Commodity Trade Mantra

Gold Fix Demise May Free Gold’s Price To Rise

Gold Fix Demise May Free Gold’s Price To Rise

Gold Fix Demise May Free Gold’s Price To Rise

Today’s AM fix was USD 1,292.00, EUR 934.67 and GBP 768.32 per ounce.
Yesterday’s AM fix was USD 1,289.75, EUR 930.02 and GBP 767.07 per ounce.

Gold fell $0.50 or 0.04% yesterday to $1,296.10/oz. Silver slipped $0.10 or 0.51% yesterday to $19.49/oz.

The gold price drifted lower overnight in Asian trading and settled just above the $1,290 level as markets await the conclusion of the U.S. Federal Reserve’s 2 day FOMC meeting later today. The Fed is expected to announce that it will continue its monthly tapering of bond purchases by another $10 billion this month, a move which would signal continued belief by the Fed in a U.S. economic recovery.

The gradual removal of monetary stimulus is viewed as negative for gold as it tenuously indicates that U.S. interest rates and economic activity may normalise over the medium term.

However, the gold price is continuing to be supported by ongoing geo-political tensions from Ukraine and Russia. Yesterday, the EU joined the U.S. in introducing further economic sanctions against various Russian companies and persons, a move which Putin vowed to retaliate against.


Silver in U.S. Dollars, 5 Years – (Thomson Reuters)

Deutsche Bank Departs London Fixings On Tuesday 13th May

German banking giant, Deutsche Bank, announced yesterday that it will be resigning from both the London Gold Fixing and London Silver Fixing panels, and that it is withdrawing without having found a buyer for either of its seats on the respective panels. According to informed sources, the Bank’s last day as a member of the Fixings is Tuesday, 13th May.

While Deutsche’s resignation was expected and there had been signs that it was struggling to find  buyers, the news is noteworthy in that by giving only two weeks’ notice, the bank’s departure is now imminent, and the worst case fear for the other participants seems to have now been borne out, namely that prospective buyers of the seats have been frightened off by the growing regulatory investigations into the nature of the fixings and additionally, up to 20 commercial lawsuits which are alleging that the Fixing process is conducive to the manipulation of gold and silver prices.

When Deutsche departs, this will leave only four members, namely, Barclays, HSBC, Société Générale (SocGen) and Scotiabank, and only two members for the silver fixing, HSBC and Scotiabank. SocGen currently chairs the Gold Fixing, while the Silver Fixing is currently chaired by Scotiabank. The mechanics of the Fixing process are described here.

The gold and silver fixings are actually organised through UK limited liability companies of which the member investment bank traders are directors. There are five directors and five alternate directors of “The London Gold Market Fixing Limited” and three directors and three alternate directors of “The London Silver Market Fixing Limited”. When Deutsche resigns from the two companies, it is actually Deutsche’s director and alternate director to the two companies who will be resigning, namely Matthew Keen and James Vorley.

The Fixings are conducted twice daily at 10am and 3.30pm London time and are used widely by all participants in the precious metals industry for benchmarking prices and valuations and also as trading price reference points. In fact, the prices that GoldCore quotes each morning in our daily commentaries are the London fixing prices.

Earlier this year on 16th January, German financial regulator BaFin stated that possible manipulation of currency and precious metals markets could be more serious than the manipulation that has already been proven in the Libor rigging scandal. Interestingly, the next day on 17th January, Deutsche Bank announced that it was withdrawing from both the gold and silver fixings in what it called “a scaling back of its commodities business”.

It was then thought that Deutsche would sell its two seats to other investment bank buyers, the expectation for the gold seat was that Standard Bank of South Africa would acquire it, especially since Standard has recently agreed to sell 60% of its global markets division to Chinese banking giant ICBC, which would have given ICBC a ready-made route into the London gold market.

UK financial regulator, the Financial Conduct Authority (FCA), has also been adding to anxiety for the fixing banks, as it was reported last week that the FCA recently visited SocGen’s offices in London to sit in on the Fixing calls with SocGen’s precious metals traders, and that it intends to make similar visits to the trading floors of other fixing members.

Officially, Deutsche stated yesterday that it did not sell its seat in the gold fixing due to a lack of agreement on terms, but given that the last seat at the gold fixing to be sold was by NM Rothschild to Barclays in 2004 for somewhere in the region of £1 million, this type of price level would not seem to be an obstacle for a large investment bank buyer.

Over the last few months, there does not appear to have been any buying interest whatsoever in Deutsche’s silver seat, which begs the question, will the demise of the Silver Fixing come first and would this in turn undermine the rationale for retaining the Gold Fixing?

Now that there are significant regulatory and litigation spotlights on the Fixings, there is a real possibility that it may signal the beginning of the end for this historic price discovery process.

How this would affect gold and silver prices is not known, however, if there is found to be any basis to the price manipulation allegations, the removal of such manipulation would be expected to allow gold and silver prices to move to higher, to more natural price levels.

 

Courtesy: Mark O’Byrne via Goldcore

Why Gold and Silver Could Outperform Every Other Asset Class in 2014

Why Gold and Silver Could Outperform Every Other Asset Class in 2014

Why Gold and Silver Could Outperform Every Other Asset Class in 2014

After almost a three year bear market in gold and silver it’s safe to conclude that most of precious metal bears have sold out and moved on.  As gold and silver prices corrected sharply over the past three years, the chorus of bearish sentiment in the mainstream press has become endemic, thus setting the stage for a powerful and unexpected contra rally.

What will set off an explosive rally in precious metals remains to be seen but there are plenty of potential triggers including war in the Ukraine or South Korea as well as the significant financial risk of collapsing asset bubbles engineered by the extremely loose monetary policies of the world’s central banks.

Here’s some of the most interesting recent commentaries on why 2014 could be a big year for gold and silver.

While every journey does begin with the first step, we need more evidence than a minor rally day to declare that a bull market has arrived. For the SPDR Gold Trust ETF (ticker: GLD), the April 24 rally was not very remarkable other than the fact that the day started with a loss and ended with a gain.
Now let’s talk about what it was rather than what it wasn’t.

For starters, it was an encouraging hold of short-term support from March. And the failure to set a lower low for the current two-month decline also falls on the bullish side of the ledger.

But more importantly, it was a suggestion that prices will not travel to the bottom of a giant year-long trading range again. In other words, any further strength now would tell us that investors are ready to buy. They will not wait for “better” prices to buy at the bottom of the range, and that means a shift in sentiment for the better.

Finally, the gold market has a “golden cross” in place. This is a condition where the 50-day average crosses above the 200-day average, and while it is really a stock market indicator, the macro look and feel are the same to me. After a long decline and period of sideways movement, this is the market’s first sign it has had enough healing. As long as the sideways trading range is not so long that the averages are completely flat, I think the signal is worthy of respect.

We can also we look at rising momentum indicators as bullish. Weekly charts show the relative strength index (RSI) setting higher lows between June and December even as prices set equal lows. This means the bears were tired as 2013 ended, and the fact that this indicator continued to rise this year suggests the bulls are starting to wake up.

Silver also had a bullish short-term reversal last week, but it has a lot more technical damage to repair. It does not have a moving average golden cross in place, and has already fallen rather close to its previous major lows from last year. Generally, that’s not a good sign, but in this case it’s not so clear cut.

When we look at the bigger picture using the iShares Silver Trust (SLV), we will see something really interesting. Recall 2010, when both gold and silver shot higher, but silver moved at a much faster pace than gold did. On the charts, we can see the technical launching point and breakout in August of that year.

As we see in many markets that appear to be bubbles, with such steep gains and ever-accelerating trends, the “bubble” part of the rally is often completely erased before conditions stabilize and then improve. Silver’s rally is now erased, which means the market is likely washed out and left for dead. Even so, there is a bullish RSI condition in place for the white metal, just as there is for gold.

 The Long Goodbye – by Andy Xie

The recent tumbling of Internet and biotech stocks may indicate that the speculation in such stocks has peaked. But, unlike in 2000, the bursting will occur in slow motion. The financial market structure has radically changed in the past 15 years. Too many money managers have a one-sided incentive to long such stocks.

The global financial system has experienced one bubble after another because major central banks have kept monetary policy loose. Prolonged loose monetary policy has made the financial system extraordinary large relative to the real economy. This change forces central banks to respond to negative shocks, like the bursting of a bubble, from the financial system. Such responses make the financial system even bigger. This vicious cycle explains why speculation has become such a powerful force.

A bubble cannot expand forever, even in an environment of loose monetary policy. The balance between fear and greed can tip over when the price of an asset becomes too high, like Internet stocks now relative to the average. The subsequent deflating bubble, in a continuing environment of loose money, just shifts air into other assets.

The talk of monetary tightening in the United States or China will not be followed up with strong enough actions. Real interest rates will remain negative until another crisis, like high inflation or hyperinflation or political crisis, force the hand.

Gold is the safe asset in today’s environment. As paper currencies lose credibility, the demand for gold will surge. The alternative digital currencies are fool’s good, really scams to take advantage of people’s fear over the potential collapse of paper currencies.

Two changes in the past 15 years have made bubble formation a constant feature of financial markets around the world. The inefficiencies in capital allocation and income redistribution to finance are the main reason for today’s sluggish global economy.

At the macro level, globalization has made inflation slow to emerge, as multinational companies can shift production around the world in response to cost pressure. This force has given central banks more room in increasing money supply without facing the inflation consequences for years. Hence, central banks around the world have become more active in response to economic fluctuations. The consequence is a rising ratio of money supply or credit to GDP. By definition, this means a bigger and bigger financial system, which needs more and more income to survive.

The real economy, as the previous analysis indicates, can only bear so much. Bubble formation has become central to supporting a bloated financial system. A large and bubbly financial system is unstable. Its periodic collapse brings down the economy, which triggers more monetary stimulus. Hence, constant monetary stimulus and an ever-expanding and bubbly financial system have formed a vicious cycle.

What’s Up With Gold and Silver? (Market Anthropology)

Anecdotally, we are seeing and hearing from those anxiously long the precious metals sector and contentiously short. With gold and silver down sharply in the early morning session – then reversing violently higher, the emotional spectrum in the market is likely diverged at or near another extreme. Over the past 10 months, both bulls and bears alike have been waiting for the next leg to commence. Instead, the market has played the jester – traversing a narrowing range and taking turns at frustrating both sides.

When will the argument resolve itself ?

Although it’s felt like a standing room only performance of Waiting For Godot, we expect long-term yields still hold the key to the next chapter for precious metals and the broader market story. We continue to view the move in 10-year yields as historically stretched to a relative extreme (see chart), a notion apparently lost on many participants as the Fed tapers their way to the end of QE and through an esoteric Fed cycle.
Just this week we saw that a Bloomberg survey of 67 economists unanimously expected 10-year yields to rise over the next six months (see Here). From a contrarian point-of-view, this should wake up participants that underlying sentiment is dangerously listing towards one side and the downstream and kinetic effects could be severe in many markets. The ratio chart below depicts the relationship between gold and 10-year yields, which as we noted last December had also reached a historic extreme. If and when long-term yields breakdown, we suspect a much stronger tailwind to develop behind precious metals.

As the Nikkei was breaking down at the start of the 1990’s, risk appetites changed and developed a palette for the Nasdaq. After the Nasdaq cracked going through the Millennium, investors turned to precious metals. The cycle can also come full circle, as we believe the performance and seasonal presentments of the current risk du jour describes. As the biotech index now turns down just past its zenith, we expect silver and the precious metals sector to begin making their way materially out of the trough they have trended towards over the past three years.

The Reformed Broker

Jeff Gundlach looks at the gold market. He’s not a big gold guy, but says that if you’ve held it this long (and through this much pain), “for god’s sake don’t sell it here!” He thinks the holders who remain are the quintessential, proverbial “strong hands” and that gold miner equities are completely underpriced for the potential of the metal running back up again. He’s more positive on commodities now in general, given how uninterested the investment community seems to be.

Courtesy: Goldandsilverblog

Silver: The World’s Most Undervalued Asset

Silver: The World's Most Undervalued Asset

Silver: The World’s Most Undervalued Asset

First off, it is pretty audacious to label any investment asset as the world’s cheapest when you consider the implications of that claim. Most of the world’s investors are value oriented, always on the prowl to find undervaluation and if they could identify the single most undervalued investment opportunity, it would only be a matter of time before they descended upon it. Simply put, if you could identify the most undervalued investment asset in the world that would be another way of saying you had identified the world’s best investment opportunity.

The next step would be to back up any such claim with straight forward reasoning and facts to substantiate any claim of extreme undervaluation. That’s the purpose of this article, namely, to show why I believe silver is the cheapest investment asset to own and that it is likely destined, therefore, to be the best investment opportunity over time. The only caveat is one of time. It would be unrealistic to assume that if you were able to identify the cheapest investment asset in the world and purchased it that you would be instantly rewarded. If the whole world mispriced something, it is unlikely the undervaluation would be corrected the instant you bought it; give it time, say five to ten years.

