2013 will go down as the annus horribilis for gold, to quote a famous monarch who coined the term as a pithy description for a series of misadventures that befell the British royal family in 1992.
Similarly, gold, as an investment class, was hit by a number of factors this year that saw the precious metal tumble from its perch as a safe, reliable asset that for the past several years has been an attractive alternative to depreciating fiat currencies, a hedge against inflation, and a store of wealth — the latter a sort of insurance policy taken out against future economic calamity.
At the time of this writing, gold had suffered another significant drop in a year that has seen it plummet more than 25 percent in value; or 37 percent lower than gold’s record high of $1,923.70 an ounce reached in September 2011.
On the day after the U.S. Federal Reserve’s announcement that it will scale back quantitative easing, or QE, by $10 billion a month starting in January, gold slipped below the $1,200 an ounce mark for the first time in 6 months, with the spot price trading around $1,196 in New York.
The Fed for months has been musing about when to scale back its quantitative easing program, the $85 billion a month stimulus package that since 2008 has pumped some $4 trillion into the U.S. economy in order to keep interest rates low and prevent the country from falling back into recession. But an improved economic picture in the United States, particularly on the jobs front, has lessened the need for stimulus and increased pressure on the central bank to taper its monthly bond purchases, which due to the program’s inflationary nature, has been exceedingly bullish for gold. Since the program started in 2008, the bullion price has more than doubled, and only in the past 12 months has it significantly slipped.
Indeed, there will be no Santa Claus rally for gold this year, and the metal’s 12-year bull run has almost certainly come to an end. Or has it? In this 2014 outlook, Gold Investing News takes a look at the main factors that led to gold’s demise in 2013 and then offers up some predictions, with some help from the experts, on what 2014 has in store for the precious metal.
Major trends in 2013
There wasn’t one thing that popped gold’s balloon this year. A number of factors conspired to pull the metal down. Here are eight to consider and reflect upon as we close out the year:
1. U.S. Federal Reserve: To taper or not to taper?
Hastened by the financial crisis of 2007-08, the U.S. Federal Reserve has pursued a loose monetary policy designed to keep interest rates low, the theory being that as long as inflation is kept at a manageable level, rock-bottom interest rates would inspire companies and individual to borrow money, thus stimulating the economy and cause it to grow again. Staged over three programs, Q1, Q2 and Q3 all benefitted gold and gold equities. But in May of this year, the U.S. Federal Reserve began hinting that the stimulus might no longer be necessary due to an improving economy. According to Bloomberg, economic factors that played into the Fed’s decision on December 18 to cut $10 billion a month out of the stimulus program included: a jobless rate that fell to 7 percent in November to a five-year low; retail sales climbing the most in five months in November; a boost in industrial production; and a 13.3 percent jump in housing prices, combined with a five-year high in home construction.
2. Improved U.S. economy: Jobs, jobs, jobs
Economics 101 teaches that the unemployed are a drain on the economy. People out of work do not pay payroll taxes, and are in no position to make large discretionary purchases that are a key factor in driving economic growth. According to the latest numbers from the US Bureau of Labor Statistics, in November the unemployment rate declined from 7.3 to 7 percent in November, with total nonfarm payroll employment rising by 203,000. Jobs were created in transportation and warehousing, health care and manufacturing, according to the U.S. Labor Department.
All is not sweetness and light on the economic front, however. Ben Bernanke, the out-going U.S. Federal Reserve chair, has admitted that economic growth has lagged previous recoveries — with the economy expanding at just 2.3 percent a quarter for the past 17 quarters, compared to a 3.2 percent average rise after the last two recessions. If growth doesn’t improve with the further removal of stimulus in 2014, will the Fed rethink its decision to withdraw bond purchases?
3. U.S. equities: The stock markets are on fire
Part of the reason for gold’s decline in 2013 had to do with the alternatives for investors. When interest rates are low, fixed income instruments like bonds net a low return, yet equity markets may offer too much risk for conservative investors. But in 2013, the stock markets in the United States caught fire, and everyone seemed to be jumping into equities. That, to a significant extent, came at the expense of gold, which offers no dividend payments and can be illiquid if bought in physical form versus on paper as an exchange-traded fund (ETF). For months the stock markets have been jittery over a withdrawal of stimulus due to the likely knock-on effect of a rise in interest rates, but actually the opposite occurred on December 18. With the Fed promising to hold interest rates near zero, both the S&P 500 and the Dow Jones Industrial Average rallied to new highs that day. The S&P has surged 27 percent this year and is on track for its biggest gain since 1997, while three rounds of QE have driven stocks up 168 percent from a 12-year low in 2009, according to Bloomberg.
4. The Cyprus gold bailout
Casting our minds back to the antecedents of the gold price fall in April, gold investors will recall the hand wringing that occurred over Cyprus, the small Mediterranean island that holds significant stores of gold. At the beginning of that month, Cyprus shocked the world, and the gold market, by announcing it would sell its gold to finance a 400-million-euro bailout, and wind down underperforming banks — even signalling the government would go after the deposits of ordinary citizens. The impact on gold was drastic, with the precious metal falling below $1,500 for the first time in more than 18 months, as investors fretted over the prospect of other heavily indebted European nations doing the same.
5. Manipulation: The great short
The Cyprus moment, though, was just a taste of what would turn out to be the crucial turning point for gold this year. On April 15, in what is now being recalled as a very black day for the yellow metal, gold futures fell $140, a drop of 9.4 percent, to a two-year low of $1,360.60 — the biggest one-day drop in 30 years. While analysts initially attributed the fall to events in Cyprus, along with growing signs of a U.S. economic recovery, a more sinister reason began to reveal itself, as it became clear that leading bullion bank Goldman Sachs (NYSE: GS) had earlier slashed its outlook for gold and suggested that investors short the precious metal. Around the same time that Sachs gave its sell recommendation, JP Morgan & Chase was reportedly selling gold bullion on the paper (ETF) market. According to Yahoo Small Business Advisor, from January to April, JP Morgan had a net short position of 14,749 100-ounce gold contracts on the COMEX, equating to 1.47 million ounces of gold. “I’ll be the first to admit it: the gold bullion price takedown that started in April sure looks and smells fishy,” wrote Yahoo columnist Michael Lombardi.
6. ETF outflows: That giant sucking sound
One of the first victims of the April gold crash were gold exchange-traded funds. Four days after the meltdown, more than a billion dollars flowed out of the world’s largest gold ETF, the SPDR Gold Trust (NYSE: GLD), the third-largest withdrawal on record, reported The Wall Street Journal. Investors continued to dump gold ETFs in the second and third quarters, with gold demand falling 21 percent in Q3 driven primarily by continued outflows from ETFs according to The World Gold Council. The news for gold ETFs got even worse in December, when Barclays Capital released data showing the value of precious metals assets under management fell by $78 billion compared to last year; worst hit was GLD, whose holdings dropped 26 tonnes this month, to their lowest levels since January 2009, reported MINING.com.
7. Gold flows West to East
But while the reduction in gold ETF holdings is certainly bad news for gold demand, and has been a key factor in holding down the price, there is one positive related trend, and that is the flow of gold “from West to East,” as consumers in Asia — particularly China and India — continue to buy the metal in the form of jewelry, gold coins and bars. In its latest Gold Demand Trends report, the World Gold Council’s managing director, Marcus Grubb, noted that “Consistent with the first two quarters of 2013, the global gold market remains resilient, underpinned by the continued shift in demand from West to East, strong demand in consumer categories and solid central bank and technology sectors”. As an example, global consumer demand for gold in Q3 was 26 percent higher than the same period in 2012.
8. Indian import restrictions: The price of success
The gold price would likely have performed better this year if it wasn’t for the actions of the Indian government. As Western investors sold their gold ETFs and moved into equities and other asset classes, Indian citizens began lining up to buy cheap gold. The Economic Times reported that Indian citizens bought over 15 tonnes in just three days. The rise in gold imports to meet the demand affected India’s current account deficit, and on May 3, the Reserve Bank of India imposed restrictions on imported gold. Two months later, the RBI introduced an 80:20 scheme, whereby 20 percent of imported bullion had to be exported back. Gold trading was also banned in special economic zones. The measures resulted in total gold consumption in India dropping by 50 percent, from 310 tonnes in the second quarter to 148t in Q3, according to the World Gold Council.
Where do we go from here?
Will gold’s annus horribilis turn into an annus mirabilis (wonderful year?) in 2014? The indications aren’t promising, considering the number of negative factors pushing against it, as outlined above.
For instance, while the U.S. government recently passed the Volcker rule designed to curb banks’ participation in high-risk strategies such as investing in hedge funds and trading gold and silver, the banks are already ”seeking exemptions, loopholes and new ways to interpret the rule” instead of figuring out how to comply with it, according to a recent Forbes articles quoted by Silver Investing News. That means gold investors will likely continue to see gold and silver prices manipulated next year as they rise and fall with each mention of another pullback, or continuation, of QE.
On a more positive note, the Economic Times reported that gold buyers in India may soon have reason to cheer, considering that the government may ease import restrictions “following a dramatic improvement in the [current account deficit] and an unintended consequence of the curbs — a rise in smuggling”. A reduction in gold import duties from the current 10 percent could spur increased physical gold demand in India next year which could bid up the price.
An interesting trend that hasn’t been covered in the mainstream financial press is one identified by Jeff Clark, senior precious metals analyst at Casey Research. While the World Gold Council noted that total gold supply — mined and recycled — fell three percent in the third quarter compared with the same period a year ago, Clark is predicting a more serious supply crunch in 2014. That would bode well for the gold price, even if demand factors continue to flounder. According to Clark, the four factors that could chip away at the gold supply are: lower production, delayed mine development, and cuts to exploration budgets; “high-grading” deposits; governments putting a stop to big mining projects; and the implosion in South Africa’s gold mining industry. As the old adage goes, “the cure for low prices is low prices”, and if all or even some of Clark’s four factors come into play next year, the gold price could see an upward move.
Let’s take a look at what some of the experts are saying could happen to gold in 2014.
The day after the Fed’s decision to curb QE, the Financial Post quoted Canaccord Genuity’s Martin Roberge as pointing to the fact that this year is the first year since 1997 that gold will finish with a double-digit drop. Roberge noted that in other years where gold fell at least 10 percent, gold was flat the following year. “Very importantly, negative momentum should carry through the first half,” Roberge said in a note mentioned by FP.
UBS Investment Research
UBS Investment Resarch said earlier this month that with few positive catalysts moving forward, “gold is unlikely to regain its former appeal”. Accordingly, the firm cut its 2014 average gold pricefrom $1,325 an ounce to $1,200. “As 2013 comes to a close, the New Year will likely tempt investors to further move out of safe havens — and especially out of gold — into other assets. Gold has become old news, and investors are likely to be eagerly searching for new places to put their cash to work,” said the UBS analysts.
Bank of America
The Bank of America was a little kinder to gold, predicting on December 15 that gold in 2014 will average $1,294 an ounce, rising from $1,250 in the first quarter to $1,350 in the fourth. The bank, however, warned that further slides could occur if the U.S. central bank tightens monetary policy by raising interest rates — a factor that could push gold down to $1,100.
Morgan Stanley in October predicted that gold will extend losses in 2014 amid expectations of a further paring of U.S. stimulus — a prediction that proved prescient considering the $10 billion cut to QE announced on December 18. The investment bank said bullion will average $1,313 an ounce next year, compared to its 2013 forecast of $1,420, Morgan said in its quarterly metals report quoted by Bloomberg.
Following bearish gold calls in October, Goldman Sachs said today, December 19, that gold’s declines aren’t over. “Gold is now likely to grind lower throughout 2014,” Jeffrey Currie, Goldman’s head of commodities research in New York, told Bloomberg. “Much of the expected price decline has been priced in as opposed to a more gentle process as the Fed backs away from QE. When the gold market sees these events, it usually tries to price it in immediately.”
The most bearish of the bunch, the investment bank said on November 20 that gold will drop to $1,050 by the end of next year.
Ending on a more upbeat note, Australian Mining wrote in a December article that even though gold company revenues are predicted to shrink next year by 10.2 percent, due to the combination of a lower gold price and higher production costs, the future for gold in the short term is positive.
The publication quoted Owen Hegarty, a former Rio Tinto (NYSE:RIO,ASX:RIO,LSE:RIO) executive, as saying that Chinese demand for gold is “unstoppable” and that “Australia will be playing catch up to deal with a supply problem for years to come, as big miners continue to shelve projects.”
“Supply is going to continue to be the issue, we are going to be playing catch up football on the supply side,” Hegarty told the recent Gold Symposium forum in Sydney.
Courtesy: Andrew Topf
As reported yesterday, following a surge in various short-term and money market rates in the aftermath of the Fed’s taper announcement, the PBOC admitted after the close that it used Short-term Liquidity Obligations (SLO) to add funding to the market, and in doing so, bailing out money markets – the same product that nearly collapsed the financial system in the aftermath of Lehman.
The bank didn’t specify when it added the funds but, in another direct echo of the June panic, the PBOC said it is prepared to add more. However, it seems the market was less the convinced, and despite an early plunge in the seven day repo rate by over 2%, it suddenly and rapidly reversed direction and instead blew out hitting a whopping 9%, the highest since the June near-crash of the Chinese banking sector.
The outcome: China said it injected another $50 billion to bailout and stabilize its money markets in what is increasingly looking like a replay of this summer’s liquidity lock up. Perhaps the PBOC hinting at tapering at a time when the Fed is actually doing so is not the smart choice…
China’s central bank said it had injected over 300 billion yuan ($49.2 billion) into the nation’s money markets over a three-day period as interbank interest rates surged to their highest levels since June.
The People’s Bank of China said on its official Twitter-like weibo account that the banking system had current excess reserves of over CNY1.5 trillion and it called that level “relatively high.”
The central bank said that it had injected the funds through its “short-term liquidity operations” and this was in response to the year-end market factors.
The interest rates banks charge each other for short-term loans jumped to 8.2%, the highest level since the June cash squeeze.
The stress in the banking system is starting to spread elsewhere, with stocks in Shanghai falling for a ninth straight day to the weakest level in four months while government bonds dropped, pushing the 10-yield up to near the highest in eight years.
The turmoil has been sparked by a scramble for funds by banks as they near the end of the year when they typically need extra cash to meet regulatory requirements as well as the demand for funds from companies.
The central bank also said reminded banks that they need to manage liquidity better.
As to what drove the rapid mood reversal, the Chinese market was hit early on with talk of a missed payment at a local Chinese bank. For now it has not been confirmed, and even if it was the PBOC is expected to never allow any government-backstopped bank to fail. Still, a few more days like the last two and the world may just find out how prepared for a bank failure a credit-stretched China really is.
The US Energy Information Administration released on Tuesday an early version of its Annual Energy Outlook for 2014. The main item being that the United States will continue to develop its own oil and to press for more efficient cars in order to reduce demand on oil.
The report from the federal government forecasts a rise in US oil production of another 800,000 barrels per day for the coming two years, but sees a rise by 2016 with the US reaching about 9.5 million barrels per day. The previous high was attained in 1970 when production had reached 9.6 million bpd.
Predictions are that the oil boom is temporary and is expected to level off around 2020, but by then there should be a lot more fuel efficient cars on the roads that the drop in production will not be felt.
Another major change is that the federal government report expects that as oil production begins to decrease natural gas will rise, according to the EIA by as much as 56 percent by 2040 reaching 37.6 trillion cubic feet per year.
This news should please the environmentalists as well as politicians who want to see the United States turn away from the Middle East, its oil and its problems.
For the first group, the good news is that the total reading of U.S. energy-related emissions of carbon dioxide by 2040 will be 7 percent under 2005 levels in 2040.
The reduction in consumption will come about as the result of greater importance being given to focus on more energy efficiency in every aspect of our lives; from automobiles to buildings that require less heating to street lighting.
While this new development will no doubt be welcomed by most Americans it will bring additional joy to those who are fed up with the stagnation and violence that is perpetuated in the Middle East and will welcome this news amid hopes that the US will be less dependent on that turbulent part of the world for its fuel, thus less prone to the region’s unstable politics.
But here there is the need for a word of caution. Being less dependent on Middle Eastern oil does not mean the United States should become a political recluse, retrench inside fortress America and damn the rest of the world and their problems.
In the region of the Gulf, for example, the US counts many allies who are becoming extremely nervous at a USA hoping to step back from the region while across the waters they face a more powerful Iran with ever-growing political/religious ambitions. Up until now countries in the region felt somewhat protected largely because of their oil. Case in point was when Kuwait was invaded by Saddam Hussein in 1990 the US raised a powerful multinational coalition to throw him out of the oil producing state.
