Commodity Trade Mantra

What Are The Unintended Consequences Of A Government Shutdown?

What Are The Unintended Consequences Of A Government Shutdown?

What Are The Unintended Consequences Of A Government Shutdown?

When it comes to the intended consequences of a government shutdown, they are rather simple: a shut down government (which to many is the best news possible). So what about the unintended consequences? Here is Bank of America with a quick summary of what would begin to happen at 12:01 am tonight, and continue for the duration of the government shutdown.

What Are The Unintended Consequences Of A Government Shutdown?

The government shutdown will likely add to the budget deficit. It is costly to stop and start programs. The 1995-96 government shutdown directly added $1.4 bn to the deficit (about $2.5 bn in today’s dollars) Moreover, the shock to growth will undercut tax revenues. In addition, ironically it does not impact the implementation of Obamacare since it is an entitlement similar to Medicare. However, there is some chance it could delay US economic data releases: in 1996, the December employment report was delayed two weeks as a result of the shutdown then. The Federal Reserve and the Post Office, both of which do not depend on Congressional appropriations, will not see any cutbacks due to a government shutdown.

So for those asking if daily POMO will continue, the answer is a resounding “yes” – the government may be shut down but the wealth effect (to the 0.01%) will continue. Furthermore, it goes without saying that this is a very limited list, as nobody can truly predict what is unintended, or unpredictable (just ask money markets in the aftermath of the Lehman bankruptcy). For the full impact of intended consequences and otherwise, empirical observations will be the best gauge.

Finally, in terms of what is known about the shutdown’s impact, here again is BofA, whose core observation, that “market pressure” (i.e. a selloff) will “hopefully spark an agreement” is 100% correct.

Should we have a government shutdown, we would expect it would be relatively short — public uproar and market pressure will hopefully spark an agreement. A shutdown of a few days would likely have no real measurable effect upon the economy and result in only a small sell-off in the markets. Most of the federal government will keep running in the event of a shutdown, but a significant number of federal employees will be furloughed without pay, perhaps as many as one million. The impact on 4Q GDP growth should rise with the length of the shutdown: a coupleday shutdown would likely have zero net impact upon growth; a two-week shutdown could shave 0.5pp, while a one-month shutdown could lop 2pp from 4Q growth. These are, of course, rough estimates and subject to big standard errors.

 

The key source of uncertainty is the impact on consumer and business confidence. The revised GDP data showed very weak growth in 4Q 2012 and 1Q 2013 around the fiscal cliff negotiations, which in large part reflects heightened uncertainty. This time around, the hit to confidence and the markets could be larger still if a protracted shutdown signals the potential for an unmanaged process after the debt ceiling is breached. Lingering uncertainty — let alone a fiscal accident — would raise the chances that the Fed does not taper until next year.

And as is well known, we can’t have any tampering with the New Normal prerogative #1: preserving confidence at all costs.

 

Courtesy: Zerohedge

Strong Silver Coin and Bar Demand From India and U.S.

Strong Silver Coin and Bar Demand From India and U.S.

Strong Silver Coin and Bar Demand From India and U.S.

Today’s AM fix was USD 1,335.75, EUR 989.59 and GBP 827.30 per ounce.
Friday’s AM fix was USD 1,321.50, EUR 978.45 and GBP 822.03 per ounce.

Gold climbed$12.30 or 0.93% Friday, closing at $1,336/oz. Silver rose $0.02 or 0.05%, closing at $21.72. Gold rose 0.81% while silver slid 0.09% for the week.

Gold moved to its highest level in over a week, on investor jitters that the U.S. government may close down because of a budget stalemate that has increased the yellow metal’s safe haven demand. Today is the final day that the U.S. Congress has left to end the crisis which would be the first government shutdown in 17 years.

Gold is now on track for its first quarterly gain in a year, lifted by Fed Bank of Chicago President Charles Evans comments Friday that, “the pace of the Fed’s asset purchases could remain steady at $85 billion a month into January as policy makers wait for more signs of recovery”.

Gold should be supported by the double risk of the budget deadline next Tuesday and the debt ceiling negotiations mid October.

It is worth remembering that gold surged to record highs over $1,900/oz during the last debt ceiling debacle.

While the debt ceiling will almost certainly be resolved before or soon after the deadline, the risk is that the politicians will again kick the can down the road and not address the fundamental fiscal challenges facing the U.S.

The bottom line is that the U.S. under President Obama continues to live beyond its means. Tax hikes and major cuts in government expenditure will be needed to turn the dreadful debt situation around.


U.S. Mint Silver Coin Sales Off to Strong Start in 2013

Silver Demand Continues to Rise –

Silver continues to see strong store of value demand in India, the U.S. and elsewhere as buyers view the metal as cheap versus gold.

U.S. Mint silver coin sales are  up 37% ytd, as store of value investors take advantage of the lowest prices since Q3-2010. The drop in silver prices since April has spurred more buyers to purchase  coins, contrary to trends for both U.S. Mint gold coin sales and the historical correlation with silver prices.

The  divergence of silver coin sales and the metal price this year begs the question as to which one will follow the other as Q4 approaches.

The answer might come in emerging market demand for silver especially in India. Silver demand is surging due to the Indian government’s capital controls and harsh tax treatment of gold and silver imports look set to reach a record in 2013.

As reported by the Business Standard:

While the government has put a series of restrictions to curb gold imports, it is silver that is ruling the roost. During the April-June quarter, import of silver rose 311 per cent to $1.78 billion, compared with $433.8 million in the corresponding period of last year due to a surge in demand.

According to traders and economists, restrictions on gold have drifted the general sentiment towards silver as they feel it is the closest substitute for gold. “Ever since the government has started putting measures to curb gold imports, demand for silver has seen a sudden surge. Moreover, there is a general scare in the market that the government might soon start curbing silver imports also, as a result, traders are stocking up silver,” said Monal Thakkar, president of Amrapali Industries, a leading Ahmedabad-based stock and commodity broking house.

Thakkar added such a staggering rise in silver import could also be attributed to a substantial rise in demand for silver jewellery as well silver crockery. “People are buying silver as a viable investment option,” he added.

According to Sudheesh Nambiath, analyst at Thomson Reuters GFMS, India’s total silver imports have more than doubled from last year, crossing 4,000 tonnes in the first eight months of 2013 compared to 1,900 tonnes in the whole of 2012. “Because of the restrictions on gold, traders shifted towards silver,” Nambiath said.

He added that even by mid of the year manufacturers already had full order books through to December, a clear indication of stocking and also higher demand expectation from fabricators. Indian imports had increased at a fast pace taking advantage of lower prices, however imports dropped to just over 300 tonnes in August. It suggests that investors and bullion traders were refraining from further imports after price crossed Rs 55,000 a kg. Also delivery of near 75 tonnes to the MCX together in the July and Sept contract, only reaffirms the strong participation from investors and traders this year.

This level of delivery on futures exchange is considered very good.

Anis Chakravarty, senior director, Deloitte India said silver import was basically offsetting the demand for gold as it was a safer option.

While  the CFTC has closed their silver investigation into the continuing allegations of market manipulation, this is a story that will not go away.

Bart Chilton made other comments after which are important to note. “For me, there’s not been a more frustrating nor disappointing non-policy-related matter at the CFTC,” said Democrat commissioner Bart Chilton, who had championed the silver inquiry and had said in a 2010 CFTC meeting, referring to publicly available reports on the silver market, that there have been “fraudulent efforts to persuade and deviously control that price.”

Disgruntled investors who have been badly burnt by potential manipulative concentrated selling in futures markets will likely continue their campaign for transparency and free markets. Some are already calling for the CFTC report to be released.

The Gold Anti-Trust Committee (GATA) said that the decision was not surprising as the CFTC is an arm of government and therefore they were unlikely to find certain Wall Street banks, who are acting as proxies for the U.S. government, guilty of manipulating the gold market.

Despite the verdict, there remains a considerable degree of doubt and deep skepticism amongst many silver bullion owners that the silver price is not manipulated by the very large concentrated short positions of certain banks.

 

Courtesy: Goldcore

T-Minus 15.5 Hours: The Complete Government Shutdown Summary

T-Minus 15.5 Hours: The Complete Government Shutdown Summary

T-Minus 15.5 Hours: The Complete Government Shutdown Summary

Presenting the full summary about the only event the market is focused on today.

MAIN POINTS:

Today sees the Senate reconvene after yesterday saw the Republican-led House voted in favour of a modified continuing resolution (CR) which includes a one-year delay to Obamacare (the Affordable Care Act). The Senate is not scheduled to meet until 1400ET today meaning that if the new bill is rejected there is not enough time to create a new CR and pass it back to the Senate before the midnight deadline, leading to a government shutdown in which all non-essential government workers will stay at home. Expectations are now that it is likely there will be a temporary shutdown given that the White House signalled the new CR would be vetoed by President Barack Obama and Democrats in the Senate immediately said the legislation approved by the House yesterday is unacceptable.

Even if there is a government shutdown, it is expected to only last a day or two and a CR is expected to pass in Congress this week, however this shutdown could lead to a delay of Friday’s release of this month’s Non-Farm Payroll report. This will fund the government to at least November 15th, giving more time for Congress to create a CR which extends through the entire 2014 fiscal year. Goldman’s estimate a 2-day US govt shutdown will hit Q4 GDP (annualized) by 0.1 percentage points and one week by 0.3 percentage points, however the more important issue for Congress to address will be the debt ceiling as the US is expected to exhaust borrowing capacity on October 17th.

A Shutdown and delay in raising the debt ceiling could lead to a US credit rating downgrade

One main concern of a delay to both a 2014 budget and raising the debt ceiling is the possibility of a credit rating downgrade of the US sovereign, although overnight Moody’s said that a government shutdown wouldn’t affect debt service and that a debt cap failure would lead to perceived default risk and that failure to raise the debt limit is worse than a shutdown.

It is worth bearing in mind that several members of Congress are likely to speak to the press throughout today as they arrive for discussions and the Senate vote, and as is often the case, any deal between the Senate and House is likely to be either overnight or within the next two days. Although a US government shutdown is a risk event for financial markets, many analysts have noted this week’s voting is overshadowed by debt ceiling negotiations which will begin shortly after. These talks will have a much greater impact on market sentiment as a delay to increasing borrowing capacity risks a US default as the worst case scenario.

EVENTS OVER THE WEEKEND:

  • Shutdown seen as unavoidable without talks
  • U.S. 4Q GDP seen reduced by as much as 1.4 percentage pts. depending on shutdown’s duration
  • Latest House plan authorizes 10 wks of spending starting Oct.1 only if most provisions of Obama health law delayed a year
  • Senate Democrats, President Obama say they will reject any measure that includes provisions tied to Obamacare
  • Yday, Senate Majority leader Harry Reid D-Nev. says chamber has acted on Continuing Resolution, adjourns until today 2pm
  • Govt shutdown odds now at 90%, Democrat Collender says

ECONOMY:

  • In case of govt shutdown, Labor Dept says it will issue jobless claims data (scheduled Thursday 8:30am)
  • SEC says EDGAR system, crucial enforcement will continue
  • Treasury says it will operate debt programs and manage cash, USPTO says it will stay open “a few weeks”
  • Commerce Dept says it won’t issue economic data
  • Bearish impact on U.S. economy “significant” if shutdown lasts,  Morgan Stanley says in note
  • Shutdown means Fed will have to prolong QE: BNP Paribas

CONTRACTORS:

  • “Notable” cos. tied to potential continuing resolution moves; H.J. Res. 59 would fund govt at “close to current levels”  according to Sept. 27 note from Bloomberg Industries analyst Brian Friel: BLL, BAVA@DC, BA, CACI, ERICB@SS, XLS, GD, GSK@LN, HRS, LMT, NOC, NOVN@VX, RTN, SAN@FP, TTEK, URS
  • Top 20 tied to defense, healthcare, infrastructure, IT:LMT, BA, GD, RTN, NOC, UTX SAIC, BA/@LN, LLL, HII, MCK, Bechtel (2213Z@US), BAH, URS, CSC, DYN, HUM, HNT, Triwest Healthcare (1893Q@US), TXT/BA joint venture
  • Health Exchanges begin enrollment tomorrow there’s a partial shutdown of govt.
  • Fannie, Freddie don’t face direct shutdown effect: Moody’s
  • Senate bill ends protection Sept. 30 for Monsanto, Dupont on bioengineered seeds: BI’s Friel
  • USD begins week buffeted by increasing possibility of U.S. government shutdown

TRADING RECOMMENDATIONS BASED ON DEBT SHUTDOWN CATALYST:

Barclays

  • Go long USD/CAD 2w2w FVA; relatively low USD/CAD volatility and its exposure to U.S. economic outlook make this an attractive hedge against U.S. political risk from debt-ceiling negotiations and a potential spike in market volatility

Credit Agricole CIB

  • Risk aversion is rising, U.S. equities and USD are falling
  • Near-term prospects for USD are bleak, with limited potential for any upside unless budget deal is reached; safe-haven currencies, in particular JPY, will be buoyed in this environment
  • In terms of high-beta currencies including Asian currencies, any positive impact from the fact that U.S. yields are capped will be outweighed by rising risk aversion leaving most Asian currencies vulnerable

Bank of Tokyo-Mitsubishi UFJ

  • If no resolution is reached, partial govt shutdown will kick in on Oct. 1, which could prompt USD selling against majors although stronger against Asia
  • Beyond govt shutdown, bigger issue is how they move toward debt limit when govt runs out of cash on Oct. 17; under such circumstances, BOT-Mitsubishi UFJ’s one-week USD/JPY forecast is a wider 96.50-100.00 on safe-haven JPY bids

Westpac

  • Expects USD to continue to trade on the “backfoot” vs its peer core currencies during a govt shutdown; event risk early in the week is negative for USD
  • Failure to raise debt ceiling would mean the U.S. govt must pay all its bills out of current revenue, risking default and downgrade and probable chaos in markets

Source: RanSquawk, Bloomberg

Courtesy: Zerohedge

Investing Opportunity of a Lifetime: Lessons from the Sprott Precious Metals Roundtable

Investing Opportunity of a Lifetime: Lessons from the Sprott Precious Metals Roundtable

Investing Opportunity of a Lifetime: Lessons from the Sprott Precious Metals Roundtable

What happens when you bring together four of the top minds in the precious metals investing space to share insights from the front lines of gold, silver, platinum and palladium investing? These excerpts from a Sprott Resources Roundtable featuring Gloom, Boom and Doom Report Publisher Marc Faber, Sprott Asset Management Chief Investment Strategist John Embry, Sprott Global Resource Investments Founder Rick Rule and Sprott Asset Management Founder Eric Sprott prove that great minds think big.

