Commodity Trade Mantra

Netherlands, Germany Have Euro Disaster Plan – Possible Return to Guilder and Mark

Netherlands, Germany Have Euro Disaster Plan - Possible Return to Guilder and Mark

Netherlands, Germany Have Euro Disaster Plan – Possible Return to Guilder and Mark

The Dutch and German governments were preparing emergency plans for a return to their national currencies at the height of the euro crisis it has emerged. These plans remain in place.


German Gold Deutsche Mark – (Special Edition)

The Dutch finance ministry prepared for a scenario in which the Netherlands could return to its former currency – the guilder. They hosted meetings with a team of legal, economic and foreign affairs experts to discuss the possibility of returning to the Dutch guilder in early 2012.

The Dutch finance minister during the period has confirmed that Germany also discussed such scenarios.

At the time the Euro was in crisis, Greece was on the verge of leaving or being pushed out of the Euro and the debt crisis was hitting Spain and Italy hard. The Greek prime minister Georgios Papandreou and his Italian counterpart Silvio Berlusconi had resigned and there were concerns that the eurozone debt crisis was spinning out of control – leading to contagion and the risk of a systemic collapse.

A TV documentary broke the story last Tuesday. The rumours were confirmed on Thursday by the current Dutch minister of finance, Jeroen Dijsselbloem, and the current President of the Eurogroup of finance ministers in a television interview which was covered by EU Observer and Bloomberg.

“It is true that [the ministry of] finance and the then government had also prepared themselves for the worst scenario”, said Dijsselbloem.

“Government leaders, including the Dutch government, have always said: we want to keep that eurozone together. But [the Dutch government] also looked at: what if that fails. And it prepared for that.”

While Dijsselbloem said there was no need to be “secretive” about the plans now, such discussions were shrouded in secrecy at the time to avoid spreading panic on the financial markets.

When asked about Germany, Dijsselbloem said he couldn’t say whether that country’s government had made similar preparations.

German Silver Deutsche Mark – (1951-1974)

However, Jan Kees de Jager, finance minister from February 2010 to November 2012, acknowledged that a team of legal experts, economists and foreign affairs specialists often met at his ministry on Fridays to discuss possible scenarios.

“The fact that in Europe multiple scenarios were discussed was something some countries found rather scary. They did not do that at all, strikingly enough”, said De Jager in the TV documentary.

“We were one of the few countries, together with Germany. We even had a team together that discussed scenarios, Germany-Netherlands.”

When the EU Observer requested confirmation from Germany, the German ministry of finance did not officially deny that it had drawn up similar plans, stating simply:
“We and our partners in the eurozone, including the Netherlands, were and still are determined to do everything possible to prevent a breakup of the eurozone.”

This is quite a revelation. At that time the German finance minister Wolfgang Schauble had said that the Euro could survive without Greece. Whether it could survive without the Dutch is another matter entirely.

A Euro without Holland and especially Germany is currently inconceivable. De Jager also states that other countries found the prospect of a Euro break-up frightening.
So much so that they buried their heads in the sand rather than deal with the situation facing them. It appears that no emergency contingency plans were made in the unfortunately named PIIGS nations – Portugal, Ireland, Italy, Greece and Spain.

One has to wonder if the plans would have been made public had a TV documentary not forced the Dutch government to confirm the claim.

It is interesting to note that it is these two countries, Germany and Netherlands, whose citizens have also been at the forefront of the gold repatriation movement currently sweeping across Europe – France’s second largest party entered the fray this week.

In a climate with a lack of faith in fiat currencies, any return to a purely fiat guilder or mark would be risky in the absence of the confidence that gold backing provides.
Despite the implication that secrecy is no longer necessary because Europe is over the worst we believe the Dutch repatriation of 20% of it’s sovereign gold from the U.S. indicates that the Dutch are still, wisely, preparing for the worst – whether that be a euro crisis or indeed a dollar crisis and an international monetary crisis.

Their stated reason for returning their 122 tonnes of gold to Netherland’s soil was to instill public confidence in the Dutch central bank.

The prospect of a Euro-break up is a frightening one. It would appear that most Eurozone nations are ill-prepared and indeed unprepared for.

As always we recommend investors act as their own central bank by taking delivery of bullion or keeping gold and silver in secure, allocated and segregated vaults in safer jurisdictions such as Switzerland and Singapore.

For investors and savers currently using the euro, it begs the important question do you have a euro failure contingency plan?

Indeed, for investors and savers internationally using other fiat currencies, it begs the important question do you have a currency failure contingency plan?

While the risks in peripheral European nations of reversion to their national currencies and currency devaluations have diminished – some risks still remain.

The risk is that individual national governments may elect to take this route rather than suffer deflationary economic collapse and Depressions. Alternatively, it could happen through contagion or a systemic event like the collapse of a large European bank, a la Lehman Brothers, that leads to a domino effect jettisoning a member state out of the monetary union.

It could also come about should the German people and politicians decide that the European monetary project is not worth saving or they decide that it cannot be saved and elect to return to the Deutsche mark.
All significantly indebted nations, so called PIIGS and non PIIGS such as Japan, the UK and the U.S. are at risk of currency devaluations.

Competitive currency devaluations or the debasement of currencies for competitive advantage and currency wars poses real risks to the long term stability and prosperity of all democracies in the world and to the finances and savings of people in all countries.

 

MARKET UPDATE
Today’s AM fix was USD 1,184.50, EUR 950.80 and GBP 753.98    per ounce.
Yesterday’s AM fix was USD 1,196.50, EUR 959.20 and GBP 758.96 per ounce.

Yesterday’s PM fix was USD 1,194.75, EUR 956.49 and GBP 758.19 per ounce.
The U.S. markets were  closed for a national holiday.

Gold in USD – 5 Days (Thomson Reuters) 

In London, spot gold was down 0.6% at $1,184.44 in late morning trading. In Singapore, gold extended losses falling to a one-week low, on expectations that plunging oil prices could sap inflationary pressure, curbing the metal’s appeal as a hedge for traders.

Silver was down 1.1% at $16.04 an ounce, spot platinum was flat at $1,223.55 an ounce and spot palladium was up 0.1% at $809.50 an ounce.

The bullion market is awaiting the outcome of a referendum in Switzerland this Sunday that could force the Swiss National Bank to raise gold holdings to 20% of its forex reserves, repatriate its bullion, and undertake never to sell gold reserves.

The most recent opinion poll showed support among voters for the ‘Save Our Swiss Gold’ Initiative and the ‘yes’ side had slipped to 38% and the ‘no’ side are at 47%. A surprise ‘yes’ vote could prompt the Swiss central bank to buy about 1,500 tons of gold over the next five years. We believe the referendum will be closer than is currently expected and believe a “yes” vote is still possible.

Crude oil hit four-year lows near $70 a barrel, as OPEC refused to cut back production following a plunge of over 30% in oil prices since June.

Saudi Arabia blocked calls yesterday from Russia and poorer members of the OPEC oil exporter group for production cuts to arrest a slide in global prices. OPEC ministers meeting in Vienna left the group’s output ceiling unchanged despite global oversupply, marking a major shift away from its long-standing policy of defending prices.

Gold in USD – 10 Years (Thomson Reuters)

In the Eurozone inflation slowed in November to match a five-year low, signalling the European Central Bank may expand its unprecedented ‘stimulus’ program.  President Mario Draghi, who will lead a meeting of policy makers on December 4, says he wants to raise inflation “as fast as possible” and repeated yesterday that policy makers are united in their commitment to do more if needed.

Deutsche Bank Quits Precious Metals
Deutsche Bank is winding down its physical precious metals trading business, moving to further scale back its exposure to commodities after recent issues with financial regulators and alleged market manipulation.

The bank said in a statement that it “will retain some precious metals capability through its financial derivatives business.”

Increased regulatory scrutiny of how market benchmarks are set spurred an overhaul of precious metals fixings, price-setting rituals dating back a century for gold and silver, this year. Deutsche Bank said in January it would pull out of the daily gold and silver fixes. The bank was one of five gold and three silver members that participated in setting London fixings, benchmark rates used by mining companies, jewelers, refineries, mints and central banks to buy, sell and value bullion.

Indian and Chinese Demand Very Robust
India’s gold imports could climb to around 100 tonnes for a third straight month in November as dealers buy heavily for fear of curbs on overseas purchases, especially as the wedding season gets going.

China’s net gold imports from main conduit Hong Kong rose to 77.628 tonnes in October from 68.641 tonnes in September as the world’s biggest gold buyer saw strong demand for jewellery and bars. Total imports from Hong Kong to the mainland rose to 111.409 tonnes last month from 91.745 tonnes in September.

China is again heading for gold demand of some 2,000 metric tonnes in 2014 as seen in the Shanghai Gold Exchange (SGE) data year to date.

Gold As Safe Haven In Recent Years and In Non Western World Today
Citi’s Willem Buiter attack piece on gold was one of the most unbalanced anti gold pieces of research that we have ever seen and we have seen a lot. To say it lacked nuance is an understatement. Indeed, it played very loose with the truth regarding gold indeed.

The timing of the piece by Citibanks Dutch economist is interesting indeed – coming in the week that the Dutch repatriated 122 tonnes of their gold from the Federal Reserve and the Swiss go to the polls in their ‘Gold Initiative’- and it wreaks of a lot of nervousness in the corridors of certain banks and central banks.

The Dutch Central statement this week regarding the importance of their gold reserves is worth noting:

“In addition to a more balanced division of the gold reserves…this may alsocontribute to a positive confidence effect with the public.”

An economist working in a bank argues with the reality of human nature, physical nature and 6,000 years of history and calls gold a 6,000 year bubble.

Of course the real bubble is in banks, stocks, bonds and our modern Ponzi financial and monetary system.

Gold will still be around and likely still protecting people when many of the banks of today have gone the way of the dodo.

The very anti- gold position of Buiter is similar to many today – many of whom have a very short term, myopic, “western centric” view of the world and only see it through they eyes of dollars, pounds and euros.

This limited view blinds them to the reality of gold as a store of wealth throughout history and again today.

Willem Buiter should go to Syria or Ukraine today and speak to people there. They would tell him about the value of gold.

Conclusion
We are surprised that gold is lower this week given the backdrop of the Swiss gold referendum on Sunday, the Dutch repatriation of 122 tonnes of their gold this week and continuing very strong Russian, Indian and Chinese gold demand.

More short term weakness is possible and support is at $1,130/oz and $1,100/oz. We believe that gold is unlikely to go below that due to robust global demand but a close below $1,100/oz could lead to a sharp fall to the huge level of support which is the round number and near 50% retracement at $1,000/oz.

Smart money is accumulating bullion on the dip in anticipation of higher prices in 2015 and in the coming years.

We await the Swiss gold referendum with bated breath. It should make for interesting price movements Sunday night and Monday.