But recent events, such as the distancing of once extremely close US-Saudi relation have started to cast doubts in the minds of the oil rich sheiks of the Gulf who are truly questioning America’s resolve in the region.
The added danger for the US is the resurgence of Russia as a power to be reckoned with and now China, too. The United States could be fooled into a false sense of security inside Fortress America and start to lose more and more of its influence.
Indeed, the exploitation of American oil for American consumption may well bring about much wished for independence from foreign oil and foreign intrigue. But one should be careful what one wishes for.
Courtesy: Claude Salhani
Now that everyone is habituated to banks manipulating every single product and asset class, and for those who aren’t, see this explanatory infographic…
Regulators are looking into whether currency traders have conspired through instant messages to manipulate foreign exchange rates. The currency rates are used to calculate the value of stock and bond indexes.
Banks have been accused of manipulating energy markets in California and other states.
Since early 2008 banks have been caught up in investigations and litigation over alleged manipulations of Libor.
Banks have been accused of improper foreclosure practices, selling bonds backed by shoddy mortgages, and misleading investors about the quality of the loans.
…revelations that this market and that or the other are controlled by a select group of criminal bankers just don’t generate the kind of visceral loathing as 2012’s Libor fraud bombshell.
As much was revealed when the second round of exposes hit in the middle of 2013, mostly focusing on manipulation in the forex market, and the general population largely yawned, whether due to the knowledge that every market is now explicitly broken (explaining the abysmal trading volumes and retail participation in recent years) or because nobody ever gets their due punishment and this kind of activity so not even a perp-walk spectacle can be enjoyed, this is accepted as ordinary-course action.
Nonetheless, we are glad that the actions of the FX cartel continue to get regular exposure in the broader media, in this case Bloomberg who, among other things, reminds us that it was none other than JPM’s Dick Usher who was the moderator of the appropriately titled secret chat room titled “The Cartel” which we noted previously. It is this alleged criminal who “worked at RBS and represented the Edinburgh-based bank when he accepted a 2004 award from the publication FX Week. When he quit RBS in 2010, the chat room died, the people said. He revived the group with the same participants when he joined JPMorgan the same year as chief currency dealer in London.”
Yes, the chief currency dealer of JPMorgan, starting in 2010 until a few months ago when he quietly disappeared, was one of the biggest (allegedly) FX manipulators in the world. Define irony…
What are some of the other recent revelations?
Here is a reminder of the prehistory from Bloomberg. First came the chat rooms:
At the center of the inquiries are instant-message groups with names such as “The Cartel,” “The Bandits’ Club,” “One Team, One Dream” and “The Mafia,” in which dealers exchanged information on client orders and agreed how to trade at the fix, according to the people with knowledge of the investigations who asked not to be identified because the matter is pending. Some traders took part in multiple chat rooms, one of them said.
The allegations of collusion undermine one of society’s fundamental principles — how money is valued. The possibility that a handful of traders clustered in a closed electronic network could skew the worth of global currencies for their own gain without detection points to a lack of oversight by employers and regulators. Since funds buy and sell billions of dollars of currency each month at the 4 p.m. WM/Reuters rates, which are determined by calculating the median of all trades during a 60-second period, that means less money in the pension and savings accounts of investors around the world.
One focus of the investigation is the relationship of three senior dealers who participated in “The Cartel” — JPMorgan’s Richard Usher, Citigroup’s Rohan Ramchandani and Matt Gardiner, who worked at Barclays and UBS — according to the people with knowledge of the probe. Their banks controlled more than 40 percent of the world’s currency trading last year, according to a May survey by Euromoney Institutional Investor Plc.
Entry into the chat room was coveted by nonmembers interviewed by Bloomberg News, who said they saw it as a golden ticket because of the influence it exerted.
And after that came unprecedented hubris and a sense of invincibility:
The men communicated via Instant Bloomberg, a messaging system available on terminals that Bloomberg LP, the parent of Bloomberg News, leases to financial firms, people with knowledge of the conversations said.
The traders used jargon, cracked jokes and exchanged information in the chat rooms as if they didn’t imagine anyone outside their circle would read what they wrote, according to two people who have seen transcripts of the discussions.
Since nobody investigated, next naturally, come the profits and the crimes:
Unlike sales of stocks and bonds, which are regulated by government agencies, spot foreign exchange — the buying and selling for immediate delivery as opposed to some future date — isn’t considered an investment product and isn’t subject to specific rules.
While firms are required by the Dodd-Frank Act in the U.S. to report trading in foreign-exchange swaps and forwards, spot dealing is exempt. The U.S. Treasury exempted foreign-exchange swaps and forwards from Dodd-Frank’s requirement to back up trades with a clearinghouse. In the European Union, banks will have to report foreign-exchange derivatives transactions under the European Market Infrastructure Regulation.
A lack of regulation has left the foreign-exchange market vulnerable to abuse, said Rosa Abrantes-Metz, a professor at New York University’s Stern School of Business in Manhattan.
“If nobody is monitoring these benchmarks, and since the gains from moving the benchmark are possibly very large, it is very tempting to engage in such a behavior,” said Abrantes-Metz, whose 2008 paper “Libor Manipulation” helped spark a global probe of interbank borrowing rates. “Even a little bit of difference in price can add up to big profits.”
… along with a lot of banging the close:
Dealers can buy or sell the bulk of their client orders during the 60-second window to exert the most pressure on the published rate, a practice known as banging the close. Because the benchmark is based on the median value of transactions during the period, breaking up orders into a number of smaller trades could have a greater impact than executing one big deal.
… and much golf and “envelopes stuffed with cash“
On one excursion to a private golf club in the so-called stockbroker belt beyond London’s M25 motorway, a dozen currency dealers from the biggest banks and several day traders, who bet on currency moves for their personal accounts, drained beers in a bar after a warm September day on the fairway. One of the day traders handed a white envelope stuffed with cash to a bank dealer in recognition of the information he had received, according to a person who witnessed the exchange.
Such transactions were common and also took place in tavern parking lots in Essex, the person said.
Personal relationships often determine how well currency traders treat their customers, said a hedge-fund manager who asked not to be identified. That’s because there’s no exchange where trades take place and no legal requirement that traders ensure customers receive the best deals available, he said.
In short – so simple the underwear gnomes could do it:
And that’s why they (and especially Jamie Dimon) are richer than you.
While admitting that the Fed “doesn’t fully understand” all the reasons behind the slower pace of growth (though it could be due to “bad luck”), the following 10 statements from Ben Bernanke’s final press conference seemed to sum up perfectly the message he wants everyone to understand (and perhaps some he doesn’t)…
*BERNANKE REPEATS TAPERING DATA-DEPENDENT (we can always come back)
*BERNANKE INFLATION CANNOT BE PICKED UP AND MOVED WHERE WANTED (hhmm)
*BERNANKE SAYS MONETARY POLICY ISN’T A PANACEA (wait what?)
*BERNANKE SAYS ACTION TODAY INTENDED TO MAINTAIN ACCOMMODATION (ok great)
*BERNANKE SEES CONCERNS OF QE IMPACT ON ASSET PRICES (but no bubbles right?)
*BERNANKE REITERATES HE WAS ‘SLOW TO RECOGNIZE THE CRISIS’ (but you got it this time right?)
*BERNANKE SEES FED FUNDS RATE BETTER TOOL THAN QE (not for the equity markets it would seem)
*BERNANKE SAYS BIGGER BALANCE SHEET INCREASES POTENTIAL QE COSTS (indeed)
*BERNANKE FED CAN’T IGNORE FINANCIAL STABILITY IN MAKING POLICY (but chooses to)
And the money shot for success…
“It requires, obviously, some luck and some good policy.”
Despite the world of mainstream media pundits proclaiming the US is recovering nicely and that a taper is priced in (and the warning that the 5Y auction gave this morning that it’s not), markets are already reacting violently to the Fed’s decision to announce a small ‘taper’ (and more dovish forward guidance)…
We now leave it to Ben and his final press conference to explain his decision… and, of course, make sure everyone remembers “QE is for Main Street”, ‘tapering is not tightening’ (despite Jim Bullard telling us it is), and just how effective ‘forward guidance’ is.
Pre-FOMC: S&P Fut 1771 (spiked pre-FOMC), 5Y 1.55%, 10Y 2.875%, VIX 16.5%, Gold $1236 (which was spiking pre-FOMC), EUR 1.376
As a reminder, here are the 4 reasons why the Fed was cornered into tapering… as we have noted numerous times before; the “taper” is all about economic cover for a forced move the Fed has to make:
1. Deficits are shrinking and the Fed has less and less room for its buying
2. Under the surface, various non-mainstream technicalities are breaking in the markets due to the size of the Fed’s position (repo markets, bond specialness, and fail-to-delivers among them).
3. Sentiment is critical; if the public starts to believe (as Kyle Bass warned) that the central bank is monetizing the government’s debt (which it clearly is), then the game accelerates away from them very quickly – and we suspect they fear we are close to that tipping point
4. The rest of the world is not happy. As Canada just noted, the US monetary policy will be discussed at the G-20
Simply put, they were cornered and needed to Taper sooner rather later…
and as Jim Bullard previously noted,
“Financial market reaction to the June and September FOMC meetings provides sharp evidence that changes in the expected pace of asset purchases have conventional monetary policy effects.
Using the pace of purchases as the policy instrument is just as effective
as normal monetary policy actions would be in normal times”
Or – in other words:
Tapering Is Tightening
And as BAML noted previously, forward guidance is ineffective as,
…policy makers are finding it harder to convince markets that central bankers have more insight into the future course of the economy and policy than they actually do. Meanwhile, markets are learning that it can be painful to rely too heavily on forward guidance when the risk/reward of being long fixed income is asymmetrical when close to the zero lower bound.
Full Statement redline below:
The “swap” of $10 billion of asset purchases for a lower employment threshold and lower-rates-for-longer forward guidance knne-jerked stocks dramatically higher (for now). But while that was occurring, the Wall Street Journal’s Hon Hilsenrath was busy preparing 712 words in a record-setting 3-minutes to explain how the Fed remains data-dependent… and will remain dovish for longer than previously thought.
The Federal Reserve said it would reduce its signature bond-buying program to $75 billion per month, taking a step away from a policy meant to recharge economic growth, and said that it will continue in “further measured steps at future meetings” if the economy stays on course.
After months of intense discussion at the Fed and in financial markets, the Fed’s policy-making committee announced Wednesday it would trim its purchases of long-term Treasury bonds to $40 billion per month, a reduction of $5 billion, and cut its purchases of mortgage-backed securities to $35 billion per month, a reduction of $5 billion.
“In light of the cumulative progress toward maximum employment and the improvement in the outlook for labor market conditions, the Committee decided to modestly reduce the pace of its asset purchases,” the Fed said in its formal policy statement.
The Fed also sought to enhance its commitment to keep short-term interest rates low for a long time after the bond-buying program ends. Fed officials inserted new language in the policy statement that stressed they will be in no rush to raise rates once unemployment reaches the 6.5% threshold the central bank has set out as the point at which they would start considering raising rates, as long as inflation remains in check.
The Fed said that “it likely will be appropriate to maintain the current target range for the federal funds rate well past the time” that the jobless rate dips below the 6.5% threshold, “especially if projected inflation continues to run below the Committee’s 2 percent longer-run goal.”
Short-term rates have been pinned near zero since late 2008. Most Fed officials expect to keep interest rates low well into the future. In their latest economic projections, also out Wednesday, 12 of 17 Fed officials said they expected the central bank’s benchmark interest rate, which is called the fed funds rate, to be at or below 1% by the end of 2015. Ten of 17 officials expected the rate to be at or below 2% by the end of 2016.
The Fed acknowledged concerns that inflation continues to run stubbornly below the central bank’s 2% target, saying that it is “monitoring inflation developments carefully for evidence that inflation will move back toward its objective over the medium term.” The Fed’s preferred inflation gauge, the price index for personal consumption expenditures, increased just 0.7% in October from a year prior, according to a Commerce Department data release earlier this month.
Officials by and large stuck with their economic forecasts for 2014, making only slight adjustments to projections of growth, unemployment and inflation that they made in September. In the statement, officials said that risks to the economy and jobs market have become “more nearly balanced.”
Via Goldman Sachs,
The FOMC decided to cut the pace of its asset purchases to $75bn/mo, but offset this with a qualitative enhancement to the forward guidance. The Committee’s assessment of the economic outlook was somewhat more upbeat. We see today’s statement as slightly hawkish relative to expectations. The fact that President Rosengren dissented and President George did not is consistent with that.
1. The Committee reduced the monthly pace of its asset purchases to $75bn, trimming both Treasury and MBS purchases by $5bn.Regarding the forward-looking outlook for further cuts to purchases, the statement indicated that “the Committee will likely reduce the pace of asset purchases in further measured steps at future meetings. However, asset purchases are not on a preset course and the Committee’s decisions about their pace will remain contingent on the Committee’s economic outlook for the labor market and inflation as well as its assessment of the likely efficacy and costs of such purchases.” The reduced pace of purchases will take effect in January and the allocation of Treasury purchases across maturities will remain unchanged. The Committee likely expects to conclude the asset purchase program in the second half of 2014.
2. Additional qualitative forward guidance was provided. Specifically, “the Committee now anticipates, based on its assessment of these factors, that it likely will be appropriate to maintain the current target range for the federal funds rate well past the time that the unemployment rate declines below 6-1/2 percent, especially if projected inflation continues to run below the Committee’s 2 percent longer-run goal.” We see “well past” as potentially representing as much as one-half percentage point. In this sense it is similar to a reduction in the unemployment threshold to 6.0%, although without the degree of commitment that such a reduction would entail.
3. The economic assessment was somewhat brighter. In particular, “labor market conditions have shown some further improvement” was upgraded to “labor market conditions have shown further improvement.” In addition, the assessment of the drag on growth due to fiscal policy was slightly more upbeat, noting that “the extent of restraint may be diminishing.” The description of inflation was unchanged in the first paragraph, although the Committee added that it is “monitoring inflation developments carefully for evidence that inflation will move back toward its objective over the medium term,” indicating slightly higher concern about the inflation outlook.
4. Boston Fed President Rosengren dissented to the decision to taper asset purchases, while Kansas City Fed President George?who had previously been a hawkish dissenter?voted with the Committee.
5. With regard to participants’ economic projections, the mid-point of the central tendency of the unemployment rate was lowered to 7.05% in 2013Q4, 6.45% in 2014Q4, 5.95% in 2015Q4, and 5.55% in 2016Q4. Real GDP growth was raised by 10bp to 2.25% at end-2013, but the longer-run projection was reduced by 5bp to 2.3%. Participants reduced their end-2013 and end-2014 core PCE projections by 10bp to 1.15% and 1.5% and reduced their end-2015 and end-2016 projections by 5bp to 1.8% and 1.9%.
6. The median participant’s forecasts for the funds rate (the “dots”) remained at 0.13% at end-2013 and end-2014, fell 25bp to 0.75% at end-2015, and fell 25bp to 1.75% at end-2016. The median projection for the longer-run rate remained 4.0%. It is possible that Vice Chair Yellen was one of the participants who reduced their federal funds rate projections.
For investors having a rooting interest in the price of gold, the catalyst for a recovery may be in sight. “Buy gold if you believe in math,” Brent Johnson, CEO of Santiago Capital, recently told CNBC viewers.
Johnson says central banks are printing money faster than gold is being pulled from the ground, so the gold price must go up. Johnson is on the right track, but central banks have partners in the money creation business—commercial banks. And while the Fed has been huffing and puffing and blowing up its balance sheet, banks have been licking their wounds and laying low. Money has been cheap on Wall Street the last five years, but hard to find on Main Street.
Professor Steve Hanke, professor of Applied Economics at Johns Hopkins University, explains that the Fed creates roughly 15% of the money supply (what he calls “state money”), while the banks create “bank money,” which is the remaining 85% of the money supply.
Higher interest rates actually provide banks the incentive to lend. So while investors worry about a Fed taper and higher rates, it is exactly what is needed to spur lending, employment, and money creation.
The Fed has pumped itself up, but not much has happened outside of Wall Street. However, the Federal Open Market Committee (FOMC), during their October meeting, talked of making a significant policy change that might unleash a torrent of liquidity through the commercial banking system.
Alan Blinder pointed out in a Wall Street Journal op-ed that the meeting minutes included a discussion of excess reserves and “[M]ost participants thought that a reduction by the Board of Governors in the interest rate paid on excess reserves could be worth considering at some stage.”
