The chronological events of 2013 set the background for gold in 2014. It was a momentous year which should ensure a rise in the gold price in 2014.
Before 2013 demand for physical ETFs was high. At the same time Asian demand, from China, India, Turkey and elsewhere, was accelerating leaving Western bullion markets increasingly short of physical liquidity. Hong Kong and China between them in 2012 had absorbed on official figures 1,458 tonnes, and India a further 988 tonnes, ensuring 2013 kicked off with more global demand than available supply from mines and scrap.
The following is a list of subsequent important developments in 2013.
1. Germany’s Bundesbank announced in January that it would recall 300 tonnes of its gold stored at the New York Fed by 2020. The Bundesbank was criticised for this decision, since gold held in New York amounted to 1,536 tonnes, so why take seven years to repatriate less than 20% of it? In the event by the year-end only five tonnes had been repatriated, fueling rumors that it didn’t actually exist other than as a book entry.
2. The Cyprus bail-in debacle in February alerted everyone to the new bail-in procedures being adopted by all G20 member states. Wealthy depositors in the Eurozone suddenly realised their deposits were at risk of confiscation. Governments were no longer going to bail out large euro depositors, let alone those with bullion accounts.
3. The new bail-in regime was followed by ABN-AMRO and Rabobank’s refusal to deliver physical gold to their account-holders, offering currency settlement instead. Many interpreted this as evidence of long-term holders attempting to withdraw physical bullion.
4. By end-March it was becoming clear that growing demand for physical bullion was a potential systemic problem. This was followed in April by a co-ordinated attack on the gold price to persuade the investing public that gold was in a bear market.
5. The result was liquidation by weak holders in ETF gold funds. However, lower prices also triggered unprecedented physical demand, particularly from China and India but also across the whole Asian continent. Gold coin sales broke records. None of this escalating demand appears to have been expected by Western central banks, which by elimination had to be the principal source of maintained liquidity.
6. In July I discovered that in the four months following its 28th February year-end the Bank of England appeared to have delivered up to 1,300 tonnes of gold from its vaults. This amount tied in with record Asian demand in the wake of the April price drop, far greater than can have been satisfied from other known sources such as ETF liquidation.
7. The new Governor at the Reserve Band of India, Raghuram Rajan, who was once the IMF’s Chief Economist, introduced restrictions on India’s gold imports blaming them for the trade deficit. This overturned official policies which led to the liberation of the gold market in the early 1990s, fueling suspicions that this move was orchestrated by Western central banks.
8. Premiums in India rocketed and gold smuggling escalated to meet demand.
9. Ben Bernanke in his testimony to Congress in mid-July said “No one really understands gold prices, and I don’t either.” Was he admitting to a policy failure over gold management?
10. In October both the Swedish and Finnish central banks announced the location of their gold reserves. Additionally, the Finnish central bank’s Head of Communications added further information in Finnish in a blog run on the Bank’s website, to the effect that all 25 tonnes held at the Bank of England was “invested” (i.e. leased or swapped), and that “Gold investment activities are common for central banks”. This appears to be an admission that significant amounts of monetary gold have been sold into the market. Question: How do they get it back, when Asian demand alone absorbs the equivalent of all global mine and scrap supply?
11. Chinese public demand through the Shanghai Gold Exchange and Hong Kong rose to 2,668 tonnes over the whole year. Add in 50 tonnes of coin, and it amounts to 2,718 tonnes in all. We know this because these are firm figures issued by the SGE and the Hong Kong Government, not the result of surveys, aiming to identify end-users.
12. We can assume that China’s own mine production of 430 tonnes is not in these figures, on the basis that the government buys all domestic mine production and is unlikely to put gold production from mines it controls through commercial brokers on the SGE. This being the case, Chinese mine production should be added to total demand figures, raising the total to 3,148 tonnes. Furthermore available statistics do not include gold bought outside China by the Government and wealthy citizens and either imported or held in vaults abroad, so we can probably regard this figure as a minimum, even though the SGE deliveries includes scrap of a few hundred tonnes.
13. Meanwhile the China Gold Association reports gold “consumed” of 1100 tonnes, and the WGC reports identified Chinese demand of 1,066 tonnes. These are the figures commonly accepted by Western analysts as total demand.
The events of 2013 persuaded investors in western capital markets that gold’s bull market had definitely been broken, and that gold would probably go lower or at best move sideways in 2014. The underlying reality is very different, with China in particular managing to corner the physical market with trend-following Western analysts caught unawares.
So far, instead of continuing to fall the gold price actually bottomed on 31 December at $1182, and since then has rallied over 13% to $1340. The position today is that some hedge funds which were short have closed their positions and there are more yet to do so. There is growing evidence for the trend-chasers that the price is entering a new bull phase, with the 50-day and the 200-day moving averages both rising and about to complete a golden cross.
Central banks appear to be facing a problem of their own making. The lesson from Germany’s attempt to repatriate her gold appears to have providedprima face evidence that central banks have little or no physical liquidity left. Minor central banks, such as Finland’s, must now be wondering if gold out on lease will ever be returned to them, so may be increasingly reluctant to make their gold available for further leasing. Instead they are likely to end current leasing agreements as they mature rather than extend them.
In 2014 there is likely to be a growing realization that the vaults in the West are very low on stock.
2014 should be an interesting year.
Courtesy: Alasdair Macleod
It is by now well understood that the US housing market over the past year has not benefited from broad consumer participation, exhibited best by the unprecedented, 13 year low collapse in mortgage applications. And since bond yields which recently “soared” to 3.00% only to drop right back have not resulted in a spike in applicants for home mortgages, it is clear that the problem is far more broad and systemic and has to do more with affordability than any other aspect of the market. And yet one thing that did support the elevated, or as some call them, bubble prices, of US houses, was the bid from institutional investors: those “house flippers” who buy a home with the intent of either renting it out or selling it to a greater fool.
Alas, just like the rental bubble whose bursting we chronicled here just last week, so the institutional bubble has just popped, which we know courtesy of RealtyTrac data reporting that institutional investors — defined as entities purchasing at least 10 properties in a calendar year — accounted for 5.2 percent of all U.S. residential property sales in January, down from 7.9 percent in December and down from 8.2 percent in January 2013. This was the biggest one month plunge in history. It gets worse: the January share of institutional investor purchases represented the lowest monthly level since March 2012 — a 22-month low.
Some other RealtyTrac findings:
Metro areas with big drops in institutional investor share from a year ago included Cape Coral-Fort Myers Fla. (down 70 percent), Memphis, Tenn., (down 64 percent), Tucson, Ariz., (down 59 percent), Tampa, Fla., (down 48 percent), and Jacksonville, Fla., (down 21 percent).
Yet, unwilling to give up on this latest bubble craze, institutional investors are still hoping there is some last minute cash to be made in some remaining markets.
Counter to the national trend, 23 of the 101 metros analyzed in the report posted year-over-year gains in institutional investor share, including Atlanta (up 9 percent), Austin, Texas, (up 162 percent), Denver (up 21 percent), Cincinnati (up 83 percent), Dallas (up 30 percent), and Raleigh, N.C. (up 15 percent).
The rotation from one set of markets to another is shown on the chart below:
The following quote summarizes the situation best, and it also refutes the entire “harsh weather” excuse that has become so popular in recent months:
“Many have anticipated that the large institutional investors backed by private equity would start winding down their purchases of homes to rent, and the January sales numbers provide early evidence this is happening,” said Daren Blomquist. “It’s unlikely that this pullback in purchasing is weather-related given that there were increases in the institutional investor share of purchases in colder-weather markets such as Denver and Cincinnati, even while many warmer-weather markets in Florida and Arizona saw substantial decreases in the share of institutional investors from a year ago.”
So with retail buyers long out, and cash buyers and institutional investors – which as readers know amount to about 60% of all purchases – on their way out, just what will be the next myth be that will be disseminated to percent the general public from realizing that the artificial housing market “recovery”, which was entirely driven by hot money, speculation, and hope of a quick profit? Because with QE also fading, and with it the MBS bid, not to mention the surge in foreclosure exits and the flood of foreclosed properties about to hit the market as we wrote yesterday, things for the US housing market are about to get very messy.
In 2013 we’ve experienced the kind of extreme buying power China is able to unleash on the physical gold market. Chinese wholesale demand in 2013 was 2200 tons, and this excluded PBOC purchases. While the mainstream media is still absolutely clueless on what actually happened and how much gold was distributed across the globe, the facts aren’t that hard to summarize. Let’s have a look at the facts, supplemented with commentary by yours truly.
As most countries disclose their gold trade numbers, by analyzing these numbers we could see a clear gold vein running from the vaults of the the Bank of England (BoE) in London to the 55 vaults of the Shanghai Gold Exchange (SGE) in China mainland. This main vein ran through Switzerland and Hong Kong.
Most gold in the UK is located at the vaults of the BoE, where gold from the LBMA, GLD, the official reserves from the BoE and official reserves from many other central banks are stored. In response to the drop in the price of gold in April 2013 we have seen significant outflows from the UK; net export broke all records.
The UK net exported 1425 tons of gold in 2013, of which 152 tons net to the United Arab Emirates, 145 tons net to Hong Kong and 1329 tons net to Switzerland. In December total net export was 62 tons, up 68 % from November, while net export to Switzerland dropped to 52 tons. Net export (directly) to Hong Kong was 29 tons.
In 2013 GLD’s inventory dropped by 552 tons.
From refineries in Switzerland we know that all the gold that came from the UK in 400 ounce London Good Delivery (LGD) bars was being refined into 1 Kg bars 99.99 % purity, and sent to the East. Switzerland has never traded and refined as much gold as in 2013; gross import was 3082 tons and gross export 2786 tons.
Switzerland has a long history in gold refining and vaulting, both businesses had to adapt in 2013. Refining exploded as some plants almost doubled their capacity, working in three shifts 24 hours a day to supply the East. From Looking at the chart below we can see Swiss net import decreased to 295 tons in 2013 from an average of 572 tons in 2002 – 2012, which suggests their vaulting business grew less than in recent years.
The Chinese are not only buying unprecedented amounts of physical gold, additionally they strive to have more power in the pricing of the yellow metal. I have published numerous translations – a memo on gold policy from the Chinese government to various ministries, gold institutions, exchanges and the central bank, an interview with the head of the precious metals department of China’s biggest bank on it’s gold aspirations and an article on Chinese gold policy written by one of the most influential leaders of the Chinese gold market – in which this is all clearly exposed. In my opinion the Chinese will eventually take over the entire (paper) gold market.
Swiss refineries are also refining LGD bars for Gulf nations in the new standard 1 K four-nines bars (LGD bars are shipped from the Gulf to Switzerland, 1 K four-nines bars are shipped back). The president of the Peoples Republic of China Xi Jinping has called for better ties for China and Gulf Nations and for an acceleration in talks towards a free trade agreement.
China’s Foreign Minister Wang Yi met with Israeli Prime Minister Benjamin Netanyahu, the Saudi Arabian crown prince, the Iranian Foreign Minister, as well as a multitude of players from the Gulf and North Africa in the last couple of months to develop trade with West Asia. Yi’s goal was to reinforce the oil supply chain from the Middle East, and improve ways to export Chinese goods. Additionally China is investing in large infrastructure projects (railways, harbors, etc) in West Asia to breathe new life into the Silk Road.
At the same time four Gulf nations (Bahrain, Kuwait, Qatar and Saudi Arabia) are planning to setup a new common currency. All developments just mentioned are related as Asian nations seek allies to make a stand in a post US dollar system.
Hong Kong gold trade also broke all records. Net gold import jumped 1500 % from 37 tons in 2012 to 597 tons in 2013. Gross import in 2013 accounted for 2239 tons up 133 %, gross export 1642 tons up 78 %.
The biggest supplier by far was Switzerland, as Hong Kong net imported 913 tons from the Swiss in 2013, up 613 % from 128 tons in 2012 (look at the chart below and spot the record). The Swiss gross exported 1236 tons more in 2013 than in 2012, apparently the bulk of this extra refining output went to Hong Kong.