 

 
Courtesy: Goldcore

Deflation and Inflation – Why You Should Be Prepared for Both

Deflation and Inflation - Why You Should Be Prepared for Both

Deflation and Inflation – Why You Should Be Prepared for Both

[Ed. Note: The debate over whether or not the US economy will experience inflation or deflation in the near term is an extremely heated one… According to our own Chris Mayer, two respected economists almost came to blows over it. But, as Jim Rickards explains below, there really is no debate, since they’re both equally likely. Read on…]

Today’s investment climate is the most challenging one you have ever faced. At least since the late 1970s, perhaps since the 1930s. This is because inflation and deflation are both possibilities in the near term. Most investors can prepare for one or the other, but preparing for both at the same time is far more difficult. The reason for this challenging environment is not difficult to discern.

Analysts and talking heads have been wondering for five years why the recovery is not stronger. They keep predicting that stronger growth is right around the corner. Their forecasts have failed year after year and their confusion grows. Perhaps even you, who have seen scores of normal business and credit cycles come and go for decades, are confused.

If this “cycle” seems strange to you there’s a good reason. The current economic slump is not cyclical; it’s structural. This is a new depression that will last indefinitely until structural changes are made to the economy. Examples of structural changes are reduction or elimination of capital gains taxes, corporate income taxes and the most onerous forms of regulation. Building the Keystone Pipeline, reforming entitlement spending and repealing Obamacare are other examples. These are other structural policies have nothing to do with money printing by the Fed. This is why money printing has not fixed the economy. Since structural changes are not on the horizon, expect the depression to continue.

What’s the first thing that comes to your mind when you think of a depression? If you’re like most investors I’ve spoken to, you might recall grainy, black-and-white photos from the 1930s of unemployed workers in soup lines. Or declining prices. Yet if you look around today, you’ll see no soup lines, read that unemployment is only 6.2% and observe that prices are generally stable.

How can there be a depression? Well, let’s take each one by one.

The soup lines are here. They’re in your local supermarket. Government issues food stamps in debit card form to those in need, who just pay at the checkout line.

Despite popular beliefs, unemployment is at 1930s levels too. If the Bureau of Labor Statistics measured the rate using the Depression-era method, it would be much higher than 6.2%. Also, millions today are claiming disability benefits when unemployment benefits run out — that’s just another form of unemployment when the disabilities are not real or not serious, as is often the case.

What about prices? Here the story is different from the 1930s. Prices declined sharply from 1929-1933, about 25%, but they have been relatively stable from 2009-2014, rising only about 10% over the five-year period.

The Federal Reserve’s money printing is responsible. The Fed had an overly tight monetary policy in the early 1930s but has employed unprecedented monetary ease since 2009. Ben Bernanke, who was in charge at the time, was reacting to what he viewed as the erroneous Fed policy of the 1930s. In a 2002 speech on the occasion of Milton Friedman’s 90th birthday, Bernanke said to Friedman, “Regarding the Great Depression. You’re right, we did it. We’re very sorry. But thanks to you, we won’t do it again.”

But this did not mean that Bernanke had single-handedly discovered the cure for depression. Fighting deflation by itself does not solve the structural problems of the economy that lead to depressed growth. Instead, Bernanke, and now Yellen, have created an unstable dynamic tension.

Depressions are naturally deflationary. In a depression, debtors sell assets to raise cash and pay their debts. That pushes down asset prices. Falling asset prices, in turn, put other investors in distress, causing further asset sales. So it goes on in a downward price spiral.

Printing money is naturally inflationary. With more money chasing a given quantity of goods and services, the prices of those goods and services tend to rise.

The relative price stability you’re experiencing now is an artifact of deflation and inflation acting at the same time. Far from price stability, what you’re seeing is an extremely unstable situation. Think of the forces of deflation and inflation as two teams battling in a tug of war. Eventually, one side wins, but the battle can go on for a long time before one team wears out the other side.

If central banks stop causing inflation, deflation will quickly overwhelm the economy. If central banks don’t give up and keep printing money to stop deflation, they will eventually get more inflation than they expect. Both outcomes are very dangerous for you as an investor. The economy is poised on the knife edge of destructive deflation and runaway inflation. Prices could quickly and unexpectedly fall one way or the other.

This doesn’t mean you should throw up your hands and say “I don’t know.” Plenty of analysts will tell you why you should fear inflation. And prominent policymakers such as Christine Lagarde of the IMF and Mario Draghi of the ECB have warned of deflation. Yet analysis has to be more than a matter of guesswork or stating a bias. The correct analysis is that both deflation and inflation are possible. Anyone who warns just of inflation or deflation is missing half the puzzle.

If you knew deflation was coming, you’d have an easy time constructing a profitable portfolio. You would have some cash and invest primarily in bonds. The value of cash goes up during deflation as prices decline, and bonds rally as interest rates decline. You might want to own some raw land in that case also. During a deflationary period, the nominal value of the land might go down, but the costs to develop the land go down faster. The key would be to develop it cheaply in time for the next up cycle.

If, on the other hand, you knew inflation was coming, it would also be easy to construct a robust portfolio. All you would need to do is buy commodities like gold and oil, and stocks of companies with hard assets in sectors such as transportation, energy, natural resources and agriculture. You could also purchase fine art, which has excellent wealth preservation properties in an inflationary environment.

What should you do when the outcome is on the knife edge and could tip either way toward deflation or inflation?

The answer is prepare for both, watch carefully and stay nimble. Your initial portfolio should have gold, fine art, raw land, cash, bonds, select stocks and some alternatives in strategies like global macro hedge funds and venture capital. Not all of those strategies will pay off, but some will do well enough to outperform others and preserve wealth.

 
Courtesy: James G. Rickards via The Daily Reckoning

Petrodollar Death Means A Liquidity And Oil-Exporting Crisis On Deck

Petrodollar Death Means A Liquidity And Oil-Exporting Crisis On Deck

“There Will Be Blood”: Petrodollar Death Means A Liquidity And Oil-Exporting Crisis On Deck

Recently we posted the following article commenting on the impact of USD appreciation and dollar circulation among oil exporters, as well as how the collapsing price of oil is set to reverberate across the entire oil-exporting world, where sticky high oil prices were a key reason for social stability. Following today’s shocking OPEC announcement and the epic collapse in crude prices, it is time to repost it now that everyone is desperate to become a bear market oil expert, if only on Twitter…

How The Petrodollar Quietly Died, And Nobody Noticed

Two years ago, in hushed tones at first, then ever louder, the financial world began discussing that which shall never be discussed in polite company – the end of the system that according to many has framed and facilitated the US Dollar’s reserve currency status: the Petrodollar, or the world in which oil export countries would recycle the dollars they received in exchange for their oil exports, by purchasing more USD-denominated assets, boosting the financial strength of the reserve currency, leading to even higher asset prices and even more USD-denominated purchases, and so forth, in a virtuous (especially if one held US-denominated assets and printed US currency) loop.

The main thrust for this shift away from the USD, if primarily in the non-mainstream media, was that with Russia and China, as well as the rest of the BRIC nations, increasingly seeking to distance themselves from the US-led, “developed world” status quo spearheaded by the IMF, global trade would increasingly take place through bilateral arrangements which bypass the (Petro)dollar entirely. And sure enough, this has certainly been taking place, as first Russia and China, together with Iran, and ever more developing nations, have transacted among each other, bypassing the USD entirely, instead engaging in bilateral trade arrangements, leading to, among other thing, such discussions as, in today’s FT, why China’s Renminbi offshore market has gone from nothing to billions in a short space of time.

And yet, few would have believed that the Petrodollar did indeed quietly die, although ironically, without much input from either Russia or China, and paradoxically, mostly as a result of the actions of none other than the Fed itself, with its strong dollar policy, and to a lesser extent Saudi Arabia too, which by glutting the world with crude, first intended to crush Putin, and subsequently, to take out the US crude cost-curve, may have Plaxico’ed both itself, and its closest Petrodollar trading partner, the US of A.

As Reuters reports, for the first time in almost two decades, energy-exporting countries are set to pull their “petrodollars” out of world markets this year, citing a study by BNP Paribas (more details below). Basically, the Petrodollar, long serving as the US leverage to encourage and facilitate USD recycling, and a steady reinvestment in US-denominated assets by the Oil exporting nations, and thus a means to steadily increase the nominal price of all USD-priced assets, just drove itself into irrelevance.

A consequence of this year’s dramatic drop in oil prices, the shift is likely to cause global market liquidity to fall, the study showed.

This decline follows years of windfalls for oil exporters such as Russia, Angola, Saudi Arabia and Nigeria. Much of that money found its way into financial markets, helping to boost asset prices and keep the cost of borrowing down, through so-called petrodollar recycling.

But no more: “this year the oil producers will effectively import capital amounting to $7.6 billion. By comparison, they exported $60 billion in 2013 and $248 billion in 2012, according to the following graphic based on BNP Paribas calculations.”

In short, the Petrodollar may not have died per se, at least not yet since the USD is still holding on to the reserve currency title if only for just a little longer, but it has managed to price itself into irrelevance, which from a USD-recycling standpoint, is essentially the same thing.

According to BNP, Petrodollar recycling peaked at $511 billion in 2006, or just about the time crude prices were preparing to go to $200, per Goldman Sachs. It is also the time when capital markets hit all time highs, only without the artificial crutches of every single central bank propping up the S&P ponzi house of cards on a daily basis. What happened after is known to all…

At its peak, about $500 billion a year was being recycled back into financial markets. This will be the first year in a long time that energy exporters will be sucking capital out,” said David Spegel, global head of emerging market sovereign and corporate Research at BNP.

 

Spegel acknowledged that the net withdrawal was small. But he added: “What is interesting is they are draining rather than providing capital that is moving global liquidity. If oil prices fall further in coming years, energy producers will need more capital even if just to repay bonds.”

In other words, oil exporters are now pulling liquidity out of financial markets rather than putting money in. That could result in higher borrowing costs for governments, companies, and ultimately, consumers as money becomes scarcer.

Which is hardly great news: because in a world in which central banks are actively soaking up high-quality collateral, at a pace that is unprecedented in history, and led to the world’s allegedly most liquid bond market to suffer a 10-sigma move on October 15, the last thing the market needs is even less liquidity, and even sharper moves on ever less volume, until finally the next big sell order crushes the entire market or at least force the [NYSE|Nasdaq|BATS|Sigma X] to shut down indefinitely until further notice.

So what happens next, now that the primary USD-recycling mechanism of the past 2 decades is no longer applicable? Well, nothing good.

Here are the highlights of David Spegel’s note Energy price shock scenarios: Impact on EM ratings, funding gaps, debt, inflation and fiscal risks.

Whatever the reason, whether a function of supply, demand or political risks, oil prices plummeted in Q3 2014 and remain volatile. Theories related to the price plunge vary widely: some argue it is an additional means for Western allies in the Middle East to punish Russia. Others state it is the result of a price war between Opec and new shale oil producers. In the end, it may just reflect the traditional inverted relationship between the international value of the dollar and the price of hard-currency-based commodities (Figure 6). In any event, the impact of the energy price drop will be wide-ranging (if sustained) and will have implications for debt service costs, inflation, fiscal accounts and GDP growth.

Have you noticed a reduction of financial markets liquidity?