Blinder was once the vice chairman at the Fed, so when he interprets the minutes’ tea leaves to mean the voting members “love the idea,” he’s probably right. Of course “at some stage” could mean anytime, and there’s plenty of room in the word “reduction”—25 basis points worth anyway. Maybe more if you subscribe to Blinder’s idea of banks paying a fee to keep excess reserves at the central bank.
Commercial banks are required a keep a certain amount of money on deposit at the Fed based upon how much they hold in customer deposits. Banking being a leveraged business, bankers don’t normally keep any more money than they have to at the Fed so they can use the money to make loans or buy securities and earn interest. Anything extra they keep at the Fed is called excess reserves.
Up until when Lehman Brothers failed in September of 2008, excess reserves were essentially zero. A month later, the central bank began paying banks 25 basis points on these reserves and five years later banks—mostly the huge mega-banks—have $2.5 trillion parked in excess reserves.
I heard a bank stock analyst tell an investment crowd this past summer the banks don’t really benefit from the 25 basis points, but we’re talking $6.25 billion a year in income the banks have been receiving courtesy of a change made during the panicked heart of bailout season 2008. This has been a pure government subsidy to the banking industry, and one the public has been blissfully ignorant of.
But now everything looks rosy in Bankland again. The banks collectively made $36 billion in the third quarter after earning over $42 billion the previous quarter—showing big profits by reserving a fraction of what they had previously for loan losses.
The primary regulator for many banks—the FDIC—is even cutting its operating budget 11%, citing the recovery of the industry. The deposit insurer will have one short of 7,200 employees on the job in 2014.
That’s a third of the number it had in 1991 after the S&L crisis, but almost 3,000 more than it had in 2007 just before the financial crisis.
So with all of this good news, the Fed may indeed be thinking they can pull out the 25bp lifeline and the banks will be just fine. What Blinder thinks and hopes is the banks will use that $2.5 trillion to make loans. After all, one-year Treasury notes yield just 13 basis points, while the two-year only kicks off 31bps. Institutional money market rates are even lower.
Up until recently, banks haven’t been active lenders. The industry loan-to-deposit ratio reflects a tepid loan environment. During the boom, this ratio was over 100%. Now it hovers near 75%. It turns out that what the Fed has been paying—25 basis points—has been the best source of income for that $2.5 trillion.
However, banks won’t be able to cut their loan loss reserves to significant profits for much longer. Loan balances have grown at the nation’s banks the last two quarters and this will have to continue. If the Fed stopped paying interest on excess reserves and bank lending continues to increase, those $2.5 trillion in excess reserves could turn into multiples of that in money creation.
Banks create money when they lend. As Blinder explains, Fed-injected reserves are lent “creating multiple expansions of the money supply and credit. Bank reserves were called ‘high-powered money’ because each new dollar of reserves led to several additional dollars of money and credit.”
Fans of the yellow metal, like Mr. Johnson who sees the price going to $5,000 per ounce, have likely been too focused on the Fed’s balance sheet when it’s the banks that create most of the money.
When the Fed announces it won’t pay any more interest on excess reserves, and banks start lending in earnest again, the price of gold will be very interesting to watch.
Courtesy: Doug French
You know the old saying “You are what you eat.”
Well, what if you eat, you know… crap?
Unfortunately, we already know what comes out of that set-up. More of the same.
And even more unfortunately, that’s exactly what we’re going to get when the next big bank fails (and it’s only a matter of time). More of the same.
You’ve got to see this.
Under Title II of the Dodd-Frank Act, the “orderly liquidation authority” gives the FDIC the power to liquidate grossly faltering, insolvent, or failed “systemically important financial institutions,” or SIFIs.
The FDIC, which really did one helluva of a good job during the financial crisis, calls its overall strategy for handling a big bank liquidation its “single point of entry” (SPOE) plan.
The “SPOE” means the FDIC will go into the bank’s parent or holding company and orchestrate its orderly liquidation, wiping out shareholders, haircutting creditors, and borrowing from the new Treasury Orderly Liquidation Fund to keep the bank’s subsidiaries and affiliates operating, so as to not disrupt the rest of the world.
That’s because the Federal Deposit Insurance Corporation (FDIC), which will have the authority to liquidate miscreant banks, will just rearrange them.
Here’s what’s rancid on that menu.
The subsidiaries and affiliates are likely to be where the real trouble actually is. Bank holding companies are shells. They just manipulate the puppets on the stage where we all play.
So under this new strategy, the shareholders in the parent are going to get wiped out. And creditors are going to end up with new equity in, guess what? The same subsidiaries and affiliates. Those are going to just be “restructured” or “reorganized” into a “successor firm less risky to the system.”
Somebody stick a finger down my throat, please. Doesn’t that make you sick?
So what if the new big bank – maybe a good bit more svelte from puking up its guts – gets new owners and new management? It will still have to have the backstop of taxpayers who will ultimately fund the Treasury’s fund. It will still be a big bank. It will still be systemically important. What will have changed?
This kind of “liquidation” is a bailout.
It’s not the FDIC’s fault. They’re being asked to be the stooge for the big banks, to keep them going in another wolf’s set of lambskins.
The FDIC will set up a “bridge” company that will orchestrate and support (with taxpayer money) the subs and affiliates (hmmm, wasn’t AIG’s catastrophic derivatives business in a subsidiary, and didn’t JPMorgan’s London Whale loss occur in a subsidiary?) that need to be kept going. Because, you know, they’re systemically important. The bridge company can last as long as necessary. That means the newly reshaped, old, failed bank will be protected by the government while it lipsticks itself up again for its next trick.
Last week the FDIC put out its new plans for comment. The public has 60 days to submit comments.
Here’s mine: The plan is crap. The single point of entry will result in just another crappy big bank coming out the other end.
This is all smoke and mirrors. The only way to make systemically important financial institutions safe is to not have systemically important financial behemoths in the first place.
We have a bankruptcy code. Banks should be allowed to fail. And they should never get so big that it makes the world shudder or come to a standstill if they blow themselves up.
As the Fed continues with its Quantitative Easing policy, U.S. gold bullion exports hit a new record in the first nine months of 2013. While it’s no secret to anyone in the precious metal community, the majority of U.S. gold exports found their way to Hong Kong and Switzerland.
Not only have gold bullion exports hit new records during Jan-Sept, they have already surpassed the total for 2012. If we look at the chart below, we can clearly see who has received most of the gold.
In the first nine months of 2013, Hong Kong received 176.3 mt (metric tons), Switzerland 130.9 mt and the United Kingdom 26 mt. Of the 416 mt of U.S. gold bullion exports Jan-Sept, these three countries received 342 mt or 82% of the total.
Why is this such a big deal? Because in the first nine months of 2012, total U.S. gold bullion exports were only 283 mt compared to the 416 mt so far this year. Which means the United States has exported 47% more gold bullion at an additional 133 mt compared to the same period last year.
Furthermore, total U.S. gold bullion exports in 2012 were only 371 mt compared to the 416 mt in the first nine months of 2013.
As the price of gold started to decline in March of this year, including the huge take-down in April, U.S. gold bullion exports picked up significantly:
The number of gold bullion exports increased from 40.1 mt in Jan to 62.1 mt in April. Then we can see they fell in May (38.1 mt) and June (40.7 mt) as the gold buyers were waiting to see if prices would stop falling. And in June, the price of gold finally bottomed right below $1,200 level.
What is interesting to see here is that there were a higher amount of gold bullion exports in July (64.4 mt) than in April (62.1 mt)
As the price started to rise in July, gold bullion exports to Hong Kong & Switzerland picked up substantially. The table below details which countries were the recipients of U.S. gold bullion exports.
Not only did Hong Kong increase its gold bullion imports from the U.S. in July to 27.9 mt up from 15.5 mt in June, but it jumped even higher in August when it reached a 30.7 mt — a record month for the year.
According to the data from the USGS Gold Mineral Industry Surveys for Jan-Sept 2013, Hong Kong has received a total of 176.3 mt and Switzerland 130.9 mt. The United Kingdom came in third at 26 mt while Thailand came in fourth at 21. mt, followed by South Africa at 19.5 mt, Canada at 15.3 mt, China at 11 mt and India at 2.7 mt.
There was an additional 13.5 mt that went to several misc. countries in which the United Arab Emirates received the greater share.
Now, I want to make something clear here. These figures only represent “Gold Bullion” exported out of the United States. There are also two other categories that come under the heading of gold bullion exports beside manufacturing and scrap supply. We also have the following:
Ores & Concentrates = 5.1 metric tons
Dore’ & Precipitates = 152 metric tons
If we add up all the three categories of U.S. gold exports we have total of 573 metric tons for the first nine months of 2013. This turns out to be a significant trend when we factor in several other figures.
As U.S. gold bullion exports increased in 2012, its imports have fallen considerably. The chart below shows the change in U.S. net gold supply:
The chart is broken down into four components; Mine Production, Gold Imports, Gold Exports and Net Supply. There is no real change in U.S. gold mine supply, but we can certainly see that gold imports have fallen off dramatically since 2011.
U.S. gold bullion imports fell to 332 metric tons in 2012 down from 507 metric tons in 2011. I would imagine overall gold imports in 2013 will be about the same as they were in 2012 when we receive the remaining four months of data from the USGS.
However, the big change here is the large increase of U.S. gold bullion exports. Total gold bullion exports out of the U.S. increased from 474 mt in 2011 to 693 mt in 2012. Currently, the United States has exported 573 mt, 45 mt more than the same period last year.
Compiling all the figures for the past three years (including only Jan-Sept 2013), the United States has a negative 171 mt of net gold supply so far in 2013. Basically, this means that the U.S. has exported 171 mt more gold than it has produced from its mining sector and imports combined.
In 2011, the U.S. had a positive net supply of 265 mt, but due to high demand for gold abroad this fell in 2012 to a negative 127 mt. And as you can see, U.S. net gold supply continues to decline — a negative 298 mt since the beginning of 2012.
It will be interesting to see what takes place for the remainder of the year. If we consider that Hong Kong had record gold bullion imports in October, I would imagine the U.S. supplied a good portion of this amount.
Lastly, when we realize that the majority of U.S. gold bullion exports to Switzerland and the U.K. are probably making their way to the East…. we can assume that the overwhelming majority of the gold leaving the shores of the United States is most certainly ending up in China.
India will keep a tight leash on gold imports despite a recent improvement in its trade deficit and lobbying by a bullion industry struggling with high premiums and a supply crunch.
The government is worried the trade gap could worsen again and the currency could weaken as the U.S. Federal Reserve looks set to start tapering its economic stimulus soon.
“There is no proposal to relax restrictions on gold imports as of now,” said a top finance ministry official who is part of the team deciding on gold import restrictions. He declined to be named as he is not authorised to speak to the media.
“The question has not arisen as a U.S. decision on tapering its monetary stimulus could come at any time (and) that could have severe implications for the rupee.”
The Indian rupee hit a record low in late August on concerns over funding of the record trade gap, and capital outflows prompted by the Fed signalling that it would soon begin rolling back its $85 billion monthly bond purchases.
The Indian government and the central bank issued a series of curbs on imports of gold – the second-most expensive item on India’s import bill – hoping to ease the pressure on the currency.
The import duty on gold was hiked to a record 10 percent, and import quantity was tied to sagging exports, leaving the market short on supplies.
Gold imports dropped to 24 tonnes in October from a record 162 tonnes in May, helping ease the current account deficit (CAD). The rupee has also recovered about 10 percent from its record lows.
That has prompted the gold industry in India to lobby the government on rolling back its tough rules.
“Now since the CAD is under control, we are asking them to remove the 80/20 rule because any curbs will not help the industry,” said Haresh Soni, chairman of the All India Gems and Jewellery Trade Federation, which represents more than 300,000 jewellers.
The 80/20 rule dictates that 20 percent of all gold imports have to be re-exported.
“We are also asking the government to reduce import duty to 2 percent as smuggling has increased,” Soni said.
Stung by the tough rules imposed this year, Indian dealers and individual customers have been fanning out across Asia to buy gold and sneak it back into the country.
But some analysts said the rules should remain in place.
“We should not be going for an easing of restrictions on gold imports at this point in time. I would wait to see if gold imports decline on a sustainable basis,” said Madan Sabnavis, chief economist at local ratings agency CARE Ratings.
India will hold a general election by May, which has added to speculation that the government may ease the rules to appease some sections of the public.
“Even from an elections point of view, if the government wants to ease restrictions, they are still three or four months away,” said the finance ministry source.
Another official involved in making gold policy said the central bank and government should wait longer to see the impact of the restrictions.
“Indian importers have never been subject to restrictions and that is why they are finding this very painful. We have just seen the impact for one quarter, we should wait till March at least to understand the full impact,” said the policymaker.
Some have dreamt of it, others have only imagined it. Now Saxo Bank, the online multi-asset trading specialist and investment advisor has released its ‘Outrageous Predictions’ for 2014. They fully admit that the probability of any of them coming to fruition is rather low. But, that hasn’t stopped them making them. Be outrageously provocative and it can be predicted that as sure as eggs are eggs the crystal ball will go cloudy on you. But, it makes for light-hearted reading along the rocky road of fortune-telling. The saving grace is that if any one of them does actually hit the truth on the nose, Saxo Bank will be saying ‘I told you so’. If they don’t come true, Saxo’s drivel will be forgotten in the mass of pages on the internet.
1] Soviet-Style Economy in EU: This one comes from Steen Jakobson, Chief Economist and CIO at Saxo Bank. It tops the list. The Soviet-Union will be back in force in style at least in the EU, when deflation causes panic amongst the leaders of the EU. Wealth Taxes will be introduced across the Union in the attempt to reduce inequalities in society. Europe will at last move into the final stages of totalitarian government from Brussels.
2] Fat-Five Tech Companies: Amazon, Netflix, Twitter, Pandora Media and Yelp are all trading at about 700% above market valuation. That’s while the rest of the information-technology sector is 15% under market value. The bubble will burst in 2014 for the fat five. Some of that flab just has to come off.
3] US Deflation: It’s only the US government and the Federal Reserve that are saying that the US economy is doing better. January will see the FOMC dealing with deflationary pressure on the economy as consumer confidence gets a whacking and employment and investment take a beating after Congress ends up ‘disrupting the US economy’ again.
4] Brent to Fall to £80/Barrel: Sanctions against Iran are going to ease. This coupled with the problems that will seem to abate in Libya will see the price of oil fall drastically. Non-Opec supply is predicted also to increase by 1.5 million barrels per day.
5] CAC40 to Drop 40%: They don’t call it the 40 for nothing. The French economy will fall like pigeons being shot out of the sky. The investors in France will be scrambling for the way out as the French government ends up taking a lashing.
6] Fed Tapers: March-time will cause widespread panic on the financial markets. Apparently the prediction is that Yellen will resign and that Bernanke will be called back. Oh, there is a Hollywood film too of what happens when Yellen gets kicked out of the comfy bed.
7] Germany to Need Bailout: Germany will fall into recession and end up asking to be propped up by the European Central Bank. Let’s hope the Greeks agree to that one.
8] Spain to Recover: Spain is set to become the strongest economy in the EU.
9] Russia to Turn Tails: Russia will turn to the Western world and end up crying in mummy’s skirts as there are escalating costs of the Olympics and plunging oil prices. Russia will give up on Syria and will cave in to Europe on energy prices.
10] China to Revolt: The Chinese will become emboldened and empowered in the face of their government as the one-child policy is loosened and the residency program comes to an end. Urban cities will see demonstrations and the government will change its policies bring the country into modernity.
Steen Jakobsen, Chief Economist at Saxo Bank states “This isn’t meant to be a pessimistic outlook. This is about critical events that could lead to change – hopefully for the better. After all, looking back through history, all changes, good or bad, are made after moments of crisis after a comprehensive failure of the old way of doing things. As things are now, global wealth and income distribution remain hugely lopsided which also has to mean that significant change is more likely than ever due to unsustainable imbalances. 2014 could and should be the year in which a mandate for change not only becomes necessary, but is also implemented”.
That’s all well and good except for the fact that looking back in history, changes rarely happen even at the crossroads of a crisis. Things carry on as they always did and it’s just business as usual. The banks haven’t changed the way they do business and governments haven’t changed the way they do theirs.
Apparently, the idea behind the predictions is to make people think of the worst-case scenarios that might possible happen in the world and to be in a position to adjust investments accordingly. Hype or outlandishly canny laughable material?
How many of the predictions do you go along with?
It’s the world’s largest financial market. It trades around $5 trillion daily. It’s more than all global equity markets combined. It operates round-the-clock. It’s manipulated for profit.
Grand theft reflects official Wall Street policy. Bankers make money the old-fashioned way.