Sprott Resources: Marc Faber, help us understand the Federal Reserve’s recent announcement regarding tapering.

Marc Faber: When the Fed began Quantitative Easing 1 (QE1) in 2008, I said it would continue until QE99. So I’m not so surprised by the “no tapering decision.” But this money printing has numerous unintended consequences and actually does not help the economy much. Asset purchases benefit maybe 1% of the population, the super-rich. I’m not complaining because I own stock, bonds and real estate, but from a social point of view, it’s undesirable because it creates widening wealth inequality and dissatisfaction among the majority of voters. This could lead to more votes for a populist leader who will then tax the wealthy more heavily.

SR: You are based in Asia. China, India and Russia have been very big buyers of gold bullion. What is behind that trend?

MF: In the Far East, we have a tradition of owning physical gold, but what is new is the Chinese government encouraging citizens to own gold. I believe that in the face of political instability and a lack of faith in the U.S. dollar, Asians will continue to accumulate physical gold and silver.

SR: What is the component that you have in your own portfolio of precious metals? And to add onto that, would you comment on the fact that precious metals shares are vastly oversold and they are a complement to physical bullion holdings?

MF: I recommend an asset allocation of about 25% in equities; 25% in fixed income, securities and cash; 25% in real estate; and 25% in precious metals—gold, silver. I think I have around 25% in gold whereby I don’t value my gold. I have it and it’s my insurance policy. It is important that one day when the so-called shit hits the fan—and I think the Fed is well on its way to creating that situation—you have access to your gold, that it is not taken away.

SR: John Embry, you went through the market correction in 1975–1976. Would you share some perspective from that time?

John Embry: That’s a very good question because there’s a remarkable correlation with what is happening today. For the first three years of the 1970s, the gold price rose almost sixfold, and there was great enthusiasm. Then from 1974 to 1976, it was virtually cut in half. At that point, you could cut the pessimism with a knife it was so thick. Then, gold rose another eightfold from there. The price correction of the last two years has been even more counterintuitive than it was in the 1970s. The sentiment arguably is even more negative, yet the fundamentals are better than they were in the 1970s, so I think we’re setting up for a major reversal. The only thing we’re debating here today is whether it’s going to happen tomorrow, next week or several months from now. It’s just a matter of short-term timing because everything is in place.

SR: We have seen an incredible correction. During the upward trend we have seen during the past 10 years, we have had a number of corrections along the way, including some “puke” days. It looked like we had a bottoming at around $1,200 an ounce ($1,200/oz). We’ve corrected back to $1,300/oz, and now we seem to be heading upward. Can you help us put some perspective on that?

JE: We have had, from top to bottom, over a $700/oz correction in the past two years. That attests to the power of the central banks, the Bank for International Settlements (BIS), the bullion banks and their ability to control the paper market aggressively. I think that is coming to an end because it has driven the price down to remarkably undervalued levels. Talk of gold going to $1,000/oz and below is ridiculous. It’s not going to happen. I think this is a fabulous opportunity because it’s hugely undervalued and the fundamentals are compelling. We’re just on the verge.

SR: What happened to the gold shares in that period?

JE: Gold shares were similarly under pressure, but their subsequent gains were historic. After gold topped in 1980 and then started to re-rally, the gold shares exploded again. You’re talking in many cases, ten- or twentybaggers. So I wouldn’t get discouraged here for the simple reason that I think gold and silver shares are now as cheap as they’ve ever been in history relative to where they are going. So it’s a great buying opportunity, but very few people seem to be willing to take advantage of it.

SR: Rick Rule, what is happening in the platinum and palladium sector?

Rick Rule: Platinum and palladium benefit from all of the factors concerning precious metals. They have for many centuries fulfilled the same roles with regard to stores of value and mechanisms for transferring or storing wealth as gold and silver. Where they differ a bit is on the supply side. All of us know that a lot of the gold and silver that has been mined historically has been stored in vaults. So in the near term, supply considerations in gold and silver have to do with sellers’ intentions. I, like the prior speakers, believe that the holders’ intentions will turn very bullish, and it will be very good for gold and silver prices. But platinum and palladium supplies are different. They don’t get stored. They get used.

Currently, worldwide stocks of finished platinum and palladium bullion are less than one year’s platinum and palladium fabrication demand. The supply story gets more interesting because as a consequence of not having any stored bullion, the only supply is new mine supply and recycled supply. That new supply is very, very concentrated. South Africa constitutes 75% of world platinum supply and 39% of world palladium supplies. Russia supplies 13% of platinum supplies, 41% of palladium supplies. In many cases, current metal prices do not earn the cost of production. The consequence is that new mine supply, which is the most important source of supply, is declining. This isn’t something that’s going to occur in the future. It’s something that is occurring right now. Further, costs are going up because workers’ wages have to go up. Social take in the form of taxes, rents and royalties have to go up, but they can’t because the industry doesn’t earn its cost of capital. On the demand side, platinum and palladium provide incredible utility to users. We anticipate that the utilization of platinum and palladium will continue to grow even in the face of supply declines. There is only one way that dichotomy can be resolved, and that’s in the form of price.

It is also worth knowing that just in the last year and a half, platinum and palladium have begun to enjoy elevated status from an investment point of view. The physical inventory held by exchange-traded products (ETPs) like our own Sprott Physical Platinum and Palladium Trust have increased dramatically. This could exacerbate an already-troubled supply-demand imbalance.

SR: Eric Sprott, what is going on in the silver market?

Eric Sprott: Marc indicated that he was a 25% investor in precious metals; I am probably an 80% investor in precious metals. Silver COMEX inventories have held up even though the price has gone down. It’s sort of an interesting contrast with gold where there were huge redemptions in the ETFs. Those redemptions, in my mind, were created to solve the physical shortage. We had 700 tons of ETF liquidation. That would represent close to 50% of all mine supply annually, in other words, an increase in supply. But it was needed because we definitely have a shortage.

I continue to believe that silver will be the investment of the decade because 1) of its industrial uses and 2) it will take very little investment demand to really move things along.

We have years where people are buying 50 times more silver than gold, and yet mine production is only 11:1 silver versus gold. By my calculation, we only have 3 oz of silver available for investment purposes for every ounce of gold. Every time I’m talking to metal dealers, my favorite question is: What part of your business is silver, and what part is gold? And almost everyone says, 50/50. I guarantee you, that cannot continue.

What I really want to talk about is what I think is the investment opportunity of my lifetime. I happen to very firmly believe that within the next year, gold will be through $2,000/oz. I’ve chosen $2,400/oz as a target of where it will be in a year. That has amazing implications for gold equities. Back in 2000, I was beginning to aggressively buy mining stocks.  At the time, I thought if gold could ever get to $400/oz, maybe these companies whose costs then were $300/oz could earn $100/oz and we could make three or four times our money. With most producers averaging around $1,000/oz costs, if the gold price goes to $2,400/oz, you have $1,400/oz of margin. That is 14 times the opportunity in 2000.

I totally subscribe to the manipulation of gold and silver and the shortages of gold and silver. I’ve written many articles asking whether the central banks have any gold left and what is going to happen to gold when they finally give up the ghost, which I believe is coming. That is why I think the opportunity in the equities is spectacular. Of course, also I’m a great believer in owning physical gold and silver with my particular emphasis on silver these days.

 

Courtesy: Moderated by John Budden of Sprott Resources 

Fed Balance Sheet Liquefaction and the Race for Precious Metals

Fed Balance Sheet Liquefaction and the Race for Precious Metals

Fed Balance Sheet Liquefaction and the Race for Precious Metals

Why does the Fed seem to be stuck?

The Fed seems to be stuck because of housing market weakness and its associated mortgage backed securities. The repo market appears to be where the stress is most threatening, though hidden from view. These trillion dollar daily transactions are the lifeblood of world financial markets.

Furthermore, the size of global financial markets has become so large that their downfall would severely threaten the underlying economy.

The Fed can only supply the much needed repo market collateral through deficits, hence the need for war to stimulate the economy and lending interest. They have apparently lost the ability to taper with the last fumbling attempt.

Out of Control Money Printing

Money may not be flowing into the economy in direct proportion to the unprecedented recent money supply expansion, but it is making it into equities as is evidenced by all-time highs.

This provides useful behavioral cover. Even though a small portion of individual investors hold stocks, the perceptual cues from such stock rises remain a crucial confidence enabler.

Banks currently care most about leveraging their credit via capital markets — and the resulting higher asset prices — not about their unused reserves or traditional lending practices.

If the Fed Were to Exit

An exit by the Fed would likely result in the immediate collapse of stocks and all the derivatives associated with that enormous bubble as 2.2 trillion in marginalized credit has been injected into the capital markets.

This would once again necessitate huge bailouts and monetary expansion. It would also mean that the next round of monetary expansion would probably occur via more conventional lending channels.

The larger issue once all the 2.2 trillion in leveraged and marginalized credit begins to unwind, is that the markets will then see the mother of all flows away from paper and into any and all remaining physical assets. This will be the shot heard round the world to herald the end of the long deferred fiat monetary experiment.

How the Banks Fleece Their Customers

Still, before that moment arrives, the banks must be prepared by doing precisely what you, dear reader, are likely already doing. They are buying as much hard assets as they can, in the form of gold, silver and life preserving supplies, before that traumatic day dawns.

Evidence for this comes in the form of aggressive sell recommendations and manipulative pressure on market prices. This allows the banks to take assets from clients at discounted prices.

They can also sometimes use buy recommendations to generate a price spike whereupon they initiate downdrafts and buy back on the resulting dips. This phenomenon is quite noticeable in precious metals futures where bullion banks like JPMorgan Chase still maintain a very large concentrated silver short position. They are also now controlling a large concentrated long position in gold.

All of this underscores the precious metals’ eventual return to their previous monetary or investment status, without them needing to circulate as currency. Of course, silver’s return will probably be that much more violent since its substantial underlying industrial demand will squeeze the large users.

Courtesy: Dr. Jeffrey Lewis

Current Situation in U.S. Dollar and Non-USD Gold Price

Current Situation in U.S. Dollar and Non-USD Gold Price

Current Situation in U.S. Dollar and Non-USD Gold Price

In the previous week the Fed surprised markets when it decided to stick with its massive stimulus measures. However, in the following days some officials said that the U.S. central bank could still begin tapering later this year. Since then, markets are no clearer on when the Fed will eventually taper its stimulus.

From today’s point of view, it seems that this uncertainty over tapering has kept the price of gold in its narrowest range since the June bottom. Since the August low the yellow metal has been trading between $1,271 and $1,434.

Yesterday, investors received mixed economic data, which fueled persistent uncertainty over the outlook for U.S. monetary policy and gave conflicting signals on the health of the economy. According to Reuters, contracts to buy previously owned U.S. homes fell for the third straight month in August but fewer Americans filed new claims for jobless benefits last week.

What impact did the above have on the yellow metal? Gold lost almost 0.7% and dropped below $1,330 an ounce. It seems that buyers keep on the sidelines, although wrangling over the U.S. budget supported prices and pressured the dollar.

Speaking of the greenback… Yesterday, after economic data was released, the dollar rebounded and climbed above 80.76 on an intraday basis. However, it was up by only 0.29% – not a strong bullish reaction. If a given market is supposed to react somehow, based on some important information, but doesn’t, it’s a sign of either strength or weakness – the latter in the case of the USD Index. So, has the outlook for the USD Index changed since our previous essay was posted? Will the dollar recover quickly? What impact could it have on gold?

The US Dollar Index

Today, we’ll examine the US Dollar Index once again (from many perspectives) and take a look at charts of gold priced in other currencies to see if there’s anything on the horizon that could drive gold prices higher or lower in the near future. We’ll start with the short-term USD Index chart (charts courtesy by stockcharts.com)

Short-term US Dollar Index chart

On the above short term chart, we see that the USD Index remains between the support line based on the June low and the resistance line based on the September highs. Therefore, we will probably see a breakout or a breakdown in the near term. If there is such action, a bigger move to the upper or lower border of the declining trend channel is quite probable. Because of this uncertainty, the downside target area has been modified and marked with a red ellipse.

Generally, the situation in the USD Index evolved in line with the True Seasonal tendencies.

True Seasonal pattern for  U.S. Dollar Index (DXY) Index Price

We saw a small correction, as seen on the short-term chart. The above patterns are suggesting another move lower in the final part of this month, which could mean a breakdown below the June low and a more decisive move to the downside.

Please note that the quality of the prediction (green line in the lower part of the above chart) declines in the final part of the month, which means that a deviation (in the form of a bigger decline) is not unlikely.

The bearish implications are for the first days of October, so the move lower could be seen quite soon. That’s one of the factors that make the short-term outlook for precious metals not as bearish as one might view it based on the medium-term trend.

Now, let’s examine the US Dollar Index weekly chart.

Weekly US Dollar Index chart

On the above chart, we see that the breakdown below the rising, medium-term support line is still not confirmed (weekly closing prices this week and next will confirm the breakdown if they are seen below the rising support line). Taking into account what happens on the short-term USD Index chart, the dollar could move lower – to the area marked with the black ellipse on the above chart – but it doesn’t have to.

As we wrote in our previous essay on the dollar and gold:

(…) the target area is quite unclear because of the multiple support lines, including the long-term support line seen on the previous chart. It seems that we could see the US Dollar Index in the 78-79 range before the bottom is in. Again the exact price target is unclear.

Therefore, the area marked with the black ellipse is the lowest downside target level.

Let’s check the long-term outlook.

