manner of things which are structured and presented to get Germany, the Netherlands, Finland et al to pay for their shortcomings. "More Europe" in the troubled countries means that Germany and her amigos should foot the bill for the Continent while "More Europe" in the fiscally sound countries means control and oversight and domination if you will as exemplified by Ms. Merkel's proposal that there be one central European approval office for all of the national budgets in Europe. A concept quickly rejected by France, Britain and a host of other countries. Think of a very expensive mid-day meal; lunch is over and everyone wants everyone else to pick up the check and so they sit there and politely banter and try to contrive schemes so that it will be anyone but them. The actuality is that the numbers have grown so large, the meal has become so expensive, that no one can pick up the bill without quite severe consequences.

Let's focus on Greece for a moment. In two or three weeks Greece will run out of money. We have already done the "Public Sector Involvement" trick and the last bit of magic was the ECB handing money to the Greek banks who then bought private sovereign debt issued by Greece, got the bonds, then pledged the bonds back to the ECB and got their money back. This is how they did the short term funding of Greece while everyone winked and blinked and went on about their business. The actual truth is; a form of Eurobonds was used, just under the letterhead of the European Central Bank. Now however, the IMF has said they will not fund as Greece couldn't pay the money she owes unless the goddess Hera shows up with some loot. The IMF has shorted the fuse box and they want the EU or the ECB to take an "Official Sector Involvement" hit which you may translate into "Debt Forgiveness" which would probably be the end of the governments in more than one Northern European nation. Europe then is faced with writing off the debt of Greece, never mind the fancy words, or having the ECB take the hit which would mean a recapitalization of the ECB as they only have $18 billion of paid-in capital or the IMF refusing to fund the next tranche of Greek aid which means that the European Stabilization Funds would have to pick up the bill and that local politics may collapse without the IMF's participation.

In the case of Spain it is not Mr. Rajoy "assessing the situation" but a very concentrated effort to get "Euros for Nothing and Conchitas for Free." Not only does Spain have several of its integral regions calling for succession but it has a regional debt problem exceeding $50 billion in my estimation and a bank problem that is several multiples of that. The Oliver Wyman bank stress tests had all of the validity of a three toed sloth residing in your living room as there was no verification, no audits and nothing but garbage pressed into the shredding machine and so "garbage in is garbage out" and let's not deceive ourselves that it was anything else. Once again, one more time, we have an example of a country trying to get anyone else, everyone else, to pick up the bill because they cannot afford it. Germany, in the meantime, says that Spain does not need the money and so the bills go unpaid and the crisis worsens.

 "As long as there are individual national budgets, I regard the assumption of joint liability as inappropriate and from our point of view this isn't up for debate...The Spanish government will be liable for paying back the loans to recapitalize its banks. Plans to give the Euro rescue fund the power to inject cash directly into banks won't be made retroactive."

                 -German Chancellor Merkel

Here is the issue of legacy liabilities. Here Germany has been fairly clear. The new ESM fund will not pick up the check and it is up to each country to pay for their own past problems. You may translate this piece of jargon into a "No" to Ireland that the ESM will not pick up the bill for the Irish banks and the same response for Spain. This new German definition puts Portugal, Greece, Spain and Ireland back at square one and effectively closes the door on any further negotiations. While all of this wrangling continues the tone at the summit was no longer the nicey-nice repartee of past meetings. Cyprus needs money, Spain needs money, Portugal probably needs more money and Greece is just about out of money. The summit was held, the meeting is over and the worth of any accomplishments is about at Zero as the only agreement was a plan to have a plan to deal with bank supervision. This is not an inch forward, this is not a millimeter forward; this is quicksand where they are all stuck as both money and time run out as the Socialists scream for alms while the landed gentry, utilizing head fakes and other polite deceptions, refuse to provide it. The clock is running, the cash is almost gone and make-believe will no longer suffice. The crisis phase, in my opinion, has been entered.

"Heh, heh, heh! Lisa! Vampires are make-believe... like elves, gremlins and Eskimos."
      
             -Homer Simpson

Following up on my Alex Jones appearance yesterday…

Posted: 20 Oct 2012 06:18 AM PDT

Turk – One Of The Most Important Gold Charts Ever Gold is rising against all paper money as we head into the paper money apocalypse.


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