I’m not going to speak today about silver’s undervaluation in the ways unique to silver, such as it being at or below its primary cost of mine production or of how scare and rare it is, particularly in dollar terms, or how much it has dropped from its price highpoint of three years ago. Certainly, one could establish whether silver was undervalued by such measures, but that would not be the way to determine if silver was the most undervalued investment asset in the world. The only way to determine what the world’s most undervalued asset might be is by comparing all assets to each other. In other words, you can only declare any asset to be the most undervalued by relative price comparison.

Fortunately, a relative comparison by price is not a difficult thing to do. Instead, trying to figure out why I didn’t see this sooner is more difficult to answer. But in my defense, I discuss silver’s relative valuation to gold on a non-stop basis. After all, silver and gold are as connected as love and marriage or a horse and carriage; it’s hard to conceive of a better relative comparison. So let’s start with gold and silver. It is said that a picture is worth a thousand words, so let me see if I can spare you some unnecessary verbiage. For the sake of uniformity, let me present silver’s relative valuation as it is usually depicted, namely, by dividing silver’s price into gold’s price and stick to that format in the examples that follow. Remember, the higher the ratio, the more undervalued silver is to the item depicted. These charts cover the last three years or so.

 

Here’s silver compared to platinum;

 

Silver compared to palladium;

 

Silver compared to copper;

 

Silver compared to crude oil (West Texas Intermediate);

 

Silver compared to the Dow Jones Industrial Average;

 

Silver compared to the US dollar Index;

 

Silver compared to the 10 year US Treasury note (interest rates);

 

Remember, the higher the relative price ratio, the more undervalued is silver. I’m not intentionally leaving out any other comparisons and would include real estate if I knew of a chart. I believe silver would show up as generally the most undervalued if you included all other commodities. My point is simple – on a relative basis, silver is the cheapest asset of all. And to my mind that makes it the asset offering the highest prospective gains for the future.

I’m not trying to trick anyone in any way – this is as straight forward as it gets. As I indicated earlier, I’m kind of mad at myself for not writing about this before now. And just because it’s as simple as pie that doesn’t invalidate the approach. About the only thing I haven’t addressed is how silver got to be the most undervalued investment asset in the world. I suppose, if there were some obvious and compelling legitimate explanation for why silver should be so undervalued relative to everything else, perhaps the undervaluation would be widely understood and justified. But there is no such justification.

The best thing about silver’s extreme undervaluation is that the reason for it is as clear as is the undervaluation itself; not in terms of legitimacy, but certainly in terms of clarity. As I have reported recently and for years, COMEX silver has the largest concentrated short position of any traded commodity. Eight traders, led by JPMorgan, are responsible for silver being the most undervalued asset in the world. The world’s largest concentrated short position should logically result in the world’s most undervalued asset. I think this is good news because it would be impossible for me to show conclusively that silver was the cheapest investment asset of all without providing a definitive explanation for the unprecedented undervaluation.

Of course, I suppose a rejoinder to silver’s compelling undervaluation leading to eventual outstanding investment performance might be if JPMorgan and the other commercial crooks on the COMEX were able to continue to manipulate the price indefinitely thru additional short contracts. While this can extend silver’s undervaluation in terms of time, it cannot last forever. Additional paper short sales by JPM and the crooks will blow up in their faces at some point or the COMEX will shut down. That’s because selling additional paper contracts short will not satisfy physical demand in excess of physical supply. That day must come, for no other reason than silver is the cheapest asset in the world.

That is not to say that silver can’t get even more undervalued in the short term, but isn’t this what investment is all about? Is it not the universal goal of all investors to seek out the most undervalued assets and try to avoid the most overvalued sectors?

As must be expected, silver didn’t get to be the cheapest investment asset in the world without price pain and suffering. It is guaranteed that whatever might be the world’s most undervalued asset only got to that point because it was overlooked and unappreciated or loathed or manipulated. There is no way the world’s most undervalued asset could achieve that status through positive investment returns. By definition, the cheapest investment asset in the world had to have horrid price performance to get to that point. It’s good news that the reason in silver’s case was due to deliberate price manipulation because that manipulation must end at some point.

Also good news is the fact that silver is no stranger to being the best performing asset in the world, as was the case most recently up through the price highs of 2011. The reason silver was the very best investment asset was because it had formerly been incredibly undervalued before that price run. It is said that history doesn’t repeat itself, but in the case of silver, I don’t see how that can be avoided. In more ways than not, silver today reminds me of the time when it traded under $5 per ounce. As was the case back then, the thought that it might eventually climb more than ten times in value was widely disbelieved and openly scoffed at. That’s because silver was the most undervalued asset in the world, both then and now. If you didn’t catch the first run, you’ve just been given a second chance.

And it is also interesting that silver is registering as the most undervalued investment asset precisely at the same time when there is more total investment net worth and buying power in the world than ever before. The assets in hedge funds alone are now at a record $2.7 trillion; 1 percent of which ($27 billion) is more than the value of all the silver bullion in the world (if it could be bought). The 100 million oz of new silver available for investment annually would take only one-tenth of one percent ($2.7 billion) of hedge fund assets. Unless hedge funds have stopped looking for undervalued assets, I can’t help but feel that’s a set up akin to a lit match and a barrel of dynamite.

Don’t be confused by the simplicity of this presentation. Comparing the relative price of all investment assets is the only objective way to determine which is the most undervalued. Right now, on that objective basis, silver is the cheapest investment asset in the world. I feel fortunate to have made this observation and even more fortunate that it doesn’t conflict in any way with anything I’ve written previously. I’ll probably make this article public (sometime next week) after subscribers have had a chance to digest it. To me, it’s a big deal.

 

Courtesy: Ted Butler via Silverseek

Prospects For Gold And Silver From A Russian Point Of View

Prospects For Gold And Silver From A Russian Point Of View

Prospects For Gold And Silver From A Russian Point Of View

One of the biggest problems for the West, the US in particular, is its increasingly parochial perspective from the narrowest of lenses,  fully colored by the elite’s use of its main propaganda machine, the Maintstream Media.  It will not work for people to expect more from their government, rather, people have to demand and expect more from themselves, for in the end, people will discover all they really had to rely upon was themselves and failed to do so.

All of the information one needs to make more enlightened decisions is out there. One has to change their broken habits of spoon-fed expectations from local news and take a more active role in seeking the truth.  In a nation that relies upon a police state, increased militarization, and NSA [STASI] spying on its docile population, one cannot expect to hear truth, only lies, and the Obama administration is certainly delivering them.

Ask yourself, what is your impression of Russia, of Putin?  Then, consider the following information about both.  Never in the history of the world have [mostly] Western central bankers issued anything but worthless paper currency, backed by nothing, controlled by unelected bureaucrats, and none beholding  to nor responsible for citizens of a nation, your neighbors and everyone you may know.   This is the world in which most of you live without challenging it.  Others, outside of the Western sphere of central banks, with a firm grip on their respective governments, refuse to remain a victim of the West’s inflationary degradation via fiat currencies and the rot-from-within they generates.

Who has been the champion prodder of the Ukrainian situation?  The United States, led by its teleprompter-reading corporate president, Barack Obama.  What has he done? Threatened economic sanctions, provided neo-Nazi thugs to continue to stir unrest, steal, or remove, if you prefer, all the Ukrainian gold in the middle of the night, and drain the country of billions of dollars, transferred to Swiss banks.  Are any of these moves in the least bit constructive, let alone justifiable?

Putin’s response?   Aggression to match aggression?  No.  Just patience, waiting as events that are doomed to fail play out.  While Obama does what he can to stir up a hornets nest in an area of the world the US has no business in interfering, Putin is allowing Obama to take as much political rope as he needs to hang himself.  In the meantime, Putin is busy putting together deals with other countries, and its natural gas deal with China in the works will be a game-changer for Russia.   All of the deals made and those in process will bring income to Russia as a nation.  What kind of income?

More rubles, some yuan, maybe even some gold.  Totally absent is the use of the dollar as the disappearing world reserve currency.  Putin is taking his job of running a country seriously and responsibly.

Putin spurns Western central banks and continues to strengthen the ruble.  He makes deals with other natural resource-rich countries.  Obama invades oil-rich countries. While Obama pushes for war on the other side of the world with Syria and Ukraine, Putin is busy making deals on the other side of his world with Obama’s ignored neighbors, Mexico and Latin America.  While Obama allows the Fed and Wall Street to continually suppress and disparage the gold market, Putin is building Russia’s gold reserves.  No fiat ruble over there.

What has Obama done to help strengthen the US financially?  Nil, and to the contrary, he has increased government spending, with no means of ever repaying it, and he has worsened the plight of millions and millions of Americans through his enrich-insurance-companies scheme at the expense of leaving people without affordable insurance coverage.

Most Americans have never heard of Russia’s Gazprom, yet it dwarfs Exxon and Mobil in size.  In anticipation of Western sanctions, Gazprom secured natural gas deals with China. If Gazprom never sold another energy unit of natural gas to the West, its bottom line will continue thrive with its natural gas sold to the East.  Further, Gazprom will now only sell their product using rubles, yuan, and gold, no petrodollars allowed.

The Russian banking system has responded to the West’s petty and of no-effect sanctions by raising a one-finger salute to the West.  Russian banks have stopped using the dollar and have adapted total reliance upon its own ruble, intent on having the ruble become a part of any new global currency.  US banks continue to entrap citizens with debt-forever fiat.  Russia has the second largest gold reserve in the world.  US is the highest debtor nation in the entire world.  The US has always had a fondness for being number 1 in everything.

The fact that Russia has rejected the dollar in every way, coupled with another fact that it will only transact its gas and oil trade in the ruble will have an impact on the US and the West more than any sanctions Obama can ever hope to [under]achieve.  As a  consequence of pushing Russia away from the [totally failed] Western banking system, the US stands to lose trillions of fiat $ in return.  It is not just Russia.  All of the other BRICS nations are following suit.  The US and the central banking system is committing seppuku, [hari kari], financial [self-imposed] disembowelment.

Still think of Russia as an “evil empire?”  Here is a quote from one of Russia’s members of Parliament on the US and its fiat:

“The dollar is evil. It is a dirty green paper stained with blood of hundreds of thousands of civilian citizens of Japan, Serbia, Afghanistan, Iraq, Syria, Libya, Korea, and Vietnam. Our national industrial giants will not suffer any losses if they choose to make contracts in Rubles or other alternative currencies. Russia will benefit from that. We should act paradoxically when we deal with the West. We will sell Rubles to consumers of our oil & gas, and later we will exchange Rubles for Gold. If they do not like this, let them not do this and freeze to death. Before they adjust, and this will take them three of four years, we will collect tremendous quantities of Gold. Russian companies will at last become nationally oriented and stop crediting the economy of the United States that is openly hostile to Russia.”    

Source: Izvestia newspaper

What of the US ally Germany?  Guess where Germany will turn when push comes to shove?  East!  It has vastly important financial ties with Russia.  Germany’s ties to the US?  Mostly fiat and highly objectionable NSA tentacles covering the country.

Israel.  Surely the staunchest US ally?  Well, it turns out that the US worsening of events in Ukraine are a threat to Israeli security.  Israel has its own floating Tamar natural gas platform, and it has made a deal with Gazprom to export the liquefied natural gas.

How much of any of this has anyone read or heard about from government-controlled mainstream media?  Not a peep, not a sentence.  The elites want US citizens to remain dumbed down, and US citizens are complying in utter ignorance and steadfast refusal to consider any alternative news sources.  Reliance upon the total control over the corporate and bankrupt federal government’s newspeak is the elite’s goal.

At the outset, we said people need to expect more from themselves and take more responsibility for their own lives.  Reliance upon any government is a trap from which there is no escape.

We have not even covered all that can be covered on Russia and Putin, or Obama and the federal government, for that matter.  We have not even touched China, India, the growing BRICS nations as a power unto themselves, totally outside of and separate from the self-toppling United Sates.

The acronym BRICS brings to mind the story of the Three Little Pigs, making houses of straw and twigs that failed, [fiat], with the safest being the one built of brick.  The BRICS are using a lot of gold in building their financial ties together.

None of this addresses timing, but the message is clear:  Financial integrity and strength is relying upon gold, in some large degree, as a standard, at least indirectly.  The message should be the same for us all who endeavor to withstand the inevitable fall-out from fiat currencies destroying the Western financial system.  The East, parts of the Middle East, and even Central and South American countries are accumulating gold.  There is no concern about gold going lower or even not going higher, for now.  The end-game is not the short-term price, it is for where gold will seek its natural price level once freed from Western central bankers and to not be caught holding nothing but value-lost paper.

On a side note, the elites are not stupid.  It is likely that they may even be orchestrating the demise of the Federal Reserve Note “dollar.”  The direction may have been intended to replace the “dollar” with another fiat issue, like an SDR, [Special Drawing Rights], to be issued by an all-controlling, non-elected or representative government, like the BIS, [Bank for International Settlements], or some similar elite organization.  What was not anticipated, during all the decades of planning, was the rise of the East and the use of gold as a measure of currency control.