Long-term US Dollar Index chart

The situation in the long-term chart hasn’t changed much recently. The long-term breakout above the declining long-term support line was not invalidated, even though the USD dropped heavily last week.

However, since the medium-term breakdown (below the support line marked in red) is visible also from this perspective, we could see some short-term weakness anyway. It seems that the long-term support line will stop the decline – that is, if the USD Index reaches that low. Therefore, from the long-term perspective, it seems that the downside is still quite limited.

With a possible move lower in the case of the USD Index in the very short term, perhaps there is significant upside potential for gold?

Having discussed the current situation in the U.S currency and the True Seasonal patterns’ impact on future movements in the dollar, let’s now move on to the chart that shows us the yellow metal’s performance from the non-USD perspective. Approximately, it’s the price of gold multiplied by the USD Index (technically: divided by its opposite) – it shows changes in the price of gold if we leave out the influence of the USD Index.

Gold from the non-USD perspective - GOLD:UDN

On the above chart, we see that the breakdown below the rising short-term support/resistance line was not invalidated. The situation deteriorated slightly as we saw another weekly close below the rising support/resistance line based on the June and August bottoms.

Therefore, from this perspective, the implications remain bearish.

Now, let’s examine gold from another perspective – priced in British pounds.

Gold price in British Pound - GOLD:XBP

Earlier this month, gold gave up the August gains and dropped below the rising resistance line once again. Additionally, the breakout above the 50-month moving average was invalidated. These invalidations are bearish signals.

Before we summarize, let’ take a look at gold priced in euros.

Gold price in Euro - GOLD:XEU

On the above chart, we see that the situation hasn’t changed much. Although gold priced in euros pulled back in the past week, it still remains below the previously-broken, rising support/resistance line (marked with red). Therefore, the medium-term implications remain bearish.

Summing up, the medium-term outlook for gold remains bearish. Despite last week’s show of strength, the downward trend is not threatened at the moment. However, taking into account the short-term action in the dollar and the True Seasonal patterns’ short-term implications for the USD Index, the short-term outlook for precious metals may not be as bearish as one might view it based on the medium-term trend. Simply put, a pullback in gold would not surprise us even though the medium-term trend is down.

 

Courtesy: Przemyslaw Radomski, CFA

JPMorgan Urged to Pay More in Mortgage Deal

JPMorgan Urged to Pay More in Mortgage Deal

JPMorgan Urged to Pay More in Mortgage Deal

The Justice Department is moving closer to striking a multibillion-dollar settlement with JPMorgan Chase over questionable mortgage practices, after authorities urged the bank to raise its offer and the bank’s chief executive took the rare step of meeting with Attorney General Eric H. Holder Jr. in Washington to discuss the deal.

Mr. Holder’s nearly hourlong meeting on Thursday with the chief executive, Jamie Dimon, followed days of intense negotiations during which JPMorgan ultimately offered to pay a roughly $7 billion fine and provide $4 billion in relief for struggling homeowners, according to people briefed on the talks. While the Justice Department has largely agreed to the $4 billion in relief, which requires the bank to reduce the size of certain mortgages and refinance others, it seeks more than the proposed $7 billion in penalties and is now waiting for JPMorgan to prepare a new, larger settlement offer, the people said.

The latest push on the size of the penalties indicates that the talks are entering their final stages. After JPMorgan raised its total offer to $11 billion earlier in the week, the disparity in negotiating positions narrowed significantly.

And the size of the fine is not the central negotiating point for the bank: JPMorgan is instead focused on using the wide-ranging pact to resolve many of the mortgage-related investigations it faces. Most important, the bank is asking that prosecutors in California drop a criminal investigation into the bank’s mortgage practices — a request that the Justice Department has yet to meet.

Despite the progress, the people briefed on the talks cautioned that the terms were shifting and that the discussions could still fall apart. The people spoke on the condition of anonymity because they were not authorized to discuss private negotiations.

If the settlement talks proceed on the current course, the people said, the deal would most likely resolve all federal investigations into whether JPMorgan duped investors into purchasing mortgage securities from 2005 to 2007 — the height of the housing bubble. The deal would not prevent the government from suing over mortgage securities originated in 2008 and beyond, after the housing market crashed.

Under the current contours of the settlement, the Justice Department will also not include an investigation from the United States attorney’s office in Manhattan. The bank, the people said, is in advanced stages of negotiating that deal, which involves violations of the rules of the Federal Housing Administration’s mortgage insurance program.

The Justice Department’s potential settlement pact, however, would be likely to resolve a 2011 lawsuit from another housing agency. The deal would require JPMorgan to pay from $3 billion to $6 billion to settle with the Federal Housing Finance Agency, which accused JPMorgan of selling shoddy loans to Fannie Mae andFreddie Mac, the government-controlled housing organizations, the people briefed on the talks said. That case was one of the largest threats to JPMorgan.

The Justice Department’s settlement deal, if approved, is also likely to force JPMorgan to pay hundreds of millions of dollars to settle a lawsuit filed by Eric T. Schneiderman, the New York attorney general, and close an investigation from prosecutors in Pennsylvania. Both cases involve mortgages that the bank inherited from firms it bought in 2008; Mr. Schneiderman’s case involves Bear Stearns, and the Pennsylvania investigation is focused on Washington Mutual.

Another front in the settlement talks, and a significant worry for the bank, is a lawsuit that federal prosecutors in California have readied against JPMorgan over mortgage securities it sold to investors in the run-up to the housing crash. The prosecutors, from the United States attorney’s office for the Eastern District of California, are also conducting a parallel criminal investigation. Although it is unclear whether the bank will be charged, the criminal investigation continues to focus on JPMorgan employees involved in the mortgage deals.

JPMorgan declined to comment, as did a Justice Department spokeswoman.

The mortgage talks, which represent only a sliver of JPMorgan’s legal woes, coincide with the bank’s broader effort to resolve these problems and mend frayed relationships in Washington. JPMorgan faces investigations from at least seven federal agencies, several state regulators and two foreign governments.

As the investigations linger, the bank incurs significant legal costs. Bracing against potentially hefty payouts to the authorities, JPMorgan recorded a $678 million expense for additional litigation reserves in the second quarter, up from $323 million in the same period a year ago, according to a filing in August.

In its filing, JPMorgan estimated it could incur as much as $6.8 billion in losses beyond its reserves. That figure is up nearly $1 billion from the first quarter of the year. One possible silver lining, however, is that the fines and penalties could be tax deductible.

The inquiries run the gamut of the bank.

The Securities and Exchange Commission is investigating the bank’s decision to hire the children of Chinese officials, and whether those hires violated federal bribery laws. The Consumer Financial Protection Bureau is examining the bank’s debt collection practices. And federal prosecutors in Manhattan are scrutinizing whether the bank failed to sound alarms about Bernard L. Madoff’s Ponzi scheme.

Last week, JPMorgan began to clear one of the largest legal clouds hanging over the bank. The bank agreed to pay $920 million to four regulatory agencies investigating the bank’s multibillion-dollar trading loss in London last year. The agencies — the Securities and Exchange Commission, the Office of the Comptroller of the Currency, the Federal Reserve and the Financial Conduct Authority in London — cited the bank for “severe breakdowns” in internal controls surrounding the losses. (That same day, JPMorgan agreed to pay $80 million to regulators over accusations that it charged credit card customers for identity-theft products they never received.)

In the mortgage case, settlement talks heated up this week after news reports on Monday indicated that the federal prosecutors in California were poised to sue the bank. That day, people briefed on the matter said, Mr. Dimon reached out to Mr. Holder’s office and floated the idea of an in-person meeting.

The lawsuit from California apparently frozen, that meeting was convened on Thursday morning in Mr. Holder’s fifth-floor conference room. Two of Mr. Holder’s top lieutenants — James M. Cole and Tony West — also attended the meeting.

Mr. Dimon had his own entourage: Stephen M. Cutler, the bank’s general counsel; Stacey R. Friedman, another senior attorney; and Matthew E. Zames, the bank’s chief operating officer.

While it is common for chief executives to meet with Justice Department officials, it is rare that they meet directly with Mr. Holder. When the chairman of UBS, for example, visited the Justice Department last year to discuss its plans to extract a guilty plea from the bank’s Japanese unit, he met with an assistant attorney general and staff lawyers.

At a news conference on Thursday, Mr. Holder declined to discuss the details of the meeting.

“I will say that I did meet with representatives from JPMorgan Chase,” Mr. Holder said. “That is an ongoing matter.”

 

Courtesy: dealbook.nytimes

Gold And Silver – The Central Bank Death Dance, Part I

Gold And Silver - The Central Bank Death Dance, Part I

Gold And Silver – The Central Bank Death Dance, Part I

If “they” can get you to ask the wrong questions[s], “they” do not have to worry about giving the right answer[s].

The question most have been asking is, why aren’t the prices of gold and silver reflecting the unprecedented huge demand and the almost depleted holdings of the exchanges and central banks?  Article after article has been retelling the stories of long lines to buy silver and gold, all over the world, Russia and China buying everything available for sale from the gutless Western central bankers, failure to deliver physical gold by banks to customers, failure to deliver contract gold on the COMEX, rolling it forward and/or settling for cash for those who take it.

Each of these factors have been posed in the form of a question to ask why prices have not reached new highs, and substantially higher PM highs.  These are the wrong questions which is why no one has offered the “right” answer as it pertains to price.

We have alluded to other issues in salvos against the central banks and New World Order, [NWO], on several occasions.  The NWO, through the Bank for International Settlements, [BIS], its central banks own the United States since 1933, when this country was forced into bankruptcy and Socialist Roosevelt shut down the banking system to give time for the Federal Reserve to take total control.  The de facto corporate federal government has been taking it marching orders from bankers since about 1861.

Central banks and governments produce nothing.  Governments exist by sucking the financial lifeblood from the same citizens the government is supposed to serve.  At least that was not the way it was supposed to work when this country was formed as a Republic. Since 1913, this government has been turned into an [un]represented democracy, controlled by the Fed/Wall Street bankers, for the benefit of their shareholders and uber-wealthy.  Anyone else, under the 1%, is considered merely as fodder.

The only thing the United States has left to defend is the fiat Federal Reserve Note, [FRN] incorrectly known as “the dollar.” [By established law in the United States, FRNs are not dollars, repeat, are not dollars.]  The de facto federal government rules by deception on every level, and it does everything to hide this fact of law, successfully, we should add, as but one example of many re deceptive practices.

Cognitive dissonance has almost all of the American population, and the rest of the world believing FRNs are “dollars.”  Those unaware are unaware of being unaware, and as a consequence, the unaware are not asking the right question[s].  When presented with the truth, people do not believe it.  Instead, they believe in the lies fed to them so that the real truth sounds like a lie.

The NWO has shredded the organic Constitution, created by our forefathers, and replaced it with a federal constitution that is very similar to but drastically different from the original.  The NWO has also driven out capitalism and replaced it with corporate fascism and central planning, for over the past century, but few have noticed or even care to know.

When you start to ask the right questions about the installed de facto regime that started over 150 years ago, when you ask the right questions about what money is, what a dollar is, what Federal Reserve Notes are not, despite their deceptive claims, then you will better know why gold and silver have not rallied to considerably higher levels in light of all that is going on in recent years.

Federal Reserve Notes are evidences of debt.  Debt is not and cannot be money, yet people accept it as though it were.  As long as Americans choose to be ignorant about basic facts as these, the NWO’s federal government will continue to fleece the population and suck the wealth out of this nation, as it has in the biggest wealth transfer ever in the world.

How do people in this country measure their wealth?  By the worthless fiat FRN.  Almost all measure their worth by debt.  What is the antithesis of debt?  Gold and silver, those metals which have a proven history of an intrinsic store of value.

Prior to the Federal Reserve, this country issued United States Treasury Notes, backed by gold and silver.  Every Note could be exchanged for its face value into gold or silver, at any time.  Into what can anyone exchange a Federal Reserve Note?  For another one, only.

The value of an original FRN issued in 1913 is worth about 2 cents, today, maybe less, not that it matters.  The value of an ounce of gold in 1913 was $18.32.  Even at today’s price, suppressed as is has been, that same ounce of gold is worth $1,340.  The price of silver in 1913 was $1.29 vs $22 today.

Here is at least one right question you should be asking:

Which would you rather own, a fiat piece of paper, or an ounce of gold and silver?

The reason why gold and silver are not priced higher is not because of the true demand situation, or even the dwindling supply/default on physical delivery circumstances. The question hardly anyone is asking is why are central banks and their servant governments doing everything possible to preserve the soon to be devalued “dollar,” more accurately, FRNs?

Central bankers may currently be engaged in their own “death dance,” with increasing odds that their criminal banking scheme is being exposed for what it is and has been. Whether it is allegro or adagio, no one knows.  For sure, Eastern countries are no longer tolerating the Western banking Ponzi scheme and are shunning the “dollar,” forever.

If the prices of gold and silver were allowed to reflect their true worth, it would totally undermine the existence of the “dollar” and topple central bankers and governments. Those bankers in control are not going to go down, [which they inevitably will], without a fight, and they will destroy existing western currencies in the process.  If the paper “dollar” is how you measure your worth, you have been warned.

We have been advocating buying and holding physical gold and silver, regardless of price for reasons such as the above.  Anyone gambling on timing of the availability for buying physical gold and silver is playing a risky game and ignoring factual history supportive of owning either or both.  Do so at your own peril.

We have heard from esteemed sources that the COMEX/LBMA exchange pricing is a joke.  That may be true, but it continues to work, and it may continue to work for longer than anyone expects.  Some are measuring central banking gold/silver failure in months. It may last for years, still.  No one knows the future, and those who have professed gold and silver reaching stratospheric heights have been wrong, for the most part, over the past few years.

At this point, we turn to those “silly” charts because we know of no better substitute no matter how corrupt they may be.  They are accurately telling everyone what they can expect to pay for the purchase of physical gold and silver.  What we do not see in any of the charts are signs of panic from the bears.  That can change next month, but we are dealing with the present.  Until there are definite signs of change, we reference the charts because of no viable alternative.