Hong Kong’s main gold export destination was China mainland. Net export was 1158 tons, up 108 % from 525 tons in 2012. Gross export was 211 tons, gross re-export (gold that passes through Hong Kong without being processed, i.e. 1 K bars) was 1284 tons.
Gross import from the mainland was 337 – this reflects a lot of jewelry fabricated in Shenzhen that is being exported to Hong Kong. Shenzhen is located just across the border from Hong Kong, accommodates the biggest SGE vault and is known for it’s jewelry production industry. The jewelry that is being shipped to Hong Kong is ‘smuggled’ back into the mainland to some extent.
In the mainland there is a 22 % tax on jewelry (17 % VAT, 5 % consumption tax), In Hong Kong there is 0 % tax on jewelry. It’s quite common for Chinese in the mainland to make trips to Hong Kong, buy cheap jewelry and other physical gold products and take this home without being bothered at the border. Customs are very stringent on gold exports from China mainland, on the import side Chinese can easily walk through wearing their new necklaces.
The Chinese jewelry company Chow Sang Sang estimates more than half their products sold in Hong Kong are purchased by mainland tourist. Additionally there are mainland tourists that purchase physical gold in Hong Kong and store it locally in safety deposit boxes at banks as well as vaults outside the banking system. This hidden mainland demand partially explains the unprecedented net gold imports by Hong Kong in 2013 (597 tons by 7 million inhabitants). The other explanation being Hong Kong vaults gold for investors from all over the world.
Please be aware that China mainland can import gold through many other ports than Hong Kong (as I have written bout here). According to my analysis the mainland has roughly imported 2000 tons of gold in 2013 including PBOC purchases.
Courtesy: Koos Jansen
And just like that the Chinese yuan devaluation has shifted away from the merely “orderly.”
In the past few hours of trading, China, which as we reported two days ago has started intervening aggressively in the Yuan market (for the reasons why, read this), has seen its currency crash by nearly 0.9%, which may not seem like much, but is in fact the largest drop since December of 2008, and at last check was trading at around 6.18, even as the PBOC fixed the CNY reference rate 0.02% higher from the last official close to 6.1214, erasing pivot support point at 6.1346 and 6.1408. Naturally this means that the obverse, the CNYUSD, has crashed to as low as 0.1620. Should this move sustain without reverting, this will be the biggest weekly loss ever!
The dramatic monthly plunge from the CNY perspetive is shown on the chart below.
There isn’t much commentary on this most recent dramatic move aside from this comment by Zhou Hao, a Shanghai-based economist at ANZ, who said “CNY movements indicate that the authorities are determined to deter capital inflows and there were likely stop-losses triggered when the CNY broke key psychological levels.”
What is more notable is that the move, while certainly intending to shake out the carry traders bent on riding the USDCNY ever lower, is starting to appear borderline erratic. As a reminder, and as we posted yesterday before the FT picked up the story earlier today, there is a lot of pain in store for those betting on a stronger Yuan, because while the move may not seem dramatic (by USDTRY standards), the reality is that the carry trade positions have massive leverage associated with them, with the pain level on $500 billion in existing carry trades beginning to manifest once the Yuan enters the 6.15-6.20 gap and becomes acute once the European Knock-In zone of 6.20 is crossed (see first chart below) and rising exponentially from there. In fact as we explained, should the renminbi break past 6.20 per dollar, which it is very close to right now, banks would be forced to call in collateral, accelerating the Yuan plunge, at which point the drop would become self-sustaining. The pain from that point on is around US$4.8 billion in total losses for every 0.1 above the average EKI (see third chart).
This is what we warned yesterday:
The total size of the carry trade is hard to estimate although even just looking at some of the onshore CNY positions accumulated, DB Asia FX strategist Perry Kojodjojo estimates that corporate USD/CNY short positions are around $500bn. The size of the carry trade and the fact that China saw significant capital outflows during the last period of substantial Renminbi depreciation in the summer of 2012 has led to concerns over what this might mean for both the Chinese economy and financial markets as well as broader global financial implications.
Morgan Stanley believes that one such carry-trade structured product that will be the “pressure point” for this – should the Yuan continue to depreciate – is the Target Redemption Forward (TRF) which has a payoff that looks as follows…
While this is just an example of a product payoff matrix to the holder, the broader point is that the USD/CNH market has a particular level (or range of potential levels) at which three factors can create non-linear price action. These are:
1. Losses on TRF products will (on average) crystallize if USD/CNH goes above a certain level. This has implications for holders of TRF products, who are mostly corporates;
2. The hedging needs of writers of TRF products (banks) mean that there is a point of maximum vega for banks in USD/CNH. Below this level banks need to sell USD/CNH vol; above this level banks need to buy USD/CNH vol;
3. The delta-hedging needs of banks are complex. As we approach the average strike (the 6.15 in the theoretical point of Exhibit 1), banks need to buy spot USD/CNH. Above this point but below the European Knock-in (EKI) (i.e., between 6.15 and 6.20 in Exhibit 1), banks need to sell spot. Then above the EKI, banks don’t need to do anything in spot.
From internal Morgan Stanley data, we estimate that the point of maximum vega is somewhere in the range of 6.15-6.20, and that the 6.15-6.20 in Exhibit 1 is reasonably indicative of the average strikes and EKIs in the market.
In other words, so long as the TRF products remain in place (i.e., are not closed out) and we remain below the maximum vega point (somewhere between 6.15 and 6.20), there is natural selling pressure by banks in USD/CNH vol. When we get above that level, there is natural vol buying pressure.
Of course, in the scenario that USD/CNH keeps trading higher and goes above the average EKI level, the removal of spot selling flow by banks and the need to buy vol means the topside move may accelerate.
Simply put, if the CNY keeps going (whether by PBOC hand or a break of the virtuous cycle above), then things get ugly fast…
How Much Is at Stake?
In their previous note, MS estimated that US$350 billion of TRF have been sold since the beginning of 2013. When we dig deeper, we think it is reasonable to assume that most of what was sold in 2013 has been knocked out (at the lower knock-outs), given the price action seen in 2013.
Given that, and given what business we’ve done in 2014 calendar year to date, we think a reasonable estimate is that US$150 billion of product remains.
Taking that as a base case, we can then estimate the size of potential losses to holders of these products if USD/CNH keeps trading higher.
In round numbers, we estimate that for every 0.1 move in USD/CNH above the average EKI (which we have assumed here is 6.20), corporates will lose US$200 million a month. The real pain comes if USD/CNH stays above this level, as these losses will accrue every month until the contract expires. Given contracts are 24 months in tenor, this implies around US$4.8 billion in total losses for every 0.1 above the average EKI.
Deutsche Bank concludes…
Looking forward it’s possible that the PBOC is not attempting to actively engineer a sustained depreciation of the Renminbi but rather is attempting to increase the level of two-way volatility in the market to discourage the carry trade and also excessive capital inflows. In terms of the broad risk going forward the sheer scale of the challenge the PBOC has set out to tackle likely means they will have to move with restraint. This is certainly a story to watch…
As Morgan Stanley warns however, this has much broader implications for China…
The potential for US$4.8 billion in losses for every 0.1 above the average EKI could have significant implications for corporate China in its own right, as could the need to post collateral on positions even if the EKI level is not breached.
However, the real concern for corporate China is linked to broader credit issues. On that, it’s worth reiterating that the corporate sector in China is the most leveraged in the world. Further loss due to structured products would add further stress to corporates and potentially some of those might get funding from the shadow banking sector. Investment loss would weaken their balance sheets further and increase repayment risk of their debt.
In this regard, it would potentially cause investors to become more concerned about trust products if any of these corporates get involved in borrowing through trust products. In this regard, this would raise concerns among investors, given that there is already significant risk of credit defaults to happen in 2014.
Remember, as we noted previously, these potential losses are pure levered derivative losses… not some “well we are losing so let’s greatly rotate this bet to US equities” which means it has a real tightening impact on both collateral and liquidity around the world… yet again, as we noted previously, it appears the PBOC is trying to break the world’s most profitable and easy carry trade – which has created a massive real estate bubble in their nation (and that will have consequences).
The bottom line is the question of whether the PBOC’s engineering this CNY weakness is merely a strategy to increase volatility and thus deter carry-trade malevolence (in line with reform policies to tamp down bubbles) OR is it a more aggressive entry into the currency wars as China focuses on its trade (exports) and keeping the dream alive? (Or, one more thing, the former morphs into the latter as a vicious unwind ensues OR the market tests the PBOC’s willingness to break their momentum spirit).
It appears, as Bloomberg notes, the PBOC is winning: “Yuan has gone from being most attractive carry trade bet in EM to worst in 2 mos as central bank efforts to weaken currency cause volatility to surge. Yuan’s Sharpe ratio turned negative this yr as 3-mo. implied volatility in currency rose in Feb. by most since May, when Fed signaled plans to cut stimulus.”
So far the PBOC’s “shock and awe” has impressed currency traders. Hopefully, the PBOC knows what it is doing because if indeed it causes the carry trade to unwind, the unwind could send the currency plunging well beyond the central bank’s intended limits. What happens then nobody knows.
Curious for more? Read our first post in this series: Welcome To The Currency Wars, China (Yuan Devalues Most In 20 Years)
Finally, if indeed this is the start of the real carry unwind, things go from bad to worse: read “The Pig In The Python Is About To Be Expelled”: A Walk Thru Of China’s Hard Landing, And The Upcoming Global Harder ResetCourtesy: Zerohedge
Despite now two doses of QE taper and much more confirmation that the FOMC will be committed to that course, gold prices have not collapsed. Conventional wisdom has been uniform in believing QE as inflationary, and thus a positive for gold prices (despite the trajectory since 2011). Removal of QE should have been, if this thinking is correct, a negative factor for gold via that inflation channel. Yet, pretty much since the first taper was announced in December, gold prices have been on a steady climb. The reason for that, and I think there is little doubt now, is gold as a “tail risk” hedge or insurance.
The relationship between QE and inflation was always tenuous, particularly given the actual (as opposed to imagined) role of reserves (and excess at that) in the modern, shadow/investment banking system. Instead, I believe it was the projection of FOMC resolve in QE that allowed the entire financial system to fall into the trap of expectations – that the Fed would not countenance major systemic risks, thus removing considerations of “tail risk.” Less tail risk = lower demand for tail risk hedging.
That gold would reclaim a steady bid after such visible removal of FOMC-driven “surety” is a direct consequence of removing not just the pace of “reserve” expansion but the recalibration of market risk without that visible assurance.
On the other side of the economics of gold lies the monetary system as it actually exists – the one in which collateral is much more money like than “money” or currency. The operational fact of QE has been the reduction in available collateral to the marketplace for secured short and overnight lending (interbank). As episodes of collateral shortages broke into the open, gold filled the breach with a resulting slam in terms of gold prices. The indication of such collateral demand was forward rates (GOFO).
As with what I mentioned above of the apparent return of the golden bid, the collateral system has also been affected by changes in systemic operations post-taper. While the Open Market Desk is removing less collateral from the system in its POMO activity, that has not alleviated all collateral conditioning. In fact, as I highlighted last week, bond issuance, particularly MBS and t-bills, is declining even more rapidly. Mortgage issuance, ironically enough, is being decimated by taper threats from this past summer. T-bill issuance has collapsed under the illusion of fiscal responsibility.
Yet for all these ongoing imbalances, gold has remained in that steady upward march. I think in addition to the restart in demand for tail risk, on the other side there has been added an alternate pathway for collateral to flow, thus making the appeal of gold less appetizing at the margins.
On September 20, 2013, the Fed announced, via its Open Market Desk, that it would conduct daily reverse repo “tests.” The first, beginning September 23, was designed to gauge effectiveness of expanded policy coverage to, in a historic first, nonbank participants (the cash side of repo). The reasons for the reverse repo program really boil down to enforcing a lower limit, or floor, on short-term interest rates that have not conformed due to the US financial system’s quirks regarding banks vs. nonbanks (a fuller discussion of this here).
The other primary facet of the reverse repo program is the potential for nonbanks and banks alike to use it to obtain collateral sitting idle in the SOMA “silo.” In this kind of “reverse repo” (from the Fed’s perspective), banks and institutions are parking cash with the Fed, collateralized by the Fed’s holdings of UST. In other words, it represents another avenue to get collateral into the repo system.