They do it through fraud, grand theft, market manipulation, front-running, misrepresentation, scamming investors, naked short selling, precious metals price suppression, controlling Washington, getting open-ended low or no interest rate bailouts when needed, and assuring world financial capitals are banker occupied territories.
They do it artfully. Few people know what’s going on. Scandals rarely surface. Budding ones are usually buried. Little more than dust gets kicked up. Headlines disappear in short order.
In June 2012, JPMorgan Chase CEO Jamie Dimon testified before the Senate Banking Committee. He discussed his firm’s trading losses at the time.
It was more of a homecoming than grilling. Washington is Wall Street occupied territory. Regulators don’t regulate. Oversight is absent.
Investigations rarely happen. Initiated ones are whitewashed. Criminal fraud is institutionalized. It’s encouraged, not curbed.
Congress, the administration, SEC, and credit rating agencies incestuously collude with giant banks and other major financial institutions. Whatever they want, they get.
Wall Street never had it so good. Senators didn’t lay a glove on Dimon. His grand theft business model wasn’t discussed.
Former bank regulator/financial fraud expert Bill Black’s book titled “The Best Way to Rob A Bank Is To Own One” explains well.
He coined the term “control fraud.” It lets corporate officials commit grand theft. Finance capital never had it so good. Trillions of dollars are stolen. Nothing intervenes to stop it.
MF Global (MFG) looted customer accounts. Former Goldman Sachs chairman/CEO Jon Corzine ran operations.
MFG faced a run on its holdings. In October 2011, it filed for Chapter 11 bankruptcy protection.
Months before doing so, it moved hundreds of millions of dollars in customer money from its US brokerage unit to Bank of New York Mellon Corp.
It looted them. It used client money to speculate, pay down debt and cover losses. It committed grand theft. It’s longstanding Wall Street practice.
Why not when rare punishments at most are wrist slaps. Top Wall Street officials aren’t punished. They free to steal again.
Markets are rigged. Movements up or down aren’t random. The
Wall Street controlled Fed and high-level insiders manipulate them for profits.
Washington facilitates their lawlessness. It does it with business friendly legislation. It does it with similar executive orders. It does it by turning a blind to the worst of what goes one.
Market rigging is longstanding practice. It’s part of the system. On March 18, 1989, Ronald Reagan’s Executive Order 12631 created the Working Group on Financial Markets (WGFM).
It’s commonly called the Plunge Protection Team (PPT). Officials involved (or their designees) include:
PPT’s “Purposes and Functions: Recognizing the goals of enhancing the integrity, efficiency, orderliness, and competitiveness of our Nation’s financial markets.”
”(T)he Working Group shall identify and consider:
(1) the major issues raised by the numerous studies on the events (pertaining to the) October 19, 1987 (market crash and consider) recommendations that have the potential to achieve the goals noted above; and
(2)….governmental (and other) actions under existing laws and regulations….that are appropriate to carry out these recommendations.”
Government and Wall Street collude. They manipulate markets doing so. They move them up and down. Enormous profits are made both ways. Most people don’t know what goes on.
Wall Street/Washington invisible hands work better than Adam Smith imagined. They do it in dirty ways unknown in his day.
Mythology holds that prices move up or down randomly. Market forces do so, it’s claimed. Manipulation isn’t mentioned.
It’s commonplace. It’s longstanding. Tools are much more sophisticated than earlier. Computer technology facilitates blatantly illegal practices.
The 1934 Gold Reserve Act created the Treasury’s Exchange Stabilization Fund (ESF).
Section 7 of the 1944 Bretton Woods Agreements made its operations permanent.
The Treasury runs the Fund. Congressional oversight is bypassed. Manipulation keeps sharp dollar fluctuations up or down from disrupting financial markets.
Treasury operations include stabilizing foreign currencies, extending credit lines to foreign governments, and guaranteeing money market funds against losses up to tens of billions of dollars.
In 1995, Clinton provided Mexico a $20 billion peso credit stabilization line. It did so in time of crisis.
Earlier administrations extended loans or credit lines to various other countries. Current US lending to the IMF tops $35 billion.
Years earlier it was $57 billion. In 2009, Congress expanded contributions by $108 billion. The Treasury’s web site states:
“By law, the Secretary has considerable discretion in the use of ESF resources.”
“The legal basis of the ESF is the Gold Reserve Act of 1934.”
“As amended in the late 1970s….the Secretary (per) approval of the President, may deal in gold, foreign exchange, and other instruments of credit and securities.”
In other words, the Treasury maintains a slush fund. It uses it for whatever purposes it wishes. It manipulates markets. It operates secretly.
In 1999, the Counterparty Risk Management Policy Group (CRMPG) was established. It followed the Long Term Capital Management (LTCM) crisis.
CRMPG manipulates markets beneficially for Wall Street giants. It lets them collude through large-scale program trading. Doing so manipulates markets up and down advantageously.
Troubled giants get bailed out. Ordinary people get sold out. The process repeats as needed. A secret FDIC plan involves looting bank accounts.
Depositor theft may follow. Doing so is called bail-ins. It’s code language for grand theft.
Ordinary people and richer ones have trillions in bank accounts. It’s low-hanging fruit. It’s a treasure trove begging to be looted. Legislative shenanigans may legitimize it.
Cypriot officials did it. Canada approved it. So did Eurozone member states and New Zealand. It’s theft by other means.
Leading US banks warned about charging depositors. They may do so if the Fed cuts interest it pays them on bank reserves.
Imagine being charged for checking, savings and/or money market accounts. Depositors already earn virtually nothing on them. Penalizing them further may follow.
It’s an acronym for London Interbank Offered Rate. It’s a fundamental rate-setting benchmark. It’s set daily between UK banks for overnight to 12 month durations.
It’s produced for ten currencies with 15 maturities. It represents the London market’s lowest cost of unsecured funding. It’s the primary global short-term rate benchmark.
In the 1980s, it began expanding exponentially in importance. London’s status grew as an international financial center. It’s the world’s largest.
It handles over 20% of all international bank lending. More than 30% of foreign exchange transactions go through London.
Demand grew for an accurate measure of the real rate at which banks and other financial institutions could borrow from each other.
It affects the price and availability of capital. The higher Libor goes, the greater the borrowing cost for business, individuals, real estate and other loans.
When things work right, operations are hardly noticed. When trouble occurs, all hell breaks loose.
Libor rigging affects countless trillions of dollars. Amounts involved exceed global GDP multiple times over.
Predatory banks manipulate things advantageously. Practices are too corrupted to fix. The longer they go unaddressed, the more harm done.
Financial giants, central bankers and complicit politicians bear full responsibility. Dirty policies persist out-of-control.
Libor rigging is one of many manipulative market practices. Systemic corruption breeds more of the same. An illusion of stability conceals business as usual.
Gold and other precious metals markets are rigged. Naked short selling offsets rising bullion demand. Prices are driven lower.
Naked shorts reflect what sellers don’t have. It’s illegal. It persists anyway. Bullion prices would be much higher otherwise. Eventually they’ll rise to their true value. When remains to be seen.
QE reflects Fed market rigging. Treasuries and mortgage-backed securities are bought. Too-big-to-fail banks hold enormous amounts of junk. Fed buying substitutes dollars for toxic assets.
Banks get lots of cash to speculate. Markets are manipulated up in response. It’s artificial. It’s not real. It can’t last. It continues until bubbles eventually pop.
Foreign exchange markets are rigged. On October 12, The Economist headlined “The FX is in,” saying:
It’s “been a dreadful couple of years for financial benchmarks.” Banks rig libor. “Commodities prices from crude oil to platinum have been the subject of allegations and inquiries.”
Authorities now scrutinize global foreign exchange (FX) markets. Trillions of dollars are involved daily. “(S)uspect banks have tampered with those, too.”
On October 4, Reuters headlined “Switzerland probes banks over possible forex rigging.” FINMA said it’s “currently (investigating) several Swiss financial institutions in connection with possible manipulation of foreign exchange markets.”
It’s coordinating with regulators in other countries. “(M)ultiple banks around the world are potentially implicated.”
UBS is Switzerland’s largest bank. It was fined $2.7 billion for market rigging. Credit Suisse may be involved. So are major Wall Street banks.
Bloomberg said major ones use advance customer order knowledge to push through trades manipulatively.
They colluded with other banks doing so. FX markets are poorly regulated. Most trading takes place away from exchanges. It’s a shadowy anything goes realm.
Price rigging is standard practice. Hundreds of banks trade currencies. Four dominate the market: Deutsche Bank, Citigroup, Barclays and UBS.
Concerns center around what’s known as the “London Fix.” It’s a daily snapshot of currency prices.
Enormous shifts happen during a 60-second window before 4PM London time. It’s when markets are especially liquid.
Banks set a certain rate for trades of one currency against another. Shortly afterwards, prices revert to normal rates.
Forex traders call the practice banging the close. It reflects blatant market manipulation. Betting the right way yields huge profits in seconds.
A fraction of a cent is all it takes. Trading involves a measure called a “pip.” It represents one basis point or 1/100th of 1%.
Multiple trades near the London Fix can yield enormous profits. Repeating the process many times daily multiplies it hugely. A few pips in the right direction is all it takes.
The so-called WM/Reuters (WMR) rate works as follows. It’s when “more than 40% of daily global FX trading is done. It’s the nearest thing to a closing price in a 24-hour, self-regulated market.”
Unwary traders are fleeced big time. Banks know big trades they’ll execute on behalf of others.
Moving forex prices ahead of the fix yields big profits. Major banks do it at the expense of unsuspecting clients.
According to New York University’s Stern School of Business Professor Marti Subrahmanyan:
“There’s no policeman. These things have sort of fallen through the cracks. Foreign exchange is really nobody’s kind of baby.”
Major forex traders collude in electronic messaging groups. They’re called “the bandits club” and “the cartel.”
They profit at the expense of clients. They do so by manipulating markets up or down. Regulators do virtually nothing to stop it.
Investigations come and go. Minor penalties at most are imposed. It’s part of the system. It shifts enormous wealth to major players.
Forex trading is a buyer’s beware market. Traders call it the wild west. Volatility is valued. Sharply enough rice movements create profit opportunities. Stability minimizes them.
Manipulation is part of the system. Forex trading shenanigans reflect grand theft. Who said crime doesn’t pay?
Courtesy: Stephen Lendman
It’s no surprise that Stephan Bogner, analyst with Rockstone Research Ltd. and CEO of Elementum International—a precious metals trading and storage firm—advises investors to hold physical metals outside the banking system, but he also advocates mining companies keeping gold on their balance sheets and forming a cartel. In this interview with The Gold Report, Bogner discusses which exploration and development companies will be ready to produce when metals prices rise and shares his interest in the diamond, potash and uranium space.
The Gold Report: Stephan, two years ago, Europe was awash in fears of debt defaults and countries exiting the Eurozone. On a scale of 1 to 10, where are we today on Europe’s “fear meter?”
Stephan Bogner: I think we are between 3 and 5. Inflation in the Eurozone fell to 0.7% in October, its lowest level since January 2010. Deflationary risks, a stronger euro and economic weakness have motivated the European Central Bank (ECB) to cut rates to a record low of 0.25%. However, these unprecedented low interest rates substantially devalue savings in the Eurozone and increase the danger of bubbles.
I believe the downward pressure will get worse and companies will suffer. Once the companies start demanding loans, the ECB will pump liquidity into the real economy, and inflation will pick up. The ECB seems to want inflation, but to justify that, it first must strangle the economy so people indirectly demand inflation. They then become the scapegoats during the upcoming inflationary times.
TGR: Are European investors embracing gold as a hedge against these weaknesses?
SB: Along with some central banks, only the smart money is moving into gold and silver at the moment. People should buy when prices are declining and low, but they are not. The masses buy when prices are rising and high.
I anticipate negative real interest rates ahead. Once that happens, people will take their money out of the banking system and look for safe vehicles like gold and silver. It only takes 5% or 10% of depositors withdrawing their deposits to push a bank into bankruptcy. Hence, I anticipate new laws to prohibit cash holdings and to prevent bank runs, especially if nominal interest rates go below zero.
People are increasingly looking for alternatives to banks. Independent vaults offer exactly that. Instead of holding your cash in a bank account, you can buy gold and silver and store it in an independent vault outside the banking system. My firm, Elementum International, stores precious metals in a high-security facility inside a mountain in central Switzerland. Our clients can sell the metals to us at any time if they need cash. That is banking backed by real values.
TGR: Should volatility of the gold price concern investors?
SB: Volatility is seen as something negative and the media is propagandizing that gold is not a safe investment anymore because it is so volatile. However, I somewhat like it being volatile because it shows that the market is alive and that the market forces are fighting a dead-serious war. I would be more concerned if the price moves sideways on low volumes. Volatility means action and investors want to be where the action is. People should not ask who is selling but who is buying.
TGR: How do you see paper versus physical gold?
SB: I see paper as an instrument to drive people out of holding bullion and to get their hands on that gold. Gold prices are beaten down to achieve one thing: redistribution of real values. If investors believe that inflation will come, they should want to hold gold and silver now. However, there are very few physical gold and silver sources from which to purchase substantial quantities, so investors must be smart on how to accumulate. They can accumulate most when buying into a declining price after it has been high.
A lot of speculative money has left the precious metals markets. Someone bought into all that. China is importing huge amounts of gold, and India now imports massive amounts of silver. I think China will back its currency with gold or somehow utilize gold as a monetary asset once gold prices have started to rise toward $2,000/ounce ($2,000/oz) and/or once there is nothing left to purchase from a dried-up physical market. Russia may very well do so, too. There is no other solution to the growing financial excesses but inflation, so investors have got to go for gold. Follow the smart/quiet money and not the dumb/noisy money.
TGR: Is China purposely trying to suppress the gold price, and, if so, how?
SB: Yes, I think it is. Why shouldn’t it do so? China is a large buyer in a small market, so it has to play smart to get its hands on physical bullion. It may do so with paper money and by playing the futures markets and putting pressure on the markets.
However, as soon as the price picks up again and the physical market has dried up, China will no longer manipulate the price to the downside but to the upside. China doesn’t mind price declines in the short term because it is buying for the long term and has an ever increasing interest to appreciate these assets relative to its dollar reserves.
TGR: You have advised gold and silver producers to hold onto their production in an effort to sell at higher prices. In a cash-hungry business like mining, is that feasible?
SB: It is sad that mines are coming into production or increasing output at these low prices.
Deposits should be exploited during high prices not low, when companies can only make losses or marginal profits. If I owned a gold mine, I would stop all operations and wait for better times. I know this is not easy or feasible, especially for public companies, but this is the time for innovation.
TGR: It’s one thing if you own the company, but a CEO needs to have the company perform to keep his job. How does management balance those two priorities?
SB: As soon as a company mines gold or silver, it sells it into the market and trades it for dollars. Instead, the company should use gold and silver as the functional currency for the industry. I’m certain that most companies would participate if such a system was in place. Companies should look for ways to bank their gold as cash assets or take out gold loans, not dollar loans. They should buy physical gold and silver and store it outside the banking system. When they require cash, they can sell part of their holdings.
Many exploration, development and producing companies have millions of dollars of cash in the bank. If they all bought bullion and stored it in an independent vault facility outside the banking system, that would put upward pressure on the price, which would benefit the companies.
Such a system is already in place and it is only a matter of time until mining companies will hold their cash in gold and silver. Shareholders will appreciate such prudent companies that know how to play a depressed market for the benefit of the shareholders. This also would bring a lot of credibility and investor confidence back into this dried-up market.
There are oil and potash cartels; the gold industry should come up with something similar.
TGR: Most cartels, like the Organization of the Petroleum Exporting Countries (OPEC) are privately held businesses. This makes it easier to get consensus. How would that work with publicly held companies?
SB: Public companies are part of the American and Russian potash cartels. A gold cartel would work like the potash market. Mining companies should collectively refrain from selling into the market at spot prices but should instead find buyers themselves, as there are definitely investors worldwide—especially from Asia, as well as the Middle and Far East—that would pay high premiums on the spot price to get their hands on physical bullion.
What is there left to lose for the deeply depressed mining industry but to take revolutionary steps and to fight back smartly? I hate to see the miners just waiting and hoping for better times, getting increasingly beaten up, defenseless. Now is the time to get their act together before the banks force them to hedge and sell forward their business for peanuts, rendering them incapable of benefiting from rising prices in the future.
TGR: Your research reports suggest that you favor small-cap precious metals companies over larger producers. Why are small caps worth the added risk?
SB: During down markets when metals prices are below production costs, producers struggle to stay alive. I only buy producers leveraged to a rising metal price, as they tend to rise stronger by a factor of three to five.