Not a lot can be said about the weekly.  The trend is down.  It has weakened a little but has not changed.  The past three weeks were an attempt to get the market lower that failed, at least for now.  Last week’s small range rally bar was relatively weak, but price managed to close on the higher end of the bar, a plus.

GC W 28 Sep 13

The same information is seen in greater detail on the daily.  The effort to push price lower from six weeks ago was stopped, but the rally effort since has been somewhat weak.  Gold needs to rally away from this little support area, or it could be challenged, again.

GCZ D 28 Sep 13

Price continues to hold above the gap higher rally bar, 7 weeks ago.  It continues to be an important turning point for silver.  The trend is down, but there has been no concerted effort to push it lower, as was seen in the Spring.

SI W 28 Sep 13

There is a slight positive aspect to the clustering of closes, but with the trend still down, the onus is on buyers to show control by moving price higher, soon.

The futures have been difficult to trade, but buying physical gold and silver is a no-brainer

SIZ 28 Sep 13

 

Submitted By: Edgetraderplus

The Evolution of the Precious Metals IRA

The Evolution of the Precious Metals IRA

The Evolution of the Precious Metals IRA

Precious metals currently look like a no brainer investment in a world of market volatility, rehypothecation, massive bail ins and outs, and a growing number of templates for taking people’s retirement assets away.

Many are familiar with the option of keeping precious metals in an IRA. Those who understandably refuse to take the penalty for cashing out in order to take full personal possession now have the next best option and a way to get control of their metal.

A Historical Perspective

Self-Directed IRAs were first introduced in the United States in 1975, shortly after the inception of the IRA.

Soon thereafter, trust companies and custodians started allowing alternative asset classes such as real estate, foreign real estate, REITS, private equity, promissory notes, and certain precious metals to be held in self-directed IRAs.

One recommended custodian, IRA Services Trust, was one of the first to do this.

Traditional Self-directed IRAs versus IRA LLCs

Traditional self-directed IRAs do not allow personal possession of precious metals, whereas the IRA LLC does. Both have deferred taxation benefits pursuant to the retirement tax code.

Traditional self-directed IRAs require that PMs be held at a qualified depository, most of which are in Delaware, and many also have a large percentage of COMEX holdings.

They are typically not especially costly to set up, but they can incur considerable storage, maintenance, and transaction fees over time. Most sovereign bullion coins, U.S., Canadian, Perth, etc… are accepted, as well as “other 999 bullion.”

For the security minded retirement investor, the IRA LLC allows an investor to take personal delivery with no taxes or penalties incurred. Precious metal shipping costs are free in most cases, and shipping and supply turnaround times will depend on market conditions, but are currently only a couple of weeks or less.

The New Age

The new wave of retirement funds are allowed to keep their tax deferred status, but still allow an individual to choose how their funds are allocated. In other words, you can hold cash, investments, physical silver and gold.

The IRA LLC allows for any investment that is not a prohibited transaction, including cash in the IRA LLC bank account, stocks, bonds, private placements, oil and gas leases, investment real estate, precious metals in your closet, etc…

An IRA LLC is not subject to annual audits, although anyone subject to U.S. taxes is subject to an IRS audit, so one would just need to be able to furnish the assets of the IRA LLC. The basic annual requirement is merely the reporting of the LLC’s assets.

The real advantage of the IRA LLC is that it acts as an emergency hedge, without requiring that you leave the system entirely. There is no penalty in using one, and you can still put the assets to work for you and leverage your precious metals as collateral.

American Eagles are the only coins eligible for personal holding within such an IRA LLC. Other bullion is allowable in traditional self-directed PM IRAs, but they cannot be held personally, only in a depository.

Some 401 retirement plans allow the participant to periodically withdraw into an IRA while still contributing and building their 401 plan. Old 401 plans are free to rollover.

Australia’s Retirement Program

In Australia, you can choose where you invest your retirement money, however under stricter guidelines and yearly audits.

Property and borrowing for certain investment properties are allowed, as well as stocks, authorized property funds, gold and silver. Other investments are also permitted, although mainly bricks and mortar.

These plans have tax benefits and once it reaches maturity, they offer excellent tax free incentives. However, these plans are much more costly to set up and audits are much more expensive. It is recommended to have at least $100k at set up to make them worthwhile.

Such precious metal retirement programs are not the same or as cheap as the “option” of holding unencumbered metal under your direct control or possession, but they seem to be the next best thing since they are not potentially worthless digital or paper assets.

Courtesy: Dr. Jeffrey Lewis

Gold Analysts Bullish Due To Money Creation On Scale Never Seen In History

Gold Analysts Bullish Due To Money Creation On Scale Never Seen In History

Gold Analysts Bullish Due To Money Creation On Scale Never Seen In History

Today’s AM fix was USD 1,321.50, EUR 978.45 and GBP 822.03 per ounce.
Yesterday’s AM fix was USD 1,332.50, EUR 987.92 and GBP 830.22 per ounce

Gold slid $9.40 or 0.7% yesterday, closing at $1,323.70/oz. Silver fell $0.06 or 0.28%, closing at $21.70. Platinum dropped $21.70 or 1.5% to $1,404.50/oz, while palladium slipped $1.75 or 0.2% to $718.75/oz.

After initial gains, gold sold off soon after U.S. markets opened, falling from $1,336.40/oz to $1,322.53/oz in concentrated selling over a few minutes. Gold traded sideways in Asia prior to eking out marginal gains in early European trading prior to giving up those initial gains.


U.S. Total Debt Versus Gold (1970-2013)

While data has been mixed lately, some important data points have been negative including purchases of second hand homes which fell for the third straight month in August.

The misguided speculation regarding Fed tapering has begun again.  A Bloomberg survey of 41 economists last week showed 24 expect the Fed will pare ‘stimulus’ in December. None of these same economists predicted that the Fed would not taper last week and their views on tapering should be taken with a pinch of salt.

As we have long contended, QE is set to continue for the foreseeable future as a discontinuation of QE would lead to market declines or worse and a serious recession or depression.

It remains prudent to ignore the noise from the Fed and the constant speculation from many analysts and economists – most of whom have a dismal track record in predicting events before or since the global financial and economic crisis.


Gold in USD, 5 Days – (Bloomberg)

Gold analysts are Bullish

Gold analysts are bullish for a second week due to the view that ultra loose monetary policies and budget talks risk a U.S. government shutdown which will spur demand for gold bullion as a haven.

According to Bloomberg as featured in The Washington Post:

Seventeen analysts surveyed by Bloomberg expect prices to rise next week, seven are bearish and three neutral. Gold, which fell into a bear market in April, rose 7.3% since the start of July, poised for the first quarterly advance in a year.

Bullion is still heading for its first annual drop in 13 years after some investors lost faith in the metal as a store of value. The Federal Reserve unexpectedly left its bond-purchase program unchanged last week, saying that restrictive fiscal policies pose risks for the economy. President Barack Obama and congressional Republicans are debating the federal budget in a confrontation that risks a government shutdown within days.

“The outlook is positive due to the twin risks of continued ultra-loose monetary policies as seen in the lack of tapering and also due to forthcoming risks regarding the U.S. debt ceiling. They may resolve the debt ceiling, but how they resolve it is most likely to kick the can down the road. People may buy gold as a safe haven.”

Gold prices languished from 1980 to 2000 and had declining correlations with debt levels because GDP growth was sufficient to mute concerns about budget and deficit issues. Debt levels in GDP terms actually fell in the 1990’s. Also the 1990’s was an era of great economic and geopolitical optimism with the end of the Cold War, a more stable world and the emergence of China, India and other  emerging markets into the global economy.

This was during the Clinton presidency and prior to the Bush and Obama presidencies which have seen the U.S. spend money like a drunken sailor. That profligacy began soon after September 11th and the U.S. military response to the terrible events of that day.

It continues today despite a very precarious fiscal position. Since September 11th the world is a far more uncertain place and geopolitically the world is now reverting to the instability of the Cold War years.

The punch and judy show that is the U.S. Congress is making creditor nations around the world very nervous and astute investors and savers are diversifying into gold to protect from the real risk of a dollar crisis and global currency crisis.


Gold In USD and All Federal Reserve Banks Total Assets – 1996 to Today (Bloomberg)

The Federal Reserve decision to refrain from a QE taper is very bullish for gold.

‘Tapering’ may be put off indefinitely due to the very fragile state of the massively indebted U.S. economy. This means that interest rates must be kept low for as long as possible, leading to money printing and electronic money creation on a scale never before seen in history.

This will inevitably lead to higher gold prices – the question is when rather than if.

QE1 and QE2, in addition to the start of the current QE3, sent gold to record nominal highs. Misleading guidance from the Fed and misguided speculation regarding tapering and the possible end of QE decreased interest in gold from more speculative buyers, contributing to its weakness in recent months. That will change in the coming weeks and months when there is a realisation that ultra loose monetary policies are set to continue.

Concerns about systemic risk and currency debasement is leading to  continuing robust central bank demand for gold.

The IMF data released Wednesday showed that eight central banks increased their gold reserves in August, some very significantly.

Russia, which has the world’s seventh largest reserves of gold, increased its holdings last month by the biggest amount since December. Russia increased reserves by 12.722 tonnes to 1,015.521 tonnes, according to the IMF’s website. Russia’s gold holdings crossed the 1,000 tonne mark in July.

Turkey raised its gold reserves by the most in five months in August. Turkey added 23.344 tonnes to lift its gold holdings to 487.351 tonnes. Turkey’s increases have been bigger this year as its central bank allowed commercial lenders to hold a portion of their lira reserves in gold.

Turkey has bought gold in 13 of the past 14 months and Russia has added to its reserves for 11 consecutive months.

Ukraine, Azerbaijan and Kazakhstan were the other countries that added to their gold reserves by more than 2 tonnes each last month. Canada, Mexico and Czech Republic were among those that reduced their holdings very marginally.

Other very large buyers of gold, include sovereign wealth funds, some of which are also continuing to diversify into gold.

Azernews reports that:

The State Oil Fund of the Republic of Azerbaijan (SOFAZ) has said that SOFAZ’s gold reserves will reach 40 tons in 2014. The total amount of gold purchased by SOFAZ will reach 30 tons until the end of 2013, and 20 tons of the volume will be delivered to the country.

“So far, 26 tons of gold have been purchased, most of which has already been delivered to the country,” Movsumov said.

He said the process of a phased purchase of gold over three years is effective, which allows to provide the average cost of purchased gold considering the volatility of prices for this precious metal.

According to the plans, SOFAZ buys gold in batches. The fund began buying gold in the first quarter of 2012. The first batch of gold in the amount of 32,150 troy ounces was delivered to the country on January 11, while the second batch was brought on February 1 and the third one on March 1.

The continuation of ultra loose monetary policies by the U.S. Federal Reserve and the other major central banks will lead to continuing diversification into gold by prudent money internationally. 

This will lead to gold reaching a real (inflation adjusted) high above $2,400/oz in the coming years.

Courtesy: Goldcore

US Federal Reserve And The Ghosts Of LTCM

US Federal Reserve And The Ghosts Of LTCM

US Federal Reserve And The Ghosts Of LTCM

It has only been a few days since the Federal Reserve stunned the market and announced that it would not taper its $85 billion bond buying program, but it has been long enough to show that the US central bank is a house deeply divided. Since Mr. Bernanke’s press conference on September 18th, four Fed governors have given their own opinion on whether the Fed should extend their bond buying program and continue to provide additional stimulus to the economy.

After the market reacted positively to Bernanke’s comments, James Bullard pulled the carpet out from under the market on Friday with his take on the decision. The Federal Reserve Bank of St. Louis President suggested that the decision to continue the purchasing program “was a borderline decision” after “weaker data came in,” and that some data change could make the committee be comfortable with a small taper in October.” This was enough to spook the gold and silver markets into erasing all the gains it had made over the previous two days.

So we ask what road map is the Federal Reserve following for monetary policy now?

Why would an easy money policy need to be extended after guiding the market for months that monetary stimulus would be removed, albeit slowly, over the next nine months? Bernanke, in his press conference, said that despite growth proceeding at a moderate pace, “federal fiscal policy continues to be an important restraint on growth and a source of downside risk.” Could the FOMC be providing easy money in an effort to pre-empt the impact of the debt ceiling debate on the US economy? For some answers we look back to a financial event that happened 15 years ago yesterday. The story sounds all too familiar and strikes a chord we have heard many times in recent memory.

LTCM crisis averted through a Federal Reserve intervention

A hedge fund borrows billions of dollars to make large bets on esoteric securities to “vacuum up nickels that everyone else had overlooked”. Long Term Capital Management’s (LTCM) objective was to identify arbitrage opportunities using massive databases along with the insights of two Nobel Prize-winning economists. Started in 1994 with initial capital of $1 billion dollars and buoyed by their success, LTCM in 1998 borrowed $125 billion with only $5 billion in assets. In August of 1998 Russia defaulted on their debt and set off a chain of events that could not be predicted by computer models, causing the fund to hemorrhage cash. Almost overnight, the firm lost most of its capital, and Wall Street suddenly shunned it. Seeing no options left, the Federal Reserve Bank of New York organized a bailout of $3.625 billion by the major creditors to avoid a wider collapse in the financial markets. History is not without its sense of irony, as many firms that were employed by the Federal Reserve to rescue LTCM were themselves teetering 10 years later and necessitated a rescue of their own.

The crisis had been averted through a Federal Reserve intervention and a new policy instrument had been perfected for the Federal Reserve’s toolkit – the ‘Greenspan Put’. The term was coined in 1998 after the Fed lowered interest rates following the collapse of Long Term Capital Management. The effect of this rate reduction was that investors could borrow funds more cheaply to invest in the securities market, thereby averting a potential downswing in the markets. In other words, the Federal Reserve would not let the financial markets fall too far, hence the term ‘put’. This template has been used over and over again to cut interest rates and pump liquidity into markets. After several bailouts for other stricken financial institutions over the preceding decade, it appeared that traders and executives believed there would always be a rescue from the Federal Reserve if they needed it. Fast forward to this past week’s events and the strategy of the current Federal Reserve becomes much easier to understand. You see the Federal Reserve is once again facing an issue that nearly cratered the markets, and the economy; the debt ceiling debates.