The first reverse repo test regime was limited to a maximum of $500mm per bidder, and was scheduled to expire on January 29, 2014. In the interim, the bidder ceiling was raised, and on January 29, the per bidder max was further increased to $5 billion and the overall “test” program was extended by another year, now set to expire on January 30, 2015. As you can see from the chart below, the “test” has been quite popular.
Reverse repos are not new to the Fed’s monetary toolkit. The most (in)famous usage occurred the week Lehman failed, as the FOMC directed the Open Market Desk to “drain” $50 billion in “excess liquidity” from the system. That was an attempt to get the federal funds rate back up to its target, as it tended below target in the growing fragmentation between London (eurodollars) and NYC (federal funds). As we know now from the 2008 FOMC transcripts, there were intraday discrepancies that made such a movement somewhat suspect – the Fed may have been trying to rectify the target imbalance, but only to make the geographic divide that much greater.
In the current set of circumstances, given the origination demise in MBS and t-bills, it would make sense that the reverse repo “test” would take the place of gold as a marginal source of collateral. That theory is bolstered further as repo rates have sunk closer to zero, making the Fed’s program a realistic, and even cost-efficient, alternative (and performing as desired by policy intentions).
If collateral strains have been transferred back to the Fed’s SOMA by the daily reverse repo auctions, it would offer a more complete picture as to gold’s recent behavior. Put that together with the “expiration” of QE as a full-blown tail risk suppressant, and it is very compelling in my mind.
We are beginning to see cracks in the overall bearish sentiments towards gold expressed by most bank analysts earlier this year, but some still remain unmoved by the recent positive gold price performance.
We have stated a number of times here that the bank analysts are effectively totally reactive in their analyses and forecasting of precious metals prices – indeed they tend to follow the herd and with gold performing rather better than they had anticipated so far this year (up 11.5% since the December 31st London fixing) some are already beginning to increase their predictions sharply, although admittedly others have stuck to their bearish forecasts so far. However how long they continue to do so if gold maintains its recovery remains to be seen.
Whether there is a real recovery in the U.S. economy in particular or not – a recovery suggesting that investors will continue to support the general equity market rather than gold (which is perhaps the view most quoted by bearish analysts like Jeff Currie at Goldman Sachs) – there are other drivers out there which should remain positive for gold and suggest that the recent gold price recovery could perhaps be sustainable.
As we have stated here before, a turnaround in the draining of gold from the big gold ETFs is a perhaps underestimated driver in this respect. Even if the gold price falls and sales out of the ETFs resume there’s no way they are likely to be anything like on the scale seen last year with over 800 tonnes of gold coming onto the markets from this source creating a huge imbalance in the supply/demand metric. Thomson Reuters GFMS suggests that this outflow was perhaps the key element behind last year’s gold price falls, so any reduction in sales from this source should be positive for gold. Indeed if current gold price levels are sustained then the indications are that last year’s ETF outflows could be replaced with inflows and say a 200 tonne inflow would effectively make a 1,000 tonne difference in supply/demand figures which would be very positive for the gold price. Indeed were this to occur it could be more than self-sustaining with rising gold prices pushing more and more investment back into the big gold ETFs.
And, despite a Bloomberg headline suggesting the contrary, Chinese gold demand looks like it could be continuing at last year’s high levels where estimates of imports range from around 1,500 tonnes to over 2,000 tonnes depending on whose statistics one believes.
Add to this what we see as the likelihood of India relaxing its unpopular gold import curbs and continuing global uncertainty around flashpoints like the Ukraine, Syria, Venezuela etc. – and wherever next appears on the serious political unrest front – plus the possibility that China could announce a big increase in its gold reserves given it is 5 years since it last did this (admittedly perhaps the most speculative of the above potential drivers) and we could well be set for a good year for the gold price.
So some of the bank analysts now seem to be coming round to the possibility that gold prices could just perhaps rise this year, as against the almost unanimous consensus back in January that they were more likely to fall. For example, UBS analyst Edel Tully has sharply revised upwards her short term and medium term gold price predictions in the light of the latest moves. She is now looking to $1280 as her one month average forecast – up from $1180 which has already been comfortably surpassed – and $1350 in three months, up from $1100, while a removal, or easing, of India’s import controls could push gold to $1400. But she still doesn’t see the gold price as deserving of a tag north of $1400 – but also recognises a fall to below $1200 is similarly undeserved. Now with gold this morning at around the $1340 level, Tully’s forecasts, although substantially higher, could still be seen as overly conservative by some observers.
Likewise RBCCM’s Toronto-based analytical team have revised their long term gold and silver price assumptions to $1,400 and $23.50 respectively, from $1,300 and $22 previously, commenting that the price of gold seems to have taken U.S. Fed tapering in its stride, ETF outflows as having ‘slowed’ and with physical demand remaining strong. They feel the price risk with respect to gold is now to the upside.
In truth, the longer gold can sustain its recent gains, the more sentiment towards it as an investment in its own right, or as a safe haven, will return. But a sharp crash in price could reverse all this gradual change in perception very quickly, and as we saw last year gold can be prone to some very sharp and rapid price falls for whatever reason. One can’t rule this out from happening again.
Thus analysts like Goldman Sachs’ Jeffrey Currie, Soc Gen’s Robin Bhar and Credit Suisse’s Tom Kendall are all still predicting $1,050 gold this year – or even lower. Kendall commented recently that he wouldn’t be surprised if gold were to trade at $1,300 (which of course it has already exceeded, but that the momentum thus achieved would be quickly exhausted and he anticipated gold falling back to $1,000 towards the end of the year.
But the very fact that some, if not yet the majority, of bank analysts are breaking ranks and looking to even small increases in the gold price does suggest sentiment is changing towards gold. They will always be conservative in their forecasts – that’s the nature of bankers, but the unanimous bearish consensus may be beginning to shift.
Courtesy: Lawrence Williams
Statistics are how you read them and China both imported 326% more gold from Hong Kong in January than it did a year earlier, or 9% less than in the previous month.
Lies, damn lies and statistics! Take the headline above and compare it with the Bloomberg headline for effectively the same story using exactly the same figures which was: China’s Gold Shipments From Hong Kong Decline as Demand Weakens. Both headlines are absolutely correct based on the figures but you wouldn’t believe so from reading them, indeed you could be forgiven for thinking one of them is obviously a downright lie. It just depends which way you care to spin it and some recent Bloomberg headlines do seem to have tended towards negativity with regard to Chinese gold imports.
Consider the facts. According to the Bloomberg interpretation of the latest gold import and export figures from the Hong Kong Census and Statistics Department, the special administrative region exported a net 83.6 tonnes of gold to the Chinese mainland in January. As Bloomberg rightly notes this is a fall – albeit a fairly small one – of around 9% from the 91.9 tonnes in December – so far so good. But gold trade between Hong Kong and Mainland China can be seasonal so perhaps the better comparison should be to compare this with the net exports from Hong Kong to mainland China in January last year – which came to a very low 19.6 tonnes – hence the 326% rise noted in the Mineweb headline. Incidentally Hong Kong net gold exports to the mainland were 96.7 tonnes in December 2012 – so the December figures for 2012 and 2013 were broadly comparable, but the January ones certainly were not!
What can one surmise from that? Perhaps not a lot, although there are continual anecdotal stories in the press of huge demand in China by individuals for gold from shops which sell the precious metal in various forms. By any standard, 83.6 tonnes of gold is a lot of the yellow metal. To put it in perspective it’s 3.7 tonnes more than the world’s 37th largest holder of gold, Australia, holds in its total central bank reserves, and given that most over the counter gold purchases in China are in grammes rather than kilos or tonnes – and 83.6 tonnes equates to 83.6 million grammes, that suggests a huge number of Chinese are still stocking up on gold. So if this represents a weakening in demand, as the Bloomberg headline suggests, then the gold investors should still be happy with that interpretation despite its overall downbeat connotations.
What can be gleaned from the figures is that gold demand in the runup to the Chinese New Year remained strong. Historically December is a strong month for Chinese gold imports as traders stock up ahead of the Lunar New Year holiday, and it usually slips back in January, but this year was somewhat different with demand obviously remaining strong right through January. Rather than taking month on month figures perhaps one should look at December and January combined as a guide to real demand over the holiday, and this may well have been exceptional. Imports into the mainland through Hong Kong ahead of this New Year holiday thus totalled 175.5 tonnes, whereas that immediately ahead of last year’s New Year holiday was a mere 116.1 tonnes, suggesting that demand in this Year of the Horse was actually over 50% greater than a year ago! You can make of these statistics what you may, but to this observer it suggests that Chinese demand remains extremely strong.
Of course, as we have often noted here, it is believed that China imports gold through other ports of entry than Hong Kong too as the Shanghai Gold Exchange consumption figures remain consistently well in excess of the Hong Kong export stats. We should probably leave it to Koos Jansen and his very interesting In Gold we Trust website for further comment on what we believe to be the true figures for Chinese consumption.
Courtesy: Lawrence Williams
Today’s AM fix was USD 1,340.00, EUR 975.33 and GBP 803.12 per ounce.
Yesterday’s AM fix was USD 1,332.75, EUR 969.48 and GBP 798.53 per ounce.
Gold rose $2.80 or 0.21% yesterday to $1,340.60/oz. Silver fell $0.15 or 0.68% at $21.86/oz.
Gold reversed early losses and rose to its highest in four months today at $1,345.45/oz. Economic data raised questions about the strength of the U.S. economy, increasing gold’s safe-haven appeal.
Gold in U.S. Dollars – 1 Year (Bloomberg)
Data yesterday showed that U.S. home price gains slowed in December, underscoring the risk of an end to the recent housing recovery, while consumer confidence also fell this month.
Value investors are finding gold attractive at these levels on worries about economic conditions in the United States and also China, which has seen unprecedented growth in corporate and sovereign debt.
Mt. Gox, once the world’s largest and most popular bitcoin exchange, has gone “dark” or offline.
Mt. Gox went offline early yesterday morning. The site made no announcement to users about its shutting down, they were instead met with an empty page. Moreover, Bitcoin has halted cash withdrawals following the departure of its chief executive.
There are allegations that the company is insolvent and that bitcoin buyers have lost over $375 million dollars due to a multi year hacking effort that went unnoticed by the company.
According to a leaked document, the exchange is insolvent after losing 744,408 bitcoins — worth about $375 million at Monday’s trading prices.
Gold Sovereign and Bitcoin
Reports that hackers may have pilfered more than $375 million in Bitcoin from Mt. Gox prompted companies from San Francisco to London as well as their industry group, the Bitcoin Foundation, to assure Bitcoin users that their funds won’t disappear due to theft or mismanagement.
“This is certainly not the end of Bitcoin,” the foundation said yesterday in a statement. “As our industry matures, we are seeing a second wave of capable, responsible entrepreneurs and investors who are building reliable services for this ecosystem.”
The shutdown of Mt. Gox comes after months in which the currency’s price soared and it attracted increased attention from investors and speculators. We cautioned clients that it should not be seen as a store of value and that its potential value was as a means of exchange.
Virtual currencies remain an innovative and increasingly important means of payment. However, claims that bitcoins are safe haven currencies that would compete with gold bullion look increasingly misguided.
The developments are bullish for gold prices as various bitcoin exchanges had captured capital flows from investors and speculators who are skeptical of the current financial and monetary system and many of whom would have previously have bought gold and silver. Some of this capital is more likely to flow into gold in the coming months.Courtesy: Goldcore
Gold declined from $1,900 in September 2011 to $1,188 on December, 19, 2013. Silver declined from $48.50 to $18.50 over approximately the same time frame. Precious metal equities declined by approximately 70% over this period. This move down played out exactly as was scripted. However, let us review the causes of this decline. We start out with the most important words ever written by a regulator: BaFin, the German equivalent of the SEC, said that precious metals prices were manipulated worse than LIBOR. What are we to read into this, particularly the word “worse”? Obviously, worse than LIBOR could not mean that more money was fraudulently earned since the LIBOR markets are many orders of magnitude larger than the precious metals markets. Then it must mean that the egregiousness of the pricing dysfunction was materially larger in precious metals.