Outside from the domestic economic impact within EMs due to the downward oil price shock, we believe that the implications for financial market liquidity via the reduced recycling of petrodollars should not be underestimated. Because energy exporters do not fully invest their export receipts and effectively ‘save’ a considerable portion of their income, these surplus funds find their way back into bank deposits (fuelling the loan market) as well as into financial markets and other assets. This capital has helped fund debt among importers, helping to boost overall growth as well as other financial markets liquidity conditions.

Last year, capital flows from energy exporting countries (see list in Figure 12) amounted to USD812bn (Figure 3), with USD109bn taking the form of financial portfolio capital and USD177bn in the form of direct equity investment and USD527bn of other capital over half of which we estimate made its way into bank deposits (ie and therefore mostly into loan markets).

The recycling of petro-dollars has benefited financial markets liquidity conditions. However, this year, we expect that incremental liquidity typically provided by such recycled flows will be markedly reduced, estimating that direct and other capital outflows from energy exporters will have declined by USD253bn YoY. Of course, these economies also receive inward capital, so on a net basis, the additional capital provided externally is much lower. This year, we expect that net capital flows will be negative for EM, representing the first net inflow of capital (USD8bn) for the first time in eighteen years. This compares with USD60bn last year, which itself was down from USD248bn in 2012. At its peak, recycled EM petro dollars amounted to USD511bn back in 2006. The declines seen since 2006 not only reflect the changed  global environment, but also the propensity of underlying exporters to begin investing the money domestically rather than save. The implications for financial markets liquidity – not to mention related downward pressure on US Treasury yields – is negative.

* * *

Even scarcer liquidity in US Capital markets aside, this is how BNP sees the inflation and growth for energy exporters:

Household consumption benefits: While we recognise that the relationship is not entirely linear, we use inflation basket weights for ‘transportation’ and ‘household & utilities’ (shown in the ‘Economic components’ section of Figure 27) as a means to address the differing demand elasticities prevalent across countries. These act as our proxy for consumption the consumption basket in order to determine the economic benefit that would result as lower energy prices improve household disposable income. This is weighted by the level of domestic consumption relative to the economy, which we also show in the ‘Economic components’ section of Figure 27.

Reduced industrial production costs: Outside the energy industry, manufacturers will benefit from falling operating costs. Agriculture will not benefit as much and services will benefit even less.

Trade gains and losses: Lost trade as a result of lower demand from oil-producing trade partners will impact both growth and the current account balance. On the other hand, better consumption from many energy-importing trade partners will provide some offset. The percentage of each country’s exports to energy producing partners represents relative to its total exports is used to determine potential lost growth and CAR due to lower demand from trade partners.

Domestic FX moves are beyond the scope of our analysis. These will be tied to the level of openness of the economy and the impact of changed demand conditions among trade partners as well as dollar effects. Neither do we address non-oil related political risks (eg sanctions) or any fiscal or monetary policy responses to oil shocks.

GDP growth

The least impacted oil producing country, from a GDP perspective, is Brazil followed by Mexico, Argentina, Tunisia and Trinidad & Tobago. The impact on fiscal accounts also appears lower for these than most other EMs.

Remarkably, the impact of lower oil for Russia’s economic growth is not as severe as might be expected. Sustained oil at USD80/bbl would see growth slow by 1.8pp to 0.6%. This compares with the worst hit economies of Angola (where growth is nearly 8pp lower at -2%), Iraq (GDP slows to -1.6% from 4.5% growth), Kazakhstan and Azerbaijan (growth falls to -0.9% from 5.8%).

For a drop to USD 80/bbl, it can be seen (in Figure 27) that, in some cases, such as the UAE, Qatar and Kuwait, the negative impact on GDP can be comfortably offset by fiscal stimulus. These economies will probably benefit from such a policy in which case our ‘model-based’ GDP growth estimate would represent the low end of the likely outcome (unless a fiscal policy response is not forthcoming).

Global growth in 2015? More like how great will the hit to GDP be if oil prices don’t rebound immediately?

On the whole, we can say that the fall in oil prices will prove negative, shaving 0.4pp from 2015 EM GDP growth. The collective current account balance will fall 0.58pp to 0.6% of GDP, while the budget deficit will deteriorate by 0.61pp to -2.9%. This probably has the worst implications for EM as an asset class in the credit world.

Energy exporters will fare worst, with growth falling by 1.9pp and their current account balances suffering negative pressure to the tune of 2.69pp of GDP. Budget balances will suffer a 1.67pp of GDP fall, despite benefits from lower subsidy costs. The impact of oil falling USD 25/bbl will be likely to put push the current account balance into deficit, with our analysis indicating a 0.3% of GDP deficit from a 2.4% surplus before. Fortunately, the benefit to inflation will be the best in EM and could help offset some of the political risks from reduced growth.

As might be expected, energy importers will benefit by 0.4pp better growth in this scenario. Their collective current account will improve by 0.6pp to 1.1% of GDP.

The regions worst hit are the Middle East, with GDP growth slowing to 0.3%, which is 3.8pp lower than when oil was averaging USD105/bbl.The regions’ fiscal accounts will also suffer most in EM, moving from a 1.7% of GDP surplus to a 1.8% deficit. Meanwhile, the CAB will drop 5.3pp, although remain in surplus at 3.9%. The CIS is the next-worst hit, from a GDP perspective, with regional growth flat-lined versus 1.91% previously. The region’s fiscal deficit will worsen from 0.7% of GDP to -1.8% and CAB shrink to 0.7% from 3% of GDP. Africa’s growth will come in 1.4pp slower at 2.8% while Latam growth will be 0.4pp slower at 2.2%. For Africa, the CAB/GDP ratio will fall by 2.4pp pushing it deep into deficit (-2.9% of GDP).

Some regions benefit, however, with Asia ex-China growing 0.45bpp faster at 5.5% and EM Europe (ex-CIS) growing 0.55pp faster at 3.9%, with the region’s CAB/GDP improving 0.69pp, although remain in deficit to the tune of -2.4% of GDP.

* * *

And so on, but to summarize, here are the key points once more:

  • The stronger US dollar is having an inverse impact on dollar-denominated commodity prices, including oil. This will affect emerging market (EM) credit quality in various ways.
  • The implications of reduced recycled petrodollars has significant ramifications for financial markets, loan markets and Treasury yields. In fact, EM energy exporters will post their first net drain on global capital (USD8bn) in eighteen years.
  • Oil and gas exporting EMs account for 26% of total EM GDP and 21% of external bonds. For these economies, the impact will be on lost fiscal revenue, lost GDP growth and the contribution to reserves of oil and gas-related export receipts. Together, these will have a significant effect on sustainability and liquidity ratios and as a consequence are negative for dollar debt-servicing risks and credit ratings.

 

 
Courtesy: Zerohedge

Swiss Anti Gold Propaganda Questioned – Gold Protects Purchasing Power

Swiss Anti Gold Propaganda Questioned - Gold Protects Purchasing Power

Swiss Anti Gold Propaganda Questioned – Gold Protects Purchasing Power

By Eric Schreiber, independent asset manager, former head of commodities UBP, former head of precious metals Credit Suisse Zurich. All views expressed are his and may not reflect those of his former employers.

The Swiss will vote on a referendum on November 30th that would ban the Swiss National Bank (SNB) from selling current and future gold reserves, repatriate foreign stored gold holdings to Switzerland, and mandate that gold must comprise a minimum of 20% of central bank assets. The SNB does not usually comment on political referendums. However, in this case it has done so quite vocally.

Why has the central bank decided to step into the political fray and oppose this initiative? What are its concerns? Are they valid or motivated by other factors?

The SNB’s primary objections to the gold initiative are three fold. 1) It claims that gold is “one of the most volatile and riskiest investments”, 2) that a 20% gold requirement will lower the “distributions to the confederation and the cantons” since gold does not pay interest like bonds and dividend paying stocks, and 3) that the 20% gold holding requirement will interfere with its ability to conduct monetary policy and complicate efforts to maintain “the minimum exchange rate”, the “temporary” policy of pegging the Swiss franc (CHF) to the Euro (EUR) it initiated in 2011 and continues to enforce to this day.

The first two concerns can quickly be addressed and discounted. Gold is indeed a volatile asset at times but so are bonds and equities. In recent years Greek, Spanish, Italian, Irish and other European bonds have been far more volatile than gold. The SMI, the Swiss stock index, lost over 50% of its value on two separate occasions between 2000 and 2009 while gold steadily rose at an annual rate of 8.50% over the same period.

Regarding the second concern, the distribution of proceeds derived from financial speculation and paid to the confederation and cantons, one has to question whether or not it is really appropriate for the SNB to re-brand itself as a hedge fund instead of remaining focused on its core responsibilities as a central bank.

To properly address the third SNB concern requires a historical context and a more detailed analysis. Prior to the change in the Swiss constitution, the CHF was backed by a minimum amount of 40% gold. Despite this constraint, Swiss monetary policy at the SNB was unhindered and functioned properly during the post World War II period. The SNB is correct in implying that today a partial gold backing, as required by the referendum, would make its policy of weakening the CHF against the EUR more difficult. Although the SNB has raised the currency peg as a reason for voting against the referendum the issue has not been directly addressed by the “YES” camp. Is the peg necessary? Does the population in Switzerland benefit as a whole from a weak EURCHF exchange rate? Why does the SNB feel compelled to continue a policy that it characterized over 3 years ago as “temporary”? How did “the minimum exchange rate” policy come to be? Why hasn’t there been a public debate about it?

The answer to these questions begins with a look back into regional history a little over two decades ago. The Swiss population voted down two separate initiatives, one in 1992 and the other in 2001, to join the European Union (EU). Despite the popular votes, Switzerland was integrated into the EU for all practical purposes although officially it still remains outside the group of member nations. Entry into the EU was initially achieved by political means through a series of bilateral treaties, 10 in total, and then later in 2005 by popular vote in favor of the Schengen agreement. Laws between the EU and Switzerland were harmonized and Swiss border controls with EU member countries were abolished to permit the free flow of people, goods, and services. Unfortunately, Switzerland’s stealth ascension to the EU made a public vote on whether or not to replace the nation’s sovereign currency the CHF with the EUR politically impossible. To circumvent the issue, the SNB decreed on September 6th 2011 that it would enforce a “temporary” peg of 1.20 CHF to the EUR, a policy it refers to as “the minimum exchange rate”, to fend off EUR flows entering the country due to the financial crisis that was engulfing Spain and Greece at the time. The CHF would henceforth be permitted to loose value against the EUR but never to strengthen beyond 1.20. In this manner, monetary policy for Swiss affairs was quietly handed over to the European Central Bank (ECB) while maintaining the mirage of a Swiss sovereign currency before the public. The CHF was transformed overnight into a derivative instrument of the EUR without the ratification or knowledge of the population. The chart below shows the link between the EUR and the CHF derivative instrument since the “temporary” “minimum exchange rate” measure was put in place over 3 years ago. Note how the red line, the CHF, closely tracks the green line the EUR, but always remains a little bit below it (weaker) but never above it (stronger). Why is this policy still in place given the fact that the crisis in Spain and Greece has ended according to the EU?