In approximately seven days, we approach the limit of the US government’s borrowing capability and the threat of a government shutdown and the “debt ceiling” debate once again takes center stage. As he mentioned in his press briefing, Bernanke is fearful of such a repeat event given an already weak economy, coupled with rising interest rates. Any shutdown of the government, fear of “default” or restrictive fiscal policies could collapse what incremental recovery there has been to date.“ Upcoming fiscal debates may involve additional risks to financial markets and to the broader economy,” Bernanke said at a September 18 news conference after the FOMC minutes were released. If you recall, the last time Obama and Congress were at a stalemate over the debt ceiling, in 2011, Standard & Poor’s lowered the U.S. federal government credit rating. The S&P 500 stock index fell 16.8%between July 22, 2011, when talks on a broad deal faltered, and August 8, the first trading day after the government’s AAA debt was downgraded. The index rebounded to close with a gain of about 12%for the year. However gold over the same time period returned 7% and then continued rising to an all-time high of $1,921/oz. on September 6 in the process. Therefore, it would appear that tepid economic data and fear of a prolonged debt ceiling debate forced the hand of the FOMC to extend quantitative easing for the time being, providing investors this time a ‘pre-emptive-Bernanke-put’.

It’s as if the ghosts of LTCM bailout have returned 15 years later reminding investors that the ‘Greenspan put’, delivered in a new incarnation, is alive and well. While the price of gold appears to be range bound, an extension of the Fed’s quantitative easing program or a prolonged fiscal debate have the ability to raise gold’s spirits as well.

 

Courtesy: Sprott Group

This Could Finally End The TBTF – “Too Big to Fail”

This Could Finally End The TBTF - "Too Big to Fail"

This Could Finally End The TBTF – “Too Big to Fail”

TBTF – The Too Big to Fail Banks

Last December, Senators David Vitter (R-LA) and Sherrod Brown (D-OH) got the Senate to pass legislation (the House never took it up) to get the General Accountability Office (GAO) to examine the government “subsidy” too-big-to-fail banks enjoy.

Thankfully, the GAO, a government watchdog group, agreed to the task.

Now we’re about to get their report.

It’s coming in two parts – a “backgrounder” due out in a few weeks and the hard number calculations coming in early 2014.

I’m telling you about this now because we all need to be watching for it. While I’m sure the report won’t draw conclusions or offer solutions, let’s hope it gives the world the ammunition it needs to shoot down to size (to what would preferably be mid-tier regional bank size) the TBTF banks… so our free markets can be free at last.

The GAO report will attempt to calculate, among other benefits, the annual dollar amount the big banks “earn” as a result of government and taxpayer backstopping. Simply put, these banks are so big they would never be allowed to fail and, therefore, are considered by most depositors the safest place to park their money.

TBTF banks benefit hugely from that.

The banks use all that money to conduct their businesses, buy Congress, wage their bets, manipulate markets, pay themselves huge bonuses, pay their fines, and still have billions left over to pay shareholders fat dividends.

Bloomberg, drawing on a study by two IMF economists, determined that the “subsidy” amounts to $83 billion a year. The GAO study will attempt to do its own calculations on the annual subsidy. We’ll see.

According to GAO spokesman Charles Young, the coming report will also “look at government support and economic benefits that banks and bank holding companies received from emergency government actions during the crisis, how recent financial reforms changed government safety nets for banks and bank holding companies, and factors that could impact the effectiveness of these changes.”

There are lots of ways to look at the subsidy issue and lots of ways to calculate benefits and costs.

Professor Cornelius Hurley, director of the Boston University Center for Finance, Law & Policy, said this about the GAO report in an American Banker article Tuesday: “Taxpayers already have been required to open up their wallets to keep these financial giants in business to prevent catastrophic collapse. They should not also have to foot the bill for the operating costs of the business model these financial firms have chosen. In other words, the GAO should focus on the gross benefit of being TBTF, not the benefit net of fines, penalties and regulatory burdens.”

The professor’s suggested approach to the TBTF subsidy issue is, “Have the insurance industry tell us what it would cost each major bank to insure itself against criminal charges. The cost of those insurance premiums may not be the final answer regarding the economic value of criminal immunity, but it would be much closer to the truth than zero.”

That’s a scholarly approach. It uses the free market (letting insurance risk models determine premium costs) to determine “the economic value of criminal immunity.”

Me, I’m not a scholar.

I have a different approach to ending the TBTF subsidy.

I say, first of all, apply criminal statutes to what are being characterized as civil crimes.

Calculate the amount of losses that result from banks schemes in terms of fraud and theft and hand out jail sentences (to all directors and all the top executives who can be placed at the scene of the crimes) commensurate with what criminals like Bernie Madoff face… a lifetime behind bars.

Second, fine the Hell out of crooks and make them have insurance policies to pay those fines. At least there will be less of a direct burden on shareholders, who foot the bill for fines, on account of it being cheaper to foot the premium bills for directors and officers and executives and traders, than just reaching into the equity pile to pay fines.

Third, don’t allow fines to be deducted as operating costs. Establish them on the balance sheet as a liability to be paid out of future compensation. That way, there won’t be any bonus pools for years and years and no incentive pool for coming up with criminal schemes.

Do you think that could work?

 

Courtesy: Shah

10 Reasons The Market Will (Or Won’t) Crash

10 Reasons The Market Will (Or Won't) Crash

10 Reasons The Market Will (Or Won’t) Crash

Douglas McIntyre, of 24/7 Wall Street, recently wrote an article discussing the 10 reasons why the market will, or won’t, crash.  The problem is that the view presented is terribly myopic which creates a misleading discussion of the current market environment.  My notations are in order to balance the discussion accordingly:

Like clockwork, every time the American stock market makes new highs, some people insist it cannot go higher. A subset of those believe the market will crash. Others even believe it will reset like it did when the S&P 500 dropped from more than 1,500 in October 2007 to just above 600 in March 2009. A review of the most widely held beliefs about why a new crash is coming shows that some are bogus, while others almost certainly are likely to be right.

The reason that when markets push to new highs that analysts begin to discuss the potential for the next crash is simply because every crash in history has occurred from market highs.  The chart below shows the history of the S&P 500 going back to 1871.  Each major “crash” has occurred from market peaks when valuations, based on trailing 12 months reported earnings, exceeded 20x earnings.

S&P-500-secular-periods-real-030713

Here are the top ten reasons why the market will, or won’t, crash:

1. The S&P 500 price-to-earnings (PE) ratio is too high. Right now, it stands at almost 20. Market expert Mark Hulbert recently made the point that:

… according to data compiled by Yale University finance professor Robert Shiller. The average P/E for the S&P 500 since 1871 is 15.5 and the median P/E is 14.5.

Much analysis based on ancient history has the disadvantage of being old. Earnings have been measured differently over time, and accounting for earnings has evolved. The “S&P is too high” argument can be thrown out. Earnings definitions change too rapidly, as do the ways that public companies report them.

Once again a quick study of history will show that when valuations exceed 20x earnings that forward returns from investments begin to fall.  Furthermore, every major reversion has come from levels of excess valuation.  The problem with the statement above is that “earnings definitions” have not changed in regards to the only measure that truly matters which is trailing reported earnings.  All other measures, such as forward operating and pro-forma earnings, are extremely faulty measures used to justify owning overvalued assets by Wall Street looking to create fees and revenues and offload those same assets to the retail market.

SP500-PE-Reversions-020413

2. The economic recovery has slowed. Well, the recovery has been slow since the recession. If a weak gross domestic product (GDP), a poor housing market and historically high unemployment undermine the market, the S&P should not have moved from its recent low of just over 600 to its current level just shy of 1,700. This is another poorly reasoned argument, if only based on a short period of activity.

The reason that the market has risen well in excess of the underlying economic activity is summed up with just two words:  Quantitative Easing.

Without the interventions by the Federal Reserve it is not only very likely that the current market would be much lower in price but it is extremely likely that the U.S. would have already experienced a secondary recession.

3. Forward earnings forecasts are weak. This is a strong argument. Many of America’s biggest companies anticipate poor fourth-quarter numbers, which could extend into 2014. Among the causes are a recession-plagued European economy, which is essential to the revenue of many multinationals. American consumers may have lost the bit of optimism they have had as the recovery barely bounces along the floor without a powerful recovery. Corporations dependent on consumer sales may have trouble posting improved numbers.

Forward earnings, as stated above, is an extremely poor indicator of future performance.  However, the fact the forward earnings forecasts have continued to fall, so that companies can “beat” their respective earnings estimates, shows the fault in using “guesses” about future profitability in trying to justify owning overvalued assets in the first place.

4. The federal government could be shut down for weeks or even months. This is another powerful position. Federal spending is a significant part of GDP. The United States employs too many people for a drop in their purchasing power to be shrugged off. If Washington is shuttered, many federal workers will drop off the payroll. So, the average citizen has reason to be anxious. If America cannot keep its own government operating, well, America cannot keep its own government operating.

First of all a government “shut down” is unlikely as the Republican Party has little “stomach”for the fallout from such an event.  However, even if a “shut down” occurs it will only be temporary and will not result in a “default” of payment.  It could certainly roil the overvalued and extended markets but since the Fed is maintaining its bond purchases to offset just such a risk, as I recently discussed, a crash from this scenario is unlikely.

5. There will be a new recession. That is not really likely, even if the government shuts down for a time. Unemployment, even if it is high by historic standards, continues to shrink toward less than 7%. Housing has recovered enough so the market in home sales is brisk. The number of underwater mortgages continues to disappear quickly, which leaves more and more people with positive home equity. That equity, in turn, in the past at least, has helped consumer spending.

Saying that there will not be a new recession is just naive and very short sighted.  Recessions are part of the economic cycle and are inevitable.  As shown in both charts above recessions occur roughly every 4-5 years on average.  Considering that we are already more than 4 years into the current economic recovery we are likely closer to the next recession than not.  As far as the stock market goes – the average drawdown during a recession has been in excess of 30%.  Ignoring this reality is perilous to your long term returns.

6. Oil prices could spike. Another very unlikely option. Even if the unrest in the Middle East continues, it would take a regionwide catastrophe to stop the flow of crude from Saudi Arabia, Kuwait, Qatar and the United Arab Emirates. Oil production in other countries with large reserves — Canada, Russia, Venezuela, the United States and China — would not be curtailed. Oil prices might rise temporarily, but they are unlikely to stay high for long.

I am not sure what the writer considers to be an oil spike but oil prices have jumped from close to $90 a barrel at the beginning of this year to a high of almost $110 this past summer.  That jump has impacted consumer spending which has been in a steady decline on an annualized basis.  High oil prices lead to higher costs of living which reduces disposable personal incomes which has already been under pressure from weak economic growth.

7. The Chinese economy will collapse. Another unlikely scenario. Although it slowed briefly this year, Chinese GDP improvement should be well above 7% in 2013. Most expert forecasts call for the number to improve to 8% or better in 2014. The anxiety about high residential property values and regional bank loan levels may be well founded, but it is hard to make a case that the central government of the People’s Republic does not have adequate reserves to deal with these problems. China, the world’s second largest economy by GDP, will remain open for business, and business will be brisk.

I do agree with this point.  The Chinese economy is unlikely to collapse.  However, the real growth rate of the economy is far less robust than what the Chinese government reports.  The U.S. reports the 1st estimate of GDP 28 days after the end of the quarter.  It is subsequently revised two more times and then revised one final time the following year.  The Chinese government reports GDP 15 days after the end of the quarter and is never revised.  How reliable do you really think the data is?  Of course, this is the benefit of a running a centrally controlled economy.

8. Apple’s sales will continue to suffer, and along with that its earnings. Apple Inc. is supposed to be a proxy for the consumer’s enthusiasm. It is the largest company in the world, based on market cap. However, it is not an overall proxy for the economy or stock market. The “Apple is the economy” argument is all but stupid, and certainly no more than an invention of Apple fanboys.

No argument here.

9. Dark pools will move against the rally. These nearly invisible and massive oceans of unseen traders have watched the market soar and see the only real profit in shorting it. Dark pool trades are made away from the exchanges, which makes their activity hard to track. However, these pools do trade a huge number of the shares in U.S. companies. A conspiracy among them to take the market down has some chance of success, although it would cause mass prosecutions. However, conspiracy theories usually are wrong, and dark pool participants have goals that are different enough that it is improbable they will act in concert.

Setting aside the argument of a “conspiracy” for a moment the reality is that these “dark pools” do pose a serious threat to the overall market.  Many of these pools are heavily leveraged and run by algorithmic programs.  The problem is that when the market corrects enough to trigger program selling the resultant sell off, combined with margin calls, could lead to a very fast “feeding frenzy” of selling.  The volatility of the market since 2009 has risen with the continued rise in program trading and, unfortunately, when the programs begin to “run in reverse” the speed and depth of the correction is likely to take most individuals by surprise.

10. The market will collapse because it always does. This is the most powerful argument for a huge correction. No matter how powerful a rally, the market will not go up forever. That observation is obvious, but that does not prevent it from being true.

The market will eventually correct as it always does – it is part of the market cycle.  This is why managing portfolio risk is so critically important – if you don’t sell high, you cannot buy low.  As I stated in “5 Questions Every Market Bull Must Answer:”

“Being bullish on the market in the short term is fine – you should be. The expansion of the Fed’s balance sheet will continue to push stocks higher as long as no other crisis presents itself. However, the problem is that a crisis, which is ALWAYS unexpected, inevitably will trigger a reversion back to the fundamentals.

…with margin debt at historically high levels when the ‘herd’ begins to turn it will not be a slow and methodical process but rather a stampede with little regard to valuation or fundamental measures. As prices decline it will trigger margin calls which will induce more indiscriminate selling. The vicious cycle will repeat until margin levels are cleared and selling is exhausted.

The reality is that the stock market is extremely vulnerable to a sharp correction. Currently, complacency is near record levels and no one sees a severe market retracement as a possibility. The common belief is that there is ‘no bubble’ in assets and the Federal Reserve has everything under control.