However, if you believe that the gold price will now recover quickly above $1,600/oz, I would recommend buying producers with the highest production costs. They’ve been beaten down the farthest, so they will benefit the most.
If you bet, as I do, that the gold price will go sideways or down for some time before rising, you should look for exploration and development companies active in bringing their deposits into production in the next few years when prices will be higher. When a junior discovers and develops a deposit, its share price will definitely rise because real value has been created. Right now, I see less risk with explorers and developers than with producers.
TGR: You recently went to various investment conferences in Europe and learned more about a number of companies. Please tell us about some of those names.
SB: Gold Standard Ventures Corp. (GSV:TSX.V; GSV:NYSE) is a young exploration company starting to make respectable gold discoveries in Nevada, potentially sitting on 20+ million ounces (20+ Moz) gold. If it can prove such a large gold resource, its stock will thrive even if gold continues to fall. This is the kind of exploration and development story I am focusing on right now during declining metal prices, as such stocks have the power to rise no matter what the gold price is doing.
I also like companies with a business model like Zimtu Capital Corp.’s (ZC:TSX.V). Creating, investing in and growing junior mining companies provide a great way for investors to participate in and profit from the public company-building process. Zimtu was behindWestern Potash Corp. (WPX:TSX.V), which has a large mineable potash deposit in Canada. If Western Potash can find $700–900 million ($700–900M) from a strategic investor, it will develop that resource into a mine. It’s only a matter of time before this deposit is mined, and I’m very bullish for the mid- to long-term potash price.
I am certain that Brazil is becoming the largest agricultural farming and potash source of the world. For this reason I closely follow the current drill program of Pacific Potash Corp. (PP:TSZ.V) in the Amazonas Basin, a potash-rich basin that could change the fundamentals of the entire market.
TGR: Zimtu has a number of positions in graphite companies. Has it also taken positions in precious metals companies?
SB: Precious metals not so much, with the exception of Equitas Resources Corp. (EQT:TSX.V; T6U1:FSE), which will start drilling early next year on a remarkable copper-gold porphyry on Vancouver Island, and Pasinex Resources Ltd. (PSE:CNX), which is focused on base and precious metal exploration projects in Turkey. It has a promising joint venture with the Akmetal Group and started an exploration program a few weeks ago.
I like Zimtu because it is active on many fronts of the commodity markets and is thus somewhat independent from the precious metals prices. For example, Zimtu is involved with diamonds throughArctic Star Exploration Corp. (ADD:TSX.V). Buddy Doyle, who was instrumental in discovering the Diavik diamond mine in Canada as head of diamond exploration for Kennecott Canada [now part of Rio Tinto Plc (RIO:NYSE; RIO:ASX; RIO:LSE; RTPPF:OTCPK)], is behind Arctic Star. It looks as if he and his team are doing it again, discovering diamond deposits in Canada close to two other world-class diamond mines. I very much like the fundamentals of the diamond market and think prices will start rising substantially in 2014.
The fundamentals of the uranium market, where Zimtu is well positioned with Lakeland Resources Inc. (LK:TSX.V), also are attractive. Lakeland is active in the Athabasca Basin in Canada. The company is backed by Jody Dahrouge, who was instrumental in the J-Zone discovery in the eastern part of the basin and in the Patterson Lake deposits to the south. Other backers include John Gingerich, who worked in the northern part of the basin for Eldorado Nuclear, now Cameco Corp. (CCO:TSX; CCJ:NYSE), and Thomas Drolet, an experienced uranium industry expert.
Zimtu management is also behind Commerce Resources Corp. (CCE:TSX.V; D7H:FSE; CMRZF:OTCQX), a development company with two advanced-stage rare earth elements (REEs) deposits in Canada. I’m very bullish on REEs. Commerce has two projects, the Ashram REE project and the Blue River tantalum and niobium project. The Ashram REE project is remarkable because 1) it has a huge resource, 2) it has high grades, 3) it has a unique distribution with competitive grades of the most highly in-demand elements namely neodymium, europium, dysprosium, yttrium and terbium, and most important, 4) it is hosted by the three minerals that completely dominate current commercial production globally: bastnaesite, monazite and xenotyme. All of the first three (very positive) points are subservient to the fourth and most important point—that really only these three minerals are processed commercially.
The capital expenditure (capex) for Ashram is CA$763M, so it must find a strategic partner. This is only a matter of time because I believe the REE market will soon escalate. Commerce has a new set of drilling and metallurgical results that also will be released shortly, and I am positive that this will revive the stock and bring in a strategic partner, likely from Asia. The Blue River tantalum and niobium project is the world’s largest production scenario, cash positive, for tantalum. The Upper Fir capex is only CA$379M and in the last six months Commerce has increased the resource by over 30% and the recovery rate by 15% over the amounts used as the basis for the completed preliminary economic assessment.
Zimtu is also active in northern British Columbia via Prima Fluorspar Corp. (PF:TSX.V) and Big North Graphite Corp. (NRT:TSX.V), and is about to launch a new company involved with high-purity quartz used for silica. These are the kinds of industrial minerals I’m also bullish on.
Remarkably, Zimtu’s stock investments in all these companies have a book value 50% below the market value at the moment, so the company looks quite attractive, trading at a huge discount, and diversified with different kinds of projects.
TGR: Which small-cap precious metals companies are you following?
SB: I like stocks with prospective deposits that are heavily discounted and trading below or near cash levels. For example, Mundoro Capital Inc. (MUN:TSX.V) is trading almost 50% below cash value despite owning highly prospective deposits in Serbia and Bulgaria. More than 58 Moz gold has been discovered in the Tethyan porphyry copper-gold belt that runs through Serbia, Bulgaria and Turkey. This underexplored belt is similar to the well-explored porphyry Maricunga belt in Chile or the Greenstone belt in Ontario and Québec.
The corporate tax regimes of Serbia (15%) and Bulgaria (10%) are better than Ontario’s (30%). It’s no surprise that senior miners are active in this neglected part of this world, such as Rio Tinto and Freeport-McMoRan Copper & Gold Inc. (FCX:NYSE).
Mundoro’s management is highly experienced and is prudently budgeting its large cash reserves for a project that shows remarkably high-gold grades. Mundoro is a bargain at current prices, and I’m certain this won’t last much longer, as I see a bottom at $0.18/share.
Among the few producers that I like, Klondex Mines Ltd.’s (KDX:TSX; KLNDF:OTCBB) stock has been rising since April. Paul Huet, its president and CEO, has high-grade mining experience, especially with narrow gold veins. Previously, he was with Premier Gold Mines Ltd. (PG:TSX) where he served as chief operating officer, was general manager at Great Basin Gold Ltd.’s (GBG:TSX, GBG:NYSE.MKT) Hollister mine and mine manager at Newmont Mining Corp.’s (NEM:NYSE) Midas mine.
Klondex’s flagship is the high-grade epithermal Fire Creek gold project in north-central Nevada, which is stunningly similar to the Midas and Hollister mines. In September, Klondex updated its NI 43-101 resource, applying a 7 grams/ton (7 g/t) gold cutoff, to host a Measured and Indicated resource totaling around 300,000 ounces (300 Koz) gold at 45 g/t and an Inferred resource of 421 Koz gold, averaging 90 g/t. That may not sound like a lot of gold, but Klondex has the skills to drill very effectively. Klondex has one of the best upside potentials in the entire market.
In regard to development companies bringing deposits into production within the next few years, I like Columbus Gold Corp. (CGT:TSX.V). It is developing a highly prospective gold deposit into a mine in French Guiana—a safe, but somewhat expensive jurisdiction. When Columbus acquired the property in 2011, it had a resource of 1.8 Moz gold. Columbus increased that to more than 5 Moz by drilling deeper than 135 meters and starting infill drilling. Further infill drilling will add another 2 Moz or so. The deposit is still wide open with excellent upside potential. I’m positive that more than 10 Moz gold can be proven during the next three years.
Columbus recently did a deal with Nord Gold N.V. (NORD:LSE). The Russia-backed company can earn 50.01% by spending $30M and completing a bankable feasibility study by October 2016. Nord Gold is a very aggressive resource company that had no assets in 2007. Since then, it has acquired eight companies and now has nine producing gold mines in four countries and $1 billion ($1B) in revenue. Nord Gold produces more than 800 Koz gold annually, which puts it among the top 20 gold producers worldwide. Columbus just started another aggressive, 28 kilometer drill program and Columbus will have a lot of news flow over the next two to three years. This development company’s stock price will thrive regardless of the gold price.
Sama Resources Inc. (SME:TSX.V) is another remarkable project that hasn’t received any attention from analysts and investors. It is poised to become a world-class nickel-copper-palladium producer in West Africa. The Minerals & Metal Group Ltd. (1208:Hong Kong) owns 18%, the IFC (World Bank group) 12% and African Lion owns 5%. Marc-Antoine Audet is the president and CEO. Benoit LaSalle, founder of SEMAFO Inc. (SMF:TSX; SMF:OMX), is the executive chairman.
Sama’s revised NI 43-101 Indicated resource includes 75 million pounds (75 Mlb) nickel and 61 Mlb copper, plus an Inferred resource of 134 Mlb nickel and 107 Mlb copper. The company is drilling in a newly discovered zone called Yepleu. Newly defined geophysical anomalies, along with nickel-copper sulphides at surface, indicate that Sama’s resource could grow exponentially. Yepleu could turn out to be a company maker shortly, and I believe the surrounding district will become a significant mining center for nickel.
TGR: You believe that silver could decouple from gold in the medium term. Can you explain why?
SB: Silver, unlike gold, is both a currency metal and an indispensable industrial metal. If the gold market is very small, the silver market is tiny. Central banks worldwide hold some 25,000 tons (25 Kt) gold, which has a market value of around $1 trillion. Central banks do not hold silver, but some 30 Kt are held as reserves for silver ETFs, stocks in warehouses from the London Bullion Market Association and COMEX or minted coins from the U.S. and Canada. Those 30 Kt of silver have a market value of only $20B.
If a drop in liquidity hits the silver market, the price will explode upward. Aboveground silver stocks are depleting quickly. A strongly rising or falling silver price does not affect demand or supply—both demand and supply are largely price inelastic, which is somewhat unique in the commodity sector and important to understand. If silver trades at $100 or more tomorrow, industry will not consume less because silver is mostly indispensable or nonsubstitutable. Typically, silver is a relatively small component of a product and thus, a fraction of its total cost. Price escalation is just a matter of time, in my opinion, especially when looking at the depleting warehouse stocks.
TGR: Which silver equities do you follow?
SB: Given that grade is king, one of my favorite stocks, especially during depressed metals markets, is MAG Silver Corp. (MAG:TSX; MVG:NYSE). I believe this company will become one of the largest silver miners in the world, maybe even the largest.
I also like companies that brought mines into production during this depressed market and are still profitable, such as IMPACT Silver Corp. (IPT:TSX.V). It owns four producing mines in Mexico, three of which are adjacent to each other. These three are mined underground from epithermal deposits feeding a 500 ton per day (500 tpd) mill. IMPACT’s fourth mine, Capire, started production as a volcanogenic massive sulfide open pit with a 200 tpd mill in March 2013. Then, the stock traded at $1/share. Its current price of around $0.46/share is quite attractive. I am confident IMPACT Silver can increase grade and output, and it has vast unrealized exploration potential.
I also like the prospects for Dolly Varden Silver Corp. (DV:TSX), an advanced-stage exploration company that owns 100% of a promising high-grade property in the Stewart Complex in British Columbia. Dolly Varden’s property has the potential for precious metal-rich Eskay Creek-type deposits. The company is expanding its historic resource with the goal of restocking production, and is exploring for untested Eskay Creek-type deposits. The property is near the ocean, making it easy to ship ore or concentrate. The company doesn’t yet have an NI-43-101-compliant resource, however its historic resource of 15 Moz silver will be changed into an official resource soon, with upgrade potential.
Another is Aurcana Corporation (AUN:TSX.V; AUNFF:OTCQX), which owns 100% of the low-capital cost and low-risk Shafter silver mine in southwest Texas. It has an NI 43-101 resource of 25 Moz silver in the Measured and Indicated category, with an average grade of 265 g/t silver and 23 Moz in the Inferred category averaging 327 g/t silver. Production started last year, but was suspended pending replacement of some parts. It should start up again in Q4/13.
Modifications to the plant will allow throughput of 1,500 tpd by mid-2014. This is an excellent entry point, as the stock was beaten down severely in October.
Aurcana’s second mine is La Negra, in Mexico. Starting in 1970, Industriales Peñoles S.A. de C.V., discovered, developed and operated the mine, until putting it on care and maintenance in 2000. Peñoles produced 36 Moz silver, 323 Mlb zinc, 70 Mlb copper and 161 Mlb lead. The 2000 NI 43-101 resource estimate shows 150 Moz silver, 270 Mlb copper, 540 Mlb lead and 1.4 billion pounds zinc, so there is more to be mined.
In 2012, Aurcana produced 2.5 Moz silver equivalent and in H1/13 produced 1.4 Moz silver equivalent. In Q2/13, total cash costs per silver ounce, net of byproducts, were $7.79. I like Aurcana’s substantial production upside potential. It’s a nice coincidence that the company didn’t produce at maximum while the silver price weakened.
TGR: Are there any other companies you’d like to tell us about?
SB: I like Sumatra Copper & Gold Plc (SUM:ASX), an emerging gold and silver producer on the Indonesian island of Sumatra. Its most advanced project is the 100%-owned Tembang, which is being fast-tracked into production in 2014. Sumatra’s other advanced project is Tandai, which is being developed under a joint venture with Newcrest Mining Ltd. (NCM:ASX).
Other gold stocks I follow closely include Golden Queen Mining Co. Ltd. (GQM:TSX), which is looking for a strategic investor for its gold project in California. San Gold Corp. (SGR:TSX.V) is a producer, looking to convert its debts. The Malaysian gold producer Monument Mining Ltd. (MMY:TSX.V) is restructuring, cleaning and preparing to double its resources and output. Pilot Gold Inc. (PLG:TSX), Mawson Resources Ltd. (MAW:TSX; MWSNF:OTCPK; MRY:FSE) and Midas Gold Corp. (MAX:TSX) also have compelling exploration and development projects.
TGR: How do you stay so positive in this bear market for precious metals?
SB: After the bear comes the bull; there is no other solution to the globalized financial excesses but gold and silver. Given global population growth, especially in emerging countries, coupled with the natural and inexorable human drive to improve one’s standard of living, when you look at the vanishing supplies of commodities, the question is not when the commodity bull market will end, but if it can end.
TGR: Stephan, thank you for your time and your insights.
A week from now, the Federal Reserve System will celebrate the 100th anniversary of its founding. Resulting from secret negotiations between bankers and politicians at Jekyll Island, the Fed’s creation established a banking cartel and a board of government overseers that has grown ever stronger through the years. One would think this anniversary would elicit some sort of public recognition of the Fed’s growth from a quasi-agent of the Treasury Department intended to provide an elastic currency, to a de facto independent institution that has taken complete control of the economy through its central monetary planning. But just like the Fed’s creation, its 100th anniversary may come and go with only a few passing mentions.
Like many other horrible and unconstitutional pieces of legislation, the bill which created the Fed, the Federal Reserve Act, was passed under great pressure on December 23, 1913, in the waning moments before Congress recessed for Christmas with many Members already absent from those final votes. This underhanded method of pressuring Congress with such a deadline to pass the Federal Reserve Act would provide a foreshadowing of the Fed’s insidious effects on the US economy—with actions performed without transparency.
Ostensibly formed with the goal of preventing financial crises such as the Panic of 1907, the Fed has become increasingly powerful over the years. Rather than preventing financial crises, however, the Fed has constantly caused new ones. Barely a few years after its inception, the Fed’s inflationary monetary policy to help fund World War I led to the Depression of 1920. After the economy bounced back from that episode, a further injection of easy money and credit by the Fed led to the Roaring Twenties and to the Great Depression, the worst economic crisis in American history.
But even though the Fed continued to make the same mistakes over and over again, no one in Washington ever questioned the wisdom of having a central bank. Instead, after each episode the Fed was given more and more power over the economy. Even though the Fed had brought about the stagflation of the 1970s, Congress decided to formally task the Federal Reserve in 1978 with maintaining full employment and stable prices, combined with constantly adding horrendously harmful regulations. Talk about putting the inmates in charge of the asylum!
Now we are reaping the noxious effects of a century of loose monetary policy, as our economy remains mired in mediocrity and utterly dependent on a stream of easy money from the central bank. A century ago, politicians failed to understand that the financial panics of the 19th century were caused by collusion between government and the banking sector. The government’s growing monopoly on money creation, high barriers to entry into banking to protect politically favored incumbents, and favored treatment for government debt combined to create a rickety, panic-prone banking system. Had legislators known then what we know now, we could hope that they never would have established the Federal Reserve System.