(Source Bloomberg)

The conversion of the sovereign Swiss currency into a EUR derivative tracking unit was achieved by the SNB in a four step process:

1 – the SNB publicly announced in 2011 that it stood ready to print “unlimited quantities of CHF “ and proceeded to print CHF out of thin air

2 – the SNB sold the newly minted CHF to buy EUR when the EURCHF exchange rate traded below 1.20

3 – the SNB used the EUR it acquired in step 2 to buy EUR denominated bonds

4 – the SNB promised Federal and Cantonal politicians the future interest “revenue” from the vast bond stockpile

Evidence of this process can be seen in the figure below demonstating the dramatic expansion of the SNB balance sheet since the “minimum exchange rate policy” was put into effect. At over 83% of GDP, the Swiss National Bank’s EUR bond purchasing program is in a league of its own when compared to other activist central banks around the world. SNB “assets” have surpassed 520B CHF and keep growing.


(Source Bloomberg)

By gorging itself on EUR denominated bonds and bloating its balance sheet the SNB has created a significant foreign exchange risk exposure for itself. The SNB cannot meaningfully reduce its holdings and extricate itself from the currency risk it has created without incurring significant losses selling its inventory of EUR bonds at a rate below the 1.20 level. China, a country that has pegged its currency to the USD for decades, finds itself in a similar predicament. It is unable to sell its massive inventory of USD holdings without putting pressure on its own peg as well. However the Chinese and the Swiss situation differs in one very important manner. China is a net exporter of goods and services to the US. Chinese losses on the import side of the trade balance are more than offset by gains on the export side of the trade balance. This has been one of the key elements of China’s growth strategy since the 1990s. Chinese policy makers systematically undervalue their currency to provide an artificial boost for their exports. Switzerland on the other hand is a chronic net importer of goods and services from the EU and thus does not have the offsetting EU exports in sufficient quantity to compensate for the damage the peg inflicts on its domestic purchasing power.


(Source Bloomberg)

Thus, the SNB “minimum exchange rate” policy impoverishes the domestic Swiss population by increasing the price of all EU imports purchased in Switzerland. This is perhaps the most egregious and certainly least publicized effect of the SNB action. Each time a Swiss resident purchases a good or service in Switzerland made in the EU, he or she is rendered poorer by the actions of his or her own national bank.

The problem of central bank overreach is certainly not isolated to Switzerland. Since the financial crisis 6 years ago, central banks around the world have interfered in and manipulated bond, foreign exchange, and equity markets on an unprecedented scale. These unelected institutions have actively redistributed wealth from one group to another and compete against one another to adjust the purchasing power of their national currency downwards relative to other nations without the knowledge of their populations. For over 3 years the SNB has been operating opaquely behind the scenes substituting another currency for its own, converted its citizen’s savings into EUR, and imposing a stealth tax on European imports without public consent.

A “YES” vote for the gold referendum is a first step towards redressing the imbalance that exists between the SNB and the people of Switzerland. A “YES” vote will begin a process to restore restraint, accountability, and transparency on an institution that took advantage of the removal of its previous gold holding constraint already once before to explode its balance sheet, reinvent itself as a hedge fund, and significantly expand into areas of policy far beyond its original remit. Central banks should be lenders of last resort and systemic regulators. In a direct democracy, decisions regarding taxation, membership in trade / political unions, and the autonomy of the national currency should be determined by popular vote not decreed or circumvented by central bank edict.

 

 
Courtesy: Goldcore

Gold Is A 6,000 Year Old Bubble – Citi’s Dutch Strategist Throws Up All Over Gold

Gold Is A 6,000 Year Old Bubble - Citi's Dutch Strategist Throws Up All Over Gold

“Gold Is A 6,000 Year Old Bubble” – Citi’s Dutch Strategist

Citigroup may have been unable to prevent the Netherlands from repatriating some 122 tons of “a fiat commodity currency with insignificant intrinsic value“, or in the words of Ben Bernanke, “tradition”, but it sure won’t stop that erudite expert on the timing of Greece’s exit from the Eurozone, Willem Buiter, from doing all in his power to throw up all over the “fiat currency” known as gold. So with Buiter no longer predicting with certainly just which month in 2010, 2011, 2012 Grexit will take place, here are his bullet points that make readers scratch their heads in wonder:

  • Gold is a fiat commodity currency (with insignificant intrinsic value).
  • Bitcoin is a fiat virtual peer-to-peer currency (without intrinsic value).
  • Gold and Bitcoin are costly to produce and store.
  • Gold as an asset is equivalent to shiny Bitcoin.
  • Central bank fiat paper currency and fiat electronic currency are socially superior to gold and Bitcoin as currencies and assets.
  • There is no economic or financial case for a central bank to hold any single commodity, even if this commodity had intrinsic value.
  • Forbidding a central bank from ever selling any gold it owns reduces the value of those gold holdings to zero

Scratching… because some may ask if gold is indeed such a worthless insignificant “fiat currency” (don’t ask), then why just two months ago, did Citibank rush to be “reclassified as a spot Market Making Member of the London Bullion Market Association with effect from today, 25th September, 2014… In order to qualify as a LBMA Market Maker, a company must offer two-way quotations in both gold and silver to the other Market Makers throughout the London business day.” Could it be that gold actually has some value to Citi, if nothing else than pocketing commissions from traders, now that the bank’s rigging of everything from Libor, to FX to, drumroll, gold, is no longer possible?

Here are some of the more amusing punchlines from Citi in its blitz-propaganda campaign aimed at the undecideds in the Swiss gold referendum:

On November 30th, 2014, the Swiss will vote in a referendum on a popular initiative ‘Save our Swiss gold’ (henceforth the Gold Initiative). If the Gold Initiative passes three consequences follow: (1) the Swiss National Bank (the SNB) must hold 20% of its assets as gold, (2) the SNB has to repatriate the 30% of its official gold stock that is now held abroad by the Bank of England and Bank of Canada and has to physically hold all its gold in Switzerland, and (3) the SNB may never sell any gold again.

 

Figure 1 shows the total assets of the SNB, its gold reserves and its other foreign exchange reserves, the sum of foreign currency investments, the reserve position with the IMF and international payment instruments. There is a break in the series for the value of the gold holdings and for total assets: as of 2000, gold holdings have been priced at market value. Until 1999, they were valued at the official parity price of CHF 4,596 per kilogram.

 

 

As can be seen from Figure 1, the balance sheet of the SNB has exploded in size since it began to lean against the appreciation of the Swiss Franc by active foreign exchange interventions early in 2009. Its balance sheet at the end of September 2014 stood at 522 bn Swiss Francs, about 83% of annual GDP. On that same date, the value of its gold reserves was about 39 bn Swiss Francs, about 7.5% of the value of its total assets. That represented 1,040 metric tonnes of gold, almost 129 grams (4.5 oz.) per capita. In 2000, the SNB held 2,500 tonnes of gold and it has also been the biggest national seller since.

 

If the gold initiative passes, the SNB would have to purchase at least 1,733 metric tonnes of gold to meet the 20% threshold by 2019 (based on end-of September 2014 SNB balance sheet size and gold price). The world’s annual production of gold is around 2,500 metric tons.

 

The price of gold, like that of any asset price, is volatile. In nominal terms it has increased spectacularly over the more than 200-year period shown in Figure 2, and especially since the end of the gold peg of the US dollar in 1971. In real terms, the increase has been somewhat less spectacular, from $10.08 in 1971 (measured in 1913 dollars) to $59.89 in 2013. The real price of gold hit $73.60 in 1980 and $73.30 in 2012, underlining the volatility of the (real) gold price. Someone who invested in gold in 1971 and held onto it for 42 years, that is, till 2013, would have achieved an annual real rate of return of 4.3 percent – reasonable given the riskiness of the asset.

 

 

Item (2) on the Gold Initiative ballot makes little sense to us. Holding all one’s physical assets in one nation means ignoring the benefits of geographic diversification of ‘custodial risk’. Item (3) is quite extraordinary because it would make the SNB’s gold holdings worthless. Making it illegal to ever sell any of the gold the central bank has now or acquires in the future and enforcing this gold sale ban effectively would make the gold useless as an international reserve. The gold stock can never be used for foreign exchange market interventions and it cannot be used as collateral. The gold becomes useless as a store of value of any kind. The gold has no consumption value to the central bank. Its value is therefore zero.

Apparently the Russian, the Germans and the Dutch never got this particular memo. Ukraine however sure did…

Yet in an attempt to at least appear somewhat objective, Buiter devotes a few hundreds words to what he views is “The good news for gold bugs”:

Since gold is a fiat commodity currency, its value will be determined largely by its attractiveness relative to other fiat currencies – the fiat paper currencies issued by central banks. Gold should not be analyzed as one of a set of intrinsically valuable commodities (silver, iron, lead, zinc, platinum, aluminum, titanium etc. etc.) but as part of a set of intrinsically useless and valueless fiat currencies – the US dollar, the yen, the Yuan, the euro, sterling, the rupee, the rouble, Bitcoin etc. etc.). It is therefore in times that market participants are nervous about the future value of most other fiat currencies that gold will be most attractive. 

 

Such a time is what we are going through now. Many systemically important central banks have expanded their base money stocks and balance sheets massively. The Fed has quadrupled the size of its balance sheet. The Bank of England has more than tripled the size of its balance sheet. Many central banks have bought vast amounts of public debt. In the UK, out of the initial £375 bn of quantitative easing, almost everything was spent on gilts. Over the past two years, the Fed added $1.7 trillion to its balance sheet (which is around $4.5 trillion as of end-October 2014) through large-scale asset purchases involving Treasuries and Agency MBS.

 

Although in most of the developed world low-flation or even deflation is the immediate threat, there is a medium and long-term threat of much higher inflation in all countries with enlarged central bank balance sheets and the prospect of large future fiscal deficits. The great advantage to investors of gold is that, although it is not intrinsically valuable, it is very costly to increase its stock. The tap can be opened at the drop of a hat for fiat paper and electronic currency. The tap produces never more than a trickle in the case of gold.

 

So when fiscal profligacy threatens price stability in some of the main industrial countries (especially the US and the UK) because the central banks in these countries may be forced to monetize both the stock and large new net flows of public debt, the one fiat money whose quantity cannot be varied at will by a monetary authority will do well. We see that with gold  today. We also see that, to a lesser degree, in the strength of the euro. The ECB is by far the most independent of the leading central banks. It also has a heavily asymmetric de-facto interpretation of price stability: inflation is unacceptable, deflation is OK.

 

So until the risk of serious inflation is removed from the medium-term outlook for the US, the UK and other fiat currencies, gold could be a relatively attractive store of value despite the cost of storing it.

 

This argument, however, assumes that if paper or electronic fiat money loses its value, gold will keep its value. That is an assumption and, as I shall argue in what follows, most likely an unwarranted assumption.

That’s the good news to “gold bugs.” And now comes the propaganda.

An economy with fiat money can have many different equilibria. To make the point as clearly and simply as possible, consider a stationary economy. Population, endowments, technology, government spending, taxes and preferences are all constant. The government budget is balanced. Prices are flexible. There is a constant stock of fiat money (which could be paper money, gold, Rai, pet rocks, or Bitcoin). This fiat money is perfectly durable and therefore can serve as a store of value. It pays no interest. Because this fiat money exists and is  durable, it can, in principle, be a store of value – an asset. It is may help, but is not necessary for the argument that follows to assume that, should this fiat money have positive value, society has (informally/spontaneously/collectively) decided to use it as a medium of exchange or as means of payment. It could even be legal tender.