Take a moment to compare what you have heard, and read, with the questions presented here. Draw your own conclusions and invest appropriately.”

Courtesy: Lance Roberts

CFTC Closes Silver Market Investigation Without Any Action

CFTC Closes Silver Market Investigation Without Any Action

CFTC Closes Silver Market Investigation Without Any Action

U.S. regulators on Wednesday closed a five-year investigation into alleged manipulation of the silver market, saying 7,000 staff hours of investigation produced no evidence of wrongdoing.

No Evidence of Manipulation of the Silver Market-

The decision by the Commodity Futures Trading Commission was a defeat for silver market commentators and investors who urged the probe, saying big banks were using futures and options to hold prices down. Big traders had dismissed the investigation as a waste of time and the charges as a conspiracy theory.

The CFTC formally closed the probe six months after a U.S. District Court dismissed a class action lawsuit making similar claims against JPMorgan Chase & Co..

“Based upon the law and evidence as they exist at this time, there is not a viable basis to bring an enforcement action with respect to any firm or its employees related to our investigation of silver markets,” the CFTC said.

The CFTC typically does not comment on ongoing inquiries, but made the silver case public in 2008 after receiving complaints alleging manipulation of the silver futures contracts traded on the Commodity Exchange Inc (COMEX). The agency launches dozens of such investigations each year, many of which do not result in formal charges or action.

The probe gathered urgency in 2011, as silver prices doubled to a record of nearly $50 an ounce, then collapsed nearly 30 percent in five days. That roller-coaster ride brought back memories of the Hunt Brothers silver short squeeze in 1980.

The CFTC said the allegations “asserted that because the prices for retail silver products, such as coins and bullion, had increased, the price of silver futures contracts should have also experienced an increase.”

The complainants, who were not named, also cited public regulatory data on futures traders to support claims that several large short positions were depressing prices, it said.

The decision may highlight the high hurdles that U.S. regulators face in proving a case of “market manipulation”, even after the CFTC was given greater powers to crack down on trading malfeasance after the 2010 Dodd-Frank financial reforms.

In the past, the CFTC has levied heavy fines for trading rule violations. Yet only once in its 36-year history has it successfully concluded a manipulation prosecution: a 1998 case concerning electricity futures prices.

U.S. Regulators V/s Wall St.

Closing of the probe was a rare bright spot for Wall Street commodities players during a year in which the U.S. power market regulator has leveled record fines against two big banks, and the Federal Reserve is considering whether to rein in Wall Street’s ability to operate in physical markets.

But Democrat commissioner Bart Chilton, who had championed the silver inquiry, said he was disappointed.

“For me, there’s not been a more frustrating nor disappointing non-policy-related matter at the CFTC,” he said in a statement after the agency’s announcement.

The Gold Anti-Trust Action Committee, an advocacy group that believes the Federal Reserve and banks are colluding to keep gold and silver prices artificially low, said it was not surprised by the CFTC decision.

“We believe that the U.S. government is part of the trading operation. In essence, you are not going to have the CFTC turns against its own government,” GATA Chairman Bill Murphy said.

“We are not even slightly surprised and had expected this.”

A JPMorgan spokesperson declined to comment.

Commodities traders said it makes no sense for banks to distort precious metals prices, since they generally earn more from trading on behalf of clients in an orderly market.

“The fact that the CFTC couldn’t prove any illicit activities in the silver market is enough to let people feel more at east trading there,” said Miguel Perez-Santalla, a veteran precious metals trader for more than 20 years and now vice president of online precious metals market BullionVault.

“The silver market is much greater than the sum of the players,” he said.

No Stranger To Scandal

Although silver is most visibly used in jewelry, it has wide industrial uses, including in electrical switches, circuit breakers and solar panels. The metal has also featured prominently in modern commodity market scandals.

In the most memorable case, the Hunt brothers of Texas hoarded the precious metal, aiming to corner the market and control global prices starting in the late 1970s.

But the silver market collapsed in 1980 and the Hunt brothers declared bankruptcy. Their losses grew and in 1989 they were convicted of conspiring to manipulate the market.

In 2004, the CFTC had published an open letter to silver investors telling them that the existence of a long-term manipulation was not plausible and that an analysis of activity in the silver futures market at that time did not support the conclusion that the market was being manipulated.

In October 2010, JPMorgan and HSBC, two of the world’s largest banks participating in precious metals derivative contracts, were hit with lawsuits accusing them of conspiring to drive down silver prices by amassing huge silver shorts, a trading position designed to profit from a fall in prices.

HSBC was later dropped from the complaints, which had alleged the firms reaped up to hundreds of millions of dollars of illegal profits, and a judge dismissed the consolidated lawsuit in March.

The District Court judge said that while the investors showed that JPMorgan had the ability to influence prices, a fact the bank did not dispute, they failed to show that the bank “intended to cause artificial prices to exist” and acted accordingly.

 

Source: Reuters

The Housing Recovery – Is It Really Recovering?

The Housing Recovery - Is It Really Recovering?

The Housing Recovery – Is It Really Recovering?

There has been much hoped placed on the “housing recovery story” over the last couple of years as it relates to the economy. With each passing month all eyes have been glued to television screens, and headlines, as the latest estimations of housing starts, completions, new and existing home sales, etc. are trumpeted as a sign of a renewed housing cycle.  This is no trivial matter as real estate is seen as a bedrock to economic strength as much as it is the sign of achievement of the “American Dream.”

[Note:  The “American Dream” is not home ownership.  Millions of immigrants did not immigrate to the United States, with only the clothes on their back and few personal possessions crammed in a knapsack, just to buy a home.  No.  The “American Dream” has always been the freedom to achieve success in whatever endeavor they choose which ultimately afforded them the opportunity to own a “home” when they could afford it.  For more on this subject read: “The Real American Dream”]

It is true that in past housing was a large contributor to the strength of economic growth in the U.S.  The same was true for automobile manufacturing.  The building of homes and cars increased economic output and the multiplier effect through the economy was large.  However, due to the shift in the makeup of the U.S. economy, housing is no longer the contributor to the economy it once was.  The chart below shows the percentage that housing and automobile manufacturing contributes to U.S. gross domestic product.

GDP-Not-Your-Fathers-Economy-072513-3

At less than 3% the impact of increases in residential construction is very small relative to exports, which comprises roughly 40% of corporate profits, and Equipment & Software spending which has increased worker productivity and lowered costs.

At The Margin

The problem with all of the analysis each month on the transactional side of housing is that it only represents what is happening at the “margin.”  Housing is more than just the relatively few number of individuals, as compared to the total population, that are actively seeking to buy, rent or sell a home each month.

In order to really understand what is happening in terms of “housing” we must analyze the“housing market” as a whole rather than what is just happening at the fringes.  For this analysis we can use the data published by the U.S. Census Bureau which can be found here.

Total Housing Units

In an economy that is 70% driven by consumption it is grossly important that the working age population is, well, working.  More importantly, as discussed in “Obama’s Economic Report Card:”

“Full-time, benefit providing, employment is the only type of employment that matters for the average American. Full-time employment allows for an increasing standard of living, household formation, and higher personal savings rates.”

To present some context for the following analysis we must first have some basis from which to work from.  Our baseline for this analysis will be the number of total housing units which, as of Q1-2013, was 133,082,000 units.  The chart below shows the historical progression of the seasonally adjusted number of housing units in the United States.

Housing-totalhousingunits-072613

As an example, the most recent report of “existing home sales” showed that 5,080,000 homes were sold on an annualized basis in June.  Since this is an annualized number we must divide it by 12 months for the estimated seasonally adjusted number of sales in June which was 423,333 homes.  This number of home sales represents just 0.3% of the total number of homes available.  This is what I mean by “activity at the margin.”   When put into this frame of reference the “existing home sales” report doesn’t seem nearly as exciting.

Vacancy Rate

Out of the total number of housing units some are vacant for a variety of reasons.  They are second homes for some people that are only used occasionally.  They are being held off market for one reason or another (foreclosure, short sell, etc.), or they are for sale or rent.  The chart below shows the total number of homes, as a percentage of the total number of housing units which are currently vacant.

Housing-vacant-housing-072513

If a real housing recovery was underway the vacancy rate should be falling sharply rather than rising in the latest quarter and hovering only 0.5% below it’s all-time peak levels.

Owner Occupied Housing

Another sign that a “real” housing recovery was underway would be an increase in actual home ownership.  The chart below shows the number of owner occupied houses as a percentage of the total number of housing units available.

Housing-owner-occupied-072513

Despite the Federal Reserve flooding the system with liquidity, suppressing interest rates and the current Administration’s efforts to bailout banks and homeowners, owner occupied housing is at it lows.

Home Ownership

The simple reality is that there has really been very little actual recovery in housing, and as shown in the first chart above, which explains its weak contribution to economic growth.  The chart of home ownership really shows the lack of recovery the best.

Housing-ownership-072513

At 65% the current level of home ownership is the lowest that it has been since the early 1980’s.

However, the recent reports of sales, starts, permits, and completions have all certainly improved in recent months.  Those transactions must be showing up somewhere, right?

REO To Rent

While the Federal Reserve and the current Administration have tried a litany of programs to jump start the housing market nothing has worked as well as the “REO to Rent” program.  With Fannie Mae/Freddie Mac, and the banks loaded with delinquent and vacant properties, the idea was to sell huge blocks of properties to institutional investors to be put out as rentals.  This has worked very well.

The chart below shows the number of homes that are renter occupied versus the seasonally adjusted home ownership rate.

Housing-Ownership-Renters-072513

Do you see the potential problem here?  Speculators have flooded the market with a majority of the properties being paid for in cash and then turned into rentals.  As this activity drives the prices of homes higher, reduces inventory and increases rental rates – it prices out “first time homebuyers” who would become longer term home owners.  The problem is that when the herd of speculative buyers turn into mass sellers – there will not be a large enough pool of qualified buyers to absorb the inventory which will lead to a sharp reversion in prices.

Maybe this is why the Federal Reserve, and the FDIC, are looking to relax the regulation put in place after the last housing bubble which required banks to have “skin in the game.”   By removing that restriction banks can now go back to providing mortgages to unqualified buyers, pool them and sell them off to unwitting investors.   Haven’t we watched this movie before?

While the surge in housing activity, which still remains at historically low levels as shown in the chart below, has certainly been welcome it should not be forgotten that it has taken massive bailouts, stimulus and financial supports to induce such relatively small amounts of activity.

 Home-TotalActivityIndex-072513

The mistake, however, as I addressed in “Housing Recovery, What Has Been Forgotten” is that:

“There is no argument that housing has improved from the depths of the housing crash in 2010. However, while the housing market remains at very recessionary levels, recent analysis assumes that this has been a natural, and organic, recovery. Nothing could be further from the truth as analysts have somehow forgotten the trillions of dollars, and regulatory support, infused to generate that recovery.

I recently penned an article showing the $30 trillion, and counting, that has been thrown at the economy, and financial system, to keep it afloat over the last 4 years. Of that, trillions of dollars have been directly focused at the housing markets including HAMP, HARP, mortgage write downs, delayed foreclosures, government backed settlements of ‘fraud-closure’ issues, debt forgiveness and direct buying of mortgage bonds by the Fed to drive refinancing and purchase rates lower. Of course, the Fed has also maintained its ZIRP (zero interest rate policy) during this same period with a pledge to keep it there until at least 2015.

The point here is that while the housing market has recovered – the media should be asking ‘Is that all the recovery there is?’ More importantly, why are economists, and analysts, not asking the question of ‘What happens to the housing market when the various support programs end?’ With 30-year mortgage rates below 4% we should be in the middle of the next housing bubble – not crawling along a bottoming process.”

The housing recovery is ultimately a story of the “real” unemployment situation which still shows that roughly a quarter of the home buying cohort are unemployed and living at home with their parents. The remaining members of the home buying, household formation, contingent are employed but at lower ends of the pay scale and are choosing to rent due to budgetary considerations.

As I stated previously the optimism over the housing recovery has gotten well ahead of the underlying fundamentals.  While the belief was that the Government, and Fed’s, interventions would ignite the housing market creating an self-perpetuating recovery in the economy – it did not turn out that way.  Instead it led to a speculative rush into buying rental properties creating a temporary, and artificial, inventory suppression.  The risks to the housing story remains high due to the impact of higher taxes, stagnant wage growth, re-defaults of the 6-million modifications and workouts and a slowdown of speculative investment due to reduced profit margins.  While there are many hopes pinned on the housing recovery as a “driver” of economic growth in 2013 and beyond – the data suggests that it might be quite a bit of wishful thinking.

 

Courtesy: Lance Roberts

Fed Concerned About Suspicious Gold Trading Prior To FOMC Meeting

Fed Concerned About Suspicious Gold Trading Prior To FOMC Meeting

Fed Concerned About Suspicious Gold Trading Prior To FOMC Meeting

Today’s AM fix was USD 1,320.25, EUR 977.67 and GBP 825.36 per ounce.
Yesterday’s AM fix was USD 1,316.50, EUR 976.05 and GBP 823.43 per ounce

Gold rose $1.40 or 0.11% yesterday, closing at $1,322.50/oz. Silver climbed $0.09 or 0.42%, closing at $21.65. At 3:13 EDT, Platinum inched up $7.89 or 0.6% to $1,423.49/oz, while palladium rose $6.75 or 0.9% to $718.75/oz.

Gold’s support is at $1,300/oz and a fall below that level could see gold test the next level of support  at the $1,180/oz to $1,200/oz mark. Resistance is at $1,400/oz to $1,434/oz level and a breach of resistance should see gold quickly test the $1,500/oz level (see chart below).

Physical demand in Asia is down from the huge levels seen in recent months but remains robust  heading into the peak wedding and festival season in India and China. Bargain hunting was seen again yesterday with prices close to $1,300/oz.


Gold in USD with Resistance and Support – 1 Year  (Bloomberg)

Demand in China remains robust as seen in premiums for gold of $15 per ounce on the Shanghai Gold Exchange (SGE) overnight.