Today, however, we do know better. We know that the Federal Reserve continues to strengthen the collusion between banks and politicians. We know that the Fed’s inflationary monetary policy continues to reap profits for Wall Street while impoverishing Main Street. And we know that the current monetary regime is teetering on a precipice. One hundred years is long enough. End the Fed.
By – Dr. Ron Paul
Jeff Clark has pulled together data on four major factors that will drive the price of gold, starting next year. The information below is concise and compelling, so I’ll turn it over to him…
If you’re like me, you’ve bought gold due to the money printing policies of most developed countries and the effect those policies will have on the future purchasing power of our paper money. Probably also because there’s no viable way for governments to escape the consequences of all the debt they’ve piled up. And maybe because politicians can’t be trusted to formulate a realistic strategy to avoid any number of monetary, fiscal, or economic crises going forward.
These are valid, core reasons to hold gold in a portfolio at this point in time. But a new trend is under way, and someday soon it will be just as much a driving force for gold prices as anything else: a good old-fashioned supply crunch.
A few metals analysts have mentioned it, but it escapes many and certainly is off the radar of the mainstream financial media. But unless several critical factors reverse course, a supply shortage is on the way with clear implications for the price of gold.
The following four factors are combining to diminish gold supply. While we’ve touched on some of them before, put together they’re creating a perfect storm that will, sooner or later, impact the gold market in several powerful ways. As these forces gather steam, you’ll want to make sure you’ve already built a substantial position in physical bullion.
Gold producers don’t operate in a vacuum. If the price of their product falls by 30% over a two-year period, they’ve got to make some adjustments. And those adjustments, more often than not, result in lower production, delayed mine development plans, and cuts in exploration budgets. The response is industrywide, and even low-cost producers are not immune.
The drop in metals prices means some mines can’t operate profitably, and if the losses exceed the cost of closure (and possibly, restart in the future), these mines will be shut down. As operations come offline, global output falls.
While lower metals prices are not what any of us want, they’re long-term bullish because, as they say, the cure for low prices is low prices. If prices drop further, a greater number of projects will be unable to maintain production levels. For example, we know of several operating mines that, in spite of large reserves, will be forced offline if the gold price falls to the $1,100 level.
The impact on development and exploration projects is even greater—it’s easy to postpone construction on tomorrow’s new mine when you’re worried about cash flow today. As a result, many companies have cut drilling projects and laid off geologists.
The chart below shows the precipitous decline in the number of drilling projects around the world.
Through the first nine months of 2013, 52% fewer drills have been turning compared to the same period last year. And it’s not just fewer holes being poked in the ground—ore grades are declining too.
As of last year, ore grades of the ten largest gold operations are less than a third of what they were just five years ago, and less than a quarter of what they were 14 years ago.
Here’s the troubling aspect: This trend cannot be easily reversed.
It takes about a decade to bring new projects on line, and even shuttered, recently producing mines held on “care and maintenance” take time and money to get going again.
In other words, even when gold prices start rising again, new mine supply will take years to rebuild. Many companies will find themselves with a lack of readily available ore, and the market with fewer ounces.
Lower metals prices obviously have an impact on how much metal gets dug up. This alone is bad enough for supply, but unfortunately it’s not the only factor…
Many mining projects have both low-grade and high-grade zones. When prices fall, a company can mine the richer ore and still make money. It may sound shortsighted, but it can be the right thing to do to stay profitable and be able to survive in a temporarily weak price environment.
But high-grading, as it’s called, can make low-grade ore part of a disappearing act. Here’s how:
When metals prices are low and companies focus on high-grade ore, the low-grade material is temporarily bypassed. It’s still physically there, so one might assume the company will come back at a later time to mine it. But not only is it not economic at lower metals prices, it may never get mined at all.
That’s because some low-grade ore only “works” when it’s mixed with high-grade ore. Even when gold moves back up, it doesn’t matter, because the high-grade ore is gone. So it’s not just gone legally, as per regulatory definitions of mining reserves—it may be economically gone for good.
Miners could return to some of these zones in a very high gold price environment (something well north of $2,000), but that’s a concern for another day. The point for now is that many of today’s low-grade zones would be written off if the high-grade they need to work is gone.
Critical point: You may read reports early next year that global production is rising. However, to the degree that’s due to high-grading, it virtually guarantees lower production is around the corner.
It’s become increasingly difficult for mining companies to navigate the political minefield. Many governments have become so rapacious that supply is already suffering.
We’ve mentioned this issue before, but take a look at how governments and NGOs (nongovernment organizations) put an effective halt to some of the biggest precious metals discoveries seen this cycle…
Pebble Project in Alaska. Anglo American (AAUKY) spent $540 million on one of the biggest copper/gold discoveries ever, but recently announced that it will walk away from it. The company said it wants to focus on lower-risk projects and is undoubtedly tired of putting up with ongoing environmental scares and regulatory delays.
Fruta del Norte in Ecuador. Kinross Gold (KGC) bought Aurelian shortly after what many called the discovery of the decade, but the politicos demanded such a big slice of the pie that Kinross stopped developing the project.
New Prosperity Mine in British Columbia. Taseko Mines (TGB) has been relentlessly challenged by environmental activists at the world’s tenth-largest undeveloped gold/copper deposit and pushed politicians to continually delay permitting.
Pascua-Lama in Argentina & Chile. This giant deposit has been postponed for several years, largely due to environmental issues and unmet regulatory requirements. Some analysts think it may never enter production.
Navidad in Argentina. Pan American Silver (PAAS) was forced to admit that the Navidad silver deposit—one of the world’s biggest silver-primary deposits—was “uneconomic at any reasonable estimate of long-term silver prices” when the local governor announced he wanted “greater state ownership” and increased royalties from 3% to 8%.
Minas Conga in Peru. Newmont’s (NEM) multibillion-dollar project was put on the back burner last year when the government gave the company two years to develop a way to guarantee water supplies for residents of the Cajamarca region.
Certainly bigger projects attract greater attention and scrutiny, but as it stands now, none of the above projects are in operation.
This list is by no means exhaustive; large numbers of smaller projects all around the world face similar challenges.
The bottom line is that finding economic gold deposits in pro-mining jurisdictions is getting increasingly difficult. The result? The metal stays in the ground.
As you’ve likely read, the gold mining industry in South Africa is imploding.
The breakdown in South Africa is important because as recently as 2006, it was the world’s top producing country; it’s now #5. Unfortunately, there’s every reason to expect this trend to continue, in many countries around the world.
The result is—you guessed it—fewer ounces come to market.
These four factors are already affecting gold supply. Gold production in the US was already 8% lower in the first half of 2013 vs. the first half of 2012. Through June of each year, output dropped from 655,875 ounces last year to 623,724 in 2013.
The net result of this perfect storm is that we should expect gold supply to decline until prices are much higher. Even when prices do rise, management teams will be reluctant to expand operations, reopen mines, or buy new projects until they feel the new price level is sustainable. As a result, this trend will almost certainly last several years.
Based on the research we’ve done, it is my opinion that after a bump in output early in 2014, the shortfall will become increasingly evident by the end of the year and reach fractious levels by 2015.
If demand remains at current levels, or even if it falls by less than the decrease in supply, gold and silver prices will be forced up. And in an environment of currency depreciation, we should see more demand, not less. We have the makings of a classic supply squeeze.
Higher metals prices are not the only ramification, however: Investors will be required to pay higher premiums on bullion. Further, we can expect a lack of available product, most likely resulting in delivery delays or even rationing.
That’s why it’s so important to buy bullion now, before the storm. Even if you need to sell a little to maintain your standard of living, the effects on you will be all positive. The product you sell will…
All it takes to capitalize on this opportunity is to recognize the supply shortage that’s on the way and act accordingly.
Critical point: Buy the physical gold and silver you think you’ll need for the future NOW.
One of the best places I know has among the lowest premiums available in the industry, and also offers several international storage locations in case things get bad in your home country. This breakthrough program is as liquid as GLD and offers greater safety than storing bullion at home.
Courtesy: Jeff Clark
Today’s AM fix was USD 1,229.50, EUR 892.62 and GBP 754.57 per ounce.
Friday’s AM fix was USD 1,222.75, EUR 891.22 and GBP 750.89 per ounce.
Gold rose $11.10 or 0.91% Friday, closing at $1,237.60/oz. Silver climbed $0.18 or 0.92% closing at $19.70/oz. Platinum fell $1.05, or 0.1%, to $1,357.70/oz and palladium fell $0.72 or 0.1%, to $714/oz. Gold and silver were both up for the week at 0.72% and 1.13%.
All eyes are on the FOMC this week and speculation is high that the Federal Reserve may taper. Fed policymakers gather for the last time in 2013 for a two day policy meeting that concludes this Wednesday.
The dreaded ‘taper’ is becoming a bit of a caper as the death of QE is greatly exaggerated. While a taper is indeed possible, any reduction in bond buying is likely to be small and of the order of less than $15 billion. This means that the Fed is likely to keep its bond buying program at close to $70 billion per month which is still very high and unprecedented for any industrial nation in modern history.
This still high level of debt monetization, in conjunction with continuing zero percent interest rate policies is bullish for gold.
Gold in U.S. Dollars, 10 Day – (Bloomberg)
Gold was higher last week which was positive from a technical perspective but as of late morning trading in London, there has been, as of yet, little follow through.
The dollar looks overvalued, considering the overly indebted U.S. consumer and government, and is likely to come under pressure again in 2014 which will support gold and could lead to a resumption of gold’s bull market.
2013 has been a torrid year for gold and it is down 26%. Given the still strong fundamentals, we are confident that in a few years, 2013 will be seen as a mere blip in the context of a long term, secular bull market which will likely see gold prices have a parabolic peak between 2016 and 2020.
ETP liquidations have been one of the primary reasons for gold’s weakness in 2013. ETP holdings may continue to fall as more speculative investors reduce allocations to gold and some ETP buyers sold in order to move to the safety of allocated gold.
However, the supply demand data clearly shows that ETP liquidations are being matched by robust global demand, especially in China. Even if ETP holdings dropped by another 300 plus tonnes in 2014, average Chinese imports through Hong Kong alone are running at well over 100 tonnes per month.
Outflows of gold from ETFs amounted to 24.3 million ounces, nearly 700 metric tonnes, in 2013 from their peak at the end of 2012. Much of this gold was taken out of ETF holdings in London and shipped to refineries in Switzerland, where it was melted down and made into kilogramme bars, then sent to Hong Kong and ultimately to China.
Imports from Hong Kong to China totaled 26.6 million ounces or 754 metric tonnes through September alone. It is unknown where the gold would come from to replenish these ETF holdings were there a sudden surge in demand in the West in the event of a new sovereign debt crisis or a Lehman Brothers style contagion event.
Global Asset Performance Since ZIRP Began 5 Years Ago
Despite the 26% fall in 2013, gold is 44% higher in the last five years and has protected those who have bought it as a long term hedge and financial insurance against macroeconomic, systemic and monetary risks.
There is much negative noise and sentiment towards gold due to the recent price falls. The smart money ignores this noise and continues to focus on the long term. We are confident that gold will again perform well in the coming five years and protect investors from the considerable risks lurking out there today.
It is worth noting that gold fell 25.2% in 1975 (from $187.50/oz to $140.25/oz) and many experts pronounced the death of the gold bull market. Experts such as economist Milton Friedman warned that gold prices could fall further.
Gold in U.S. Dollars in 1975 – (Bloomberg)
Gold subsequently rose 6 times in the next 4 years – from January 1976 to January 1980 – proving many extremely wrong.
A historical perspective is valuable today and history does not always repeat but often rhymes.
The death of the gold bull market is greatly exaggerated.
Due to western central bank price manipulation, the mining sector is in critical condition, the supply line is all but halted, and the physical supply is being swallowed up by Asia. The last shoe to drop is for major mining companies to start closing down production at major mines. Though this would be perceived as the end for gold, speculators will be happy to know that this would be the beginning of the biggest Fed induced bubble in history! But unlike previous Fed bubbles where they support the price increase, the gold bubble will be a result of western central planners mis-managing the gold price for the past 3 decades and finally losing control. As Peak Resources explains in the brief clip, the perfect storm is coming for gold…
Friday October 11th, gold trading was shut down for 10 seconds according to the CME.
Why, because someone sold 2 million ounces of gold at one time. Who does this? Who sells nearly 2 and half percent of annual gold production in a single minute? The gold valued at over $2.5 billion could not have been sold by a small trader, and certainly not the smart money, institutional investors know that you don’t exit a large trade like this…
So who could it be? Try the dumb money, The Western Central Banks.
As noted by organizations like GATA, TF Metals Report, ZeroHedge, and Shtfplan, gold manipulation is out in the open. Friday October 11th is just one of the daily examples.
With the western central banks suppressing the price, the eastern central banks have been happy buyers.
However, PeakResources.org believes this gold price suppression scheme is nearing its end.
With the Federal Reserve on a fiat currency suicide mission with QE forever, and the U.S. federal government bankrupt, the days of dollar supremacy are in its last days.
For gold though, the central banks have really screwed themselves.
At a price of $1,250, gold mining companies can no longer make a profit. Recent studies show their all in cash cost anywhere from $1,400 to as high as $1,700. Liquid fuels, human energy, and new exploration are costly in the mining process, so it is unlikely these costs can be cut to accommodate the low gold price.
Since gold’s peak in 2011, the TSX Venture exchange, home to the worlds gold exploration companies, is down more than 59%
The gold juniors index, the GDXJ, is down 83%
And the large cap gold companies, despite seeing a 400% increase in the price of gold over the past 12 years, are trading at lower valuations then they did even 20 years ago.
As noted in our video Peak Gold, no major gold discoveries have been found in more than 10 years! Gold production as a whole has plateaued.
Remember, all mines have a limited supply of gold, at some point in time they either deplete themselves or become uneconomical. Uneconomical meaning companies can’t mine for profit, which is exactly the case for nearly all gold mines today!
Consider a very famous gold mining region, South Africa
In 1971 South Africa produced 47.5 million ounces of gold, accounting for 68% of global mine production.
In 2011, South Africa accounted for only 7% of gold production with about 8 million ounces of mine production.
Despite all the technological advances and billions in exploration and development, South African gold production is down 82%.
South Africa isn’t an anomaly either, here in the U.S. production in the past 20 years is down 30%.
Current discoveries are small, in remote areas, and are lower grade deposits.
PeakResources.org recently attended a gold mining event in London, what we learned was that exploration budgets were being slashed! No development, no exploration, and a scaling back of projects.
What this all leads to is a price spike in gold, just as gold rose rose from $35 to $850 in the 70s, The Dow Jones from 2,000 to 11,000 in the 1990, and Bitcoin from a penny to $1,200 more recently, so to can gold have a parabolic spike.
Due to western central bank price manipulation the mining sector is in critical condition, the supply line is all but halted, and the physical supply is being swallowed up by Asia.
The last shoe to drop is for major mining companies to start closing down production at major mines. Though this would be perceived as the end for gold, speculators will be happy to know that this would be the beginning of the biggest Fed induced bubble in history! But unlike previous Fed bubbles where they support the price increase, the gold bubble will be a result of western central planners mis-managing the gold price for the past 3 decades and finally losing control.
With fiat currency being pumped into the system daily and the gold sector in shambles, the central banks are in for a big surprise because sooner or later supply and demand economics will crush the very people who are behind the devastation we have seen in the gold mining and precious metal industry.
No one can question the fact that the demand for silver has grown exponentially in the past few years, record sales for American Eagle coins being one small example, record buying in India, another larger example. Demand has never been greater. Supply, on the other hand, keeps diminishing.
Global mining production is at its lowest in the past decade. The annual Consumption/ Production ratio is indicative of acute deficits. Whenever there is a situation where demand rises sharply, while supply commensurately declines, it is a recipe for higher prices, and usually, much higher prices. This is true, unless one is talking about the silver market. Under the conditions of record rising demand and considerably less supply, the price of silver is at its lowest levels in the past three years.
With talk of silver going anywhere from $150 to $500 higher, it currently struggles to hold $20, why is this so?
The answer is not to be found in the myriad supply and demand figures, no matter how cogently presented: as absolute numbers, or dramatically presented graphs, and with so many comparisons to other times/situations. Facts and figures do not lie. Politicians and bankers do.
The reason why silver continues to languish is purely a political one. Silver, along with gold, compete against fiat currencies. All [Western]currencies are issued by central banks. All central banks are owned by the elites, New World Order, [NWO], the moneychangers, call them whatever you will. These elites have a vested interest in preserving the Ponzi monopoly they have enjoyed ever since Mayer Amschel Rothschild discovered the power of interest collected on debt, over 200 years ago.