The chronology goes as follows:
Let’s imagine how this played out. Our guess is that BaFin, having reviewed DB’s trading practices, reported their findings to DB’s senior management. They are horrified at the findings (cough, cough) and decide a retreat from LBMA is required. This seems logical to us.
Let’s now discuss why bank traders get involved in price manipulation. In the most simple of all analyses, they don’t do it for the bank, but they do it to fraudulently receive higher bonuses. Otherwise, why take such personal risk? If we assume that manipulation of precious metal prices was the reality, as a bonus seeking trader, when do you want the price to be the most favorable? The answer is simple: by year-end and mid-year periods, when bonuses are calculated.
Figure 1: Gold Price Bottoms at Mid-Year and Year-End
Source: Bloomberg, Sprott Asset Management LP
If we look at what happened in 2013, the two lowest gold prices were on June 27th and December 19th(Figure 1).
Perfect! And perfectly obvious…
Now let’s deal with some reality in the real physical gold market in 2013. As we discussed in 2013, the supply/demand data suggests to us that physical demand was overwhelmingly greater than mine supply (Figure 2. See Markets at a Glance January 2014, October 2013, July 2013, May 2013 and February 2013 for more information on the shortage of physical gold).
Figure 2: World Gold Supply and Demand 2013, in Tonnes
It is obvious to us that precious metals markets were manipulated in 2013. It is also obvious that demand far exceeded annual mine supply. Now let’s analyze what should happen, going forward, with these revelations. If gold prices are back on their long-term trend, ex-manipulation, a linear progression of the gold chart from 2000 to 2014 would suggest a price of $2,100 now (62% higher than the current $1,300 level) and $2,400 by year-end (Figure 3).
Figure 3: Gold Price is far from its Long-Term Linear Trend
Source: Bloomberg and Sprott Estimates
Figure 4 shows estimates of cash flow per share (CFPS) for different sized gold miners under gold prices at both $1,300 and a $2,000 per ounce. As you will note, the potential returns vary from 180% for the lumbering seniors to 420% for some of the smaller producers.
Figure 4: Upside Scenarios For Different Types of Gold Miners
Assumed Cash Flow multiple: 10. All Figures in US dollars. Estimates are for FY2014. Source: Sprott Estimates and RBC Capital Markets. llustrative purposes only, Eric Sprott and/or Sprott Asset Management Funds beneficially (directly or indirectly) may own in excess of 1% of one or more classes of the issued and outstanding securities of the above issuer).
Are these gains likely to materialize? So far in 2014, the senior miners are up 27%, while the junior miners are up 42%. Not a bad year. But, we are only seven weeks into the year.
Gold and silver have broken their downtrends and have surpassed their 200 day moving averages. The golden cross (i.e. the fifty day rising through the 200 day) still awaits, but it is most likely to happen within weeks.
When was the last time that an obvious reversal of an anomalous, yet explicable market dysfunction allowed you to imagine that you could expect multi-hundred per cent returns over a short time period?
Again, don’t miss this Golden Opportunity!
Courtesy: Eric Sprott
Prospectors in Southern California are heading to the hills, saying the severe drought has exposed gold that has never been touched by human hands. As water levels continue to drop more nooks and crannies are easier for these gold hunters to access.
“A lot of time you would just see a husband. Now you’re seeing the whole family out,” said Kevin Hoagland, of the Gold Prospectors Association of America.
Prospectors at Lytle Creek, 60 miles from Los Angeles in San Bernardino County, pan for gold, using metal detectors and sluice boxes. CBS2/KCAL9 reporter Art Barron witnessed veteran prospector Jack Barber pull up large pieces of the precious metal.
Armed with simple equipment, anyone can look for gold as long as it’s not on someone’s property or violates an existing gold claim. Many amateur prospectors are joining the search in the gold rush.
“While you may not make a fortune, it’s a great way to spend time with the family,” Hoagland said. He said beginners may find $5 in gold, but if they’re lucky could take home as much as $200 worth.
Dear Depositor: We don’t want to cause you unnecessary stress or worry, but it might be prudent to pay attention to a series of unusual news reports recently emanating from the banking world. Viewed independently, each event might be rather insignificant.
However, when examined collectively, these events paint a very dire warning for the safety of bank deposits everywhere. Naturally, most all of these have received little to no coverage by the mainstream media. That is to be expected.
The MSM’s job one is to always obfuscate any potentially dangerous news that has a chance of frightening investors or depositors. After all, the goal of the world banking cartel/equities Ponzi scheme is to keep depositors and investors relaxed and passive in their comfort zones until the complete collapse of their positions is unavoidable.
1 – October 3, 2013: US banks fearing default stock up on cash. The Financial Times reported today that two of the country’s biggest banks are putting into place a “play book” as preparation for a possible banking panic. A senior banking executive reported that his bank has delivered 20 – 30% more cash than usual in cash panicked customers try to withdraw cash in mass.
2 – October 12, 2013: Food stamp card malfunction causes riots at Walmart stores in Louisiana. The technical problem that eliminated spending limits on food stamp debit cards sets off a bizarre shopping frenzy at Walmart stores in Louisiana.
3 – November 2 – 8, 2013: A reputed computer glitch wipes out ATMs and online banking on a massive scale. Major shutdowns of online banking occurred in Alabama, Arizona, and California and affected such banks as Wells Fargo, Chase, Bank of America, Compass, Chase Fairwinds Credit Union, American Express, and others. Tellers reportedly had a hard time with even simple transactions such as check cashing and checking balances. Rumors circulated on the internet that the banks are using this temporary shutdown as a beta test for a future full bank “holiday” closure.
4 – November 17, 2013: JPMorgan Chase halts international wire transfers from the US for many small businesses. Also, Chase alerted its small business customers that the total cash activity (the combined total of cash deposits and withdrawals made at Chase branches and ATMs, including money orders and cashier’s checks) is hereby limited to a total of $50,000 per business customer per billing cycle.
5 – January 16, 2014: Reports from Hong Kong indicate another HSBC scandal: an $80B capitalization shortfall. Forensic Asia, a Hong Kong based research firm, issued a “sell recommendation” on HSBC because of “questionable assets” on its balance sheet. The London Telegraph reported Forensic Asia’s warning that HSBC “had between $63.6B and $92.3B of ‘questionable assets’ on its balance sheet, ranging from loan loss reserves and accrued interest to deferred taxes.”
6 – January 24, 2014: HSBC imposes restrictions on cash withdrawals in Britain. Reports circulated that British HSBC customers have been suddenly refused cash withdrawals as low as 3,000 pounds. HSBC admitted that it did not inform its customers of the abrupt policy change. HSBC officers putatively suggested that it is “only for the protection of its customers.”
7 — China’s Banking Problems are Escalating Fast. Beijing based ICBC, the world’s largest bank by assets, announced it will not take full responsibility for a trust investment equivalent to US $500 million that may go bust. ICBC, one of China’s “Big Four” banks, may be linked to a loan default very similar to the type that precipitated the Lehman Brothers crisis in 2007.
In fact, this may be only the tip of the iceberg that has an outside chance of bringing down the entire Chinese banking world. This ICBC “trust investment” is actually one of a vast array of loans that comprises China’s secret shadow banking system. It is estimated that China’s total shadow banking debt is now in excess of $4.7 trillion – a staggering figure for any market, let alone an unregulated one. It is believed that much of this secret lending system is fraught with high interest, high risk loans that contain a strong possibility of default. Any major failure in this market can only have catastrophic outcomes, for not only markets in China, but for all types of markets worldwide.
8 – January 28, 2014: One of Russia’s top two hundred lenders, “My Bank,” introduces a one week complete ban on cash withdrawals. The reputed reason is customers wishing to exit the declining ruble in exchange for other currencies.
9 – February 17, 2014: Chase imposes imposes new capital controls on cash deposits. Chase alerted customers that they must now present a valid ID when making any cash deposit and that the bank will now only accept cash deposits in the customer’s own account. As of February 1, 2014, Chase customers are asked for ID for cash deposits for their account while cash deposits for another customer’s account will be completely banned after March 3, 2014.
Some analysts speculated that such measures are a sign that banks are getting ready for economic turmoil and possible bank runs.
10 – February 20, 2014: Royal Bank of Scotland group announces lay-offs of 30,000 employees in coming months. The Financial Times reported that Britain’s largest state owned lender will shrink its work force by 30,000 and also pull out of “dozens of the 38 countries” in which it does business. As initially reported in Bloomberg (but later revised for online posting), this dramatic pull-back by RBS (which is 80% government owned), was strongly encouraged by British Prime Minister David Cameron, who undoubtedly has become concerned by the bank’s overextension in non-British markets. (A special thanks to David Lenihan of Wavesync Research LLC, for the tip on this story)
Our question, dear reader, is why any sane person would wish to risk their hard earned money in any of today’s banking institutions, especially when they are paying ridiculously low returns substantially below the real rate of inflation. From our perspective, another Lehman Brothers, Iceland banking collapse or Cyprus depositor bail-in confiscation is in the making. Do you really want to entrust your hard earned savings to these completely irresponsible institutions? If you don’t, please consider precious metals investment as an excellent alternative.
Courtesy: Mike McGill
As talk ramps up about putting and end to the ‘austerity’ here in the US, it should be rather clear what the intent of the establishment is with regards to the US dollar. They’re going to burn it to the ground, as is the case with every other fiat currency to this point in history. Now we could debate, argue, and otherwise cogitate all day about the timing, mechanisms, and signposts of these coming events. In truth, many of the ‘events’ have already happened.
For those of you new to ‘My Two Cents’, I’m going to provide many links in this piece to prior work that has laid the foundation for the assertions I’m going to make in this essay. If you’re a regular at gold-eagle.com, chances are excellent that you’re awake to what is happening and that is the most important thing. Moving forward will take on many forms depending on the individuals involved. This piece is going to cover silver – the ‘other precious metal’. It is not often talked about, but it should be.
But before we begin, let’s put our house in order, so to speak. Let’s dispense with the traditional groupthink that says that you buy high and then sell low when it comes to assets. At the grocery store and so forth, people stock up when something they want is on sale. Why then, when it comes to assets, do they do the exact opposite? I personally have been advising people to ‘buy the dips’ in metals since 2006 when I started writing, and many others have been doing it much longer than that. It’s called an accumulation strategy and it works for anything you want to get more of, whether its navy beans or silver Eagles.
To be successful in this endeavor, the first thing you need to do is turn off the television. Stop reading mainstream financial websites. I have contact with a great many metals dealers and have had more than one tell me firsthand that the very clowns who go on the telescreen and tell you that metals are junk and ancient relics are the same ones buying with both hands before their shows even hit TV screens around the country. They do it with stocks – as some like Jim Cramer readily admit – is it really a stretch to imagine the same being done with metals? Journalism has become a joke and it is a big part of the reason why people buy the tops and sell the bottoms.
I’m going to make the following arguments for making silver a part of your overall financial mitigation strategy. These arguments are not ordered in any particular way because degree of importance is really up to the individual investor to determine. I will, however, provide my opinions and experiences. In the interests of furnishing a comprehensive analysis, I’ll also point out potential drawbacks where they exist. The goal is to provide you, the reader, with actionable information.
1) Silver is ‘cheap’.
It has been called poor man’s gold. It’s been called a lot of things, but it is cheap. It can be bought in decent quantities from most metals outlets without a lot of waiting and you generally don’t get penalized unless the orders are very small. One of the big drawbacks on silver is storage. A hundred thousand dollars will get you around 73 US gold Eagles based on today’s price. 73 ounces. A little more than 4.5 pounds. A pretty compact little package. That alone ought to really put on full exhibit the loss of purchasing power of the dollar. Before the gold was called in back in 1933, the same $100,000 would have gotten you 5000 ounces of gold, or 68 times more. Moving to silver, the $100,000 will get you around 4,167 ounces of silver, or over 260 pounds. Not such a tidy package. However, as you’ll see below, there are some very distinct advantages that are compelling with regard to having a position in physical silver.
2) A vast array of products.