Last week could have been an important anchor for a turning point in gold and silver. The comments on the weekly chart cover a lot of ground.  What can be added are the observations labeled 4 and 5.  Both are directed at the level of volume.   The area marked 4 shows increased volume as price rallied.  On the current correction, volume has dropped off.   This tells us that the selling pressure is not there, as it used to be.

The gold price is also respecting, albeit loosely, the half-way correction area between the recent swing low and swing high.  In somewhat of a down market condition, that is a good showing.  Gold’s failure to decline to the lower channel line is an indication of strength.

GC W 26 Apr 14

The daily gold chart is confirming observation made on the weekly, but with more detail. What was not covered in the chart comments was the thin line at the half-way measure of the down sloping channel.  Whenever price can hold the half-way point of anything, it is taken as a relative measure of strength

GC D 26 Apr 14

Silver is a test of one’s patience.  All purchases made at current, even slightly higher, prices will be viewed as gifts and wise moves sometime in the future, be it later this year or into 2015/2016.  When silver finally does rally away from its [very constructive] support zone, purchases made at any higher price in the past few years will look like bargains.

The way the charts are setting up, even purchases in the paper futures market now have a diminished downside.  What cannot be known is when a move to the upside will make any such buys worthwhile from a profit perspective.

SI W 26 Apr 14

That high volume spike should loom as important, moving forward.  As with gold, it may be an anchor for establishing the low point for silver, too.  Similar to gold, silver has kept just above the half-way area in its down channel.  In this last correction, silver did not even come close to reaching the lower channel live, as it did in late March.  Last week’s close has it bumping up against the upper channel line very soon after the last challenge just two weeks ago.  This is a positive development within a negative down trend.

On an ending note, last week, mention was made of Gann and the Cardinal Grand Cross, an astrological significant time frame.  It all ends with a solar eclipse on the 29th. [See Gann, Cardinal Grand Cross, A Mousetrap And Wrong Expectations, if you did not read it.]  It is just interesting to see how both gold and silver can be potentially bottoming at the same time.   From our unwavering point of view, price and volume remain the most reliable guides and source of market information.

SI D 26 Apr 14

 

Submitted by: Edgetraderplus

Why Housing Has Stalled — And Why Everything Else Will Follow

Why Housing Has Stalled — And Why Everything Else Will Follow

Why Housing Has Stalled — And Why Everything Else Will Follow

It’s not easy being a mainstream economist. You spend your life building models that become your professional identity. And when those models fail to describe and predict reality, you’re left wondering about the meaning of it all.

The latest case in point is US housing. Keynesian economic models say that if you lower mortgage rates you get more houses bought, sold and built. A nice, simple piece of cause and effect. But today’s mortgage rates are at levels that would have incited a buying frenzy a generation ago, employment is rising — and home sales, home building and mortgage originations are all flat-lining.

Zero Hedge and Automatic Earth recently posted good discussions of the current state of the housing market. See:

Economists Stunned By Housing Fade

US Housing is Down For the Count

Both articles conclude that housing is weak and getting weaker. But the real question is what this means for the rest of the economy. Is housing a discrete sector dealing with its own supply/demand issues, or is it a sign of things to come for consumer spending, government tax revenues, and business investment?

The argument for the latter scenario is based on the idea that newly-created currency pouring into the financial system pumps up asset prices, which convinces people that they’re rich enough to indulge in new cars, new clothes and nice vacations — and more stocks, bonds and houses.

But this “wealth effect” only works when the amount of debt in the system is low enough for new paper profits to change behavior. If people already carry too much debt, then they don’t feel comfortable borrowing even at historically low interest rates, and inflated asset prices become harder and harder to support. Either they stall or start moving lower, which shifts the wealth effect into reverse and sucks the air out of the economy.

The reason that so many economists didn’t see housing rolling over and don’t think it will affect the rest of the system in any event is that most Keynesian models don’t pay attention to society’s balance sheet. A given amount of new debt is supposed to increase “aggregate demand” by the same amount whether the government and consumers are debt-free or buried under a mountain of obligations taken on in years past. That’s a false assumption of course. Liabilities matter, and the fact that debt levels, especially student loans, are hitting records probably explains why housing isn’t behaving according to script.

The other fuel for a wealth effect-driven boom is the stock market. Here again, a nice pop has coincided with a big jump in debt, in this case margin debt, which investors incur when they borrow against stocks to buy more stocks. Late last year margin debt hit a new record and since then has gone even higher. Now it’s at levels that, based on history, imply less bang for each new borrowed dollar. Going forward it will be harder for investors to generate big returns by borrowing money and buying more equities. Taking profits will begin to seem more and more prudent, until sellers swamp buyers and the markets correct.

Margin debt 2014

Click here for a great explanation of why pretty much every stock market valuation measure is now flashing either yellow or red, from John Hussman.

Assuming that equities plateau or start falling, what does that do mean for government’s strategy of using asset bubbles to pump up the consumer economy? Probably it derails it. The question is when.

Hussman notes that periods of extreme overvaluation like today are good indicators of low average stock market returns over the next decade, but not necessarily great trading signals. Stocks might get more overvalued before they stop. But that would raise the risk of a crash, which would have an even more serious impact on investor psyches. So either way, this year or next, the wealth effect will become the poverty effect, and asset owners will become asset sellers.

 

Courtesy: John Rubino via Dollarcollapse

Silver reply’s on Bear Markets, Manipulation and Investor Sentiment

Silver reply's on Bear Markets, Manipulation and Investor Sentiment

Listen, Silver: We Need to Talk

I wrote to Silver last week, and she answered back. I’d like to share our correspondence with you…

Dear Silver,

Happy anniversary. It was on April 25, 2011 that you hit $49.80 per ounce in the New York spot market.

Today, three years later, you sell for around $20, nearly 60% less.

Is your bear market almost over—or are these low prices here to stay? Your price has lagged gold this year, so your normal volatility is lacking. How much longer will you be stuck?

Jeff Clark, silver investor

Here’s her polite response:

Dear Mr. Clark,

I have good news for you. While some investors have lost interest in me and my price is at 2010 levels, things will soon change.

I put together this historical chart for you, and I hope you’ll share it with your fellow silver investors. It shows every major bear market over the past four decades. The black line represents what’s taken place from April 2011 through last Friday.

Of the seven prior bear markets, four lasted longer and three were shorter. Four declined less than today; two were about the same; and only one was significantly deeper.

If I were to match the two longest bear markets, my price would stay down until this October. If it matched the other two longer bear markets, it would end this summer.

Over the past 40 years, there has been no bear market that would extend my low past this October.

Or my low may already be in.

Either way, I think it’s safe to say that I’m close to the end of my down cycle. In fact, the historical data say the opportunity to buy me at $20 or less will soon be unavailable.

Let me relay some other data to you that also signal current prices can’t last too much longer…

The US Mint (Still) Can’t Keep Up with Demand

The sharp drop in my price in 2013 unleashed a wave of pent-up demand for silver coins. Look at the response from investors.

The question this year is if those record levels could continue to be supported. The first quarter is over, so I can tell you the answer…

The US Mint sold 13,879,000 ounces of me in Q1, 2.4% less than the 14,223,000 sold in the first quarter last year. Here’s the monthly breakdown:

2013 2014  Gain/Loss
Jan. 7,498,000 4,775,000 -36.32%
Feb. 3,368,500 3,750,000 11.33%
Mar. 3,356,500 5,354,000 59.51%

January’s 36% decline from the prior year looks big, but it’s not what you think: the Mint didn’t begin sales until the end of the second week of the month. The monthly total thus reflects only 2.5 weeks of sales.

And March sales were the fourth-biggest month ever. Add in April’s sales figures and the US Mint is now on pace to exceed 2013 totals.

It’s clear that your fellow investors think my price will go higher.

Silver ETFs Have Net Inflows (Again)

You might remember that silver ETFs’ holdings were largely flat last year, unlike the mass exodus seen in gold funds. The pattern is continuing this year.

Holdings in my exchange-traded products (ETPs) have risen 3.5% year to date, an additional 17.5 million ounces. In fact, the net purchases by silver ETPs have totaled $354 million YTD, the largest influx of all commodity ETPs!

Meanwhile, gold-backed ETPs have seen sales of 500,000 ounces, about a 1% drop.

Jewelers Love Low Silver Prices

Low prices for me have led to increased silver jewelry purchases.

As just one example, the UK reports that silver jewelry sales jumped 40.4% in February, to 351,791 items.

India Just Won’t Stop Buying Silver

India imported 5,500 tonnes of me last year, 180% more than 2012. Imports comprised 20% of all global demand.

Last month’s silver imports were 250% lower. This was mostly due to the recent increase in import duties, and the fact that six banks got permission to import gold, which would soften purchases of me. This could partly explain why my price has struggled.

But as long as politicians keep gold restrictions in place, Indians will keep buying me.

China: More Silver for Solar

Chinese imports of me rose drastically in February, up by 75% month on month and 90% year on year to 358 tonnes, the highest since March 2011. Though lower the following month, March imports were up 16% year over year.

China’s solar industry is growing explosively. In 2009, it represented about 0.2% of the global market; this year, it’s estimated to be one-third.

It’s interesting to note that my price rose in February and fell in March, which suggests that Chinese demand affects my price, too.

Silver Supply Sources Are Concerning

So far, suppliers have managed to meet demand. However, there are dark clouds on the horizon…

  • Very little excess supply is expected this year, as production is projected to remain flat, and demand for me shows no signs of letting up.
  • Solar power accounted for 29% of added electricity capacity in America last year. “More solar has been installed in the US in the past 18 months than in 30 years,” says the US Solar Energy Industries Association. “Eventually solar will become so large that there will be consequences everywhere.”
  • Supply from recycling will probably be weak, because it’s not cost effective to recover every tiny bit of me from cellphones or prescription eyewear or casino chips. One report says that Americans threw away 130 million cellphones last year, containing over 46 tonnes of me.
  • Several major base-metals mines are expected to be depleted over the next several years. The problem is that two-thirds of me is a byproduct from base-metals operations—if their output falls, there will be less of me, as well.
  • The Silver Institute says that demand for industrial products made from me continues to grow.

No Regrets

As I look at your current situation from a historical perspective, I see a lot of catalysts that will catapult my price higher in the near future. It seems rather clear that as demand continues to grow, supply tightens, and my role as money grows more substantial, I will trade at much higher levels in just a few short years.

In fact, I offered to bet my cousin gold that I will outperform him before this cycle is over. He declined to take the bet.

The clock is ticking. Don’t set yourself up for regret when my price leaves $20 in the dust.

Your friend,

Silver

 

Courtesy: Jeff Clark via Casey Research

Russian Sanctions Could See Gold Prices ‘Explode’

Russian Sanctions Could See Gold Prices ‘Explode’

Russian Sanctions Could See Gold Prices ‘Explode’

Today’s AM fix was USD 1,302.00, EUR 938.45 and GBP 772.79 per ounce.
Friday’s AM fix was USD 1,294.25, EUR 934.88 and GBP 769.38 per ounce.

Gold climbed $9.80 or 0.76% on Friday to $1,302.70/oz. Silver rose $0.04 or 0.2% to $19.71/oz.
Gold and silver finished up for the week – up 0.60% and 0.41% respectively.

Gold eked out small gains in European trading, as growing tensions in Ukraine are contributing to higher prices.  On Thursday prices dropped to $1,268.40 per ounce – the lowest since early February, before rallying due to tensions over Ukraine. In the last 3 sessions, gold bullion has rallied nearly 2%, as the crisis in Eastern Europe bolsters safe haven demand.


Gold in U.S. Dollars, 2 Years – (Thomson Reuters)

Today, geopolitical tensions have deepened with President Obama saying that the United States will impose additional sanctions on Russia targeting individuals and companies.

The move is expected to be followed by separate sanctions from the European Union. Washington said at the weekend the new sanctions would target individuals and companies close to Russian President Vladimir Putin, as well as new restrictions on high-tech exports to Russia’s defense industry.

The geopolitical risks may overshadow a number of important reports on the U.S. economy this week.

The conflict reached a new level over the weekend, when a group of international observers from the Vienna-based Organization for the Security and Cooperation in Europe (OSCE) were abducted by pro-Russian groups. The separatists later released one of the captives due to a medical condition requiring treatment, but also said they had no intention of freeing the others. Negotiations for the release of the observers are underway, Russia saying it will help as much as possible with the situation.

Western diplomats will hold high level talks today, with the goal of agreeing further and tougher sanctions against Moscow. The BBC reported that, according to sources familiar with developments, this round of asset freezes and travel bans may target individuals at the top of Russia’s energy industry. There is even speculation that Putin himself and his considerable net worth may be targeted.

Russia will likely react to these sanctions and retaliate. This could come in the form of financial, economic or currency warfare.