India’s gold jewellery exports climbed in August from the previous month on improving U.S. demand before the Christmas season. Indian exporters face tight supplies of gold due to the central banks desperate attempts to tackle the country’s rising trade deficit and prevent a currency crisis.

Suspicious Gold Trading Prior To FOMC Meeting

The Federal Reserve is “concerned about suspiciously heavy trading of gold futures” after its meeting last week, that may have been triggered by a premature release of market sensitive information according to Associated Press.

In a statement, the central bank said that news organizations that receive embargoed information from the Fed agree to withhold information until the time set for its release. The Fed statement said, “We will be conducting follow-up conversations with news organizations to ensure our procedures are completely understood.”

After the meeting, the Fed said it would hold off on slowing its $85 billion a month in purchases of U.S. government debt and mortgage debt. That surprised markets and led to a sharp rise in gold and silver prices.


Gold in USD – 10 Day (Bloomberg)

Two hours prior to the Federal Open Market Committee (FOMC) release, gold was trading below $1,300/oz but started to gradually tick higher prior to surging higher on heavy volume, minutes prior to the release of the FOMC statement.

FX markets, stock, bond and commodity markets did not see similar large moves.

Trading in financial markets is now dominated by automated computer systems, which make trades in tiny fractions of a second that can lead to millions of dollars in profit. Receiving the data early – even by a few milliseconds – can give an unfair advantage to favored hedge funds or banks.

The security of sensitive, market-moving information is becoming an increasing concern due to strong suspicions of recent leaks.

Possible leaks of government data have already led the Labor Department to tighten its procedures for distributing information early to reporters, including the closely monitored monthly employment report.

The Labor Department also revoked early access for some media organizations.

The Fed also operates media lock-ups when its policymaking committee meets eight times a year, although the procedures are less strict than at the Labor and the Commerce Departments.

Fed officials work on an honor system. The Fed’s policy statement is distributed 10 minutes early to reporters at their desks in the press room at Treasury. Internet and phone lines are not disconnected, and cellphones are not collected. The Fed has similar procedures for a separate lockup held at its headquarters.

Separately, precious metals whistle blower, Andrew Maguire in an interview with Max Keiser described his facilitation of statements given last year to the U.S. Commodity Futures Trading Commission (CFTC) by JPMorgan Chase employees confirming that their company manipulates the precious metal markets.

Maguire cites the sudden dumping of huge amounts of futures contracts at illiquid moments in the gold market as powerful evidence that the U.S. government is intervening to protect the dollar and suppress gold and silver.

Such action is by definition manipulative, Maguire says, and easily could be tracked down by market regulators if they wanted to do so. Maguire says CFTC Commissioner Bart Chilton has told him that if the commission fails to act in its five-year investigation of silver market manipulation by the end of this month, Chilton himself will say something about it.

Maguire cites GATA Secretary and Treasurer, Chris Powell, and his increasingly apt phrase “there are no markets anymore, just interventions.”

Maguire say that peculiar recent trading activity strongly suggests that certain banks were trading on inside information and knew there would be no taper, hence the surge in prices prior to the release the FOMC minutes after their meeting last week.

Marc Faber has again told CNBC how he favors gold and silver over many other assets. Recently he emphasized the importance of owning actual gold bullion, revealing how he “owns physical gold.” 

Faber reiterated his favorable view on gold , saying the precious metal was relatively inexpensive.

“In the long-run, we have a huge bull-market in gold. Between 1999 and 2011, we peaked at $1,921 and went down to $1,180 and are now slightly above $1,300,” he said.

“I think gold and especially gold equities are relatively inexpensive and the S&P is relatively high,” he added.

 

Courtesy: Goldcore

COMEX Gold Inventories Hit New Low Not Seen Since 2006

COMEX Gold Inventories Hit New Low Not Seen Since 2006

COMEX Gold Inventories Hit New Low Not Seen Since 2006

It looks like the stagnate two month bottom in the Comex Gold inventories is now over as a huge withdrawal from HSBC has taken the total warehouse stocks to a new low not seen since 2006.

COMEX GOLD Inventories 92413

As you can see from the table, 173,358 oz of gold were withdrawn from HSBC’s Eligible category.  While this withdrawal was only 5.5% of HSBC’s Eligible (Customer) inventory, it would have totally wiped out Brinks, HSBC, Scotia Mocatta, and most of JP Morgan’s Registered inventories.

This single withdrawal was more than what most of these individual banks held in their Registered Inventories.  Furthermore, the 173,358 oz withdrawn from HSBC is 5.4 tonnes of gold… now more than likely gone forever from the Comex.

Comex Gold Inventories at a NEW LOW not seen since 2006

Not only does this large withdrawal from HSBC break the two month flat line bottom, but it also puts the Comex Gold Inventories at a NEW LOW not seen since 2006:

Comex Gold Flat Bottom

Here we can see in the one month chart below what a huge decline has taken place as it does not fit on the chart.  This chart will not be updated until tomorrow, so I stretched the graph to include the new data point which is now at 6,860,160 oz.

COMEX GOLD new Low 92413

Another surprising trend is taking place on the GLD inventories.  Since the price of gold bottomed in the beginning of July, the level of gold at the GLD is 1,887,419 ounces less even though the price has rallied nearly 12%.

On July 1st, the gold inventory at the GLD stood at 31,131,769 oz while the price of gold bottomed at $1,180.  Today, gold ended the day at $1,323, but the total gold inventory at the GLD is 29,244,351 oz.  For some odd reason, the GLD is not adding gold as readily now that the price has increased compared to how it was drained as the price declined.

There seems to be an orchestrated effort by the Gold Cartel to convince investors not to purchase physical gold.  As I mentioned in a previous article, the World Gold Council has announced the following:

World Gold Council Promoting Gold ETFs with New Program

(Kitco News) – Weak investor demand in gold markets remains a major concern as outflows continue to plague gold-backed exchange-traded funds.

However, the World Gold Council is trying to change investors’ perceptions of the yellow metal with the creation of a new program. On Thursday, the council announced the appointment of William Rhind as the managing director of its new Institutional Investment Program.

According to the WGC, Rhind will be “responsible for developing and implementing initiatives focused on expanding the use of SPDR Gold Shares (NYSE: GLD) and other physical gold-backed products.” GLD is the world’s biggest gold-backed ETF and since the start of the year has seen significant outflows as investors moved out of gold and into better performing equity markets.

Thus, the World Gold Council has appointed Rhind to be “Responsible for developing and implementing initiatives focused on expanding the use of the SPDR Gold Shares and other ETFS” to continue to bamboozle investors into buying worthless paper garbage gold products while making sure that MUMS the word for those who want to purchase physical metal.

There seems to be serious trouble ahead for the bullion banks as their registered inventories are at record lows.  There is no way a withdrawal of this size today could have been met by the bullion banks registered gold inventories.

 

Courtesy: Srsroccoreport

Grains Production In India Close To Record High May Trim Inflation

Grains Production In India Close To Record High May Trim Inflation

Grains Production In India Close To Record High May Trim Inflation

Grains production this summer is likely to be just short of an all-time high, according to a preliminary government forecast on Tuesday, leaving plenty for exports and helping to boost growth and trim inflation ahead of elections due by May.

A heavy monsoon has ensured bumper harvests even though rice output could be lower than last year as rains were patchy over the rice-growing areas of some eastern states. The monsoon waters 55 percent of farmland without irrigation.

“Growth in agriculture … will rebound this year because rains are good,” Agriculture Minister Sharad Pawar told reporters as he announced the output forecast, which is usually conservative.

“Today’s estimates are the first projections for 2013/14 and invariably we have seen that final estimates are 5-10 percent higher than the first estimate,” Pawar said.

Total output of summer-sown grains is likely to be 129.3 million tonnes in the current crop year from July, Farm Commissioner J.S. Sandhu said on Tuesday, just below the record 131.3 million tonnes of 2011/12 and up 0.9 percent on last year. Bumper output should mean India can continue exporting crops such as cotton, corn, rice and sugar.

Output of oilseeds, which could trim India’s imports of edible oils, should rise around 15 percent. Production of lentils – another foodstuff that India imports – should be up 3.2 percent.

Rice production is seen at 92.3 million tonnes against 92.8 million tonnes in the previous year. That marginal fall in rice output is not a great concern as India’s stocks are 21 million tonnes, more than double its target for September 1.

The government is relying on a bumper harvest to push agricultural growth and help the wider economy, as well as provide ample supplies of rice and wheat to support food subsidy programmes and cool double-digit food inflation.

Farm growth could be 4.8 percent this year, according to C. Rangarajan, Prime Minister Manmohan Singh’s economic adviser, up from 1.8 percent in 2012/13.

India is one of the world’s largest producers and consumers of grains and sugar, and has recently been exporting rice, wheat, sugar, cotton and corn.

But at home, food inflation touched a three-year high in August as production of vegetables, especially onions, was hit by patches of heavy rain in the south, center and west.

“Onion prices will start falling in the next 10-15 days due to the arrival of the crop and imports by some organisations,” Pawar said. “I’m sure farmers will soon start complaining of falling prices.”

Farmers in India plant rice, corn, cane, cotton and soybeans in the rainy months of June and July, the first half of the four-month monsoon season. Harvests start from October.

Bumper harvests since 2007 have led to massive stocks of rice and wheat, forcing the government to store food in open fields where stocks are exposed to rains and rodents.

The farm ministry’s first estimates for the summer sown crops forecast higher output numbers for corn, soybeans, pulses, cane and cotton. Corn, soybeans and cotton could also hit record highs, Pawar said.

Pawar said increases in government-set floor prices for certain crops had also encouraged higher output. The government sets Minimum Support Prices (MSPs) for a range of crops including wheat, cotton and corn.

 

Source: Reuters

Manipulation, Gold and the Decline of the Dollar – Sprott

Manipulation, Gold and the Decline of the Dollar - Sprott

Manipulation, Gold and the Decline of the Dollar – Sprott

 

According to Sprott Asset Management CEO, Eric Sprott, sooner or later the unintended consequences of QE will come into play, the biggest being the decline in the US dollar.

GEOFF CANDY: Hello and welcome to this Mineweb.com’s Newsmaker podcast and joining me on the line Eric Sprott, he is the Chief Executive Officer at Sprott Asset Management. Eric the last time I spoke to you was in 2011 and a lot has happened since then, but in many respects very little has happened in other respects given that a lot of the fundamentals that we saw in 2011 have remained the same if not exacerbated since then and we sit now with a gold price that is albeit substantially lower, in some respects, in a very similar position.

ERIC SPROTT: Well it’s really interesting. In fact it’s funny you should start with 2011 because I think the most meaningful thing that’s happened since 2011 (based on the statistics that come out of Hong Kong and those are the only ones we have), is that the exports of gold from Hong Kong into China have risen from under 100 tons a year in 2011 to, 1,200 tons a year in 2013, as we speak right now. That means that the Chinese are consuming an extra 1000 tons of gold. And, as you’re aware, the gold market is a 4,000 ton market, so we have a participant who stepped in to buy 25% of the gold market and the price of gold has gone down. I would challenge anyone to look at any other commodity where somebody bought 25% of it, whether its oil, or wheat, or corn, or any substance, where they would have expected that the price went down.

Demand for Gold is in excess of Mine supply –

And it begs the question, I’ve written on this at least three occasions, that the western central banks have been supplying less gold because the supply of gold has not gone up. In fact, it was down last year, I’m sure it will be down this year, I’m sure it will be down next year. So how can we have these new entrants coming into the market and buying that much gold, and the price goes down? It’s always been my contention that the demand for gold is well in excess of mine supply, that the western central banks continue to supply that gold. In fact, it was almost hitting panic proportions back in November when Germany asked for its gold back, and of course the US Treasury said well it will take seven years to give you 300 plus tons, and of course China imports 100 tons a month just from Hong Kong, so there’s no logistical issue here to deliver 300 tons of gold. I think the fact is that the 4% of the Treasury’s gold that Germany asked for is not there, otherwise why wouldn’t they just ship it off to them, so I think we’ve had a physical problem, I think the decline in gold was engineered here to try to spring some physical gold out of the market which the GLD, and other ETFs responded to in huge proportion. There was a dump of about 700 tons of physical gold in a six month period, well that’s almost 1400 tons a year annualized. That’s about two-thirds of the mine production ex China, ex Russia that kind of hit the market on an annualized basis, and yet was consumed I might point out.

So I think that gold was needed, that’s why the raid was created so that they would panic everyone out of their gold holdings which unfortunately, in a lot of cases happened, and I think those people in the long run, or medium run or short run for that matter, will all regret the decision to dispose of their shares of those trusts and have the participants redeem the shares and take the gold and in that way, were able to make some of the deliveries that they otherwise weren’t going to be able to make.

GEOFF CANDY: It’s interesting hearing what you say. I think it was about in 2010 I was doing a radio show and I was speaking to Michael Power from Investec and we were talking about the emergence of China as a super power and their appetite for gold, and he said that gold tends to move where the wealth is and, the more I look at this market the truer that statement seems to sound.

ERIC SPROTT: Yes and as I mentioned, we only get one data point on China and that’s from Hong Kong into China. Let’s not be naïve about it, there’s lots of gold that would go from Geneva to Beijing or Singapore to Shanghai or New York and London to Beijing or Shanghai, and I think the number that China is importing is way beyond the number we see going through Hong Kong. In fact, I wouldn’t even be surprised if China is close to consuming 100% of all the non-Chinese, non-Russian gold, just a little under 100% which really means there’s no room for anybody else to buy any.

India’s Physical Gold Demand –

And, speaking of no room to buy, I find it hilarious that the Indian government would shut the door on gold purchases, and I’m sure they’re shutting the door on gold purchases because as you know in April and May there were just gigantic purchases in India, simply because you can’t have two groups of people having data out there which shows them buying more than 100% of the mine output that’s available because then everyone would ask the question, where’s the gold coming from that we’re not seeing reported? We don’t see these western central banks reporting that they’re delivering the gold, but somebody has to be delivering it because this is physical gold. It’s almost draconian what the Bank of India has done here in terms of various ways that are being implemented to stop the shipments into India, which of course is ridiculous because I think of India as the one country that has gained the most by the price of gold going up five times since 2000 and it’s going to put that country in way better shape than all other countries.