You can literally go anywhere you want with silver. You can purchase one ounce coins or bars, bars up to 1,000 ounces, and then you have an entire plethora of what is very inappropriately called ‘junk silver’ – namely, old US coins such as Washington quarters, Franklin halves, Mercury dimes, and so forth. Then you can go into the foreign arena and purchase Canadian Maple Leafs, Austrian Philharmonics and the list goes on. 90% silver US coins can be purchased by the bag in various face value denominations.
3) Silver is fungible.
For instance, if you took your hundred thousand federal reserve notes and bought 73 ounces of gold and needed to use that for money, unless you bought fractional ounce coins (which would cut down on how many ounces you’d end up with due to the higher premiums on smaller denomination couns), you’d be limited to paying an ounce of gold for anything you wanted to ‘buy’. Paying an ounce of gold for a car might not be a bad thing, but paying an ounce for a sack of potatoes is definitely not going to work; at least not for very long. Enter silver. Where gold is a monetary metal, silver is both a monetary metal, and a transactional metal. You can still buy a car with silver as in the above example, but you can trade a couple 90% silver quarters for that sack of potatoes. If you stick to the commonly recognized 90% US coins, Eagles, Maple Leafs, and, to a lesser extent, Philharmonics, you shouldn’t have a problem with people recognizing your coins as being the real thing.
Those are just some of the practical reasons for owning silver. Next, we’ll take a look at some of the structural and fundamental reasons why I believe silver is going to absolutely fly over the next 5-10 years regardless of what JPMorgan, HSBC and the other paper shorts try to pull. Remember, it is a big con game. We saw physical silver soar to a 75% premium over the paper price in early 2009. There was a near complete disconnect. That will happen again, but the percentages will easily be measured in three digits, if not four.
There is currently underway, and has been the case for nearly a decade now at minimum, a move to get away from the USDollar as the world’s reserve currency. The balance of power globally has shifted. For anyone who wants a good dissection of one of the big events just in the past year that helps demonstrate this, go to our newsletter section and download Quarter 3 of 2013’s Centsible Investor Brief. It is free of charge and we don’t even ask for an email address or other contact info. It’s there to help you put the pieces together. It gives analysis and provides prima facie evidence of the power shift that is taking place.
With the undermining of the dollar comes a reduction for the demand for dollars globally. In short, this means that the not-so-US Fed will have a harder time exporting inflation and keeping it out of US prices. I expect to see more manipulation of the CPI and other relevant metrics in a vain attempt to hide it. The establishment is currently talking about increasing the minimum wage to over $10/hour and has already done so for certain government contractors. This will amount to another failed attempt at hiding monetary mischief. This is where metals come into play. As the dollar fades on the global stage, domestic prices are going to react violently to the upward side. The canary in the coal mine is already dead and too much further progression of a dollar cutoff and the cat will be out of the bag. When that happens you’d best have some alternate money because the dollar will then truly be worth the paper it is printed on.
I envision some type of gold-backed trade instrument for the BRICs and whomever else they bring on board – and that list is growing by the week. It’ll be the equivalent of the Anglo-American IMF’s SDR (special drawing rights) but, unlike its Western counterpart, it will have the authority of real money behind it. The dollar may remain in use here in America, but at a greatly diminished ‘value’. Again, you’ll need to have alternative money in place to conduct transactions outside the dollar system. Secondly, you absolutely need protection from banks and the bail-in resolution mechanism. As has already been demonstrated in Poland and Cyprus (and soon Detroit and other US cities), the pension and banking systems simply cannot be trusted.
That doesn’t necessarily mean that you need to pull everything out now, but you absolutely need to have some contingency plans in place. Physical ownership of precious metals is one such measure. And don’t get caught in the mindset that when things start unraveling that there will be time to move. It takes up to two weeks to withdraw $10,000 in cash from a bank. They don’t keep it on hand. Look at the anatomy of the Cyprus situation. They were given no quarter. It started on a Friday and by the time those folks could get anywhere near a bank teller again, the damage was done. The ATMs emptied quickly and that was all she wrote. It’ll be the same here. Furthermore, look at it this way. The banks are not paying a thing in interest and are actually considering charging people for having bank deposits; what possible motive do we have for keeping money in these corrupt institutions of theft and debauchery? Sure, they blame the not-so-USFed, but remember who works for who here. The ‘fed’ does what it’s told by its shareholders just like any other corporation.
One of the biggest drivers for silver price moving forward is supply and demand dynamics, particularly supply. While it is very true that there is an awful lot of silver ‘out there’ in untraditional forms, at least from an investment standpoint, what I’m talking about is the supply of transactional silver. This isn’t forks or necklaces, but coins. Granted, one can use those other articles in indirect exchange, but nailing down value becomes a bit of a challenge, especially when you consider that when things first go down this path we will still be thinking in dollar terms. Plus there is the issue of purity. Do you want to get into a big debate with someone over how much silver grandma’s fine dining set actually has in it, or is it much easier to pull out some coins and dispense with the bickering and just get down to business?
This same principle applies to many of the other ‘forms’ that silver takes. Good luck trading with silver chloride, for example. You can read a plethora of articles that will allege that the world is drowning in silver. While that may have some merit, we certainly aren’t drowning in silver that can be used for monetary purposes and that is what we’re after when it comes to protecting our financial position. The chart below from the silver institute sums up the various supply and demand fundamentals:
Note the steady increase in scrap silver recycling. This is one of the biggest ways the gap between mine supply and actual demand is filled. Government sales have fallen predictably – they only have so much and the smart ones are hanging onto it when possible. On the demand side, Photography and silverware have seen marked declines and jewelry has remained fairly flat. Industrial uses have taken off. They don’t include medical uses in that category, but I am assuming medical would be in there. This is the silver that doesn’t get recycled. Independent sources state that around 30% of the industrial silver gets recycled. That results in a pretty insignificant chunk being lost.
For example, in 2012, of the 787 million ounces mined, 465.9 million were used in industrial production. That’s 59.1% of mine production. Of those 465.9 ounces used in industrial processes, around 326.1 million ounces went un-recycled. Translated, 41% of mine production in 2012 was lost to further use. This is virtually unchanged from 2003 (43% lost to further use). This obviously doesn’t bode well over the very long term, all else being equal, and since we’re talking about financial preparation, we must think longer term. If you’re retired and reading this, you might be thinking about your children and grandchildren moving forward. If you’re younger, you might have another 30 or more years of work ahead of you. It may be safe to assume that recycling will become more of a priority, particularly when actual shortages manifest, but is it safe to assume that mine supply can continue to rise in a linear fashion? I don’t believe so. We haven’t heard the term ‘peak oil’ in what seems like a dog’s life, but when it comes to any of these raw materials, the low-hanging fruit is picked first. Then it gets harder and more expensive. A mine that is profitable at $40/oz might not be profitable at $30/oz. Profitability will shape the supply side of the equation as well, just as it has with oil. Inflation will also play a role, again, as it has with oil and other commodities despite the best efforts of banks and governments to cover it up.
While I wouldn’t assert that we’re running out of silver, I will say that we are draining a lot of sources of the metal – like grandma’s jewelry and silverware as well as what governments can sell. There is only so much, then it is gone. There are kiosks all over the place are filled with people selling the family jewels to make one more mortgage payment. In many coin shops, the shelves are nearly empty of monetary silver and the bulk of the transactions are people trading in heirlooms.
When you put all this together, it makes for a compelling case for silver, especially at these bargain basement prices. The activities of banks such as JPMorgan and HSBC to suppress the silver price should be reason enough to get some for yourself. Obviously they’re suppressing so others can purchase it cheaply – and to drive it out of weak hands by the buy high, sell low mechanism I described at the outset of the essay. This is one of those unique situations where you have enough information based on what has gone on elsewhere and what’s already happened here in America that you should be able to realize that merely going on as we always have is no longer an option. If we don’t get proactive and forget about the perceptions of others and the propaganda put out by governments and the press, then we’re going to be the ones with no quarter when the hammers start falling again.
Courtesy: Andy Sutton
The last 7 days have seen the unstoppable ‘sure-thing’ one-way bet of the decade appreciation trend of the Chinese Yuan reverse. In fact, the 0.95% sell-off is the largest since 1994 (bigger than the post-Lehman move) suggesting there is clear evidence that the PBOC is intervening.
The fact that this is occurring with relatively stable liquidity rates (short-term repo remains low) further strengthens the case that China just entered the currency wars per se as SocGen notes, intending to discourage arbitrage inflows. For the Chinese authorities, who do not care about the level of their stock market (since ownership is so low), and specifically want to tame a real-estate bubble, this intentional weakening is clearly aimed at trade – exports (and maintaining growth) as they transition through their reforms. The question is, what happens when the sure-thing carry-trade goes away?
BofA notes the puzzling divergence between Yuan fixings and short-term liquidity,
The turn of the Chinese New Year brought the People’s Bank of China (PBoC) back into action – it not only restarted repo operations to withdraw liquidity, it actually did it at a much higher rate. The 7d reverse repo rate at which the PBoC injects liquidity is 75bp higher than a year ago, a move considered by the market as a 75bp rate hike over the last year. The new 14d repo (liquidity withdrawal) rate is set at 3.8%, 105bp higher than the rate when 28d repo was last conducted on 6 June 2013. Based on a simple framework, this move is equivalent to another 35bp rate hike (Rate corridor, Chinese style, 18 February 2014).
The puzzle is that both money and bond markets nearly totally ignored such an operation. The 7d repo rate is now fixed nearly 200bp lower since 10 February. Such a massive liquidity improvement in the face of the PBoC’s liquidity withdrawal is puzzling, since by 10 February most of the cash used during Chinese New Year should have flowed back into the financial system already.
The FX market move also begs the question as to why liquidity improved over the last couple of weeks. Generally, the onshore repo rate rises as the RMB weakens against fixing; a normal development because FX outflow dries up liquidity. However, the move in February turned things upside down. Look at the sharp divergence between rates and FX
Which leaves 2 possible reasons for the divergence…
It is due to the seasonality of outflows, as this year could be made worse because the onshore rate was much higher before the Chinese New Year. As a result, banks might have borrowed more offshore, helping the RMB to appreciate. After the New Year, this flow reverses and pushes the RMB down. This explains why the CNY leads the CNH in spot selloff. It is also consistent with the large January FX purchase position of CNY466bn. The trouble with this explanation is that as the money flows out, the onshore rate should rise, not drop.
A more popular theory or suspicion puts the PBoC behind the move. As the PBoC buys more USD, it creates natural liquidity in the CNY, leading to much lower repo rates. This explanation is consistent with CNY leading the move, as CNY and CNH spots moved much more than forward, all suggesting a domestic investor-driven rather than foreign investor-driven endeavor. The trouble with this explanation is that the market will have difficulty proving it one way or the other without the central bank explicitly admitting it.
As SocGen notes, the latter makes more sense…
In just short seven days, the once unstoppable appreciation trend of the yuan is reversed. The USD/CNY spot has depreciated by 0.8% since 17 February and the USD/CNH has weakened by more than 1.1%. As for the causes, there is clear evidence of intervention from the People’s Bank of China. We think that the recent yuan move is intended to discourage arbitrage inflows. If short-term capital inflows abate, the depreciation will probably halt.
Ending the inexorable carry trade…
The yuan appreciated by nearly 3% against the greenback and 7% against in nominal effective exchange rate terms in 2013. Over the same period, China’s FX reserves added another $500bn, despite the repeated talk from officials that China has had enough reserves. These seemingly contradictory messages and signs, in our view, suggest that the PBoC never really wants too much yuan appreciation, especially if it is driven by short-term speculative capital inflows.
Which is crucial…
The yuan possesses the very two qualities of a carry trade currency: high onshore interest rates and a gradual but steady appreciation trend. The first quality is partly caused by the Fed’s easing policy and partly by the PBoC’s reluctance to ease domestic liquidity conditions out of concerns over debt risk. This condition is unlikely to weaken significantly in the near term. However, the PBoC is capable of altering the second condition and it seems that it is doing exactly so by reversing the appreciation trend and pushing up the volatility of the yuan.
If we are right about the reason behind the surprising deprecation of the yuan, what will follow next?