Debt = Wealth. That is the motto for the elites who charge their central banks with running up as much debt as possible for every man, woman, child. and country. The more debt, the more interest owed to the 1/10th of 1% who own the world’s wealth. As an example, what was the answer to resolve Greece’s unmanageable debt problems? Have that country borrow even more!
The problem today is that the NWO is losing its grip as the growth of debt escalates to previously unimagined levels. The biggest threat to fiat currencies is sound money, such as being backed by gold and silver. This is why the United States eliminated the backing of United States Notes with silver and gold. This move was instigated by the elites who have controlled the United States since it was forced into bankruptcy in 1933.
The next move was to have President Nixon repudiate gold backing in 1971. The stage was set to flood the world with Federal Reserve Notes, backed by oil, hence the petro- dollar as the world’s reserve currency. The US has been exporting its debt-ridden society on the world ever since. What it did not count on was China, even Russia, to a lesser extent, emerging as world powers, and world powers that now have the gold.
The Western central bankers have been leasing, hypothecating and re-hypothecating gold with impunity, no country ever strong enough to challenge Western financial supremacy. Then, in the 1990s, China wanted its gold back from the United States. “Sorry, Chinks!” was the arrogant response from the US. It was gone, “leased” out to keep a controlled lid on the world’s price of gold. Central bankers were running a scam, one of the largest Ponzi schemes, ever.
It is now payback by the Chinese. Now aligned with Russia, Brazil, India, and South Africa, the BRICS nations have formed a trading alliance outside of the US petro-dollar. The world’s reserve currency has not only been challenged, it has fast become irrelevant, except in West and EU, and even in the EU, that is changing.
The golden genie was let out of the bottle over a decade ago, and all the central bankers cannot put it back. Every attempt has been made to keep a lid on the price of silver and gold by central bankers desperate to hang onto their waning power. This is why Germany was told it would have to wait seven years to get its gold back from the Federal Reserve Bank of New York. It simply ain’t there, anymore. Gone. Guess where it is?
China. Retribution can be a bitch. The East is over taking the West, and they are doing it by buying all the available physical silver and gold. Even more. China has been on a shopping spree, buying as many precious metals mining operations around the world as are available. Here is your largest demand factor, followed by the remaining BRICS nations.
What about diminishing supply? What about the almost empty vaults at COMEX and LBMA? What about the demand of 68:1 claim for each ounce of gold? What about… insert your own example of how supply is being exhausted. All factual, all true.
The elephant in the room no one is addressing is the political one. The elites have kept pressure on PMs to keep their last gasp efforts of control alive. The current price of silver has nothing to do with supply and demand, nothing. It is all about central banks being used by the elites to prevent silver and gold from exposing the fraud.
There was a reason why, in the Wizard of OZ, the theme was to “follow the yellow brick road.” The all-controlling Wizard behind the curtain was a fraud. The all-controlling elites behind the central bank curtain are also a fraud, but a more sinister one that has been cornered like a rat, and they are fighting back.
The way in which the elites are fighting back is why silver is under $20, right now. If the price of silver were allowed to rally and reflect reality, the exponentially higher prices would expose what lies behind the central bank fraud. The market is rigged. The sad truth is all markets are rigged. The Libor interest rate market, the Federal
Reserve taper-on stock market, the OPEC oil market, the De Beers diamond market, the US world-wide drug trade market, the pharmaceutical market, the food supply market. Each factor that controls a specific market is also ultimately controlled by the elites, the New World Order.
If you want an idea of what to expect for the future price of silver, one only has to look at Bitcoin. It is not a government regulated market, and it is one that has taken the world by surprise. Just a few years ago, Bitcoin was under $1. Recently, it ran up to over $1,200. The appetite for any fiat alternative is huge. Bitcoin is not a currency, nor does it have the history of being currency-backed like silver and gold do. Once the lid is taken off the precious metals markets, they will leave Bitcoin in the dust.
The good news is: every single fiat currency throughout the history of the world has failed. An ounce of silver is still the same ounce of silver from thousands of years ago. The bad news is: no one knows for how much longer the elites can keep control, via their central banks, in suppressing the price. The good news to the bad news is that the end is near.
We are looking at the sale of the century for the price of silver, right now. There is a reason why China, Russia, and India have been huge buyers of physical silver and gold. Because of silver’s properties of being an indispensable necessity for industrial use, it has been used up considerably more than has gold. Both will rise incredibly in the not too distant future, and odds based on the gold/silver ratio favor silver.
One is likely to experience a greater return on investment in silver over gold. There is never any guarantee, but using historical relationships between the two makes silver a better buy and hold. The ratio is around 62:1. As both metals rise, once freed from central bank tentacles, the probability is that the ratio will move more toward 20:1. Wherever it goes, anything less than 62:1 makes silver preferred, on that basis.
This remains the best opportunity to be buying and holding physical silver. Only buy the physical metal, in coin or bar form, as you can afford. Do not buy silver in any form of paper, for you are unlikely to ever received physical, if promised. Plus, the fine print will tell you that delivery can be made in some form of paper payment in place of physical delivery.
If one has learned anything over the past few years, it is that governments cannot be trusted, and there is zero credibility in banks, all thieves, given the opportunity. Does it make sense to wait for the “best price possible?” Not as far as we are concerned. Silver may not be available at any price, or in very limited quantities, at some point. Plus, the reasons for buying are about wealth preservation that will eventually lead to increased wealth, when price finds its eventual true level. It is not worth the risk if you intend to accumulate silver and then not be able to buy any.
There could be one more new low in the near future, but that does not mean the physical will be commensurately lower. It is a personal choice. The time to buy is now, in the present. When silver eventually reaches over $150 the ounce, will it have made any material difference if you paid a dollar or two more or less the ounce? We live in an increasingly Orwellian world. Name, address, and SSN may be required, at some point. Anonymity will be lost.
The past cannot be changed, the future has not yet happened, so we can only deal with the present tense. The use of charts has its detractors, many simply from an inability to understand them, some from misapplying them, and a few from saying the charts are not real because they reflect the paper market, which is rigged. True, true, and true. However, paper valued or not, even the price for the physical is dictated by the paper market, [at least for now]. Until that changes, it is the only game in town.
Most people have something to say about the silver market. Here is how we see what the silver market has to say about the people trading it. For anyone not overly used to looking at charts, they do convey a certain degree of logic, and the message can, at times, be incredibly helpful.
A chart reflects the directional momentum of price behavior exhibited by participants. It is a way of tracking the results of all bets being placed, and it is the best way to see how the most skilled and informed, what we call smart money that moves markets, operate. Smart money trades with prevailing price direction, called the trend. They buy low and sell high, axiomatically, so it pays to have an idea of what they are doing.
A monthly chart provides the overall history and context of a market, and it is closely followed by smart money. Most traders/investors do not even look at monthly charts. We look for any existing synergy between the various time frames, for it tells a more compelling “story” about what is likely to happen. To the degree any synergy may be apparent, the greater the degree of logic one can glean from the charts.
According to the charts, the price of silver is not ready to reverse its trend. The monthly chart, and the lower time frames, clearly indicate the trend as down. Knowledge of the trend is the most important piece of information one can have, as a starting point.
There is a small amount of spacing when the August swing high failed to reach the 2011- 2012 swing lows. This tells us that sellers were confident enough that price was headed lower, that there was no need to wait and see how broken support would be retested.
Whenever spacing exists, the probability is high that the last swing low will be exceeded. That swing low was $18 this past June. Those odds are in the 80% area, right now. To what degree the swing low will be exceeded is unknown. It could be a failed probe, or it could take price a few dollars lower. Because this is a politically driven war against the precious metals, no one has a clue how much lower and how much longer the elites can maintain its increasingly fragile control.
With $18 having been a previous area of support, from 2008, and again in 2009-2010, the ability for sellers to move the market lower will be met with increasing buying support. For now, that spacing is indicative of silver having its work cut out to change the trend, and trends can take time to change. The one exception would be a surprise event that moves the market unexpectedly, creating a V-bottom, with price accelerating off the lows.
The labeling on the weekly supports what was expressed on the monthly. The focus will be on explaining the numbers. When we say there is a high degree of logic in reading developing market activity, the more detailed weekly chart serves as a great example.
At 1, you see a wide range vertical decline bar. This is telling us that sellers just took over in a big way, evidenced by the EDM [Ease of Downward Movement]. There was a reaction rally at 2. where price stopped at a half-way retracement. A horizontal line can be drawn from that swing high, extended into the future. We made it a dashed line to indicate it was drawn as of that swing high date, and how the market developed from that point on was after that fact.
At 3, we can expect resistance, based upon the logic that price just failed at that level in October/November 2011. A failed probe to the upside develops, right at where price failed at 2, confirming the importance resistance just under $36. Eight months later, there is another failed rally at 4, respecting the horizontal line drawn almost a year earlier.
Three failures at the $36 level are a good clue that price is more than likely to head lower. From 4, down to support at $26, you see a series of lower swing highs and lows, indicating a weak market. At some point in the future, a rally to 5 will become pertinent. Once support was broken at $26, and with ease, that level will become future resistance.
There is a small change of behavior, when price rallies quickly for four weeks in August, where the last swing high was formed. That failure is what created the bearish spacing. The decline since has been relatively labored, telling us buyers are more active and not allowing sellers to move the market lower with ease. Still, the odds of the June low at $18 to be broken remain high.
This is the message from the market that tells us about the participants and the degree of control sellers have over buyers. Sellers remain in charge, despite all of the bullish news and indicators there are about strong demand for and a shortage of silver. All of that bullish news has been priced into the market. In other words, it is going to take something new to move the market to the upside.
Our scenario is not a definitive explanation for silver, but it goes to show the kind of thinking one needs to better understand why precious metals are going lower and not higher. One of the strongest moving factors to act as a catalyst for silver will be the fate of the fiat dollar. That is all central bankers care about.
China’s and India’s record buying aren’t even enough to change the trend. Let that be your message of how strong a hold central bankers can exert in suppressing price. Why would China or India want to see silver at $25, $30, $50, or over $100 when they can buy at current levels? Take a page from their book and keep on buying.
Just as history does not directly repeat but often rhymes, so, too, does the market. People make history. The markets are composed of people, as well, and this is why one sees repeating pattern behavior. This daily chart picks up where the failed August rally created the spacing on the weekly chart.
You see the rhyming pattern on the daily repeating like the weekly above. The reason why 1 starts where is does is due to the gap lower, next day, and the last small rally just before price broke sharply was at point 2. 3 and 4 are similar to explanation given above, so no need to repeat. The chart says it all. At some point, a rally will meet up with 5.
We see the same broken support, just like the weekly, only the last swing high retest, 2 bars ago, Tuesday, [this is written Thursday evening, the 12th], it did not leave any spacing behind. However, Thursday’s wide range decline on increased volume erased the Tuesday rally which had even stronger volume. This is an indication of how rallies cannot be sustained and a sign of a still weak market.
Finally, there is no answer for when a change will occur, and there have been a great many silver experts that have used bullish signs as justification for calling for much higher prices, but that has not materialized. Listen to what the market is saying, and not what others are saying about the market.
It may be weeks, it may be months, it may even be longer before the manipulators lose control, and they will, as history tells us. History also tells us it often lasts longer than most people expect. Buy the physical while you can, even if it takes another year before reality prevails. Just as one cannot know when a turn will occur, one cannot also know for how long silver will be able to be purchased, in the interim. Be smart. Better a year early than a day too late.
Submitted by: Edgetraderplus
Here is how we respond to the myths of gold as propagated by some father-in-laws, some financial advisers and all Paul Krugmans.
Myth 1: Gold “Is A Barbaric Relic”
In fact, John Maynard Keynes never said gold was a “barbaric relic”. Actually, Keynes said that the gold standard monetary system was a barbaric relic.
Myth 2: Gold “Is A Volatile Rollercoaster”
Gold has almost the same volatility as leading equity benchmarks (such as the FTSE All Share and S&P 500) and is much less volatile than most equity indices and far less volatile than individual equities.
Importantly, an allocation to gold in a portfolio has been clearly shown to increase returns and reduce volatility in the entire portfolio. All markets are volatile today, including foreign exchange markets, given the floods of electronic currency sloshing around the global financial system.
Myth 3: Gold Has No Value or No Intrinsic Value
Gold has value today and has retained value throughout history. This value derives from it being extremely rare and finite in nature – unlike paper and electronic money and due to constant universal demand. Gold has an intrinsic value in and of itself, in the same way that oil or water have an intrinsic value.
Myth 4: Gold Has No Utility
Gold has a utility and is a very useful metal as it is used in electronics, technology, dentistry, medicine, industry, jewellery including wedding rings, as medals and trophies denoting the pinnacle of achievement. Gold’s most important use is as a foreign exchange reserve, a store of wealth and as financial insurance.
Recent academic findings and the historical record confirms that gold is a safe haven asset and an important diversification as a means of preserving wealth.
People in the UK, the U.S., Ireland and Cyprus and throughout the world who have owned gold since the global financial crisis began in 2007 will confirm gold’s utility as it has increased in value significantly in that time.
Myth 5: Gold Is A “Bad and Dangerous Investment”
Gold is a “bad and dangerous investment” and “proof” of this is that it fell from $850/oz on January 21st, 1980 to $300/oz in June 1982 or $250/oz in 1999.
Using the very short lived spike to $850/oz on January 21st, 1980 as a pricing benchmark for performance is unfair and selective. By doing so one ignores that fact that the majority of people did not buy gold on January 21st, 1980 or even in January 1980. Rather, the majority bought gold in the hundreds of other months prior to January 1980, and since.
Always focusing on gold’s poor performance from and after January 1980 is selective data mining.
In terms of performance and returns, gold has outperformed most equity indices since it became traded in 1971. Studies that purport to show gold is a poorly performing asset over the long term (since 1900 or 1950 for example) are bogus. Gold was not freely traded like stocks until 1971 as gold was money and backed paper currencies at a fixed price throughout much of history until Nixon went of the Gold Standard in 1971.
Solely focusing on possible returns, ignores that fact that gold is not really an investment at all – rather it is financial insurance and a safe haven.
Myth 6: Gold Is A Bubble or Was A Bubble
Gold may have been a bubble when it soared to over $1,900/oz in August 2011. Opinions differ.
At the very least gold had become very overvalued in the short term. After falling 35% since then to nearly $1,200 per ounce, it is hard to still maintain that gold is a bubble. Especially as the average global cost to mine one ounce of gold has now risen to $1,200/oz.
Today, there are strong grounds to be concerned that stock markets and bond markets are bubbles. However, no one can predict the future price movement of any asset class – hence the importance of diversification.
As with everything in life, it is best to do your own research prior to forming a judgement and acting.
We advise all our cleints to go online and read about and watch videos about the pros and cons of gold. Buy a book or two about gold or start by downloading our‘Guide To Investing in Gold’. Those who do so will realise that while gold is not riskless or risk free, many of the myths attached to gold are easily debunked.
Knowledge is power and educating yourself about gold is important if you wish to understand gold’s importance as financial insurance and as a safe haven asset in an uncertain world.
Today’s AM fix was USD 1,222.75, EUR 891.22 and GBP 750.89 per ounce.
Yesterday’s AM fix was USD 1,243.50, EUR 902.79 and GBP 758.51 per ounce.
Gold fell $26.40 or 2.11% yesterday, closing at $1,226.50/oz. Silver slid $0.79 or 3.89% closing at $19.52/oz. Platinum dropped $19.01, or 1.4%, to $1,360.74/oz and palladium fell $20 or 2.7%, to $715.25/oz.
Gold has spiked higher in late morning trade in London and is 0.6% higher on the day and 0.35% higher for the week. A higher weekly close this week will be positive from a technical perspective.
Gold saw a sharp move lower by over 2% yesterday, despite little market moving data or news and other assets seeing less price movement. The price fall could have been due to heightened speculation of a Fed taper as soon as next week. However, if that was the case, one would have expected stocks to have seen similar price falls. Rather stocks were only marginally lower and remain near record highs.
Peculiar gold price falls have been common in recent weeks and months and have contributed to the 25% price fall we have seen this year.
Therefore, those who have diversified into gold in order to protect their wealth will welcome the move by the German financial regulator Bafin to widen their investigation into manipulation by banks of benchmark gold and silver prices.
The FT reports on the front page today that German banking regulator Bafin has demanded documents from Germany’s largest bank, Deutsche Bank, as part of a probe into suspected manipulation the gold and silver markets by banks.