So, this very temporary stoppage of gold will end some day because the Indians are not going to go without their gold. I just think it’s a temporary thing to try to alleviate this shortage that’s obviously manifesting itself in the gold and silver market which you can see in the Comex and the majority, you can see the fact that all the dealer inventories in fact have dwindled and pretty well all of that has been spoken for. The fact that we had negative GOFO, that we’re getting the gold backwardation, all those are signs that things are getting very tough. And back to your original point… the reasons to own gold of course improve every day. We print, just think of how much more money we printed today than we printed in 2011. Its shockingly large and now you have the Japanese moving in with their $60bn or $70bn a month. So if people want to believe in zero interest rates and printing to eternity that’s fine, but a smart investor would take the long road and see well this is not going to work because it hasn’t worked: QE1, QE2 didn’t work. These are all stopgap measures to assist the banking business and governments in their profligate spending, so as you say the reasons for owning it have never been more prominent than they are now.

GEOFF CANDY: Where does this lead to then, the profligate spending and the printing of money, clearly if this doesn’t end well as you say, what does that mean for not only the gold market, but the financial markets more generally?

ERIC SPROTT: Sure, we know it’s not going to end well, that’s so obvious that this sort of thing can’t work and the way it will manifest itself as people looking in from the outside, the non-western central banks will all operate together and all of these countries that aren’t part of that group looking in, would say why would we possibly want to own something denominated in US dollars, specifically the Treasury Bond… and I think that’s why you’re rates go up here, I think that’s why you’re seeing dollar weakness right now and I suspect the tipoff to gold going higher will be dollar weakness as we realize the impossibility of the US to honor their obligations.

Higher Gold Prices on Dollar Weakness –

And, that is so cast in stone and so obvious, based on the US’s own data when they reported that they had a true gap accounting deficit in the 2012 year of something near $6tr in a $17tr economy and going higher every year, there is no way that they can honour the commitments. And I liken the US situation to the situation in Detroit where we knew 10 years ago they were bankrupt, and nine and eight and seven years ago and, finally, they declared bankruptcy but then they had to tell their pensioners that: ‘oh, by the way you can only get 25% of what we promised you’. Had they dealt with it 10 years ago, maybe that guy might have got 60% or 75% of his pension, but no one wants to deal with it. And the same is the case in the US, they’re not dealing with these funding obligations they have, they’re just ignoring them. But the obligations get bigger every year and the level of disappointment that will result someday will be mindboggling. When people on social security are told well you’re only going to get 50% of your pay cheque, what’s going to happen to the economy, particularly as we get more and more people who are entitled and so therefore you get a greater part of the population negatively affected. But it has to happen because there’s been no resolution of these contingent liabilities and entitlements that the US government has.

GEOFF CANDY: In terms of that and just before we get into the longer term effects, what did you make of the announcement last week by the Federal Reserve. Where you surprised they decided not to start tapering?

ERIC SPROTT: I personally was not surprised. I’d given interviews saying I just can’t see how they could possibly taper here, even just the talk of tapering doubled the 10 year yield and I think Mr Bernanke has lost control of the bond market. To actually taper when we have the kinds of goings on in financial markets that we do, where you have these non-western central banks and some western central banks selling US Treasuries because they’re trying to defend their own currencies and at the same time there’s huge bond redemptions by individuals and pension funds, and of course the US still continues to issue bonds, there’s just no way that the Federal Reserve could not stay in there and buy those bonds, because there’s an overwhelming supply of bonds. And here we have the most printing ever, particularly since Japan came in and, with all that printing, interest rates have doubled. So there’s no way they can stop printing, so I was not surprised by it. I thought they might try to fake it by saying, well we’re not going to taper now but we will taper in December. Well they didn’t even go that far, they kind of left the door totally wide open, it’s data dependent and to my mind the data is not going to force the hand of the Federal Reserve in terms of tapering because I think we’re going to see a very weak economy. I think we have a weak economy and just like last year – we started the year off thinking that 3,5% GDP and then as the year wears on, that number just keeps going down and I suspect we’re going to see the same thing and are experiencing the same thing this year.

GEOFF CANDY: Reading Martin Murenbeeld this morning from Dundee Wealth, he was saying that in many respects it wasn’t a surprise that they didn’t taper but it was concern because it becomes a credibility issue. That in many respects the Federal Reserve, and that’s going to make things more volatile in the future.

ERIC SPROTT: Sure. The Federal Reserve has lost a lot of credibility over time. First of all, the zero interest rate lacks credibility… who in their right mind would ever think that that was an appropriate interest rate. Who would have thought that printing money was appropriate, QE1, QE2, QE3 whatever, it’s totally ridiculous. If we all stand back and look at it from first principles here, we know that that’s a Ponzi scheme, that there’s going to be unintended consequences. Yes, it doesn’t show itself in the gold and silver market and yes, the stock market keeps going up, but sooner or later the unintended consequences will come into play here and I guess the biggest one will be the decline in the US dollar. If the US dollar starts going down, which is going down by the way, people owning those US Securities, not only are they getting no return, the yields are going up, they’re losing on capital and they’re losing on the currency, so there could be a moment here when there’s a revolt against US debt here and the dollar goes down and rates go up. So there’s no reason to believe anything that the Federal Reserve says, then they talked in 2009 about an exit policy – nothing’s ever happened there. They talked about tapering this year and nothing’s happened there. They have a bond market to deal with and it’s not going the way they wanted it and when Mr Bernanke was asked in the last Senate hearing what he thought about rates going up recently, he said, ‘well we’re puzzled by that’. And I thought, how can the chairman of the Federal Reserve be puzzled by interest rates going up? In other words, he didn’t really want to give the answer, and the answer is there are more sellers than buyers, and of course the sellers are selling for a reason.

They could see where this is all going here and I would, of course, encourage everyone not to own US bonds or bonds in any country for that matter, because they’re all doing the same thing and that’s why I was always and have been for the last 13 years, a strong proponent of owning gold and silver, because everyone is going to debase the currency. The best thing that’s ever happened to currencies is the other currency because they’re all going to be worthless, but every day we compare the dollar to the pound or the pound to the euro or the yen or something, the debts are unbelievable, the policies are ridiculous. What we really have to do is compare it to gold, and I happen to be of the belief that this declining gold price was engineered by the western central banks because of the physical shortage of gold, which seems very obvious to me. They want to keep faith in these FIAT currencies even though they know, those heads of the central banks know, that their policies are irresponsible. They know that, but they don’t want the market to know it so they keep pretending that everything is going to be fine and somehow there’ll be this take off or ignition, and there never is. So, we’ve left ourselves in a very difficult state – one of my partners here, Mark Faber probably put it right, we just raised the diving board higher from where the fall is going to take place and that would be probably a very good analogy of where we sit today.

GEOFF CANDY: Talking about Mark Faber, you are going to be running a round table discussion on September 24th with Mark, with Rick Rule as well, the founder of Global Companies, and with John Embry who is your chief investment strategist at Sprott, why did you decide to do that?

See also: Round table discussion on gold and silver: Sprott, Faber, Rule, Embry

ERIC SPROTT: Well one of the things that we believe in is if somebody has to stand in here for precious metals, and we’ve invested a lot of time and money and our clients’ money and our money in precious metals, I think we all see exactly what’s going on when I look back over the last decade, all of us recognised the situation as it was. Everything transpired as we expected, including the collapse of Lehman and the various events that the Federal Reserve would use to try to stop the natural flow of things that was occurring post the NASDAQ breakdown. We’ve gone 13 years with everyone trying to keep this thing from falling apart, but of course it gets more difficult every day which of course is typical that they wouldn’t, and they wouldn’t begin the tapering. So  we want people to be aware of what’s going on. We have forceful views, I think we have very logical views as to why you shouldn’t be in gold and silver, and we want to express that in the form. I’ve been told we already have 900 questions that have been asked by some of the participants, so we won’t get to answer them all, needless to say but there’s obvious…

GEOFF CANDY: I was going to say it’s going to be a long roundtable discussion…

ERIC SPROTT: Right, it might start on Tuesday and end on Thursday, but we hope to satisfy a lot of those questions that the listeners will want answered.

GEOFF CANDY: Not to steal your thunder necessarily but just to close off with how would you answer that question to somebody that’s looking in on this market, perhaps perplexed at what’s been going on. Where do we go from here, particularly for precious metals?

Manipulation in the Gold Markets –

ERIC SPROTT: Well as I say I think there’s lots of manipulation that’s going on, we’ve seen it everywhere, okay. For people not to think this is manipulation of the gold and silver prices is almost ridiculous particularly when you see these adventures that go on in the market where things fall, huge amounts of money in minutes, some guys trying to sell $5bn worth of gold which of course he doesn’t even have the gold, or even worse, billions of dollars of silver that they don’t have, it’s so classically obvious of what’s going on and why it’s going on because we have a financial system that’s in turmoil and that’s why we keep stepping on up the bond purchases, every day. we had a quantum leap when Japan came in here as a buyer and yet rates are going higher, so there’s no doubt in my mind that the forces of physical demand which I think could exceed supply by a factor of two by the way, will win the day and I think it actually won the day and that’s what caused this sell down so they could get people to liquidate the GLD so they could get their hands on the gold so they could make some deliveries that they otherwise weren’t going to make. And that’s why they convinced the Bank of India to, under all circumstances, stop the Indians from buying gold, because there was no gold to be purchased. If the Indians had bought 125 tons of gold and the Chinese bought 110 tons of gold we’d all be scratching our heads. We only mine 185 tons a month, how can two countries buy 235 tons, where is it coming from… is the obvious question. Where is it coming from, this is physical gold and of course the answer would then be well it’s got to be coming from western central banks who are surreptitiously leasing gold into the market and causing the price to go down and they’re probably in a situation where there’s next to no gold left – I’ve written three articles on that – do they have any gold left. And I suspect that we started to get seriously into that position at the end of last year, particularly with Germany asking for their gold back, and then other events happening which have all shown a tightness in gold and that the takedown that was engineered to try to get people to either stop buying gold or liquidate their gold, and of course it backfired because India bought a huge amount, China bought a huge amount and they were going to lose that game and that’s why I think they finally… because the Bank of India is in the Cabal, they were convinced to do something even though when you and I look back at it, the smartest thing Indians ever did was to be buyers of gold for the last 13 years which went up by 400% when everything else wasn’t going up by 400%. So to come up with some policy that they shouldn’t buy gold just goes so against the grain of what’s logical and what’s good for the country. But I think they’re trying to solve a temporary problem – that will be a permanent problem by the way by temporarily suppressing imports. But that will end and gold will go its merry way and I’m sure we’ll see gold at a record high within the next year and we’ll see silver at a record high within the next year and we’ll all look back and say, well you know what, I guess it was manipulated down, and yes gold should have been in the gold market… and I guess all those fundamentals and all those guys talked about finally came to happen, which they have to happen sooner or later so people should stay calm and stay the course and its worked for 12 years now, and I think it will work for a 13th year… by the time we finish this year, gold will end up with a positive year…

GEOFF CANDY: If people are interested in listening, how do they get more information?

ERIC SPROTT: They just go to our website, www.sprott.com and they can sign up to participate in the webinar.

 

Courtesy: Geoff Candy

JPMorgan’s Mortgage Settlement May Reach $20 Billion

JPMorgan's Mortgage Settlement May Reach $20 Billion

JPMorgan’s Mortgage Settlement May Reach $20 Billion

It just has not been JPMorgan’s year.

The firm which in the early years after the Lehman collapse was happy basking in the shadow of Goldman and Lloyd Blankein, as the squid took the bulk of the public fury, is now getting the royal punching bag treatment and it appears that with every passing day Jamie Dimon’s bank, the largest in the US, is hit with a new lawsuit, fine, or settlement. But while the most notorious breach of fiduciary duty in the recent past was the firm’s infamous London Whale prop trading blunder, which resulted in an SEC settlement that saw the firm actually admit guilt to securities violations, the actual damage to JPM was a manageable slap on the wrist amounting to a largely token $950 million.

JPMorgan’s sins from pre-crisis legacy closet result in settlement

Ironically, it may be the sins from JPM’s pre-crisis legacy closet that will come back to haunt it most painfully, and result in a fine/settlement that could make the London Whale damages seem like lunch money (expensed to an account of course).

As the NYT reports, “The nation’s largest bank is bracing for a lawsuit from federal prosecutors in California who suspect that the bank sold shoddy mortgage securities to investors in the run-up to the financial crisis, according to people briefed on the matter. The case, expected as soon as Tuesday, could foreshadow other actions stemming from the bank’s crisis-era mortgage business. Federal prosecutors in Philadelphia, the people briefed on the matter said, are also investigating JPMorgan’s sale of mortgage securities.”

But while a mortgage-related lawsuit and/or a settlement was long in the making, and was well-known to most in the industry, it is the monetary aspect of the resolution that is slowing down the outcome. Because if the NYT is correct, not even taking credit for all its fake “earnings” in the form of a complete reserve release would save JPM:

Underscoring the breadth of the scrutiny, the people said, JPMorgan and the Department of Housing and Urban Development briefly discussed the possibility of striking a wide-ranging settlement to conclude many of the looming mortgage investigations from federal authorities and state attorneys general. But the housing agency floated a price tag of about $20 billion for the settlement, the people said, effectively derailing settlement talks with JPMorgan lawyers, who were stunned by the size of the proposed penalty and expected to pay a fraction of that sum.

That’s right: $20 billion! That is more than the firm has reserved for all current and future litigation, is roughly how much net Income JPM would have in a good year, and most importantly, is more than the entire amount of loan loss reserves JPM has ($19.4 billion) on the books currently. Should this buffer be exhausted then JPM will be in a truly sticky predicament: it will actually have to make real, non-imaginary profits!

Should JPM not be able to negotiate this epic settlement away, which would likely be the largest in the history of finance, then the firm’s stock plunge from 2012 will be a playful treat compared to what awaits Jamie Dimon, who will almost certainly lose his job if a settlement of such magnitude is formalized.

 

Courtesy: Zerohedge

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