 

With a bit of further work, it can be shown that such an economy will have an equilibrium with a positive, constant price of money (a constant general price level). Economists call this the fundamental equilibrium. This stationary economy will, however, also have many other (in fact infinitely many other) non-stationary equilibria, called (speculative) bubbles. They always have equilibria in which the value of money starts at a positive value but falls steadily towards zero – the general price level rises without bound even though the quantity of money is constant. The holders of money anticipate the future inflation and thereby reduce the real stock of money balances they want to hold. This further increases the actual and expected rate of inflation, and the real stock of money balances goes to zero: the general price level goes to infinity or the price of money goes to zero. In other words, the economy becomes Zimbabwe.

 

What is often ignored is that this economy has an equilibrium that is even more ‘fundamental’ than the ‘fundamental’ equilibrium with a constant positive value of money. That is the equilibrium in which the price of money is zero in every period, not just in the long run (as with the speculative inflationary bubble equilibria). Remember, fiat money, including gold or Bitcoin, is intrinsically useless. It has value only because people believe it to have value. If everyone expects that money will have no value in the next period, it will have no value this period, because no-one will be willing to take receipt of money to carry it into the next period where it will be valueless. So fiat money with a zero value is always an (unfortunate) fundamental equilibrium.

 

I would actually call it the only fundamental equilibrium. All other equilibria with a positive price of money – an asset with no intrinsic value – are benign (relatively speaking) bubbles. The constant price of money (constant general price level) equilibrium is also a bubble, based entirely on belief and trust – a beneficial bootstrap equilibrium, lifting itself by its hair, like the Baron von Münchhausen. In a world with multiple fiat moneys, the zero value of money equilibrium lurks for each of the fiat currencies, including gold and Bitcoin. In a classic paper, Kareken and Wallace (1984) have shown that even in the other (nice) fundamental equilibrium, in which each of these fiat currencies has a constant positive value, those constant  positive values can be anything – there is exchange rate indeterminacy between the various fiat currencies. This holds for paper or electronic fiat money, gold and Bitcoin.

 

So if gold has positive, albeit wildly fluctuating value, it is because we are in a benign bubble for gold. Likewise, Bitcoin’s positive value represents a benign Bitcoin bubble. The gold bubble is, of course, pretty impressive. Intrinsically useless gold has positive value. It has had positive value for nigh-on 6,000 years. That must make it the longest-lasting bubble in human history.

Yup, Citi just called gold a 6,000 year old bubble: just call it “tradition.”

Is there a possibility that, out of the blue, the market could produce a zero value for central bank-issued fiat paper and electronic money (base money)? Yes, if the prices of goods and services in terms of base money are freely flexible. Fortunately they are not. The world is Keynesian. Nobody understands the mysteries of the unit of account or numéraire, but for some reason in most societies and most of the time, central-bank issued fiat money or base money has been the unit of account for most contracts, and prices of goods and services in terms of this numéraire, are sticky – empirically and for reasons we don’t understand, but they undoubtedly involve limited computational capacity and other manifestations of bounded rationality. Nominal wage and price rigidities therefore rule out the zero price of base money equilibrium (notwithstanding the fundamental equilibrium at the end of a hyperinflation).

He’s right: the world is Keynesian. That explains why never in the history of mankind have all central banks had to coordinate all their efforts to inject trillions of liquidity in the system to keep it from collapsing on itself, and provide the required credit money for a world in which growth is only possible as long as inside or outside money is created de novo out of thin air. It also explains, why over the past decade, western finance has gone from bubble to burst to bigger buggle, to more explosive burst… until we now find ourselves in the ultimate bubble – one where all central banks have bet all in on inflating away a global debt load which guarantees the world a slow, miserable, deflationary collapse – in the words of Albert Edwards, an Ice Age – unless there is a dramatic surge in inflation (see: Japan). Perhaps as the only natural offset to this sheer Keynesian lunacy, gold’s “6000 year old bubble” nature does not seem all that shocking after all…

But other asset prices are not sticky in terms of the numéraire. There exists therefore an equilibrium in which the price of all other fiat moneys (including Bitcoin and gold) in terms of base money is zero. We are obviously not in an equilibrium in which the prices of gold and Bitcoin at zero.Does that mean that in the future also the value of gold and of Bitcoin will be (relatively stable) even if the central bank were to start running the printing presses at full speed, producing a hyperinflation in terms of base money prices? Not necessarily. Assume the initial prices of both gold and Bitcoin in terms of base money are positive and that the value of base money in terms of goods and services is positive. Once gold and Bitcoin have positive value in terms of base money today, their future value is determined by no-arbitrage relationships between these three fiat moneys – all of which don’t have any intrinsic value as consumer goods, intermediate goods or capital goods. No arbitrage means the absence of risk-free pure profits from buying and selling these three stores of value against each other. Since neither currency nor gold nor Bitcoin is interest-bearing, the exchange rate between currency, gold and Bitcoin should be expected to be constant over time. Any change in the currency price of Bitcoin and gold is therefore unanticipated. There must have been a lot of major  surprises! The fact that the stocks of Gold and Bitcoin are finite does therefore not suffice to keep them safe from hyperinflationary base money issuance by the central bank.

In other words, even if, and Buiter is quite close to suggesting that is the endgame here, there is hyperinflation at the end, even then gold may well be worthless. So… can we just use LBMA market maker Citigroup to sell it to Citigroup’s prop desk?

And now, the punchline. Here is Buiter’s conclusion:

I don’t want to argue with a 6,000-year old bubble. There have been hyperinflations with the value of central bank base money going to zero, but the price of gold has not followed that of paper money. Perhaps that was because, at the time, gold still  had some intrinsic value as a productive input, even today retains intrinsic value as a consumer good. Even if we view gold as an intrinsically valued commodity, it would still be unsound to invest 20% of the central bank’s balance sheet in a single commodity. If the central bank is to invest in commodities, better to have abalanced portfolio of commodities or, more conveniently, a balanced portfolio of commodity ETFs or other derivatives.

 

Requiring a central bank to put 20 percent of its balance sheet in any single commodity, even if that commodity had meaningful intrinsic value, represents a highly unorthodox and risky investment strategy, in our view, regardless of whether one judges it by its likely future profitability or by its wider social benefits. We conjecture that the SNB is most concerned that the Gold Initiative might pass.

 

Even though I view gold as a pure bubble, that bubble may well be good for another 6,000 years. Its value may go from $1,200 per fine ounce to $1,500 or $5,000 for all I know. Investing a vast amount of money in something whose value is based on nothing more than a set of self-confirming beliefs will make for an exciting ride. Whether that is enough to impose it as a requirement on one’s central bank is another matter.

Dear Willem, thank you for that valiant effort.After reading a few thousands words of empty propaganda we understand your “confusion”: our advice, if you want to understand what gold really is, read the following from Kyle Bass:

“Buying gold is just buying a put against the idiocy of the political cycle. It’s That Simple”

Because if there is a bubble that is even bigger and longer than the “6000-year-old gold bubble” it is that of human corruption, greed, and idiocy. And that doesn’t even include the stupidity of those who don’t grasp this simple truth.

As for gold being a nearly worthless fiat currency, if you can perhaps first convince your homeland to return those 122 tons of gold it just repatriated in secret from the NY Fed in direct refuation of, well, everything you just said before you go ahead advising foreign nations what they should do, well that would be just swell.

Finally, we are confident that upon reading the above JPMorgan will promptly recant and admit that what he really meant was “gold is a 6,000 year old bubble and nothing else“…

 
Courtesy: Zerohedge

A Tidal Wave of Gold Repatriations Could be Unleashed

A Tidal Wave of Gold Repatriations Could be Unleashed

A Tidal Wave of Gold Repatriations Could be Unleashed – Nathan McDonald

central_bank_germany

A tidal wave of gold repatriations may have begun. As speculated in my last post, I raised a concern that should be shared with all western Central bankers…a widespread flood of countries demanding their gold back to their home soils.

This notion sounds logical to any sane individual, but to a central banker who is gold negative, this is their worst nightmare. To understand why, you need to step back and see the big picture, which shows the stark reality of how rare gold truly is and how little of it remains in western vaults, despite what the mainstream media would have you believe.

First it was Germany, then it was the Dutch. Soon it could be Switzerland depending on the results of their gold repatriation referendum, which central bankers are nervously awaiting the results. Now, there is France.

There is a strong possibility that France, which is currently part of the problem, could become an ally of the gold community going forward.

Marine Le Pen, the leader of the French right-wing Front National party, and who is currently leading in preliminary polls, ahead of  president Hollande, wrote a letter to the Central bank of France, which detailed a list of demands.

Detail of the facade of the Bank of France headquarters in ParisThese demands have set central bankers on edge, as they are anything but friendly to their current fiat power structure and which include the following:

–   Urgent repatriation of all of our gold reserves located abroad back to French soil
–   An immediate discontinuation of any gold sales program
–   Conversely, a gradual reallocation of a significant portion of foreign exchange reserves in the balance sheet of the Bank of France by buying gold at each significant decrease in the price of an ounce (with a recommendation of 20%)
–   A suspension of any financial commitment or loan contract of our gold reserves
–   At the patrimonial and financial balance of the 2004 gold sales transactions ordered by N. Sarkozy
swiss_central_bankGiven the current polling numbers, there is a strong possibility that Marine Le Pen and her party could be elected into power. This letter indicates how she feels towards gold. Clearly, she does not perceive gold as a barbarous relic.

dutch-central-bank

Given this fact, you can expect a strong, organized effort to discredit and bring her popularity down. Western central bankers know how fragile their current fiat system is. Their power rests predominately in their ability to print endless amounts of funny money out of thin air, and gold is their Achilles heel.

The double whammy of a YES vote in the Swiss gold referendum and the repatriation of Frances gold from the NY FED, will be more than what the current manipulated system can handle. You will see widespread shortages of gold as the FED “attempts” to fill in the holes that they have drilled in their vaults throughout the years.

Remember, France is no minor player in the gold market scene. They “officially” hold the fourth largest gold reserve in the World. We aren’t talking about a couple of tons, we are talking about thousands of tons!

Given the monumental demand that the recent price drop has ushered in, the continued accumulation by Russia and China, and now the rapidly unfolding gold repatriation demands of Germany, The Netherlands, Switzerland and possibly France; gold seems poised for a comeback.

The question is how long can the manipulators keep their boat afloat? Leaks are springing up in all directions and they are running out of plugs. The rising price of gold is a tidal wave that no one can stop. It is only a matter of time before the free market unleashes itself and sets the price free. Until then, sit tight and continue to be right.

 

 
Courtesy: Sprott Money

OPEC Oil Decision Is A Major Strike Against The American Market

OPEC Oil Decision: A Major Strike Against American Market

OPEC Oil Decision Is A Major Strike Against The American Market – Russian Tycoon Says

As we warned yesterday, the last time that U.S. oil drillers got caught up in a price war orchestrated by Saudi Arabia, it ended badly for the Americans. OPEC’s decision not to cut production, and Nigeria’s comments on the need for burden-sharing among non-OPEC members, ensures a crash in the US shale industry according to Leonid Fedun (Russia’s Lukoil board member). The Russian finance minister’s comments that oil at $80 in coming years is moderately optimistic and as Fedun ominously warns, this is a “major strike against the American market.” Isolated, much?