One unappreciated risk is that state sanctioned Russian hackers may target U.S. exchanges and financial infrastructure. Bloomberg reports that “U.S. officials and security specialists are warning that Russian hackers may respond to new sanctions by attacking the computer networks of U.S. banks and other companies.”

Cybersecurity specialists consider Russian hackers among the world’s best at infiltrating networks and say evidence exists that they already have inserted malicious software on computers in the U.S.

There are concerns that small numbers of computer experts could have the ability “to cripple the U.S. economy in a few days.”


Vladimir Putin

Veteran gold analyst, George Gero, who is the precious metals analyst at RBC is not a man for hyperbole or overstatement. Indeed, he has been quite bearish on gold in recent years. However, he believes that Ukraine and the deepening crisis, could have a “massively bullish impact on gold prices.”

He told CNBC the following:

“One of the largest suppliers of gold, and of course platinum, is Russia and if they’re going to be involved in sanctions, and more problems with Ukraine, and deliveries are curtailed—and there is already a problem in South Africa between the miners of platinum, palladium and the mining companies. All of that could somehow explode on the upside and curtail deliveries, meaning higher prices.”

Russia is the fourth-largest producer of gold, outputting 7% of the world’s total supply according to the British Geological Survey. Were Russia to retaliate by banning the exports of all precious metals and by selling some of their large foreign exchange reserves and diversifying into gold, silver, platinum and palladium, it would likely lead to much higher prices for all precious metals.

There is also the strong possibility of increased safe haven demand. This is likely to materialize should economic or even military conflict materialize.

HSBC point out that geopolitical incidents and a short term increase in geopolitical tensions tend to see gold prices rise, prior to the fleeting impact abating and prices falling again.

However, the risk of conflict between Russia and the U.S. and EU is more than a short term risk. It is one of the greatest geopolitical challenges since the end of the Cold War. Therefore, it is likely to have a more material impact on gold prices.

The concept of MAD or mutually assured destruction was what prevented war between the superpowers during the Cold War. Today, there appears to be a lack of awareness regarding the risk of mutually assured economic destruction.

 

Courtesy: Mark O’Byrne via Goldcore

Reckless Fed actions may push Gold Prices to over $5,000 – Peter Schiff

Reckless Fed actions may push Gold Prices to over $5,000 - Peter Schiff

Peter Schiff, chief executive officer of Euro Pacific Capital, has been known to make forecasts outside the mainstream, and his long-running belief that gold has the potential to hit $5,000 an ounce is no exception. Gold prices, after all, are struggling to get a grip on $1,300.

Reckless Fed actions may push Gold Prices to over $5,000 – Peter Schiff

‘When the Fed has to admit that its forecast of a sustained recovery is wrong, it will come to the aid of a faltering economy with even more QE. When that happens, gold will rally.’

  – Peter Schiff, Euro Pacific Capital

We caught up with Schiff to ask him how gold, a big disappointment for commodities investors last year, gets back its groove. Last year, gold futures and heavyweight ETF SPDR Gold Trust lost 28%, breaking at least eight years of annual gains.

First off, Schiff’s gold forecast isn’t brand new. The author of “The Real Crash — America’s Coming Bankruptcy” has talked about the possibility of gold hitting $5,000 or higher since at least 2011, when prices for the metal topped $1,900 in intraday trading.

Schiff reiterated his call on the potential for $5,000 gold and beyond during a heated debate with Paul Krake of View from the Peak on CNBC’s “Futures Now” episode posted on April 15.

In an email interview with MarketWatch this week, he offered his thoughts on exactly why he expects gold prices to continue to climb and under what circumstances, what it would take to change his bullish outlook on gold and whether prices for the metal have already hit bottom this year.

Here’s MarketWatch’s full email interview with Schiff that concluded Wednesday:

Q: Before this year began, what were your expectations for gold prices and how does that compare with the metal’s performance year to date?

Schiff: I thought that the selloff in 2013 was completely out of touch with reality, so I expected the price to rise this year. In this, I was virtually alone in the financial community. Just about every major investment house had predicted even more losses for gold in 2014.

So far this year, gold is the best-performing asset class, but I think the pullback we have seen over the last few weeks is just another indication of how much negative sentiment remains. Ultimately however, the fundamentals will prevail. The Fed will keep printing [dollars] and gold will keep rising.

Q: In a recent interview with CNBC, you said the Federal Reserve’s quantitative-easing program will push gold to $5,000 an ounce. Could you explain that a bit further? What’s your time frame for that forecast? [Watch: Gold bear takes on bug: ‘You’re miles off base’]

I believe the consensus expectation that the U.S. recovery is real and that the Fed will end its [quantitative-easing] program and normalize interest rates is wrong.

Over the past few years the Fed had become [a] serial mover of goal posts, delaying the decision to end stimulus more than anyone would have predicted. When the Fed has to admit that its forecast of a sustained recovery is wrong, it will come to the aid of a faltering economy with even more QE. When that happens, gold will rally.

Last year’s selloff was based [on] the expectation that a strong recovery will lead to tighter monetary policy, which would then undercut the reason for buying and holding gold. That is a false assumption.

Q: Could you offer your thoughts on other factors you see as most influential to the gold market this year, including China?

A renewed weakness in the dollar and strength in oil and other commodities will add to gold’s appeal during 2014. Also, any major geopolitical concerns, particularly if there is a deterioration of the situation in Ukraine, will add to gold’s appeal. I also expect renewed physical demand from emerging markets like India and China.

The World Gold Council recently forecast that Chinese gold demand will rise 20% by 2017 from the current level of 1,132 metric tons a year.

Q: What might alter your bullish outlook on gold?

Gold would certainly be hurt if the Fed surprised the markets by actually ending QE and tightening policy. But that is very unlikely to actually occur.

Q: What would you say to investors who are discouraged by gold’s performance so far this year? (Futures are prices up around 7% year to date, but only partially making up for last year’s plunge.)

Be patient. Many investors in the 90’s believed that gold was a dead asset class. But in the 10 years from 2001 to 2011, gold increased almost 900%. The moves come in waves.

Q: With prices currently under $1,300 an ounce, have prices hit bottom for this year? Is gold a bargain at these levels — is it a good time to buy now? Please explain.

Most likely gold prices have bottomed, as too many speculators are looking for lower prices. The fundamental case for gold has also never been stronger. From a gold short seller’s perspective, this will prove to be the equivalent of a perfect storm. Their losses will be severe. [Read about gold contrarians saying it’s time to start buying.]

 

 

Source: Marketwatch

The U.S. Dollar Under Siege – Long-Term Financial Implications

The U.S. Dollar Under Siege - Long-Term Financial Implications

The U.S. Dollar Under Siege – Long-Term Financial Implications

The U.S. Dollar Under Siege

After World War II, the dollar became the world’s preeminent currency. Convertible to gold at $35 an ounce, it was the backbone of international trade. Foreign central banks used it to back their own currencies.

Nixon removed the dollar’s convertibility to gold in 1971, rendering its value dependent on prudent management by its issuer. That issuer, of course, is the Federal Reserve—which conjures dollars into existence to support the US government’s spending habit.

The Fed has issued a lot of dollars since 1971, and even more since the financial crisis of 2008—thanks to Washington’s exploding debt levels. And it’s only going to get worse, as even the Congressional Budget Office (CBO) admits in its own forecasts.

What’s more, CBO debt estimates are notoriously overoptimistic; so while they are daunting, reality will likely be worse. To paint a realistic picture of future US debt levels, I added 20% to the CBO’s forecast, illustrated here:

You can see that US debt will continue its rapid growth that began in 2008. The question is who will fund this borrowing. Historically, foreigners have been a reliable source of US Treasury purchases. But with the US issuing so much debt, foreigners have become saturated with US dollars and so have slowed their buying considerably.

Other buyers of Treasuries have been anemic, too. The banking system holds about $500 billion of Treasuries and hasn’t increased its holdings in five years. With very low interest rates, private investors aren’t buying the bonds either.

That leaves the Fed, under its Quantitative Easing (QE) programs, as the only buyer in town. I expect that the Federal Reserve will continue to be the buyer of last resort and will purchase around $50 billion of Treasuries per month over the next decade.

Admittedly, even the Federal Reserve doesn’t know precisely what its policies will be. It could buy more or fewer Treasuries. But until there is another buyer, the Fed is stuck picking up the tab.

The most important part of this equation is how the Fed buys government debt: it creates new dollars out of thin air and swaps them for Treasuries. That’s called “monetizing the debt,” and it’s inflationary—much more so than when others buy Treasuries with dollars that already exist.

Foreigners Have Stopped Accumulating US Securities

I watch foreign investment in US securities closely, because small shifts are big enough to affect other US markets. In the last 12 months, foreigners have sold Treasuries at an unprecedented rate.

I include the US’s current account above because historically, countries that sell goods to America invest their dollar proceeds in Treasuries. China, for example, sends goods to the US, and the US pays for them with dollars. China then takes those dollars and buys Treasuries. That’s why foreign investment in Treasuries tends to closely follow the US trade deficit. Fracking has allowed the US to produce more energy domestically, helping to improve its trade deficit.

But foreigners are free to do what they want with their dollars. And recently, they’ve been doing anything but buying Treasuries—like buying American companies and Midwest farmland. It’s risky to have so many dollars and dollar-denominated assets in foreign hands, outside of US control.

Other indicators confirm that foreigners are selling US debt. The Fed holds Treasuries in custody for foreign central banks, and its custody holdings recently plummeted by a disastrous $100 billion in just one week. Announcements of sanctions against Russia seem to have precipitated that fire sale. Russia itself has decreased its holdings of US Treasuries from $165 billion to $126 billion. Why should Putin loan the US money when the US is sanctioning Russia’s use of dollars?

Again, since foreigners aren’t buying US government debt, the Fed will have to. That, in turn, increases the quantity of dollars, diluting the value of Treasuries those foreigners already own. Which eventually will induce foreigners to sell even more of their Treasuries, depressing the dollar’s value further.

It’s a risky game, and a potential vicious cycle.

The Dollar’s Importance Is Declining

The dollar has the unique and special privilege of being the world’s reserve currency, which grants the US several crucial advantages:

  • All other currencies are defined by their exchange rate to the dollar.
  • Most global trade transactions are denominated in dollars, including the most important commodity of all, oil.
  • The US can borrow in its own currency and so can always pay off foreign debts by printing more dollars.
  • The US can and has financed wars with dollars loaned to it by foreigners.

In other words, the dollar’s reserve status greatly enhances US power.

This allows the US to run up huge government and trade deficits that would be disastrous for most other countries. Case in point: US government debt is now over 100% of GDP, the level at which Greece became insolvent. The difference is that Greece couldn’t print euros to paper over its government debt, so it was on a much tighter leash.

Because oil is priced in dollars, other countries need dollars to buy oil, even from the Middle East. That’s the #1 reason the central banks of the world have accumulated dollars as backing for their currencies: because dollars are useful for international trade. Plus, the US Treasury market is the largest and most liquid market on earth, so for foreigners, parking money in Treasuries is a logical choice, at least in the short term.

All of those factors helped America dominate the global economy. But other countries are catching up—like China, which is now the clear-cut #2 world economy. The US’s relative economic power has declined sharply in the past 30 years.

Perhaps most importantly, the dollar’s reserve status is in steep decline too. In 2000, the dollar accounted for 55% of all foreign exchange reserves. In 14 short years, that number has dropped to 33%. By 2020, I project, it will drop to 20%. At that point, other large economies of the world won’t need dollars nearly as much for international trade. So America’s special privileges will continue to wane.

China is actively laying the groundwork for its yuan to become the basis for international trade. It already has developed dozens of bilateral agreements to trade with partners without using dollars. China is also acquiring over 1,000 tonnes of gold per year to support the yuan’s growing presence on the global stage. 23 central banks admit to holding yuan, and another dozen hint they hold the currency  without officially declaring it.

Geopolitics Hurts the Dollar

The US has applied severe sanctions on Iran, forcing Iran’s customers to get creative in figuring out how to pay for oil without US dollars. They tried a number of novel solutions, including using gold via Turkey. But the US squeezed that channel as well.

Now the US is sanctioning Russia—a much more powerful country than Iran—and looks to be shooting itself in the foot. Putin has announced specific plans to move away from the dollar in Russia’s international sales of energy. Gazprom, the Russian energy giant, still prices its natural gas in dollars to sell to Europe. But with US sanctions making it difficult for Russia to do business in dollars, Gazprom has announced it will issue bonds denominated in Chinese yuan. Those two countries continue to grow closer economically, as Russia has the energy that China needs.

Further, Putin, along with the presidents of Gazprom and Rosneft, is actively working to conduct transactions in rubles, yuan, and even Indian rupees. Russia announced a $20 billion deal with Iran to trade oil for goods—including nuclear technology—without using dollars.

The other BRIC countries, Brazil and India, are beginning to wean themselves off the dollar too. The BRICs have set up a development bank and are looking to create their own interbank currency transaction system to replace the Western-controlled Swift program that has been used for decades.