– Band-widening? Maybe, but as we have argued before, what matters is how the PBoC manages the currency. To make real difference, we think that the next step in yuan reform should be bolder: the PBoC should move from daily to weekly (or even monthly) setting of the reference rate, while at the same time widening the currency band.
– More depreciation? Probably not much more. Although the central bank does not like too much capital inflows, too much outflows will not be its choice either. The monthly FX position data are something to track for any change in the capital flow direction. A timelier indicator is the spread between CNH and CNY spot rate. If the offshore rate stays persistently weaker than the onshore one by a certain margin, that will be a sign of capital outflows. Then the PBoC will most likely choose to stabilise the yuan again.
The end-result is a concern:
Should the RMB weakening last a while longer, the cross border carry arbitrage flow which has been massive could reverse and lead to higher repo rates. Such a flattening force is a real threat, especially when the PBoC has shown no sign of lowering the repo rates in its operations.
But this certainly will not please the Japanese (trying to devalue and manufacture their own recovery) or any other beggar thy neighbor nation. Welcome to the Currency Wars China… (and we warned here, prepare for more carry unwind and a potential risk flare).
Potential asset deflation is a risk, as the carry trades diminish/unwind. Property prices are at risk – the collateral value for China’s financial systems. This is not a dire projection – it simply seeks to isolate the US QE as a key driver of China’s monetary policy and asset inflation, and highlights the magnitudes involved, and the transmission mechanism. Investors should not imbue stock-price movements and property price inflation in China with too much local flavor – this is mainly a US QE-driven story, in our view.
And lastly, as a bonus chart, we thought the correlation here was interesting…
As sales of Gold Eagles remain subdued, the market continues to purchase every available Silver Eagle from the U.S. Mint. Since the beginning of the year, the U.S. Mint has sold its Silver Eagles on a weekly allocated basis.
This means its authorized dealers are limited to the amount of Silver Eagles they can purchase each week. Michael White, the Public Affairs person for the U.S. Mint, told me that in order for the Mint to build up inventory of Silver Eagles, it has to ration sales to its authorized dealers.
For the second week in February (10th – 14th), the U.S. Mint allocated 900,000 Silver Eagles. At the beginning of that week, total sales were 850,000. By Friday, the 14th, total sales reached 1,750,000.
The next week, Mr. White stated in an email that the allocated Silver Eagle amount for the third week (18th – 21st) were 750,000. I believe this lower figure was due to the Presidents Day Holiday making it a four-day work week.
The U.S. Mint updated its figures on Friday, the 21st:
Here we can see that the authorized dealers bought every available Silver Eagle for the week.
The U.S. Mint just updated its sales figures today (Feb 24th), with an astonishing 744,500 Silver Eagles sold in one day:
I noticed in the past several weeks, 80-90% of the total allocated weekly Silver Eagle amount was sold on the first day of the week. Just when I was getting ready to include my next chart in this article, I checked the U.S. Mint website to see if they updated their Gold Eagle sales.
I wanted to make sure that I had the most current Gold Eagle sales figures for my Silver/Gold Eagle ratio chart. When I updated the U.S. Mint’s Bullion figures, they sold an extra 81,000 Silver Eagles — within the hour.
Including the second update, the U.S. Mint sold 825,000 Silver Eagles today. I emailed Mr. White to see what the weekly allocation of Silver Eagles will be this week. He replied stating the total allocation figure for the week to be 1,250,000. I will provide an update on Friday to see if the authorized dealers consumed the total amount.
Furthermore, the current 3,325,500 February Silver Eagle sales figure, is only 43,000 less than last year’s February total of 3,368,500.
I have to say, this is the largest amount of Silver Eagles sold in one day if we exclude the first day sales in the beginning of 2014.
Even though the huge amount of Eastern gold buying continues to steal the show, retail investors are purchasing more Silver Eagles to Gold Eagles than ever. If we take a look at the chart below, we can see a definite trend:
In 2010, the U.S. Mint sold 34.6 million Silver Eagles and 1.22 million Gold Eagles for a ratio of 28 to 1. Each year, the ratio has increased. Last year, the U.S. Mint sold a record 42.6 million Silver Eagles compared to 856,500 oz of Gold Eagles.
Thus, the Silver Eagles to Gold Eagles ratio increased to 50 to 1 in 2013. So far this year, the U.S. Mint sold 8.1 Silver Eagles and 116,000 oz of Gold Eagles. Investors are currently buying 70 Silver Eagles to every Gold Eagle.
It will be interesting to see how 2014 unfolds. As the Chinese continue to consume nearly 100% of the annual world gold mine supply, the paper precious metal trading exchanges will come under severe stress.
Supplies of physical gold and silver will become tighter as the global financial system weakens. In the future, as one metal suffers a shortage, I would bet my bottom silver dollar, investors will soak up supply of the other.
Time is running out for investors to protect their wealth in gold and silver.
The following is excerpted from The Money Bubble, by James Turk and John Rubino
“There are no markets anymore, just interventions.”
— Chris Powell, Gold Anti-Trust Action Committee
Once upon a time, a handful of countries sometimes described as “capitalist” claimed to operate on the principal that consenting adults should be free to buy, sell, build and consume what they wanted, with little interference or guidance from the authorities. The idea, derived from Adam Smith’s 1776 classic Wealth of Nations, was that all of these self-interested actions would in the aggregate form an “invisible hand” capable of guiding society towards the greatest good for the greatest number of people. Coincidentally, the political framework for such a society was envisioned the same year on the other side of the Atlantic, when Thomas Jefferson penned in the American Declaration of Independence that in addition to life and liberty, there was a third inalienable right for every individual – the pursuit of happiness. The resulting “market-based” societies were messy but brilliant, producing more progress in two centuries than in the previous 50.
But those days are long gone. After four decades of unrestrained borrowing, the developed world is in a constant state of near-collapse and governments everywhere feel compelled (or perhaps liberated) to tinker with markets, sometimes overtly and sometimes secretly, but of late with an increasingly heavy hand. The system that is evolving does not yet have a modern name but certainly looks like the central planning that failed so miserably for the Soviet Union and Social Democratic Europe in decades past. What follows is a brief overview of the manipulations that now dominate the global economy.
Artificially-low interest rates.
Interest rates are, in effect, the price of money and as such they’re a crucial signal to virtually everyone in every market. When rates are high, that’s an incentive to save, because the resulting yield is attractive. Low rates, meanwhile, are a signal that money is cheap and borrowing is potentially more profitable than saving.
Prior to the World War II interest rates were set mostly by supply and demand. When there were lots of productive uses for a limited supply of money, demand for it went up and interest rates rose, and vice versa. Market participants had a fair idea of what the economy was asking for and government generally let them respond to these signals. (The term “laissez faire,” French for “let [them] do,” is aptly used to describe this version of capitalism.)
When the Fed began playing a bigger role in the economy in the 1950s and 60s, it chose as its main policy tool the Fed Funds Rate, the rate at which it lent short-term money to banks. Long-term interest rates (i.e., the bond market) remained free to fluctuate according to the supply and demand for loans. But following the crisis of 2008 the Fed and other central banks expanded their focus from short-term rates to all rates, including long-term. Today, the Fed intervenes aggressively “across the yield curve,” pushing short rates down to zero and buying enough bonds to push long-term rates down to historically-low levels.
These interventions have preempted the market’s price-signaling mechanism, encouraging borrowing and speculation and discouraging saving…
Dishonest interest rates.
While governments have been actively depressing rates, the world’s major banks have been manipulating the London Interbank Offered Rate (Libor) for their own ends. Libor is the reference rate for trillions of dollars of loans world-wide. And in a scandal that is still escalating as this is written in late 2013, it has been revealed that the banks responsible for setting this rate have been arbitrarily moving it around and then trading on the advance knowledge of the movement, enhancing their profits and yearend bonuses. Other banks lied about the rates at which they were borrowing to make them appear less fragile during the 2008 financial crisis, misleading market participants as well as government regulators. Meanwhile, many of the loans based on sham Libor rates disadvantaged the entity on one side of the transaction, costing, in the aggregate, hundreds of billions of dollars.
Artificially-high stock prices.
Until very recently share prices, by general consensus, were set purely by market forces (though they were influenced somewhat by the Fed’s control of short term-interest rates and government tax and spending laws). Whether the market went up or down was not generally seen as a pressing policy matter for the federal government or central bank. Then in 1988 – presumably in response to the previous year’s flash-crash that had sliced about 30 percent from US stock prices in a single month – the Reagan Administration created the Working Group on Financial Markets to either prevent or manage such events in the future.
This shadowy organization came to be known as “Plunge Protection Team (PPT),” and is now thought by many to funnel government money into the market to boost share prices when it perceives the need. The origin of this idea goes back to 1989 when former Federal Reserve Board member Robert Heller told the Wall Street Journal that, “Instead of flooding the entire economy with liquidity, and thereby increasing the danger of inflation, the Fed could support the stock market directly by buying market averages in the futures market, thereby stabilizing the market as a whole.” In August 2005, Canadian hedge fund Sprott Asset Management released a report arguing that the PPT was indeed manipulating stock prices.
Cheap mortgages, inflated home prices.
For most of the 20th century, homes were bought with either cash or 30-year, fixed-rate mortgages. And because long-term interest rates were not set by the Fed, the price of money with which to buy a house was determined by the market. But after the 2008 financial crisis, when the Fed began forcing down long-term rates, cheap mortgages and rising home prices became government policy objectives. The Fed now buys mortgage backed bonds in addition to government bonds, which both lowers mortgage rates and funnels money into the mortgage market, generally making home loans easier to obtain. Here again, rising home prices are just a means to a positive wealth effect, which it is hoped will induce more borrowing and spending. And individuals are signaled by the market to buy the biggest house possible using the most aggressive mortgage possible.
Suppressed gold price.
We cover gold in much greater detail in Section IV, but for now suffice it to say that because the metal is a competing form of money, when it rises in dollar terms it makes the dollar and the dollar’s managers look bad. So for nearly two decades the US, along with several other governments and their central banks, has been systematically intervening in the gold market to push down its exchange rate to the dollar. They do this by covertly dumping central bank gold onto the market and instructing large commercial banks to sell huge numbers of gold futures contracts into thinly traded markets. Together, these secret machinations have held gold’s exchange rate far below where a free market would have taken it. Gold’s ability to signal market participants that inflation is rising and/or national currencies are being mismanaged is being short-circuited. As a result, market participants who might otherwise be converting those currencies into hard assets are not doing so.
All of the above.
The Exchange Stabilization Fund (ESF) was established in 1934 to enable carte blanche market intervention by the federal government, outside of Congressional oversight. As Dr. Anna J. Schwartz, at the time a Distinguished Fellow of the American Economic Association, explained in a 1998 speech, “The ESF was conceived to operate in secrecy under the exclusive control of the Secretary of the Treasury, with the approval of the President, [quoting here from the 1934 legislation] ‘whose decisions shall be final and not subject to review by any other officer of the United States’.”
The ESF now functions as a “slush fund” available to the Treasury Department for wide-ranging, frequently-secret market interventions. It provides “stabilization” loans to foreign governments. It influences currency exchange rates – including that of gold. It was used to offer insurance to money market funds. Most recently it was drained to provide the government some breathing room during the late 2013 debt ceiling impasse. As for the stock market, well, why not? Perhaps the ESF is the real – or at least another – Plunge Protection Team.
Distorted Signals and Lost Trust
What happens when market signals are distorted by the government? In a word, “malinvestment.” Factories are built that produce the wrong things, houses are bought that cost more than their owners can afford, bank CDs are cashed in to buy stocks just before a market correction, gold and other hard assets are converted to paper currency when they should be accumulated and held long-term. The market, in short, stops directing capital to its most productive uses and wealth creation grinds to a halt.
Along the way, people begin to notice that the markets they thought were more-or-less honest are being secretly manipulated for the benefit of others, and trust begins to erode. The next chapter explains what happens then.