As Bloomberg reports,

OPEC policy on crude production will ensure a crash in the U.S. shale industry, a Russian oil tycoon said.

 

The Organization of Petroleum Exporting Countries kept output targets unchanged at a meeting in Vienna today even after this year’s slump in the oil price caused by surging supply from U.S shale fields.

 

American producers risk becoming victims of their own success. At today’s prices of just over $70 a barrel, drilling is close to becoming unprofitable for some explorers, Leonid Fedun, vice president and board member at OAO Lukoil, said in an interview in London.

 

“In 2016, when OPEC completes this objective of cleaning up the American marginal market, the oil price will start growing again,” said Fedun, who’s made a fortune of more than $4 billion in the oil business, according to data compiled by Bloomberg. “The shale boom is on a par with the dot-com boom. The strong players will remain, the weak ones will vanish.”

 

 

In Russia, where Lukoil is the second-largest producer behind state-run OAO Rosneft, the industry is much less exposed to oil’s slump, Fedun said. Companies are protected by lower costs and the slide in the ruble that lessens the impact of falling prices in local currency terms, he said.

 

Even so, output in Russia, the biggest producer after Saudi Arabia in 2013, is likely to fall slightly next year as lower prices force producers to rein in investment, Fedun said.

 

“The major strike is against the American market,” Fedun said.

*  *  *

“Everybody is trying to put a very happy spin on their ability to weather $80 oil, but a lot of that is just smoke,” said
Daniel Dicker, president of MercBloc Wealth Management Solutions with
25 years’ experience trading crude on the New York Mercantile Exchange. “The shale revolution doesn’t work at $80, period.”

 
Courtesy: Zerohedge

Central Bank Credibility, The Equity Markets, And Gold

Central Bank Credibility, The Equity Markets, And Gold

Central Bank Credibility, The Equity Markets, And Gold

Central bank credibility is at all-time highs.  As a consequence, we suggest, equities are near all-time highs too while gold is scraping multi-year lows. A change though may be in the offing with all three. Not today, nor tomorrow. But perhaps sooner than most think.

Here’s how we see it…

In the context of five plus years of the most unconventional monetary policies the world has ever seen, there is a near universal belief that a group of Keynesian/Monetarist schooled, largely academic economists have got it all figured out; namely, that super-sized, well-orchestrated, easy money policies – zero even negative benchmark interest rates, a smorgasbord of essentially free lending programs and of course mega-size asset purchase programs (QE) – can produce sustainable, economic growth.  In other words, central bank credibility and the efficacy of their policies are in the heavens.

No central bank is more revered in this regard than the Federal Reserve.  As we discussed here, the Federal Reserve, it is said, is “pulling it off.”  Because of its heroic, unconventional, all-in easy money policies, the Federal Reserve is said to have “saved” America from an almost certain depression and then, because of its continued easy money policies, is the driving force behind America’s now accelerating economic growth. Just look at the economic numbers, say the pundits. The Federal Reserve’s monetary policies are working. Yes, not as fast as we would like, but going in the right direction. Only one task left – a well-calibrated, data-driven exit from these unconventional policies.  The strengthening economy can take it, they say. In fact, the exit should be welcomed because it signals a strong and growing economy, one that will no longer require any Federal Reserve support.

Of course, this is music to U.S. equity market investors and speculators alike, so much so that U.S. equities have become the asset class de jure.  You can’t lose, proclaim one investment manager after another. Don’t “fight the Fed,” they say, embrace it.

This unwavering faith in the prowess of central banks is seen with greatest clarity in the Eurozone.  Observe the near universal belief that if only the Germans would get out of the way and allow ECB head Mario Draghi to implement a Federal Reserve style, open-ended, sovereign debt based QE program, the Euro zone economy and especially its equity markets would boom. Isn’t that what the recent sell-off in Euro zone equities is saying, post the disappointing news that the ECB has no plans for a such a QE program. To us it’s obvious why so many people think this way.  It’s because recent U.S. economic data seems to confirm that the Federal Reserve’s unconventional, all-in easy money policies are working.  And if such policies can work in America why not in the Euro zone too?

We reject this unwavering belief in central banks and their policies, outright. As the Austrians teach, easy monetary policies sow the seeds of their own demise.  Flooding the economy and financial markets with money (and credit) created out of thin air – thereby distorting interest rates and price signals and, in so doing, creating malinvestments – is no way to create sustainable, economic growth and ever rising equity prices.  Sure, at first glance, the malinvestments and attendant booming equity prices look like genuine growth and wealth creation. But they are not. As we explored here, they are instead unsustainable bubbles that turn to bust when the growth in those money supply (and credit) footings decelerate; i.e., when the easy money abates.

Today we posit some questions we think every equity investor needs to answer. What if the Austrians are right?  What if unconventional, all-in easy money policies do not produce sustainable, economic growth?  Contrary to the expectations of nearly everyone, what if the next big event is in fact a bust?  What will that mean to the equity markets going forward?  And then, what will that say about the credibility of central banks?

Well, if the Austrians are right, as we wrote here, given the size of this monetary experiment, one can expect a pretty big swoon in equity prices if not an ugly crash.  More important though is the very real possibility that a bust could put a dagger in central bank credibility, severely damaging if not destroying the belief that unconventional, all-in easy money policies can goose the economy and equity markets anywhere near as effectively as in the past. Maybe, in real terms, not at all. Truly a problematic situation the next time central banks step in to “save” us. This we think is especially true if a bust occurs right here in America.  Consider this: The former Federal Reserve Chairperson Ben Bernanke (and world renowned expert on the Great Depression) and his closest adviser current Chairperson Janet Yellen  birthed the largest, most heralded, monetary support apparatus in world history and it was found unable to produce sustainable, economic growth, unable to float equity prices ever higher. Instead, it did the exact opposite. How many investors/speculators will then put their unswerving faith in any central bank, at least for the foreseeable future?  We’re thinking a lot, lot less than today.

The Federal Reserve is in the process of exiting its grand experiment in unconventional monetary policy.  QE3, a two plus year asset purchase program that at its peak injected an annualized $1 trillion of monetary fuel directly into the financial markets, has been wound down.  What’s more, though “data dependent,” the Federal Reserve is signaling that it will begin raising interest rates in mid-2015.  Of course, nearly every economist and nearly every investor expects this plan to work. Yes, a bit of transitional weakness in the financial markets – like we are seeing now – but after that, up and away.

We of course say not so fast.  Given the fact that this exit means a further deceleration in the already decelerating trend in the rate of monetary inflation, the risks are growing that the next big move in the economy and the equity market is not up but down.  In fact, if the banking system does not step up and fill the monetary inflation void being vacated by the Federal Reserve we think a bust could begin rearing its ugly head sooner than anyone thinks.

Enter gold, the much maligned, near universally hated asset.  It’s presently on no one’s radar screen, except maybe the shorts.  And why should it be. Thanks to supposed central bank infallibility, economic growth appears to be strengthening and the equity markets are in a major bull run. As James Grant, editor of Grant’s Interest Rate Observer likes to say, gold is the reciprocal of central bank credibility. We agree. Central bank credibility is at a peak, so gold is in the dumps.

Gold wasn’t always in the dumps.  It rose right along with equities, indeed outperformed equities, from the 2009 Great Recession bottom – when central banks the world over first began implementing their unconventional monetary policies – straight through to its September 2011 top.  The reason we think it did is quite simple.  Coming out of the Great Recession, central bank credibility – their ability to “pull us out” of the Recession – was being severely questioned by investors. Thus, a good portion of investor money found its way into gold. That changed in 2011. Underwritten by these same central bank easy money policies, the as yet unresolved malinvestments of the Housing Bubble turn Credit Bust turn Great Recession, which were in the process of a healthy liquidation, were short circuited, while new, yet to be revealed malinvestments (we think the largest being anything in and around financial engineering) were starting to bear fruit.  The belief took hold that the heroic policies of these central banks were finally working, finally restoring long term vitality to the economy. Gold then sunk while equities marched ever higher.

So here we are…

gold spx

In our minds, get that bust in America (or even a real scare playing out in the U.S. financial markets in anticipation of a bust); then, get the near certain response from the Federal Reserve; i.e., another perhaps even bigger round of easy money policies, and maybe investors will be looking to overweight their portfolios with the reciprocal of central bank credibility instead of equities, forthwith.

 
Authored by Michael Pollaro via Zerohedge

Swiss Gold Update: What a “Yes” Vote on Nov. 30 Means for Gold Investors

Swiss Gold Update: What a “Yes” Vote on Nov. 30 Means for Gold Investors

Swiss Gold Update: What a “Yes” Vote on Nov. 30 Means for Gold Investors

Swiss Gold Referendum will take place on Nov. 30, 2014 — just 5 days from now. Its terms prohibit the Swiss National Bank (the central bank) from selling any gold, require the bank to purchase gold up to the level of 20% of Swiss reserves and require that all Swiss gold held abroad be returned to Switzerland.

If it obtains a majority “yes” vote, it becomes law despite the objections of bankers and politicians. This would deliver both a demand shock and a supply shock. The gold market and central banks are whistling past this graveyard. They may be in for a shock when the votes are counted.

I have spoken to a number of economists, bankers, gold dealers and other people directly involved in the upcoming referendum. The one thing everyone says is that regardless of your view on the referendum vote, they will abide by the referendum results.

There is certainly a large group in Switzerland that is opposed to the gold referendum. But even the group that opposes the referendum says that if it passes, they will respect the democratic process and the will of the Swiss people. I think that’s important to bear in mind because unfortunately that respect doesn’t exist in every country.

So that brings us to what the referendum would actually do. The Swiss can vote “yes” or “no”. If they vote no, nothing changes. If they vote yes, it requires the Swiss National Bank to hold 20% of their assets in gold.

Any central bank has a leveraged balance sheet. They create money digitally and then use it to buy other assets. They can buy bonds, which the Federal Reserve does, or they can buy other currencies, or some central banks can buy anything. For example, the Japanese central bank has the capacity to buy equities.

In any case, central banks have balance sheets. They have a certain amount of liabilities, which is the money they create, and then their assets. What the referendum would do is force the Swiss National Bank to have 20% of its assets in gold. Right now they do not have that much.

They would have to go and buy a very substantial amount of gold on the market to meet that requirement.

Second, the referendum would require that all of the Swiss gold held abroad has to be brought back to Switzerland. A lot of people say that they have to get their gold out of the Federal Reserve Bank of New York, but that’s actually not correct. The Swiss gold is not held in New York.

10% of it is held in Canada in Toronto and then about 30% of it is held in the U.K. in London. Then the remainder is held in Switzerland. The other part — the part that’s held in the U.K. and Canada would have to be brought back.

A lot of people say, “Well, gee, you have gold in a vault in Canada and you pack it up put it on a plane and move it to a vault in Switzerland. What difference does it make? It goes from one vault to another vault. It’s still underground and it doesn’t change the supply of gold at all.”