All of these countries are after one thing: to decrease their dependence on the dollar. Using the dollar less in world transactions, of course, decreases the demand for dollars, which decreases its value. That would force America to seriously curtail its trade and government deficits, or else allow the value of the dollar to plummet faster than we’ve ever seen.

Japan, China, the Eurozone, and most other countries are all on the same path of creating money for short-term economic gain, so the dollar’s relative exchange rate vs. other currencies hasn’t changed much. The prices of important commodities like energy, agriculture, and precious metals have risen along with stock markets. While some of these are not adequately included in government measures of price inflation, we’ve seen some price inflation already. More is coming.

The bottom line is that the US is hurting its currency by using it as a political weapon. Shunning Russia only accelerates the trend of countries working to circumvent the dollar.

Long-Term Financial Implications

  • A weakening dollar is great for gold.
  • A weakening dollar means higher prices for all things, especially imported goods like oil.
  • Higher prices will push up interest rates.
  • As Russia expands its energy sales to China, the residual supply available for Europe will be smaller, driving European energy prices higher.
  • Escalating international conflicts will lead to larger military budgets, increasing future deficits and weakening not just the dollar, but all currencies.

In essence, the new geopolitical strife is just another chapter in the same story that’s been unfolding for decades: the dollar’s hegemony is in decline.

As you may have seen in our documentary video Meltdown America, the snowball effect of economic crises (once they start downhill, they go faster and faster) is what makes them so treacherous. By the time the full impact is felt, most ordinary people won’t even know what hit them.

The prepared are spared, as they say. Diversification, across different asset classes and even different political jurisdictions, is essential to escape America’s coming meltdown unscathed, financially as well as physically.

I don’t think we could make it any easier for you to protect yourself. The US dollar is on the brink—don’t waste another minute to get started.

 

Courtesy: Bud Conrad, via Casey Research

Has The S&P 500 Topped At Exactly The Same Price As Gold?

Has The S&P 500 Topped At Exactly The Same Price As Gold?

Has The S&P 500 Topped At Exactly The Same Price As Gold?

Chances are high that the S&P500 is in the process of making a huge top. We will discuss our rationale in this article, based on the gold to equities ratio, as well as current market conditions.

The extremely interesting fact is that spot gold has topped at exactly the same level as the S&P500 top (to date, on a closing basis). Compare the following data:

  • On September 2nd 2011 and September 5th 2011, spot gold in US dollar closed at $1,895.00 an ounce.
  • On April 2nd 2014, the S&P500 closed at 1890.90, its all time highs.

The following chart shows both assets over the last three years. Chart courtesy: Stockcharts.

gold sp ratio 2011 2014 price

Gold to S&P 500 ratio from 2011 to 2014

Both assets have traded visibly inversely correlated since mid-2011:

  • When gold peaked at $1,895.00 an ounce in September 2011, the S&P500 was establishing a major intermediate bottom at 1200.
  • In the last days of December 2013, spot gold made a double bottom right below $1,200 an ounce. Since then, the yellow metal has rallied nicely and convincingly, outperforming every other asset in 2014.
  • The S&P500 has established its all time highs at 1890.90 one week ago. There are convincing signs that this a major top. Interestingly, this is just 3 months after gold’s major bottom.

The following chart shows looks at the gold to S&P 500 ratio in the last 100 years. Note that the red arrows and blue ovals are own additions. Chart courtesy: Macrotrends.

gold sp ratio 1914 2014 price

Gold to S&P 500 ratio from 1914 to 2014

The last three years are marked in the blue oval at the right. One of the following two statements must be true:

  1. Either the gold vs S&P500 ratio has reversed course since gold’s peak three years ago.
  2. Either the gold vs S&P500 ratio went through a corrective phase in a secular trend.

The second scenario would be a replay of the 70ies. Back then, the secular uptrend in gold corrected significantly and equities experienced a cyclical uptrend. As the chart points out, the cyclical trends lasted for three years.

We cannot exclude the first scenario indicated above. However, we estimate the probability to be very low, in the range of 5% to 15%, based on the “set of circumstances” we see in equities and in the economy.

Of course, the fact that the S&P 500 and gold have reached the same (price) level and is merely a chart observation. It does not tell anything as such. The more important point is the set of underlying market conditions. In that respect, we currently observe conditions which, in our belief, confirm the chart observation.

The “set of circumstances” we discuss in the remainder of the article are related to the equities market, in particular the US, but also the broader economic context and even the monetary system.

First, US equities are rising for 5 years now. Technically, the current bull market is +270 days old. This is the second longest bull run in the last 80 years, being beaten by the bull run which started in October 1990 with a duration of 406 days. Source: Standard & Poors.

Second, based on the Crestmont P/E ratio, the S&P Composite is trading at very high levels, only beaten twice in the last +100 years, i.e. in 1929 and 2000.

Third, margin debt in US equities is at all time highs. SeekingAlpha released an article which explains that “margin debt at the New York Stock Exchange rose to an all-time high of about $465.72 billion in February from its previous record high of about $451.30 billion in January. There is a strong positive correlation between NYSE margin debt and SPY.” Although the equities bull run is currently still intact, at least from a technical perspective, the risk of speculation is getting higher as well. The more speculation, the sharper the inevitable correction.

Fourth, IPO fever has popped up again, in a similar fashion as during the highs of the dot com era. According to Sentimentrader, the share of money losing IPO’s (i.e., IPO’s with negative earnings) stands at a remarkable 83%. This is just a hair’s breadth away from the all-time record from mid-March 2000, when 84% of the companies that insiders were selling to the public could not prove their business models.

Fifth, according to ShortSideOfLong, in the last 140 years, there have only been 7 prior events where markets gave investors returns in excess of 100% over 5 years. The chart below shows that 6 out of the 7 instances have led to serious corrections or outright crashes, while the one in 1956 lead to only a mild pull back. The chart also shows that equity market trends with 1.5 standard deviations above the 140 year historical mostly mark an intermediate or long term top. “The market has only ever traded at these overextended levels 8.6% of the time or 143 months in the last 140 years (with the outright majority of that during the late 1990s tech bubble).” It is very likely that the run into 2014 is going to produce another major decline.

SP 500 Five Year Performance Long Term View 2014 price

Sixth, the following chart shows that the average small investor portfolio has a 70% allocation to stocks, a level. Although not visible on the chart, the remaining capital is evenly allocated to bonds and cash. Zero interest rate policy (ZIRP) inflates capital to risk assets, leading to asset inflation. Participation of small investors typically peaks at the end stages of a bull run.

investor allocation stocks 1987 2014 price

Investor allocation to stocks : 1987 to 2014

In the broader economic context, we observe some worrisome facts. Leverage in the financial system is at all time highs. As we noted earlier, “Global derivatives have a notional value of around $700 trillion (latest official BIS data from mid 2013), the highest point historically.” We believe this has the potential to accelerate a downward move in whatever asset class. In that respect, we believe that the crash of precious metals in April 2013 was a shot across the bow in increasingly distorted markets, courtesy of the central bankers’ policies of this world. Other asset classes will follow with the same vengeance.

Meantime, the debt bubble is growing bigger, especially in the US, Japan and China. A credit crisis seems to lure around the corner. The Chinese credit bubble is showing signs of cracking. The housing market in the US is propped up mostly by speculators (think Blackrock) while the real owners of houses account for a minority in the “housing recovery” of the last years. A credit induced economic recession would be similar to the 2008 collapse.

The most worrisome fact, however, lies in the monetary system. On the one hand, the central bank narrative is showing signs of cracks. As we all know, a narrative is extremely powerful … until it stops working. The insight that central bank stimulus does not contribute to productive effects in the real economy but only leads to specific asset price inflation, is spreading around. Increasingly, data out of Japan and the US underpin this insight.

On the other hand, of higher importance in our view, is the cracking dollar reserve currency. It is widely accepted that the US has enjoyed an exceptional privilege having a world reserve currency. The US has been able to grow its debt mountain to a level never seen before in history of mankind because it had a universally accepted currency which was used in the most traded asset classes, in particular oil (the petrodollar). However, the end of the dollar reserve currency seems to be imminent. Based on historical standards, world reserve currencies have lived on average 27 years. Note that the current dollar hegemony is ongoing for 43 years. Prior threats to the petrodollar have been laughed away by the use of military force. The Ukrainian case, however, has the potential to become a pivot point. Clumsy sanctions against Russia by the West point to retaliation right to the core of the monetary system: the petrodollar. Russia is about to sign energy contracts with  its major trading partners in non-dollar currencies. We believe this will act as a precedent, and several Asian and emerging countries will follow. It will result in a loss of trust in dollar denominated assets, undoubtedly affecting US equities. Needless to say, this should also be a major catalyst for precious metals.

In the short run, we do not exclude that equities could go higher. However, several factors confirm the longer term view. We see a three double top forming, a huge trading range which is lasting 2 months (very unusual since the bull run of November 2012), and a huge distribution in the RSI and market breadth.

Again, it is the combination of all circumstances described in this article, as well as the point of maturation of each, that confirm a major decline in US and European equities is very close. One could argue that the stock market will climb a wall of worry. However, that is what has been going on for five years now, and any historical standard shows that its duration is already stretched.

 

Courtesy: Gold Silver Worlds

Is It Time For Silver To Rise And S&P 500 To Dive?

Is It Time For Silver To Rise And S&P 500 To Dive?

Is It Time For Silver To Rise And S&P 500 To Dive?

Silver has had three bad years while the S&P has had five good years. It is time for both markets to reverse.

Examine the following graph of Silver versus the Silver to S&P ratio. It tells me the ratio has returned to levels seen in 2008 and that the ratio follows the price of silver. This is interesting but not that helpful.

Now examine the second graph in which the same ratio is plotted against the 14 month Relative Strength Index of the ratio. The RSI is a timing indicator that ranges between 0 – 100 and indicates buy zones when the indicator is low and sell zones when the RSI is high. Currently the RSI of the index is about 23 – quite low and indicating that the silver to S&P ratio should increase from here. Either the silver price should go up or the S&P should come down, or more likely, both will occur.

Note the RSI of the ratio was about 16 at the end of December 2013 when silver hit its double-bottom lows. That RSI reading was the lowest in 25 years. The December low in silver should have been an important bottom in the silver market and an important bottom in the silver to S&P ratio.

So What Does This Prove?

In a world of High-Frequency-Trading, managed and manipulated markets, gold leasing, politics, and Quantitative Easing, it might mean very little. In the short term, markets can be moved rather easily by large traders and influential forces such as central banks. But, in a longer perspective, the ratio of silver to the S&P is at a low, the actual S&P 500 Index is near an all-time high, and the RSI timing indicator for the ratio was at a 25 year low in December. The next major move is much more likely to be a rise in silver prices and a fall in the S&P. That major move might be many weeks away, but it seems both inevitable and imminent.

Consider this 20 year chart of the S&P. Does the S&P look safe and healthy?

Consider this 20 year chart of silver. Does silver look like it has bounced off an intermediate bottom in a long-term bull market?

Conclusions

  • The S&P is near an all-time high and looks toppy.
  • Silver is near a 4 year low and looks like it has bottomed.
  • The silver to S&P ratio is at a 5 year low and looks like it has bottomed.
  • The RSI of the ratio hit a 25 year low in December.
  • There appears to be far more downside risk in the S&P than in silver.
  • In the short term, markets can be nudged up or down, but in the long term, the December 2013 low in silver looks like a turning point.
  • We will know in a few months if the December low was an intermediate bottom or a prelude to another low. My bet is that the December low holds and silver prices will be far higher in 3 years.

An intriguing article from Bill Holter that addresses silver, an interesting interpretation, and a possible answer to questions about silver supply is My Back And Forth Yesterday with John Embry. I encourage you to read it.

 

Courtesy: GE Christenson aka Deviant Investor

CME Group plans to launch Physically settled Asia Gold Futures

CME Group plans to launch Physically settled Asia Gold Futures

* CME likely to launch Gold Futures contract in Hong Kong – sources

* Contract size expected to be 1 kg

* Rivals have been boosting Asia commodities operations

CME Group plans to launch Physically settled Asia Gold Futures

CME Group Inc plans to launch a physically deliverable gold futures contract in Asia, three sources familiar with the matter said, as the world’s No.1 futures exchange targets rising hedging and investor demand in the top gold-consuming region.

An Asian contract from CME could help set a pricing reference for gold futures in Asia, much like its U.S. COMEX gold contract sets the benchmark for bullion futures globally.

The move may also help CME boost flagging revenues from its precious metals futures and comes as its rivals are expanding their presence in Asia to tap demand from China, the world’s biggest consumer of commodities, including gold.

CME is most likely to launch the gold contract in Hong Kong, with Singapore also an option, two sources briefed on the matter said, adding the contract is likely to be launched this year.

A third source, a market maker, said CME was looking to launch a 1 kilogram (35.3 ounces) contract.

The plan has not yet been finalized and CME could still scrap it, one of the sources said. No other details of the plan were available.

The sources spoke on condition of anonymity as they were not authorised to speak to the media.