Courtesy: John Rubino
Notes from LK: Below you can read an interview with the head of the precious metals department of ICBC (Industrial & Commercial Bank of China), the world’s largest bank by assets and market cap. In a way it’s like the other side of the memo from the Chinese Government on gold policy we published earlier. On one hand, you see the policy directives in the memo carried out in practice. On the other, you can detect that this is just what the policy makers want to hear, how it’s the bank’s proud mission to bring the country into a stronger position in the international capital arena. Note the way they see that international capital markets and the players are intricately related to gold. Whichever way, they aspire to be a global player with their own full set of world-class systems and infrastructure. Being the world’s largest bank, what can stop them?
Translated by LK in Hong Kong:
January 7, 2014
“In case of changes in the market environment, we must prepare to meet the different needs of innovative products and services.” Zhou Ming, head of the precious metals department for ICBC, summarizes.
International gold prices fell sharp on uncertainty of Fed monetary policy changes. Most participants in the gold market in 2013 have gone frightened. In charge of a leading precious metals business unit for the country, Zhou Ming has never allowed his team to be lost in confusion. Two years ago ICBC foresaw the possibility of large scale volatility in the gold market and started developing products, services and marketing to prepare for this. Hence, ICBC launched gold accumulation schemes, swaps, forward hedging, lease/financing, collateralized loans and other financial services ahead of time. Developing to ongoing investment and consumption needs of the market, which produced good business results. For retail and institutional investors his department also launched products that adapt to the market. In 2013, ICBC physical gold sales increased by more than 80% YoY, the growth rate of the entire line of business also grew more than 30% over the previous year.
The bank’s precious metals department has many natural advantages. With more than 300 million customers and a more than 17,000 points sales network, the rapid rise of it’s business isn’t surprisingly. More importantly, large banks have many operational advantages. Corporates have experience in trading on the spot market, while banks can participate in the international market through five lines of business available to them: physical dealing, trading, financing, leasing and wealth management. Additionally, international commodities business requires cross-border, cross-product, cross-market, on-shore/off-shore, exchange/OTC spot and futures trading capabilities. Compared to other institutions, banks have more all-round global network transaction capabilities. This is also why the precious metals departments are growing so fast in Chinese banks.
Zhou Ming’s confidence is not limited to this. For him, the growth of the precious metals business is not accidental. Aside from ICBC’s management forward-thinking and advantages from being a bank, it’s also because in China’s internationalization process banking institutions are required to play this role.
When the precious metals department was established, ICBC Chairman Jiang Jianqing said: “We have the ambition that ICBC becomes a world-class commercial bank in precious metals investment management.”
When serving as a general manager of Shanghai Industrial Investment (Holdings) Finance in Hong Kong, Zhou Ming experienced the Asian financial crisis, seeing the Hang Seng Index and the company’s shares tumble but couldn’t do anything about it. “A business manager under a planned economic system has no idea about financial crises in free economies”, he recalled, still feeling the fear. “It was frustrating and painful, when each blow came, no matter how you try yourself to face it, it ends up in defeat. it’s humiliating.” That taught him how slow and passive Asian capital markets are in the wider international landscape, and let him witness for the first time how miserable it is to be weak in the merciless international capital markets.
“Too few people take part in the actual Wall Street transactions. Too few understand the operations in this international game. Too few participate in the global flow of capital transactions. We didn’t know what was happening until after the facts. We were besieged and were only part of the losers.” Zhou Ming sighed. “I thought, one day China enters the international stage, we will need more people to participate in understanding the characteristics of capital flows, so we don’t have to be so passive.”
Now Zhou says, “I drive our traders to work on scale and quantitative problems of our platform for the possibility of taking part in international transactions.” In addition , ICBC has been introduced to Wall Street private equity and global financial transaction specialists, research models, product planning, and ways to analyse counter-party moves. Over the past year, our precious metals department has greatly benefitted and has become a radar through which to monitor markets.
Today, the establishment of the Shanghai Free Trade Zone has provided an additional stimulant for our department. “The State is building an open market right at our door step, which lets us test the water and practice before swimming. We will use this to learn some skills.” he said.
According to Zhou, ICBC’s precious metals department is working with HSBC, JPMorgan Chase, Brink, Metalor and other professional logistics providers, manufacturers and warehouse operators to communicate and learn about storage, transport, monitoring etc. If successful the ICBC precious metals department will have a a repository that is up to international standards for any insurance purposes in the FTZ in 2014.
This aside, Zhou Ming is also constantly working to expand his territories in the international area. In the first half of 2014, his department will have a trading exchange center in Hong Kong, to help settle with demands from Southeast Asia. “Because the USD can be used for settlement in Hong Kong, it is more direct and entirely on an international standard. This helps integrate the global trading capability of Hong Kong to supply a better internationalized product for South East Asia including China.”
For the future, Zhou Ming’s goals are clear and simple: to continue to build the precious metals “battleship”, heading towards international markets. “In 2013 China became the world ‘s largest gold producer and consumer, there is no reason for it not to have any voice in international price fluctuations.” Zhou Ming said, “This must be the aim of ICBC, to service the market and our customers competitively.”
Courtesy: Koos Jansen
Severe weather events, it would seem, are becoming more common. As natural weather patterns change, water distribution and supply systems must adapt… so they may experience significant change going forward.
I recently heard from Bill Brennan, Equity CIO at Summit Global Management – a company that specializes in investing in water.
He suggested three themes water investors should consider:
· Adaptations to water systems to handle changing weather patterns
· Improving water safety
· Managing storm water in urban areas
The northeastern United States was racked with freak snowstorms this winter that reached as far as South Carolina.
Hurricane Sandy is also still fresh in the minds of many residents of the Northeast as the largest hurricane recorded in the Atlantic. Sandy prompted an evaluation of water, sewer, and storm water systems. In New Jersey, the super-storm caused the state to spend $2.6 billion in repairs. The hurricane damaged over 100 drinking water facilities and sewage plants were damaged. The damage was worsened because of chronic underinvestment in infrastructure… especially for drinking water and for wastewater, which are reportedly in need of around $45 billion in investments over the next 20 years.
In New York and New Jersey, the storm caused 11 billion gallons of raw or partially untreated sewage to flow into the water supply. The sewage treatment plants were rendered inoperable.
As you can see, water systems in the Northeast simply were not adapted to the events that unfolded. If we see more of this kind of extreme weather activity, it will require more innovation and capital to meet the challenges.
In contrast to excessive precipitation in the Northeast, a severe drought is occurring in the western states. California has declared a “Drought of the Century” as rainfall is at less than 20 percent of normal and reservoirs are dwindling.
When changing, and more extreme, weather patterns hit water management systems that have been unchanged for decades – even centuries – adaptation is needed.
Arizona farmers have already begun to implement water conservation measures. They deploy laser technology in order to diminish runoff and keep field tables flat. Nevada has created a closed loop system where water from Las Vegas is recycled and returned to Lake Mead. California recently broke ground on the largest desalination plant in the Western hemisphere.
We should expect more sophisticated, resilient, and dynamic water management schemes to evolve – a primary trend to look out for within the space.
Recycling water for human consumption is an advanced field, and technology has allowed us to enjoy cheap, safe, and plentiful water for drinking, washing dishes, or brushing teeth. But there are still potential threats to drinking water quality, such as the chemical spills in Charleston, West Virginia at the beginning of 2014, or inflows of raw sewage into water supplies as we saw during Hurricane Sandy.
Pathogens and chemicals in the water are a serious danger to humans¸ and there are several new technologies that take advantage of the demand for high-quality water for human consumption.
The next generation of water systems is already deploying monitoring devices that will track multiple points for abnormalities and have the ability to immediately halt the flow in order to investigate and remediate a potential threat.
Nanotechnology sensors among other technologies are being used to identify problems that arise in order to quickly report them to an operator.
So we should look to improvements in technology and infrastructure to protect the quality of drinking water… Especially as weather patterns change, investments in infrastructure and technology to guarantee water safety could be another big trend.
Most people don’t consider the impact of storm water on urban areas, but rain that falls on urban areas can become an issue.
Because urban areas are covered with mostly impervious surfaces (like roads and parking lots), the amount of water that seeps into the ground is decreased. The water tends to go into nearby streams and channels, which can cause flooding and massive erosion of water beds. On top of that, the runoff water often contains trash, oil and rubber from cars, as well as fertilizer and pesticides from lawns and agriculture, and other pollutants.
Although states still dominate the investment picture for water, public-private partnerships have emerged that could allow some investors to take advantage of the need for systems to handle storm water runoff. Financial arrangements where water users pay for the services provided by storm water management structures could be the model for dealing with this issue.
Systems for managing, treating and distributing water are subject to change. Soon, they could be forced to adapt to irregular weather patterns. Modifying and upgrading existing structures, providing safe water for human use, and solving the problem of storm water runoff in urban areas could be a few big trends in water investing to look out for going forward.
Sprott Global take: I talked to Jason Stevens, an Investment Executive at Sprott Global Resource Investments Ltd.
“The highly-politicized water markets in the US are broken and extremely inefficient,” he said. “The added stresses of weather events such as droughts exacerbate water supply issues to our most critical industries. Making water investments now is exploiting what I believe to be an inevitable transition to less-subsidized, higher-priced water.”
Courtesy: Henry Bonner
The last 3 weeks have seen the macro fundamentals of the G-10 major economies collapse at the fastest pace in almost 4 years and almost the biggest slump since Lehman. Despite a plethora of data showing that ‘weather’ is not to blame, US strategists, ‘economists’, and asset-gatherers are sticking to the meme that this is all because of the cold on the east coast of the US (and that means wondrous pent-up demand to come). However, as the New York Times reports, for the earth, it was the 4th warmest January on record.
G-10 macro data is collapsing…
Must be the weather in the US, right?
For people throughout the Eastern United States who spent January slipping, sliding and shivering, here is a counter-intuitive fact: For the earth as a whole, it was the fourth-warmest January on record.
But this might be another surprise: Despite all the weather drama, it was not a January for the record books.
By the time analysts averaged the heat in the West and the cold in the East, the national temperature for the month fell only one-tenth of a degree below the 20th-century average for January. January 2011 was colder.
No state set a monthly record for January cold. Alabama, also walloped by the ice storms, came closest, with the fourth-coldest January on its record books.
The United States covers only 2 percent of the surface of the globe, so what happens in this country does not have much influence on overall global temperatures.
Brazil, much of Southern Africa, most of Europe, large parts of China and most of Australia were unseasonably warm in January, the National Oceanic and Atmospheric Administration reported Thursday. That continues a pattern of unusual global warming that is believed to be a consequence of human-caused emissions of greenhouse gases.
Even in the United States, more than a third of the country is in drought of varying intensity. Mountain snowpack in many parts of the West is only half of normal, portending a parched summer and a likelihood of severe wildfires.
But the cold weather in the East is being balanced, in a sense, by the bizarrely warm temperatures in the West. And that trend, too, is likely to continue.
The outlook over the next month is for continued above-normal temperatures in the West, the Southwest and parts of Alaska, as well as a continuation of the California drought, despite recent rains that have eased the situation slightly.
Can we finally put to bed the “weather” meme and perhaps, just perhaps, recognize that the global economy is slowing as the animal spirits exuberance of global central bank liquidity pump-priming has simply run its course and faces the reality of a debt-saturated, growth-stifled reality.
As the following publicly available paper notes, the years of 2.0% ‘trend’ growth for the US are over…
The United States achieved a 2.0 percent average annual growth rate of real GDP per capita between 1891 and 2007. This paper predicts that growth in the 25 to 40 years after 2007 will be much slower, particularly for the great majority of the population. Future growth will be 1.3 percent per annum for labor productivity in the total economy, 0.9 percent for output per capita, 0.4 percent for real income per capita of the bottom 99 percent of the income distribution, and 0.2 percent for the real disposable income of that group.
The primary cause of this growth slowdown is a set of four headwinds, all of them widely recognized and uncontroversial. Demographic shifts will reduce hours worked per capita, due not just to the retirement of the baby boom generation but also as a result of an exit from the labor force both of youth and prime-age adults. Educational attainment, a central driver of growth over the past century, stagnates at a plateau as the U.S. sinks lower in the world league tables of high school and college completion rates. Inequality continues to increase, resulting in real income growth for the bottom 99 percent of the income distribution that is fully half a point per year below the average growth of all incomes. A projected long-term increase in the ratio of debt to GDP at all levels of government will inevitably lead to more rapid growth in tax revenues and/or slower growth in transfer payments at some point within the next several decades.