Well, it’s true that a move like that does not change the total supply of gold. But it does reduce the floating supply. The floating supply is the gold that’s available for pledging to support paper gold contracts.

What are paper gold contracts? A lot of customers say, “I want to own gold”. So they call up big banks, one of the London Bullion Market Association banks and say, “I’d like to buy some gold”. If you read the fine print of the gold contracts they sell you, however, it says that the gold is unallocated. What that means is that the banks have a certain amount of gold in their vaults and they can sell that gold more than once. So they can sell the same gold 10, 15 or 20 times.

So a bank may have ten tons of gold and use it to back 100 tons of unallocated gold contracts. The idea is that, just like any aspect of banking, all of the customers don’t come at the same time and ask for their gold back. If they do the banks have to go out and buy that much gold to satisfy the demands. The banks have suspected that will not happen however.

This is one of the ways — but not the only way — that banks, and central banks in particular, can use to manipulate the gold market and keep the price down. When you put a lot of selling pressure in the market that tends to reduce the price. If there’s demand and you’re able to meet the demand that tends to put a lid on the price.

As long as there is gold available and pledged — or, “rehypothecated” is the technical term — ten, twenty or even fifty times that puts a lot of gold on sale in the market that doesn’t actually exist. That keeps the price down.

To do that, the banks need some amount of gold to back up those unallocated sales. That gold is in London… New York… and, to a lesser extent, Canada. When gold is moved from a place like London or Canada to Switzerland the total supply isn’t changed, the floating supply is. In other words, the paper gold game banks play is made more dangerous. Think of it as an inverted pyramid.

The Gold Market: Futures, Options Swaps and ETFs vs. Real Gold

As you keep making the amount of gold the pyramid rests on smaller, you either have to shrink the pyramid or the whole thing becomes unstable. You get closer and closer to a point where the price of gold could skyrocket because suddenly somebody can’t deliver the gold because there’s not enough gold to go around.

You can see a lot of gold from around the world being pulled out of banks and put into other kinds of storage where it’s not available to support the paper gold market. I saw this in a recent visit to Switzerland. I met with VIA-MAT — a private vault (i.e. a non-bank vault), which is one of the biggest private vaults in the world.

They said they’re getting a lot of gold inflows from just down the street — meaning in Switzerland. They were in Zurich where there is UBS and Credit Suisse and branches of Deutsche Bank and others and here’s a vault just a couple miles outside of town in a place called Clauten and the gold was moving from UBS to VIA-MAT. Again, no change in the total gold supply, but a change in the floating gold supply.

The third thing the Swiss gold referendum would require is that the Swiss National Bank would not be allowed to sell any of its gold. It’s kind of a Roach motel — a one-way street where, once Switzerland gets this gold and puts it in its vaults, it has to stay there. It can’t go back on the market.

Putting it all together… First, the Swiss National Bank would not be allowed to sell any gold… Second, they’d have to get all of their gold back… And third, they’d have to maintain 20% of their assets in gold. And since they don’t have the gold to meet that ratio, they’d have to buy — analysts estimate — 1,500 tons of gold, which is an enormous amount.

If you’re unfamiliar with the gold market… 1,500 tons is more than half of world production for a full year. The world produces about 2,500 tons, sometimes more, but even if we had a big year and it got up as high as, say, 3,000 tons, 1,500 tons would still be half of annual production.

I can tell you from my own meetings and conversations with gold dealers — people who actually handle the physical stuff — that the physical supplies are extremely tight. It would take the Swiss a very long time to buy 1,500 tons of gold. They’d probably have to do what the Chinese are doing which is buy the gold in chunks on an ongoing basis.

There’s something else going on, as well. The Swiss National Bank is trying to maintain a peg to the euro. They’re trying to keep their currency, the Swiss Franc, from getting too strong. Left to its own devices, the Swiss franc would actually be much stronger than it is today. The way they keep a lid on it is by printing Swiss francs and buying euros to maintain the peg.

Well now, if the referendum passes and the Swiss National Bank has to have 20% of its assets in gold… but meanwhile, it’s printing more and more francs to buy euros (increasing its assets)… the SNB is going to have to buy even more gold.

And, of course, what would the 20% gold backing do to the franc? It would make it stronger against the euro… which would force the Swiss National Bank to print even more to maintain the peg… which would force it to buy even more gold and so on. They’d be in a feedback loop that they’d never get out of. The government would have to abandon the peg and let the Swiss franc move freely against the euro and the dollar.

Putting all of these things together, the Swiss gold referendum could have a massive impact on the gold market. It would be extremely bullish, not only putting a floor under gold but also sending the price of gold up significantly. The price would stay there too because the buying pressure would not go away — the Swiss would be in the market for years.

 

 
Courtesy: James G. Rickards via The Daily Reckoning

Solar Energy Industry Shines on Silver Demand

Solar Energy Industry Shines on Silver Demand

Solar Energy Industry Shines on Silver Demand

Back in the olden days, before the advent of digital cameras, photographers used a curious thing called film. Surely you remember having to feed a roll of the stuff into your analog camera. Then you’d take the roll to your local drug store and wait a week for it to be developed, only to discover that you had the lens cap on during the entirety of Cousin Ted’s birthday party.

What some people don’t know about film is that it’s coated with a thin layer of silver chloride, silver bromide or silver iodide. Not only is silver essential for the production of film but it was also once necessary for the viewing of motion pictures. Movie screens were covered in paint embedded with the reflective white metal, which is how the term “silver screen” came to be.

Since 1999, photography has increasingly gone digital, and as a result, silver demand in the film industry has contracted about 70 percent. But there to pick up the slack in volume is a technology that also requires silver: photovoltaic (PV) installation, otherwise known as solar energy.

For the first time, in fact, silver demand in the fabrication of solar panels is set to outpace photography, if it hasn’t already done so.

Silver-Fabrication-Demand-Has-Shifted-Toward-Electronics
click to enlarge

Every solar panel contains between 15 and 20 grams of silver. At today’s prices, that’s about $20 per panel. When silver was hanging out in the mid-$30s range a couple of years ago, it was double that.

Other industrial uses of silver can be found in cell phones, computers, automobiles and water-purification systems. Because the metal also has remarkable antibacterial properties, it’s used in the manufacturing of surgical instruments, stethoscopes and other health care tools. Explore and discover more about the metal’s many industrial uses in our “Brief History of Silver Production and Application” slideshow.

Going Mainstream

Solar energy was once generally considered an overambitious pie-in-the-sky idea, incapable of competing with and prohibitively more expensive than conventional forms of energy. Today, that attitude is changing. Year-over-year, the price of residential PV installation declined 9 percent to settle at $2.73 per watt in the second quarter of this year. In some parts of the world, solar is near parity, watt-for-watt, to the cost of conventional electricity.

According to a new report from Environment America Research & Policy Center:

The United States has the potential to produce more than 100 times as much electricity from solar PV and concentrating solar power (CSP) installations as the nation consumes each year.

Additionally, president and CEO of solar panel-maker SunPower Tom Werner says solar could be a $5 trillion industry sometime within the next 20 years, calling it “one of the greatest ever opportunities in the history of markets.”

This investment opportunity will likely expand in light of the climate agreement that was recently reached between the U.S. and China. Back in April I discussed how China, in an effort to combat its worsening air pollution, is already a global leader in solar energy, accounting for 30 percent of the market.

Commenting on how government policy can strengthen investment in renewable energies, Ken Johnson, vice president of communications for the Solar Energy Industries Association (SEIA), notes: “If governments are smart and forward-looking and send ‘clear, credible and consistent’ signals as called for by the International Energy Agency (IEA)… solar could be the world’s largest source of electricity by 2050.”

These comments might seem hyperbolic, but as you can see in the chart below, installed capacity has been increasing rapidly every year. According to the SEIA, a new PV system was installed every 3.2 minutes during the first half of 2014.

US-Solar-Installation-Forecast
click to enlarge

With PV installation on the rise, silver demand is ready for a major surge. About 80 metric tons of the metal are needed to generate one gigawatt, or 1 million kilowatts, of electricity—enough to power a little over 90 typical American homes annually. In 2016, close to a million and a half metric tons of silver are expected to be needed to meet solar demand in the United States alone.

An impressive 87 percent of IKEA's facilities here in the U.S. are powered by solar.

Another clear indication of solar’s success and longevity is the rate at which employment in the industry is growing. Currently there are approximately 145,000 American men and women drawing a paycheck from solar energy, in positions ranging from physicists to electrical engineers to installers, repairers and technicians. Between 2012 and 2013, there was a growth rate of 20 percent in the number of solar workers, and between 2013 and 2014, the rate is around 16 percent. Nearly half of all solar companies that participated in a recent survey said they expected to add workers. Only 2 percent expected to lay workers off.

What this all means is that solar isn’t just for granola homeowners and small businesses. On the contrary, it has emerged as a viable source of energy that will increasingly play a crucial role in powering residences, businesses and factories. Already many Fortune 500 companies make significant use of the energy—including Walmart, Apple, Ford and IKEA—with many more planning to join them. This helps businesses save money over the long run and improve their valuation.

It’s also good news for silver demand.

Bullish on Silver Bullion

Crude Cost of Production Rises as Demand Grows

Solar is only part of what’s driving demand right now. Since July, the metal has fallen close to 25 percent, attracting bargain-seeking investors.

“Commodities are depressed right now, but we’re seeing far fewer redemptions in silver ETFs than in gold ETFs,” says Ralph Aldis, portfolio manager of our Gold and Precious Metals Fund (USERX) and World Precious Minerals Fund (UNWPX).

Below you can see how silver ETF holdings continued to remain steady as gold ETFs lost assets earlier this year.

US-Solar-Installation-Forecast
click to enlarge

Ralph attributes much of this action to solar energy: “Investors recognize silver’s importance in manufacturing solar cells, and it doesn’t hurt that silver is currently pretty inexpensive relative to gold.”

It’s also oversold, as the chart below shows.

US-Solar-Installation-Forecast
click to enlarge

Last month about $1 billion was pulled out of New York’s SPDR Gold Shares, the world’s largest gold bullion-backed ETF, while holdings in silver-backed ETFs set a new record in September. Demand in India is booming, and sales of American Eagle silver coins rose last month to a two-year high of 5.8 million ounces, nearly doubling the sales volume from last October.

Silver-Prices-vs-American-Eagle-Silver-Coin-Sales
click to enlarge

A Note on Emerging Europe

As many of you might know, our Emerging Europe Fund (EUROX) began divesting out of Russia as early as December of last year, even before President Vladimir Putin started stirring up trouble in Ukraine, and was completely out by the end of July.

Our fund is all the better because of the decision to pull out. Between international sanctions and low oil prices, Russia’s economy has been wounded. Its central bank announced earlier this month that economic growth will likely stagnate in 2015, and the World Bank cited the ruble’s depreciation as a growing risk of stability.

Meanwhile, Greece, the third-largest weighting in the fund, has officially recovered after six years of recession. Its economy is finally in the black this year, expanding at an annual rate of 1.7 percent in the third quarter, its best performance since 2008. Next year the economy is expected to grow 2.9 percent. Greek auto sales are up 21.5 percent year-to-date.