“We regularly talk with our customers and market participants about new and innovative ways to help them manage their global price risk,” said a CME Group spokesman, when asked about the Asian contract.

CME’s COMEX contract – widely used for hedging by jewellers and refiners around the world, and speculation – is mostly cash settled.

In the first three months of 2014, U.S. COMEX gold futures volume fell 10 percent from a year ago. The new Asian contract could help boost volumes for CME.

Asia is the top consumer of bullion in the form of jewelry, bars and coins. Demand for physical gold in Asia has climbed over the past year after the metal’s price slumped as western investors dumped the metal on expectations a strengthening economy will dampen gold’s safe-haven appeal.

As gold tumbled 28 percent in 2013, China’s imports of the metal from main conduit Hong Kong more than doubled to about 1,160 tonnes.

TARGETING ASIA

The success of the Asian gold contract, however, will depend on the finer details, such as contract size, trading hours and the liquidity it can garner, said a Hong Kong-based precious metals trader.

CME’s U.S. futures are 100-ounce contracts which are too big for Asian clients, the trader said. They are still the most liquid gold futures in the world.

The most-traded Asian gold futures contract currently is the one on the Shanghai Futures Exchange, which is a 1 kilogram contract. But it is closed to foreign investors.

CME’s Asian gold contract could be the first among its biggest rivals, who have already been boosting their regional commodities operations.

Intercontinental Exchange Group last year announced the acquisition of Singapore Mercantile Exchange, while Hong Kong Exchanges and Clearing Ltd, owner of the London Metals Exchange, said this week it was entering the Chinese commodities derivatives market.

And the Singapore Exchange is looking to launch a contract this year, along with the government-backed industry body Singapore Bullion Market Association, as the southeast Asian country aims to get a say on gold pricing, sources told Reuters earlier this year.

 

Source: Reuters

Groupthink Or Black Swan Rising? Not A Single Economist Expects An Economic Downturn

Groupthink Or Black Swan Rising? Not A Single Economist Expects An Economic Downturn

Groupthink Or Black Swan Rising? Not A Single Economist Expects An Economic Downturn

A 100% Consensus

This doesn’t happen very often.  Marketwatch reports that Jim Bianco points out in a recent market comment that the 67 economists taking part in a regular Bloomberg survey have a unanimous forecast regarding treasury bond yields: they will be higher 6 months from now. This is a truly striking result, and given the well-known propensity of mainstream economists to guess wrong (their forecasts largely consist of extrapolating the most recent short term trend), it may provide us with a few insights.

In fact, considering that there have been only a handful of instances since 2009 when a majority of the economists surveyed predicted a decline in yields, we can already state that their forecasts regarding treasuries are quite often (though obviously not always) wide of the mark. In fact, so far this year they are already wrong again – and so are fund managers, as they hold their lowest exposure to treasuries in seven years.

This is not the only thing there is complete unanimity about. Not a single economist taking part in a separate survey believes an economic downturn is possible.

“Economists are unwavering in their assessment of where yields are headed in the next half year.

 

Jim Bianco, of Bianco Research, points out in a market comment Tuesday that a survey of 67 economists this month shows every single one of them expects the 10-year Treasury yield to rise in the next six months.

 

The survey, which is done each month by Bloomberg, has been notably bearish for some time now, with nearly everyone expecting rising rates. In March, 97% expected rising rates. In February, 95% expected yields to climb. And in January, 97% held that expectation. Since the beginning of 2009, there have only been a handful of instances where less than 50% expected rates to rise.

 

Still, the fact that every single survey participant is bearish is striking. The last time the survey had that result was in May 2012, when benchmark yields were well below 2%.

 

“Literally there is maybe one economist in the United States straddling the bullish/bearish divide on interest rates. The rest are bearish,” Bianco writes.

 

He adds that a J.P. Morgan client survey shows that the percentage of money manager respondents who said they are underweight Treasurys is the second highest in seven years.

 

This is all the more surprising when we consider that investors went into 2014 thinking yields would rise significantly. Instead, the benchmark yield is lower than when the year started, as the market waded throw subpar economic data, geopolitical tensions, and uncertainty over the Federal Reserve. The 10-year note last traded at a yield of 2.72% on Tuesday, down from just over 3% on Dec. 31.

 

Then again, a separate poll of economists recently showed that exactly zero expect the economy to contract.

 

But when the entire market thinks one thing is about to happen, the opposite outcome is often in store, notes James Camp, managing director of fixed income at Eagle Asset Management. So don’t count out that result with Treasurys, he advises.

 

“It’s the most hated asset class,” says Camp, but Treasurys are some of the best performers year-to-date.”

(emphasis added)

Color us unsurprised regarding the fact that the ‘most hated asset class’ has turned out to be one of the better performing so far this year. Gold is probably hated even more, and for similar reasons. Everybody expects the weakest recovery of the entire post WW2 era to reach ‘escape velocity’ (whatever that is supposed to mean), even after adding almost $8 trillion to the federal debt and some $4.8 trillion to the broad true money supply since the 2008 crisis have led to such a dismal outcome (of course as card-carrying Austrians we believe this development is precisely what should have been expected).

Likely Outcomes

While treasury bond yields have only moved down a little so far this year, one must keep in mind that they are at a historically very low level to begin with. At a yield of roughly 4%, a 50 basis points move represents 12.5% of the entire distance to zero. However, we also know that a lot more downside is possible. Yields have already been quite a bit lower on a number of occasions.

There can be little doubt that if the consensus of economists turns out to be wrong again, it will likely be wrong on both t-bond yields and the economy. As an aside, it is noteworthy that long term yields have weakened considerably even while five year yields have remained roughly unchanged and yields on the short end of the curve have actually risen slightly since the beginning of the year.

We interpret this as the market judging the Fed to be adopting a tighter monetary policy, and expecting weaker aggregate economic activity to ultimately result from this new stance. Clearly, the ‘tapering’ of ‘QE’ does represent a tightening of policy, no matter what Fed members are saying about it. It means the pace of money supply inflation is being slowed down.

Note that something similar happened in the run-up to the 2008 crisis, only in this instance the yield curve actually inverted prior to the economic downturn. One should not expect a complete yield curve inversion to warn in a timely fashion of a recession when the central bank is hell-bent on keeping its policy rate at or near zero. We know this from ‘ZIRP’ experiments that have been undertaken in other countries, such as e.g. Japan.

If the economy doesn’t do what seemingly everybody expects it to do in the famed ‘second half’ (practically the entire sell-side shares the consensus of the economists surveyed by Bloomberg), then treasuries and gold should be expected to rise, while equities could end up getting hit quite badly.

TYX

30 year t-bond yield: declining since the beginning of the year – click to enlarge.

It is clear that one of the reasons why economists expect no contraction in the economy is that ‘traditional’ recession indicators still appear largely benign, if somewhat weaker than previously. We prefer to keep an eye on things most people don’t watch, such as the ratio of capital to consumer goods production, which shows how factors of production are pulled toward the higher stages of the capital structure when monetary pumping is underway. This ratio tends to peak and reverse close to recessions. Its recent trend isn’t entirely conclusive yet as it has begun to move sideways, but it clearly seems to be issuing a ‘heads up’ type warning signal.

Capital vs Cons.Goods Production

Capital vs. consumer goods production – it tends to peak close to the beginning of recession periods, and declines while recessions are underway, as the production structure is temporarily shortened again – click to enlarge.

Note also that the transition from expansion to contraction is usually quite swift, and never widely expected.

Conclusion:

This is an astonishing degree of consensus thinking, but it perfectly mirrors the complacency we see in stock market sentiment and positioning data. The probability that such a unanimous view will turn out to be correct is traditionally extremely low. The economy is likely resting on a much weaker foundation than is generally believed. This is not least the result of massive monetary pumping and deficit spending, both of which tend to severely weaken the economy on a structural level, even though they can create a temporary illusion of ‘growth’.

 

Courtesy: Pater Tenebrarum via Zerohedge

The Bear’s Lair: Where’s the link to Inflation broken?

The Bear's Lair: Where's the link to Inflation broken?

The Bear’s Lair: Where’s the link to Inflation broken?

Monetary economists around 2009-10 were sure of one thing: the Fed’s unprecedented creation of “narrow money” in the form of bank reserves would show up fairly quickly in a burst of inflation. Clearly, they were wrong.

The Fed has created $2.7 trillion of bank reserves, increasing the monetary base by $3 trillion, or 319%, since September 2008. Yet inflation remains very subdued, indeed, at 1.5% in the past year, according to the U.S. Consumer Price Index statistics. So why aren’t we suffering from incipient hyperinflation?

The leading monetary economist Allan Meltzer of Carnegie Mellon University last August identified the route by which the monetary base should increase inflation. Banks have $2.7 trillion in excess reserves, so they should lend them out to companies, which in turn would redeposit them with the banks, creating more broad money and leading to economic expansion. With the amounts involved, we would pretty soon have inflation advancing a brisk trot, and not just in asset prices.

Since this isn’t happening, there are two possibilities to explain it. Either monetary theory must be wrong or, even though monetary theory is generally correct, the recent extreme monetary policy, far outside the normal range, must be producing pathological behavior in the banking system.

Even the solidest economic theory can fail to work in extreme cases. For example, Adam Smith’s description of the price mechanism is accepted by more or less all economists, and regarded as a universal truth. However, even early in the theory’s life, Charles Jenkinson (Prime Minister Lord Liverpool’s father, the first Earl, then President of the Committee on Trade) discovered flaws in it. Observing market behavior at a time of corn scarcity in 1800, he wrote to Sir Joseph Banks (the botanist, President of the Royal Society and used by Jenkinson as an agricultural forecaster):  “In time of distress the Seller becomes Master of the Market and it then becomes absurd to rest one’s confidence in Adam Smith, who has Pushed his Principles to an extravagant Length, and in some respects, has erred.”

Jenkinson therefore imported corn at government expense and sold it domestically at a subsidized price, thus preventing the onset of starvation. Fifty years later, Lord John Russell’s Whig government stuck to its Smithian free-market principles, refused to purchase grain and distribute it at a loss—and produced the worst period of the Irish potato famine.

Just as the severe wartime dearth of 1800 and the Irish potato crop failures of 1846-50 produced extreme situations in which Smith’s price mechanism failed, so the recent extreme monetary policies followed since 2008 appear to have produced a similar failure of normal market mechanisms.

To see what’s going on, we should look at Federal Reserve Publication H8, the assets and liabilities of banks doing business in the U.S., and compare bank balance sheets from January 2008, before the crisis began, with their state in March 2014. Bank balance sheets have expanded from $10.9 trillion to $14.4 trillion, a growth of 31% compared with growth of only about 16% in nominal GDP (we don’t yet have the figures for the first quarter of 2014). In spite of a major financial crisis, there has therefore been no restriction of the banking system, which has expanded further its weight in the U.S. economy.

However, when you look at the composition of bank balance sheets, you see what has gone awry. Cash, which in January 2008 represented only 2.9% of total assets, now represents 19.3% of assets. There are those excess reserves, lying on banks’ balance sheets like great lumps of suet, doing nothing useful at all. Since the Fed is paying interest at 0.25% per annum on the excess reserves, and the banks can count them at zero when calculating their required capital, there is no incentive for banks to do anything with them. The return on them is simply free money.

Total credits, which include loans and securities, have fallen from 81.9% of the banks’ combined balance sheet to 71.6%. Indeed, the amount of total credits has increased by only 15%, less than the increase in nominal GDP. So even though the banks have bloated themselves in size at almost double the rate of GDP growth, their actual working assets have grown more slowly. In other words, they have been slightly restrictive in their impact on the economy.

The impact of banks on the economy becomes even clearer when we look at the breakdown of the “total credits” figure. Treasury and agency securities have grown from 10.2% of banks’ balance sheets to 12.8%, a nominal growth of no less than 64% at a time GDP has grown by only 16%. But this is completely worthless activity, other than to bank profits. It consists of using the Fed’s guaranteed zero short-term interest rates to load up on Treasuries yielding 2.7% in the 10-year range or Federal Agency securities yielding about 1% more.

The banks are thus making 2% plus on this money, and, again, they are able to leverage it ad infinitum because the foolish Basel rules allow them to zero-weight government and agency paper. The activity does little or no economic good; it simply finances the damaging government deficit. The banks doubtless consider it risk-free, but of course it isn’t. A default on government or agency debt, with the amounts held by the U.S. banking system, would collapse the banks as well as the government, causing immeasurably worse economic chaos than a simple government default.

Finally we get to loans and leases, the productive part of the banks’ activities, the purpose for their existence (since their other purpose, providing a safe haven for deposits, is today rendered nugatory by deposit insurance). Total loans and leases have declined from 63% to 52% of banks’ balance sheets, increasing in nominal terms by only 9%, much slower than GDP. However there is some leaven here. For commercial and industrial loans, the most productive part of banks’ balance sheets and that finance actual businesses, have increased by 15% over the period, while real-estate loans have actually shrunk (or doubtless in many cases been written off).