Currently, gold fixing happens twice a day by teleconference with five banks: Deutsche Bank, Bank of Nova Scotia-ScotiaMocatta, Barclays Bank Plc, HSBC Bank USA, NA and Société Générale. The fixings are used to determine prices globally. Deutsche Bank is also one of three banks that take part in the equivalent process for silver.
The German regulator has been interrogating the bank’s staff over the past several months. Since November, when the probe was first mentioned similar audits in the U.S. and UK are also commencing.
Premiums in China and India remained robust overnight and way over western premiums. Gold on the Shanghai Gold Exchange closed at $1,258.38 at 0700 GMT – a premium of $29.18 per ounce over spot.
Bullion premiums in western markets have seen little movement again this week. One ounce gold bars are trading at $1,276.44/oz or premiums of between 3.75% and 4.5%, and larger 1 kilo gold bars are trading at $40,832/oz or premiums of between 3% and 3.5%.
Indian demand declined yesterday but remains robust as dealers were not able to source gold.
Premiums remained steady at $120 per ounce over London prices. Last week, Indian premiums hit a record high of $160/oz. Imports into India have dropped off sharply this year after the Indian government raised the import duty to 10% earlier this year and tied imports volumes to exports, in a bid to curb a rising trade gap and the rush to gold by Indians concerned about the continuing devaluation of their rupee.
If the Fed defer a taper, we should see gold bounce from oversold levels which could help it test $1,300/oz again.
We do not believe the Fed will ‘taper’ next week as the U.S. economy remains very fragile and any reduction on bond purchases could lead to turbulence in financial markets, a rise in bond yields and affect the wider economy.
But if the Fed does reduce its massive bond buying programme marginally next week, gold will likely fall to test strong support at $1,200/oz again.
Gold looks likely to bounce back next year and the positive drivers for gold are strong store of wealth physical demand, particularly in China, due to macroeconomic, systemic and monetary risk.
The eurozone debt crisis is far from resolved and sovereign debt issues in Japan, the UK and the U.S. will likely rear their ugly heads again leading to safe haven demand for gold.
We pointed out yesterday why it is important to remember that the Federal Reserve is printing nearly $20 billion every single week. The U.S. National Debt is now over $17.2 trillion and continuing to rise and the U.S. has unfunded liabilities (Social Security, Medicare and Medicaid) of between $100 trillion and $200 trillion.
Staggering numbers which suggest alas that the U.S. politicians are rearranging chairs on the titanic.
Depositors in G20 or FSB regulated countries should examine the financial health of their existing bank or banks.
Some issues to watch would include institutions with legacy issues such as a high level of non-performing loans, a possible need for recapitalization and low credit ratings. These banks should be avoided, as they have a higher chance of needing restructuring and hence a higher chance of a bail-in.
Deposits are insured for up to €100,000, £85,000 and $100,000 per person, per account in the EU, the UK and the U.S. respectively. Although there is no guarantee that an insolvent government will be able to fund its deposit insurance scheme, it is uninsured deposits which are more at risk of a bail-in.
Therefore, it would be prudent for depositors not to hold bank deposits in excess of these figures in any one financial institution since –
a) they are not insured, and
b) deposits in excess of those arbitrary figures are more likely to be bailed in
There is an assumption that in the event of bail-in, only bank deposits of over these arbitrary figures would be vulnerable. However, there is no guarantee that this would be the case. Should a government be under severe financial pressure, it may opt to only protect deposits over a lower amount (e.g. €50,000, £50,000, $50,000).
Since capital controls have already been imposed on one Eurozone country, Cyprus, it seems quite likely that they will be imposed in other countries in the event of new banking crises or a new global systemic crisis.
Cypriot authorities imposed restrictions on bank money transfers and withdrawals, including a daily cash withdrawal limit of €300 per day. Many banks had to restrict withdrawals to €100 per customer per day in order to prevent them running out of euros. Electronic wire transfers were suspended for a number of days, prior to being allowed but with a low maximum daily limit.
Therefore, having some of one’s savings outside of the banking system makes sense. It should be held in a form that is highly liquid, such as gold, and can be converted back into cash in the event of cash withdrawal restrictions. Cypriots who owned gold were less affected by the deposit confiscation or ‘haircut’ as they could sell their gold in order to get much needed euros.
In the coming years, the role of gold in an investment portfolio will become more important due to its academically and historically proven safe haven qualities. Now, with the risk of bail-ins, savers and corporate treasurers should consider diversifying their savings portfolio and allocate 5% to 10% of the overall savings portfolio to gold.
However, it will not be enough to simply allocate funds to some form of gold investment. In the same way that certain banks are more risky than others, so too are many forms of gold speculation and investment more risky than others.
It is vitally important that those tasked with diversifying deposits do not jump out of the frying pan and into the fire.
An allocation to actual physical gold owned with the safest counterparties in the world will help depositors hedge the not insignificant risk of keeping money on deposit in many banks today.
It is important that one owns physical gold and not paper gold which could be subject to bail-ins.
Physical gold, held in allocated accounts conferring outright legal ownership through bailment remains the safest way to own gold. Many gold investment vehicles result in the buyers having very significant, unappreciated exposure and very high counterparty risk.
Owning a form of paper gold and derivative gold such as an exchange traded fund (ETF) in which one is an unsecured creditor of a large number of custodians, who are banks which potentially could be bailed in, defeats the purpose of owning gold.
Potentially, many forms of gold investment themselves could be bailed in and the FSB’s inclusion of Financial Market Infrastructures in potential bail-ins including “central counterparties, insurers, and the client assets held by prime brokers, custodians and others” underlines the importance of owning unencumbered assets that are owned directly.
Extensive research shows that owning gold in an investment portfolio enhances returns and reduces the entire portfolio’s volatility over the long term. In the coming years, a diversified savings portfolio with an allocation to gold, will reduce counterparty risk and compensate for very low yields.
The wise old Wall Street adage to always keep 10% of one’s wealth in gold served investors well in recent years. It will serve those attempting to safeguard deposits very well in the coming years.
In general, people should avoid holding euros or other cash outside of their bank accounts, however there is now a case to be made that holding a small amount of cash outside of vulnerable banks would be prudent. Just enough cash to provide for you and your family’s needs for a few weeks.
However, this should never be done unless the cash is held in a very secure way, such as a well hidden safe or safety deposit box. It would be safer not to keep assets in a safety deposit box in a bank.
Overall, diversification of deposits now has to be considered.
This means diversification across financial institutions and across countries or jurisdictions globally.
Financial institutions should be chosen on the basis of the strength of the institution. Jurisdictions should be chosen on the basis of political and economic stability. A culture and tradition of respecting private property and property rights is also pertinent.
While depositors need to do their own due diligence in which banks globally they may wish to open a bank account, Table 1 (see From Bail-Outs to Bail-Ins: Risks and Ramifications) illustrates that there are numerous banks globally which are still perceived to be financially strong. The banks in table 1 have been ranked by taking the average long term issuer credit rating applied to the bank by the main global credit rating companies, Moody’s, S&P and Fitch.
A credit rating is an assessment of the solvency or creditworthiness of debtors or bond issuers according to established credit review procedures. These ratings and associated research help investors analyse the credit risks associated with fixed income securities by providing detailed information of the ability of issuers to meet their obligations. A rating is continuously monitored. It enables investors and savers to measure their investment risk.
Long term credit ratings of the major agencies take into account factors such as financial fundamentals, operating environment, regulatory environment, corporate governance, franchise value of the business, and risk management, as well as the potential financial support available to the bank from a parent group, or a local or national government.
While credit ratings express an opinion on a bank’s vulnerability of defaulting, they don’t quantify the probability of default. However, credit ratings are still widely used and are one of the most commonly used ways of ranking the relative financial strength of banks.
The credit rating reflects the credit risk or general paying ability of the issuer, and so reflects the solvency or creditworthiness of the issuer from the point of view of investors who, along with depositors, are the main creditors of the bank. Certain countries host more financially strong banks than others as can be graphically seen in the table.
Notice that many of the safest banks in the world are in Switzerland and Germany.
Indeed, it is interesting to note that despite the Eurozone debt crisis, many of the safest banks in the world are in the EU or wider Europe. These include banks in the Netherlands, Luxembourg and France – despite many French banks being very vulnerable as is the French sovereign.
Outside of Europe, Singapore has some very strong banks, as does Norway, Australia, Canada and Sweden.
There are only a few UK and U.S. banks on the list of global top banks that should give pause for thought.
There are a number of institutions in jurisdictions such as Hong Kong, Chile, Japan and some Middle Eastern countries. As of yet, banks in the large emerging markets have not made their mark but we would expect banks in China, Russia, Brazil and in India to begin moving up the table in the coming years. The sounder sovereign position and lack of public and private debt in these countries will help in this regard.
There are no banks from problem European economies on the list for good reason. Their banks do not have high enough credit ratings. In fact, banks from Cyprus, Greece, Portugal, Spain, Italy and Ireland consistently had relatively low long term ratings from the ratings agencies. In terms of ratings, they rank nowhere near the top 20 banks in the world and most are ranked between 200 and 400.
Besides considering the relative safety of different banks, with interest rates so low on bank deposits and increasing taxes on interest earned on deposits leading to negative real interest rates – depositors are not being rewarded with adequate yields to compensate for the risk to which they are exposed.
Thus, as is often the case, savers need to consider alternatives to protect their wealth
Without a clearly thought out plan, many will be prey for the financial services sales machine and brokers and their array of more risky investment and savings products – including so called “capital guaranteed” products – many of which are high risk due to significant and unappreciated counterparty risk.
It is vitally important that investors have independent custodians and trustees. This greatly reduces counterparty risk should a broker, financial adviser, insurance company or other financial institution become insolvent.
Depositors internationally should examine the financial health of their existing bank or banks. Overall, diversification of deposits now has to be considered. However, it is vitally important that those tasked with diversifying deposits do not jump out of the frying pan and into the fire. This means diversification across financial institutions and across countries or jurisdictions globally.
Financial institutions should be chosen on the basis of the strength of the institution. Jurisdictions should be chosen on the basis of political and economic stability. A culture and tradition of respecting private property and property rights is also important.
1. Diversify savings across banks and in different countries
2. Consider counterparty risk and the health of the deposit-taking bank
3. Attempt to own assets outright and reduce risk to custodians and trustees
4. Own physical gold in allocated accounts with outright legal ownership
5. Avoid investments where there is significant counterparty risk, such as exchange traded funds and many structured products
6. Avoid banks with large derivative books and large mortgage books
7. Monitor banks’ and institutions’ financial stability
8. Monitor deposit and savings accounts’ terms and conditions
9. Monitor government policy pertaining to banks and bank deposits
This past Friday the Bureau of Labor Statistics released the November jobs report which sent the mainstream analysts and economists into an ecstatic state as the numbers were substantially stronger than estimates. However, in reality, the employment report continues to show that employment is being driven almost entirely by population growth rather than real economic strength. I have discussed this previously stating:
“However, the reality is that, despite better than expected numbers in the report, employment gains to this point have been nothing more than a function of population growth. The chart below shows the 12 month average of the net change in both employment and population. As you can see, there have been very few months since the turn of the century where employment has exceeded population growth.”
“This explains two things:
1) Why the employment to population ratio has plunged along with the labor force participation rate; and
2) That employment gains, so far, have been a function of businesses hiring only to meet the demand increases caused by an increase in population rather than from a growing economy.
The latter point is very important and relates directly to an issue that has been lurking silently in the background called ‘labor hoarding.'”
Louis Woodhill reiterated this point recently in his column entitled “Curb Your Enthusiasm” stating:
“All that happened in November was that the labor market (as reported by the BLS Household Survey) made up most, but not all, of the ground that it lost in October. During the past two months, America moved 3,000 full-time-equivalent (FTE)* jobs farther away from full employment.
During those 61 days, our working age population increased by 399,000, but 265,000 Americans fled the labor force, continuing the unprecedented exodus from the world of work overseen by President Obama. While the “headline” (U-3) unemployment rate fell by 0.2 percentage points to 7.0%, the “true” unemployment rate, adjusted to the labor force participation rate of December 2008, rose from 10.9% to 11.0%.
President Obama’s so-called ‘economic recovery’ is now 53 months old. During that time, America has moved 1.3 million FTE jobs farther away from full employment, the adjusted unemployment rate has increased from 9.7% to 11.0%, and real household income has fallen by 4.4%.”
The problem, as Woodhill so correctly states, is that the “real” economy is not growing and is only, at best, treading water. While mainstream economists and analysts continue to jump on a monthly data point as a sure sign of economic recovery – the reality is quite different.
The solution to solving this problem is something that I have addressed many times in the past when analyzing the monthly National Federation of Independent Small Business Survey which continues to point to government regulations, taxes and poor sales as the top three concerns of small businesses around the country.
“The uncertainty surrounding the economy that currently exists limits the ability for businesses to plan. While the country can continue to run without a budget, as long as there is ‘ink for the printing press,’ small businesses do not have that luxury. For businesses, their future outlook is driven by those silly little economic factors like supply, demand and profits. While it may currently seem to be a statement by businesses on the results of the election – it is more of an outlook on the future of the economy and how their personal livelihoods are going to be affected.”
Importantly, Woodhill addresses this issue with his formula for a return to a strong economic America.
“So, what can the government do to encourage capital investment? Well, it can stop discouraging it. Here is the formula for prosperity:
Prosperity = Rule of Law + Economic Freedom + Stable Money + Low Tax Rates + Sane Regulations + Free Trade.“
This formula, while not a revolutionary solution to solving the economic mystery, is simply a point of logic. However, it clearly represents the detachment of the current Administration which has little real world experience, along with the bulk of the ivory tower academics advising them, from the issues impeding the economic recovery. However, as I stated previously:
“Business owners are some of the best allocators of capital and resources. They spend money to increase production, expand facilities and hire employees to meet increasing demand. They operate within the confines of the real economic environment, rather than theory, and the results of the recent election point to a tougher economic climate ahead. Until there is improvement in the uncertainty that surrounds the economy, there is likely to be little headway that will be made in the months to come. While further stimulative programs may boost asset markets in the near term it is unlikely that the engines of economic growth will kick in until debt levels are reduced, tax policies are clarified and the regulatory environment is cleared.”
Woodhill’s formula reiterates what small business owners across this country have been clamoring for over the past five years. Business owners inherently want to grow, employ more people and achieve greater profitability which in turn creates economic growth. It is simply in their best interest to do so. However, the current Administration continues to intervene with more regulations, threats of higher taxes, increased costs and uncertainty about the economic future. Subsequently, business owners continue to fight back against the current fiscal and monetary policy makeup by reducing costs, increasing productivity and suppressing employment and wage growth. As Niall Ferguson noted:
“23 years ago the world seemed much simpler. Francis Fukuyama wrote that the West had won the war of Capitalism. However, 23 years later things have changed. By 2016, the economy of China will exceed that of the U.S. This is not what Fukuyama expected in 1989. It should not be possible that a communistic society could poised to overtake a capitalistic economy. It is quite an amazing turn of events.
The explosion of public debt in Western economies is a symptom of the more profound economic malaise. The argument between stimulus and austerity is very futile. The reality is that by 2050 interest payments on government debt will be above 100% of federal revenues; according to the Alternative Fiscal Scenario (AFS) of the CBO. The AFS are the more realistic of the two assumptions that the CBO produces.
There were ‘6 Killer Apps’ that defined the U.S. during its great economic growth cycle – Competition, Scientific Revolution, Modern Medicine, Consumer Society, Work Ethic and Property Rights
Those issues allowed for growth, innovation and rising economic prosperity during the 20th century. Today, while the rest of the world has slowly been adopting these ‘killer apps’ the U.S. is slowly losing them.
A critical point is the Rule of Law. In order to have a strong, and prosperous, economic environment the participants in the system must be able to rely on a stable and fair legal system. In the U.S., the rule of law has been under continuous attack over the last 30 years. The decline in the rule of law has been evident in the shift of prosperity in the U.S. economy. If you look at 15 different measures of the rule of law, as they exist in countries all around the world today, unfortunately the U.S. does not rank at the top it any category. However, Hong Kong beats the US on every single rule of law and ranks in the top levels on every single measure.
The problem is that the U.S. has a ‘rule of lawyers’. As an example ‘Dodd-Frank’ is the largest single employment scheme for lawyers in the history of the U.S. However, when it comes to the private sector, which has to live with the implications of the bill, it massively increases costs, reduces competition and impacts future prosperity.“
The long term implications of these secular shifts are crucially important to the future of everything from investing, to living and the future of our economy. It is not too late to change our future, but it eventually will be if we do not begin to make changes soon.
Courtesy: Lance Roberts