There is no need to forecast any slowdown in the pace of future innovation for this gloomy forecast to come true, because that slowdown already occurred four decades ago. In the eight decades before 1972 labor productivity grew at an average rate 0.8 percent per year faster than in the four decades since 1972. While no forecast of a future slowdown of innovation is needed, skepticism is offered here, particularly about the techno-optimists who currently believe that we are at a point of inflection leading to faster technological change. The paper offers several historical examples showing that the future of technology can be forecast 50 or even 100 years in advance and assesses widely discussed innovations anticipated to occur over the next few decades, including medical research, small robots, 3-D printing, big data, driverless vehicles, and oil-gas fracking.
Amid weaker U.S. growth and volatility in capital markets, China stands out as a beacon in the minds of many investors. It is widely assumed that China will continue to grow at about 7% without interruption and will, in time, surpass the United States as the largest economic power in the world.
This China growth story is one that investors take for granted. But investors are in for a rude awakening when they realize how much of the China story is false and how quickly it may come unraveled.
There is evidence that Chinese growth figures are manipulated by bureaucrats to please the political leadership, but that is not the biggest problem with the growth story. Instead, the composition of growth and its non-sustainability are the Achilles Heel. Economic growth is the sum of consumption, investment, government spending and net exports. Major economies work to achieve a sustainable balance among these elements. For example, too much government spending may result in high burdens of debt or taxes, or too many exports may result in trade wars, and so on. A sustainable mix is what is needed for strong long-term growth.
China’s problem is an over-reliance on investment to the exclusion of consumption. Investment makes up 45% of Chinese gross domestic product compared with about 20% in the U.S. Investment can be sustainable if it results in improvements to productive assets such as ports, roads and other critical infrastructure. China’s problem is that much of its investment is wasted on white elephant projects such as empty cities, monumental train stations, and unused airports.
If reported GDP were adjusted for wasted investment, actual growth in China would be seen to be much lower today. If the costs of massive air pollution and other environmental degradation were also deducted, real growth would be even lower.
A frequently proposed solution to this wasted investment problem is for China to rebalance its economy away from investment toward more consumption as in the United States. But there are enormous obstacles to this. The first is that any reduction in investment would depress Chinese growth immediately while the benefits of increased consumption might only be achieved over long periods of time. The other problem is that Chinese citizens are reluctant consumers because of their need to save for retirement or health care due to the lack of a Chinese social safety net.
Also, Chinese workers are demographically dominated by those in their 40s and 50s who have the highest propensity to save, not spend. China has a shortage of younger people, who are more likely to spend, due to the “one child” policy that began in 1980. Thirty years after taking effect, that policy has depleted China of a large portion of its younger generation. China’s rebalancing effort would have been more effective around 2002 when the demographics were most favorable and before investment ran out of control into full-scale waste. That opportunity has now been lost.
Even China’s much vaunted export prowess will not be the engine of growth it was in the past because of low-cost competition for manufacturing and assembly jobs from even newer emerging markets such as Indonesia, Vietnam, Malaysia and the Philippines.
China on the verge of a financial collapse:
Finally, China is on the verge of a financial collapse of unprecedented magnitude. This is due to China’s policy of paying bank depositors low rates of interest in a manner similar to the U.S. Federal Reserve’s zero interest rate policy. These low rates send Chinese investors in search of higher yields elsewhere. Because of capital controls, Chinese citizens are not able to invest in foreign assets such as U.S. or Canadian stocks and bonds. The only investments available to most Chinese other than low-rate bank deposits are gold, real estate and so-called “wealth management products.” These wealth management products are offered by banks but are not guaranteed by them. Investor assets are pooled into the products and then invested in commercial projects with the proceeds shared among the investors.
The banks promise high returns on these products, which resemble the notorious collateralized debt obligations popular in the U.S. before the Panic of 2008. Actual performance on the wealth management products is below the promised returns in many cases. Banks cover this up by selling new products and using the proceeds to pay off the old ones. This is exactly how a Ponzi scheme operates.
Eventually some event such as a project failure or admitted fraud will start a panic in which investors demand that the banks redeem their wealth management products all at once. The banks will be unable to do so and will suspend redemptions on the products. Investors will claim that the products were backed by the banks but the banks will deny this. A run on the banks will commence that only government intervention and bailouts can contain. The result will be a general collapse in Chinese asset values for real estate, stocks and bonds as investors hoard cash, buy gold and move to the sidelines.
China’s growth is already overstated due to wasted investment and the hidden costs of pollution. Growth will slow even more as China tries and fails to move from investment to consumption in its growth composition. Finally, growth will collapse completely for a time, as financial panic grips the entire country.
Since China represents about 10% of global GDP, any problems in China will not stop there but will ripple around the world in dangerous ways. This could hit the U.S. in 2015, just as the U.S. debt and deficit problems begin to negatively impact our own economy. A continuation of the depression that began in 2007 is likely and a new more dangerous stage of the depression is possible.
Investors should be well-prepared for these scenarios with significant portfolio allocations to hard assets such as energy and transportation stocks, land, precious metals and fine art.
Courtesy: James Rickards
The credit card business is now the banking industry’s biggest cash cow, and it’s largely due to lucrative hidden fees.
You pay off your credit card balance every month, thinking you are taking advantage of the “interest-free grace period” and getting free credit. You may even use your credit card when you could have used cash, just to get the free frequent flier or cash-back rewards. But those popular features are misleading. Even when the balance is paid on time every month, credit card use imposes a huge hidden cost on users—hidden because the cost is deducted from what the merchant receives, then passed on to you in the form of higher prices.
Visa and MasterCard charge merchants about 2% of the value of every credit card transaction, and American Express charges even more. That may not sound like much. But consider that for balances that are paid off monthly (meaning most of them), the banks make 2% or more on a loan averaging only about 25 days (depending on when in the month the charge was made and when in the grace period it was paid). Two percent interest for 25 days works out to a 33.5% return annually (1.02^(365/25) – 1), and that figure may be conservative.
Merchant fees were originally designed as a way to avoid usury and Truth-in-Lending laws. Visa and MasterCard are independent entities, but they were set up by big Wall Street banks, and the card-issuing banks get about 80% of the fees. The annual returns not only fall in the usurious category, but they are returns on other people’s money – usually the borrower’s own money! Here is how it works . . . .
The Ultimate Shell Game
Economist Hyman Minsky observed that anyone can create money; the trick is to get it accepted. The function of the credit card company is to turn your IOU, or promise to pay, into a “negotiable instrument” acceptable in the payment of debt. A negotiable instrument is anything that is signed and convertible into money or that can be used as money.
Under Article 9 of the Uniform Commercial Code, when you sign the merchant’s credit card charge receipt, you are creating a “negotiable instrument or other writing which evidences a right to the payment of money.” This negotiable instrument is deposited electronically into the merchant’s checking account, a special account required of all businesses that accept credit. The account goes up by the amount on the receipt, indicating that the merchant has been paid. The charge receipt is forwarded to an “acquiring settlement bank,” which bundles your charges and sends them to your own bank. Your bank then sends you a statement and you pay the balance with a check, causing your transaction account to be debited at your bank.
The net effect is that your charge receipt (a negotiable instrument) has become an “asset” against which credit has been advanced. The bank has simply monetizedyour IOU, turning it into money. The credit cycle is so short that this process can occur without the bank’s own money even being involved. Debits and credits are just shuffled back and forth between accounts.
Timothy Madden is a Canadian financial analyst who built software models of credit card accounts in the early 1990s. In personal correspondence, he estimates that payouts from the bank’s own reserves are necessary only about 2% of the time; and the 2% merchant’s fee is sufficient to cover these occasions. The “reserves” necessary to back the short-term advances are thus built into the payments themselves, without drawing from anywhere else.
As for the interest, Madden maintains:
The interest is all gravy because the transactions are funded in fact by the signed payment voucher issued by the card-user at the point of purchase. Assume that the monthly gross sales that are run through credit/charge-cards globally double, from the normal $300 billion to $600 billion for the year-end holiday period. The card companies do not have to worry about where the extra $300 billion will come from because it is provided by the additional $300 billion of signed vouchers themselves. . . .
That is also why virtually all banks everywhere have to write-off 100% of credit/charge-card accounts in arrears for 180 days. The basic design of the system recognizes that, once set in motion, the system is entirely self-financing requiring zero equity investment by the operator . . . . The losses cannot be charged off against the operator’s equity because they don’t have any. In the early 1990?s when I was building computer/software models of the credit/charge-card system, my spreadsheets kept “blowing up” because of “divide by zero” errors in my return-on-equity display.
A Private Sales Tax
All this sheds light on why the credit card business has become the most lucrative pursuit of the banking industry. At one time, banking was all about taking deposits and making commercial and residential loans. But in recent years, according to the Federal Reserve, “credit card earnings have been almost always higher than returns on all commercial bank activities.”
Partly, this is because the interest charged on credit card debt is higher than on other commercial loans. But it is on the fees that the banks really make their money. There are late payment fees, fees for exceeding the credit limit, balance transfer fees, cash withdrawal fees, and annual fees, in addition to the very lucrative merchant fees that accrue at the point of sale whether the customer pays his bill or not. The merchant absorbs the fees, and the customers cover the cost with higher prices.
A 2% merchants’ fee is the financial equivalent of a 2% sales tax – one that now adds up to over $30 billion annually in the US. The effect on trade is worse than either a public sales tax or a financial transaction tax (or Tobin tax), since these taxes are designed to be spent back into the economy on services and infrastructure. A private merchant’s tax simply removes purchasing power from the economy.
[W]hen anyone brings up Tobin taxes (small charges on every [financial] trade) as a way to pay for the bailout and discourage speculation, the financial services industry becomes utterly apoplectic. . . . Yet here in our very midst, we have a Tobin tax equivalent on a very high proportion of retail trade. . . . [Y]ou can think of the rapacious Visa and Mastercharge charges for debit transactions . . . as having two components: the fee they’d be able to charge if they faced some competition, and the premium they extract by controlling the market and refusing to compete on price. In terms of its effect on commerce, this premium is worse than a Tobin tax.
A Tobin tax is intended to have the positive effect of dampening speculation. A private tax on retail sales has the negative effect of dampening consumer trade. It is a self-destruct mechanism that consumes capital and credit at every turn of the credit cycle.
The lucrative credit card business is a major factor in the increasing “financialization” of the economy. Companies like General Electric are largely abandoning product innovation and becoming credit card companies, because that’s where the money is. Financialization is killing the economy, productivity, innovation, and consumer demand.
Busting the Monopoly
Exorbitant merchant fees are made possible because the market is monopolized by a tiny number of credit card companies, and entry into the market is difficult. To participate, you need to be part of a network, and the network requires that all participating banks charge a pre-set fee.
The rules vary, however, by country. An option available in some countries is to provide cheaper credit card services through publicly-owned banks. In Costa Rica, 80% of deposits are held in four publicly-owned banks; and all offer Visa/MC debit cards and will take Visa/MC credit cards. Businesses that choose to affiliate with the two largest public banks pay no transaction fees for that bank’s cards, and for the cards of other banks they pay only a tiny fee, sufficient to cover the bank’s costs.
That works in Costa Rica; but in the US, Visa/MC fees are pre-set, and public banks would have to charge that fee to participate in the system. There is another way, however, that they could recapture the merchant fees and use them for the benefit of the people: by returning them in the form of lower taxes or increased public services.
Local governments pay hefty fees for credit card use themselves. According to the treasurer’s office, the City and County of San Francisco pay $4 million annually just for bank fees, and more than half this sum goes to merchant fees. If the government could recapture these charges through its own bank, it could use the proceeds to expand public services without raising taxes.
If we allowed government to actually make some money, it could be self-funding without taxing the citizens. When an alternative public system is in place, the private mega-bank dinosaurs will no longer be “too big to fail.” They can be allowed to fade into extinction, in a natural process of evolution toward a more efficient and sustainable system of exchange.
Courtesy: Ellen Brown