The only real growth in lending has come in consumer loans, up 43% since 2008, rising at more than double the rate of GDP. Keynesians will jump for joy at this; the banks are encouraging wonderful consumption, causing GDP to grow faster. But of course we know better; this surge in consumer lending is merely pushing U.S. consumers further into debt, making it impossible for them to pay off their obligations (especially to the extent they consist of student loans, which have trebled to over $1 trillion since 2004.) This is not healthy growth; it’s merely storing up trouble for the future.

The banking system is thus not doing its job. This is not entirely surprising. Lending to small and medium businesses is difficult and risky and requires high-level, specialist staff to accomplish. Ramping up such lending without the right people on board simply leads to mass defaults down the road. Consumer lending leads equally to defaults, but can be done by robots. Investing in government bonds requires no skill at all, especially as you can today reverse the interest rate risk quickly in the swap market. Thus pumping $3 trillion into the banks, as the Fed has done in the last five years, achieves absolutely nothing. Nor would pumping in $30 trillion—something the Bank of Japan, with its much larger quantitative easing program (relative to the size of the economy), is about to find out.

If the Fed wants to make its monetary policy truly stimulative (which will stoke up inflation, but it’s not currently worried about that) it can take the following policy steps to do so:

  1. Instead of paying interest of 0.25% per annum on those $2.7 trillion of excess reserves, charge 0.5% per annum on them. You’d be surprised how quickly the banks would get rid of them in that event. Balance sheets would shrink, and lending efforts would be redoubled.
  2. Increase the federal funds rate to, say, 2.5%, and close to the yield on 10-year government bonds. The banks’ bond portfolios would thereby become only marginally profitable and would be sold. Again, more effort would go into lending.
  3. Wind down the Fed balance sheet as quickly as possible, reducing the level of excess reserves in the system. The banks will be begging you to do this anyway, because they are losing money on the excess reserves. In practice it will take you several years to sell over $3 trillion of long-term Treasury and agency bonds, so the system will remain very “stimulative” while you do so. However, not doing this will make the inflationary whammy even worse.

The results of these policies will be a surge in lending, accompanied by a surge in economic growth and reduction in unemployment. That’s the good news; there are however two items of bad news. First, since the excess reserves will now be recycled into lending, inflation will reappear surprisingly rapidly. Second, with the Fed selling government bonds instead of buying them, the $500 billion government deficit will become difficult to finance. Thank goodness the Republican Congress, in about its only useful act, has stopped the explosion of deficit spending of 2006-10. With faster growth reducing the deficit further, then, provided the spendaholics don’t regain control of Congress, the deficit should decline toward zero and remain financeable.

Assuming the Fed doesn’t adopt these policies, consumer price inflation may be slow to reappear, although with $3 trillion just parked on bank balance sheets, the potential is always there. However asset price inflation, in the stock market and elsewhere, is in full swing. At some point, that bubble will burst, causing the father and mother of all stock market crashes, accompanied by a junk bond crash and another real estate crash. Needless to say, that will cause another banking crisis and prolonged recession. Overall, by the end of this period, we’ll be longing for some good healthy consumer price inflation.

There’s one consolation. Once we have fully mapped out this unpleasant economic terrain, we should be able to prevent Fed policymakers from ever taking us here again.

Courtesy: Martin Hutchinson

The Battle for Osisko Mining: A Good Sign for the Gold Mining Sector?

The Battle for Osisko Mining: A Good Sign for the Gold Mining Sector?

The Battle for Osisko Mining: A Good Sign for the Gold Mining Sector?

Steve Todoruk, an Investment Executive at Sprott Global Resource Investments Ltd., said last year that big miners were the key to a rebound in natural resource stocks.

He is happy to see them get rid of their mistakes from the bull market years, writing off their worst projects. With all this bad news out of the way, he believes they should get back to generating cash flow and sensibly expanding operations, which would improve sentiment in the sector.

Today, Steve says big miners look like they have moved past the pain of the last three years, becoming more aggressive now. See his recent note below.

When the mining sector is growing, companies expand their production by acquiring new mines and deposits. In unhealthy times in the mining sector, merger and takeover activity usually comes to a halt.

When this merger activity starts to wake back up, it could signal the start of a rebound from a bear market. Mergers signal that companies feel more confident that the worst is behind them; it indicates that they are more aggressive and preparing for rising metals prices.

Two months ago, we saw signs that majors were on the search for mergers and acquisitions once again. The world’s third-largest gold producer, Goldcorp, announced a hostile takeover of Osisko Mining Corp., which owns the large Malartic gold mine in eastern Canada, for $2.4 billion.

The mine aims to produce 500,000 ounces of gold per year for a long time, in a safe country – increasing Goldcorp’s annual production and decreasing its exposure to political risk. Goldcorp believed the mine would also have synergies with another mine that Goldcorp is building in the same province of Canada — the Eleanore Mine.

Displeased with the low-ball offer, Osisko’s management denounced Goldcorp for being opportunistic at a time when the mining company’s share price was undervalued. They urged Osisko shareholders to turn Goldcorp down and allow management to fight for a higher offer.

As with most management teams who are the target of a hostile takeover, Osisko set out to find a white knight to make a higher and more friendly takeover offer — preferably instigating a bidding war to push the takeover price even higher.

In early April, Osisko announced it had found such a suitor in Yamana Gold Inc. Yamana would buy 50% of Osisko for $1.24 billion, meaning Osisko and its shareholders would retain direct exposure to this growing gold mine through the other 50% of the company.

A week later, Goldcorp stepped in again, offering $3.28 billion to fully take over Osisko.

Once again, Osisko responded by attracting an even higher offer. Osisko announced that Yamana and Agnico Eagle Gold Mines were making a joint offer totaling $3.55 billion for the company. This latest offer represents a 60% increase from where Osisko was trading just two months earlier.

Osisko Battle

A: Goldorp makes initial bid for Osisko; B: Osisko announces Yamana counter-bid; C: Goldcorp responds with higher bid; D: Osisko announces joint bid from Yamana – Agnico Eagle

What this recent takeover fight means is that at least three big gold mining companies are seeking to make new acquisitions today. They have cash to spend. That is very healthy for the junior mining companies that own high-quality deposits – especially in mining-friendly, lower-risk countries.

The recent Osisko episode also shows share prices can rise quickly if a bigger company comes along and offers to acquire some or all of their assets.

As an investor, I suggest building positions in juniors that are most likely to be taken over by bigger companies. Don’t fret about your company’s languishing share price. If you have done your homework and chosen the best juniors with high quality deposits, I believe a bigger company will come knocking on the door someday offering a significantly higher and fairer price. From my experience, the price that a bigger company will pay tends to reflect the full value of the deposit, regardless of where the market has priced it.

The dust appears to have settled on the battle between Goldcorp and Yamana – Agnico Eagle. Goldcorp has recused itself from the bidding war, meaning they will walk away the loser. This leaves the gold miner disappointed; its cash is still there, burning a hole in its pocket.

To investors, this means Goldcorp will be on the prowl for another opportunity to expand. It’s time to find the companies that Goldcorp and others are likely to acquire. Hopefully, we may make a takeover premium as high as Osisko has just experienced.

Start by looking for juniors that have large, high-grade gold deposits in Canada.  Your Sprott Global broker is a good place to start looking for these companies.

P.S.: You can view Steve’s talk on investing in mineral discoveries here.

 

Courtesy: Henry Bonner via Sprott Group

Gazprom Delighted By China Announcement Nat Gas Need To Soar By 150% In 6 Years

Gazprom Delighted By China Announcement Nat Gas Need To Soar By 150% In 6 Years

Gazprom Delighted By China Announcement Nat Gas Need To Soar By 150% In 6 Years

It may comes as a surprise to many, if certainly not the country known as Gazpromia, that according to a government statement released on Wednesday, China will raise its natural gas supply to a whopping 420 ­billion cubic meters per year by 2020 on soaring demand due to urbanization, a government statement said on Wednesday. This compares roughly 168 bcm in gas used in 2013, which means somehow China hopes to boost gas production by over 150% in just 6 years.

The increased supply will ­cater to the rising demand for natural gas in people’s daily lives, schools, nursing homes, home heating, as well as in buses and taxis, according to a statement published on the central government’s website.

According to Global Times, the supply increase is also driven by the nation’s efforts to mitigate air pollution stemming from an over-reliance on coal, the statement said. Sounds familiar – only problem is that the same narrative, used in the US time and time again, has achieved virtually nothing in fixing said over-reliance on coal.

Global Times adds that to expand natural gas production, investment in gas storage facilities as well as their construction and operation will be open to all market players, the statement said.

And the best news for gas E&Ps: companies will also have the option to issue bonds to raise capital for the construction of storage facilities. The government will offer favorable land policies for ­sto­rage facility projects, the statement said.

China’s total consumption of natural gas rose 13.9 percent year-on-year to 167.6 billion cubic meters in 2013, according to a report published on January 15 by the Economic and Technology Research Institute of the China National Petroleum Corp.

 

The higher consumption led to a 25 percent increase in imports, totaling 53 billion cubic meters last year, 31.6 percent of the total consumption.

 

Supplies will continue to be tight this year, the report said, predicting that the natural gas consumption would expand 11 percent this year to 186 cubic meters.

And the well-known punchline to Zero Hedge readers: China and Russia aim to wrap up a 10-year series of talks about Russian gas supplies before Russian President Vladimir Putin visits China in May, Reuters reported on April 14.

Which is also the key: Russia knows very well that when it comes to organic growth, China will be woefully unprepared to boost its own production nearly threefold in just over five years. Which is where Gazprom and Putin’s holy grail deal come in. Because while Russia is happy to sit on the sidelines as China pretends its own producers can strike gold, or in this case gas, it knows they won’t. And it will be more than happy to provide all the gas shortfall China has – in the process joining China in the hip in a symbiotic relationship that solidifies the most important post-New Normal concept we first dubbed the Gas-O-Yuan.

 

Courtesy: Tyler Durden via Zerohedge

U.S. Exports A Record Amount Of Gold Bullion To Hong Kong In January

U.S. Exports A Record Amount Of Gold Bullion To Hong Kong In January

U.S. Exports A Record Amount Of Gold Bullion To Hong Kong In January

The figures are out and it looks like the United States exported a record amount of gold to Hong Kong in January.  Not only was this a one month record… it was a WHOPPER indeed.

Last year, the U.S. exported a total of 215 metric tons of gold bullion to Hong Kong.  This was not the total amount of gold exported to Hong Kong as some smaller quantities of Dore’ and precipitates made their way into the country as well.

However, Hong Kong received more gold than any other country… Switzerland came in second at 150 metric tons.  The table below shows the breakdown in U.S. Gold Bullion exports in 2013:

Total U.S. Gold Bullion Exports Jan-Dec 2013

Here we can see that the highest month of gold bullion exports to Hong Kong in 2013 was in August at 30.7 metric tons (mt)… let’s just say an even 31 mt.  According to the data just released by the USGS, the United States exported a stunning 57 mt of gold bullion to Hong Kong in January.

U.S. Gold Bullion Exports to Hong Kong

Not only is this 3 times more gold exported than January 2013 (17 mt), it was 84% more gold than the record month set in August (31 mt).  As we can see.. gold bullion is fleeing the U.S. and heading to the East.  Again.. that 57 mt figure is just gold bullion.

Furthermore, total gold exports in January nearly surpassed the total hit in March of last year.  Total U.S. gold exports in March, 2013 were 80.8 mt compared to 80.7 mt in January of this year.

This is where the majority of the remaining gold was exported in January:

Gold Bullion:

Australia 3.1 mt, Thailand 2 mt, Switzerland 1.5 mt & Singapore 1.0 mt

Dore’ & precipitates:

Switzerland 10.6 mt, India 2.7 mt & United Arab Emirates 1.4 mt

As the West continues to play games with Monopoly money and Derivatives manufacturing, the East accumulates as much gold as it possibly can.  While Main Stream Media and its Banker cohorts release bearish $1,050 price targets for gold, the Asians and Indians smile as they build the largest amount of gold stocks in the world.

I get a real kick at the amount of negative and bearish sentiment coming from many gold and silver investors.  Who said this was going to be easy?  It’s simply amazing to watch a DIEHARD gold or silver bug become bearish and downright nasty now that times are tough.

However, this is exactly what the FIAT MONETARY AUTHORITIES hand in mind.  Unfortunately, many have fallen for their plan… HOOK, LINE & SINKER.

GOD HATH A SENSE OF HUMOR.

 

Courtesy: SRSroccoreport

2014 Seems Eerily Similar To 2007. What if 2015 Is A Repeat Of The 2008 Crisis?

2014 Seems Eerily Similar To 2007. What if 2015 Is A Repeat Of The 2008 Crisis?

2014 Seems Eerily Similar To 2007. What if 2015 Is A Repeat Of The 2008 Crisis?

The similarities between 2007 and 2014 continue to pile up.  As you are about to see, U.S. home sales fell dramatically throughout 2007 even as the mainstream media, our politicians and Federal Reserve Chairman Ben Bernanke promised us that everything was going to be just fine and that we definitely were not going to experience a recession.  Of course we remember precisely what followed.  It was the worst economic crisis since the days of the Great Depression.  And you know what they say – if we do not learn from history we are doomed to repeat it.  Just like seven years ago, the stock market has soared to all-time high after all-time high.  Just like seven years ago, the authorities are telling us that there is nothing to worry about.  Unfortunately, just like seven years ago, a housing bubble is imploding and another great economic crisis is rapidly approaching.

Posted below is a chart of existing home sales in the United States during 2007.  As you can see, existing home sales declined precipitously throughout the year…

Existing Home Sales 2007

Now look at this chart which shows what has happened to existing home sales in the United States in recent months.  If you compare the two charts, you will see that the numbers are eerily similar…

Existing Home Sales Today

New home sales are also following a similar pattern.  In fact, we just learned that new home sales have collapsed to an 8 month low…

Sales of new single-family homes dropped sharply last month as severe winter weather and higher mortgage rates continued to slow the housing recovery.

New home sales fell 14.5% to a seasonally adjusted annual rate of 385,000, down from February’s revised pace of 449,000, the Census Bureau said.

Once again, this is so similar to what we witnessed back in 2007.  The following is a chart that shows how new home sales declined dramatically throughout that year…

New Home Sales 2007

And this chart shows what has happened to new homes sales during the past several months.  Sadly, we have never even gotten close to returning to the level that we were at back in 2007.  But even the modest “recovery” that we have experienced is now quickly unraveling…

New Home Sales Today

If history does repeat, then what we are witnessing right now is a very troubling sign for the months to come.  As you can see from this chart, new home sales usually start going down before a recession begins.

And don’t expect these housing numbers to rebound any time soon.  The demand for mortgages has dropped through the floor.  Just check out the following excerpt from a recent article by Michael Lombardi

One of the key indicators I follow in respect to the state of the housing market is mortgage originations. This data gives me an idea about demand for homes, as rising demand for mortgages means more people are buying homes. And as demand increases, prices should be increasing.

But the opposite is happening…

In the first quarter of 2014, mortgage originations at Citigroup Inc. (NYSE/C) declined 71% from the same period a year ago. The bank issued $5.2 billion in mortgages in the first quarter of 2014, compared to $8.3 billion in the previous quarter and $18.0 billion in the first quarter of 2013. (Source: Citigroup Inc. web site, last accessed April 14, 2014.)

Total mortgage origination volume at JPMorgan Chase & Co. (NYSE/JPM) declined by 68% in the first quarter of 2014 from the same period a year ago. At JPMorgan, in the first quarter of 2014, $17.0 billion worth of mortgages were issued, compared to $52.7 billion in the same period a year ago. (Source: JPMorgan Chase & Co. web site, last accessed April 14, 2014.)

It is almost as if we are watching a replay of 2007 all over again, and yet nobody is talking about this.

Everyone wants to believe that this time will be different.

The human capacity for self-delusion is absolutely amazing.

There are a lot of other similarities between 2007 and today as well.

Just the other day, I noted that retail stores are closing in the United States at the fastest pace that we have seen since the collapse of Lehman Brothers.

Back in 2007, we saw margin debt on Wall Street spike dramatically and help fuel a remarkable run in the stock market.  Just check out the chart in this article.  But that spike in margin debt also made the eventual stock market collapse much worse than it had to be.

And just like 2007, consumer credit is totally out of control.  As I noted in one recent article, during the fourth quarter of 2013 we witnessed the biggest increase in consumer debt in the U.S. that we have seen since 2007.  Total consumer credit in the U.S. has risen by 22 percent over the past three years, and 56 percent of all Americans have “subprime credit” at this point.

Are you starting to get the picture?  It is only 7 years later, and the same things that happened just prior to the last great financial crisis are happening again.  Only this time we are in much worse shape to handle an economic meltdown.  The following is a brief excerpt from my recent article entitled “We Are In FAR Worse Shape Than We Were Just Prior To The Last Great Financial Crisis”…

None of the problems that caused the last financial crisis have been fixed.  In fact, they have all gotten worse.  The total amount of debt in the world has grown by more than 40 percent since 2007, the too big to fail banks have gotten 37 percent larger, and the colossal derivatives bubble has spiraled so far out of control that the only thing left to do is to watch the spectacular crash landing that is inevitably coming.

You can read the rest of that article right here.

For a long time, I have been convinced that this two year time period is going to represent a major “turning point” for America.

Right now, 2014 is turning out to be eerily similar to 2007.

Will 2015 turn out to be a repeat of 2008?

Please feel free to share what you think by posting a comment below…

 

 

Courtesy: Michael Snyder

Business Man Found With 12 Gold Bars In Stomach In India

Business Man Found With 12 Gold Bars In Stomach In India

Business Man Found With 12 Gold Bars In Stomach In India

Man Eats Twelve Gold Bars To Avoid Taxes

Today’s AM fix was USD 1,283.50, EUR 927.38 and GBP 763.76 per ounce.
Yesterday’s AM fix was USD 1,290.75, EUR 935.19 and GBP 767.34 per ounce.

Gold fell $5.00 or 0.39% yesterday to $1,285.00/oz. Silver climbed $0.03 or 0.15% yesterday to $19.45/oz.

Spot gold bullion prices ticked fractionally higher today but bullion remained below the $1,300/oz psychological level and not far off yesterday’s two-and-a-half-month lows.

Spot gold stood at $1,283.75/1,284.55 per ounce, up just 20 cents from Tuesday, when prices briefly dipped below technical support to hit $1,276.35, the lowest since February 11.

Silver bullion ticked 0.5% higher to $19.45/oz and the dollar, which touched a two-week high against the euro in the previous session, retreated somewhat to around 1.3845. Asian shares were mixed and European shares were lower after three days of gains.


Gold in U.S. Dollars, YTD 2014 – (Thomson Reuters)

Increasing geopolitical risks due to the very unstable situation in Ukraine is being ignored for now. There is also increasing geopolitical tension between China and Japan after China seized a Japanese trading vessel, resurrecting a World War II dispute.

Business Man Found With 12 Gold Bars In Stomach In India

You’ve heard of people described as having hearts of gold. But what about someone with a belly full of gold? That’s what doctors in New Delhi found, when a man arrived from overseas in severe discomfort.

CNN reports on the curious incident of the man with the golden belly in Delhi:

New Delhi, India (CNN) — When a team of Indian surgeons opened up the stomach of a patient complaining of abdominal pain, they had no idea they’d extract a fortune.

The patient, whose name was not released, was hiding 12 gold bars in his belly. He apparently smuggled them into India to evade import duty, police and doctors said Tuesday.

Each gold bar weighed 33 grams, said C.S. Ramachandran, who conducted the surgery at a hospital in New Delhi on April 9. The 63-year-old patient, an Indian citizen, visited the hospital a day before with severe stomach pain and nausea.

“He told us he had accidentally swallowed the cap of a plastic bottle,” Ramachandran said.

Investigations could not confirm his claim. “We couldn’t (either) make out they were gold bars,” the doctor said. “But yes, X-Rays showed there was intestinal blockage, which required surgery.”

On the day of surgery, stunned doctors pulled out the yellow metal from his stomach. “It was unexpected,” Ramachandran said.

The hospital handed over the precious extraction to local police. The bars have since been sent to customs, which is conducting a probe, said Alok Kumar, a deputy commissioner of police.

He didn’t disclose the name of the patient. Nor did he reveal which country he smuggled the gold from. The patient was discharged after the surgery, and is doing fine. CNN story read here.

The gold bars are now in the care of Indian customs and the patient is under investigation for tax evasion, which certainly takes the shine off his import experiment. Fortunately for him, the export experiment under the surgeons knife was a success.

The gold bars are valued not just by the owner but by the Indian government. In total they’d command an import duty of $17,000 dollars. It’s little wonder some people would go to extreme lengths to try to avoid that.

Yes, this is what the process of removing twelve gold bars from the stomach of a 63-year-old looks like. Each of the objects weighs 33 grams, which might not sound much. A warning here, some of what you’ll see next, may upset your stomach.


VIEWER DISCRETION ADVISED DUE TO GRAPHIC NATURE OF IMAGES OF SURGERY

It is not known if the man intended selling the gold bars on or keeping them as a store of value.

It is interesting to note that while thousands of Indians have engaged in gold smuggling in recent months, smuggling in the western world consists primarily of drugs. This says something about the values system of India and Eastern societies versus that of the western world.

This is the lengths that people in Asia will go to own gold and also to avoid punitive taxes on gold. Middle class and wealthy Indian and people all over Asia are choosing to escape financial repression by owning gold, including gold in vaults overseas and allocated gold storage in Singapore  is attractive to them due to the lack of punitive taxes and the safety of Singapore as a jurisdiction.

India remains the world’s second largest gold market after China and despite a punitive tax of 10%  levied on gold imports in India, Indian investment in gold bars recorded an increase of 16% in 2013, according to the World Gold Council.

Official demand surged as did unofficial demand in the form of a massive wave of gold smuggling. The World Gold Council estimates that a huge 200 tonnes of gold may have been smuggled into India in 2013 – in flower pots, stomachs and other orifices…on ships, trains, planes and automobiles.

Gold is the metal most precious to the peoples of India, China and much of Asia. It is a symbol of wealth, power and beauty and the ultimate store of value. This is in contrast to people in the West, the majority of whom do not understand gold and it’s value.

This will change in the coming years.

 

Courtesy: Mark O’Byrne via Goldcore

Retail Store Closures Soar In 2014: At Highest Pace Since Lehman Collapse

Retail Store Closures Soar In 2014: At Highest Pace Since Lehman Collapse

Retail Store Closures Soar In 2014: At Highest Pace Since Lehman Collapse

What a better way to celebrate the rigged markets that are telegraphing a “durable” recovery, than with a Credit Suisse report showing, beyond a reasonable doubt, that when it comes to traditional bricks and mortar retailers, who have now closed more stores, or over 2,400 units, so far in 2014 and well double the total amount of storefront closures in 2013, this year has been the worst year for conventional discretionary spending since the start of the great financial crisis!

From Credit Suisse’s Michael Exstein

Since the start of 2014, retailers have announced the closure of more than 2,400 units, amounting to 22.6 million square feet, more than double the closures at this point in 2013 (940 units and 6.9 million square feet). After several years of attempting to cut overhead costs, the acceleration in store closures appears to be a response on the part of retailers to cope with the challenge of ecommerce and structural declines in foot traffic, and the need to address declining levels of in-store productivity. The year-to-date totals for store closing activities now challenges 2009 as the most recent year for the highest number of store closings announcements.

While distressed retailers (eg. Radio Shack) and bankruptcies, which have reached a three-year peak year-to-date, make up 63% of the unit closures in 2014, they comprise only 34% of the total square footage closed. On a square footage basis, broadline retailers  contributed over 28% of closures, with M, DDS, JCP, TGT, and Sam’s Club participating in right-sizing their store bases.

Office supply stores have been equally significant contributors to the rationalization process as they grapple with the effects of broader distribution and deeper online penetration. We expect this trend to continue as Office Depot evaluates its real estate in the wake of its merger with OfficeMax. Even dollar stores and drug stores, which combined have consistently built out hundreds of stores per year, are beginning to reel back on expansion, with Family Dollar and Walgreens both planning to shutter  underperforming stores.

The acceleration in retail closings follows several years of negative sales growth for many retailers. After slashing expenses and taking a more disciplined approach to spending, there appear to be few levers left to pull, as the top line growth remains difficult. Mall-based stores (both department store anchors and specialty apparel) in particular appear to have taken advantage of leases that have come up for renewal, as opportunities to close underproductive stores. Those that have not participated in the trend to close stores—such as higher end retailers (eg. JWN, Bloomingdale’s, and Saks)—have been relocating existing stores to more productive malls, or areas of existing malls. JWN for example recently announced the relocation of its Westfield Horton Plaza San Diego store to an upgraded area within the same mall, and is doing the same thing in Honolulu at the Ala Moana Center. 

 

Of course, it wouldn’t be a Wall Street sellside piece if there wasn’t a bullish spin on the data:

We would view more momentum in store closures as a positive for the retail industry. Retail as a whole remains overcapacitied…. further rationalization appears to be a necessary change in trend where even during good economic times the store base is being adjusted

Yup – nothing but blue skies ahead.

In fact, here is some more good news. As Bank of America notes, Consumer Durable spending – another key component of any, well, durable recovery – is founering. In their words: “Durable spending has had a very weak recovery by historic standards. The ratio of consumer durables to GDP shows that while the share of spending has recovered, it remains at recessionary levels.”

Don’t worry, that too is “positive” for the… making shit up industry.

Of course, who needs to spend on durables when one can just spend on stocks that in the new normal can never, ever go down?

 

Courtesy: Tyler Durden via Zerohedge

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