Finally, be sure to read my story about two guys, one who invested in an S&P 500 Index fund, the other who chose a less dramatic path. Happy investing!

 
Courtesy: Frank Holmes

Here Comes France: Demands Central Bank Repatriate French Gold

Here Comes France: Demands Central Bank Repatriate French Gold

Here Comes France: Right-Wing Leader Marine Le Pen Demands Central Bank Repatriate French Gold

First Germany, then the Netherlands, perhaps Switzerland this weekend, and now the French right-wing Front National, which shockingly came first in May’s European parliament elections, and whose leader Marine Le Pen is currently polling in first place in a hypothetical presidential election (in both a first and run off round), ahead of president Hollande, has sent a letter to the governor of the French Central Bank, the Banque de France, demanding that France join the list of nations which have repatriated, or at least tried to, their gold.

From her letter, here is the full list of French demands (google translated):

  • Urgent repatriation on French soil of all of our gold reserves located abroad.
  • An immediate discontinuation of any gold sales program.
  • Conversely, a gradual reallocation of a significant portion of foreign exchange reserves in the balance sheet of the Bank of France by buying gold at each significant decrease in the price of an ounce (recommendation 20%) .
  • A suspension of any financial commitment or loan contract would wager that our gold reserves.
  • At the patrimonial and financial balance of the 2004 gold sales transactions ordered by N. Sarkozy.

Her full letter below (link)

Mr. Christian Noyer

Governor of the Banque de France
31 rue Croix des Petits-Champs
75049 PARIS Cedex 01

Nanterre, November 24, 2014

Open letter to Mr Christian Noyer on the gold reserves of France

Dear Governor

On behalf of the French and in my capacity as the main opposition leader, I am writing to you because it is my duty to present a petition on the gold reserves of France, under the best interests of our nation.

Even before the outbreak of the 2008 crisis, the National Front had anticipated and informed the political institutions of the future worsening of the macro-economic and geopolitical context. As part of the business model increasingly libertarian adopted by France under pressure from Brussels, no economic fundamentals may not sustained improvement. All French can see that the austerity policies demanded by the EU and the ECB and implemented by the government are a proven failure and serious for our country.

The monetary institution you lead a historic mission to be the custodian of national central bank monetary reserves including gold reserves. According to our strategic vision and sovereign, they are neither the state nor the Bank of France but the French people and in addition serve as the ultimate guarantee of public debt and our currency.

In monetary Cold War played between the Western countries and the BRICS countries, gold gradually takes an important role. According to the World Gold Council, China’s official gold reserves, India and Russia have increased significantly between 2007 and 2013.
For these reasons and because of the rapid growth of global systemic risk, it is of utmost importance to the future solvency of our nation to engage, by mid-2015, a detailed audit procedure, the results will be the subject of a report. This report must obtain validation of French macro-prudential authorities, ACPR, and will be made public in the year.

This comprehensive audit should contain:

  • A complete inventory of physical gold amounts to 2435 tons currently displayed and their quality (serial number, purity, bars ‘Good Delivery’ …), conducted by an independent French body (to be defined). This inventory, under supervision of a bailiff, must indicate the country in which the gold reserves are stored in France or abroad.
  • A census of all formal financial employment agreement or secret vis-à-vis private banks and corporations, or bilateral loan between France and national and international institutions, having pawned the gold of France to ensure rescue of the euro. In this case, the comprehensive audit should contain the conditions of agreement or loans.

Furthermore:

Whereas, on 30 November, will take place in Switzerland a vote on a request from popular initiative referendum “Save gold for Switzerland” of the UDC party (Democratic Union of the Centre) which provides for the repatriation of their reserves of gold on their soil.

Whereas at the request of some national central banks informed, this country phenomenon for the “return of national gold reserves” and democratic control exists since 2013 in Germany (Bundesbank), Poland etc.

Whereas the Dutch Central Bank recently said it had repatriated 122.5 tons of gold.

Whereas, on 19 May 2014 the Bank of France along with other banks of the Eurosystem, announced it has signed the Washington Agreement gold sales CBGA 4 (Dirty Gold Under the Central Bank Gold Agreements) which provides no transfer of quotas on this five-year period (2014-2019), in contrast to the three previous agreements.

Whereas in fact, the Bank of France already independent, conducted as part of the agreement CBGA 2 on gold sales agreed in 2004 by Nicolas Sarkozy, then Minister of Economy and Finance of the Raffarin government .

The declared official target of more actively manage the foreign exchange reserves of the state to generate € 100 million in additional tax revenue in 2005. N. Sarkozy also said that gold sales would be used “either to finance investments that prepare the future, either to reduce the debt, but in no case to fund operating expenses. “

Over the period 2004-2012, about 614.6 tonnes of gold were sold by France, while at the same time the other central banks of the Eurosystem with the ECB have agreed to limit their gold sales. According to a report of the Court of Auditors in 2012, this operation is extremely costly for public authorities and constitutes a serious violation of the national heritage, made without any democratic consultation.

Mr Governor, according to your statements, “gold remains an important element of global monetary reserves.” For the French, you are considered the ultimate guarantor of the security of this gold reserve and therefore the stability of our currency and national financial stability. As a result, your responsibility is huge.

Also, depending on the situation we discover, I urge you to do it:

  • Urgent repatriation on French soil of all of our gold reserves located abroad.
  • In immediate discontinuation of any gold sales program.
  • Conversely, a gradual reallocation of a significant portion of foreign exchange reserves in the balance sheet of the Bank of France by buying gold at each significant decrease in the price of an ounce (recommendation 20%) .
  • A suspension of any financial commitment or loan contract would wager that our gold reserves.
  • At the patrimonial and financial balance of the 2004 gold sales transactions ordered by N. Sarkozy.

The implementation of these measures is crucial for the future of France face socio-economic problems that may occur.

Just like your heroic predecessors of the Bank of France in 1939 and 1940 had organized the evacuation of French gold, you need to undertake this vast national treasure of the security operation, patriotic act which will be recognized in due time by the public opinion.

I sincerely hope that, respectful of your duties as a senior official in the service of the state, you demonstrate lucidity and courage necessary for the defense of the general interest of our country. The stakes are high, it is the future of France in question!

Please accept, Excellency the Governor, the assurances of my highest consideration.

Marine Le Pen

 
Courtesy: Zerohedge

Swiss Gold Referendum: What’s Missing From The Debate

Swiss Gold Referendum: What’s Missing From The Debate

Swiss Gold Referendum: What’s Missing From The Debate

This article is written by Eric Schreiber, independent asset manager, former head of commodities UBP, former head of precious metals Credit Suisse Zurich. All views expressed are his and may not reflect those of his former employers.

The Swiss will vote on a referendum on November 30th that would ban the Swiss National Bank (SNB) from selling current and future gold reserves, repatriate foreign stored gold holdings to Switzerland, and mandate that gold must comprise a minimum of 20% of central bank assets. The SNB does not usually comment on political referendums. However, in this case it has done so quite vocally.

Why has the central bank decided to step into the political fray and oppose this initiative? What are its concerns? Are they valid or motivated by other factors?

The SNB’s primary objections to the gold initiative are three fold. 1) It claims that gold is “one of the most volatile and riskiest investments”, 2) that a 20% gold requirement will lower the “distributions to the confederation and the cantons” since gold does not pay interest like bonds and dividend paying stocks, and 3) that the 20% gold holding requirement will interfere with its ability to conduct monetary policy and complicate efforts to maintain “the minimum exchange rate”, the “temporary” policy of pegging the Swiss franc (CHF) to the Euro (EUR) it initiated in 2011 and continues to enforce to this day.

The first two concerns can quickly be addressed and discounted. Gold is indeed a volatile asset at times but so are bonds and equities. In recent years Greek, Spanish, Italian, Irish and other European bonds have been far more volatile than gold. The SMI, the Swiss stock index, lost over 50% of its value on two separate occasions between 2000 and 2009 while gold steadily rose at an annual rate of 8.50% over the same period.

Regarding the second concern, the distribution of proceeds derived from financial speculation and paid to the confederation and cantons, one has to question whether or not it is really appropriate for the SNB to re-brand itself as a hedge fund instead of remaining focused on its core responsibilities as a central bank.

To properly address the third SNB concern requires a historical context and a more detailed analysis. Prior to the change in the Swiss constitution, the CHF was backed by a minimum amount of 40% gold. Despite this constraint, Swiss monetary policy at the SNB was unhindered and functioned properly during the post World War II period. The SNB is correct in implying that today a partial gold backing, as required by the referendum, would make its policy of weakening the CHF against the EUR more difficult. Although the SNB has raised the currency peg as a reason for voting against the referendum the issue has not been directly addressed by the “YES” camp. Is the peg necessary? Does the population in Switzerland benefit as a whole from a weak EURCHF exchange rate? Why does the SNB feel compelled to continue a policy that it characterized over 3 years ago as “temporary”? How did “the minimum exchange rate” policy come to be? Why hasn’t there been a public debate about it?

The answer to these questions begins with a look back into regional history a little over two decades ago. The Swiss population voted down two separate initiatives, one in 1992 and the other in 2001, to join the European Union (EU). Despite the popular votes, Switzerland was integrated into the EU for all practical purposes although officially it still remains outside the group of member nations. Entry into the EU was initially achieved by political means through a series of bilateral treaties, 10 in total, and then later in 2005 by popular vote in favor of the Schengen agreement. Laws between the EU and Switzerland were harmonized and Swiss border controls with EU member countries were abolished to permit the free flow of people, goods, and services. Unfortunately, Switzerland’s stealth ascension to the EU made a public vote on whether or not to replace the nation’s sovereign currency the CHF with the EUR politically impossible. To circumvent the issue, the SNB decreed on September 6th 2011 that it would enforce a “temporary” peg of 1.20 CHF to the EUR, a policy it refers to as “the minimum exchange rate”, to fend off EUR flows entering the country due to the financial crisis that was engulfing Spain and Greece at the time. The CHF would henceforth be permitted to loose value against the EUR but never to strengthen beyond 1.20. In this manner, monetary policy for Swiss affairs was quietly handed over to the European Central Bank (ECB) while maintaining the mirage of a Swiss sovereign currency before the public. The CHF was transformed overnight into a derivative instrument of the EUR without the ratification or knowledge of the population. The chart below shows the link between the EUR and the CHF derivative instrument since the “temporary” “minimum exchange rate” measure was put in place over 3 years ago. Note how the red line, the CHF, closely tracks the green line the EUR, but always remains a little bit below it (weaker) but never above it (stronger). Why is this policy still in place given the fact that the crisis in Spain and Greece has ended according to the EU?

daily CHF EUR price movements 2009 2014 physical market

The conversion of the sovereign Swiss currency into a EUR derivative tracking unit was achieved by the SNB in a four step process:

  1. the SNB publicly announced in 2011 that it stood ready to print “unlimited quantities of CHF “ and proceeded to print CHF out of thin air
  2. the SNB sold the newly minted CHF to buy EUR when the EURCHF exchange rate traded below 1.20
  3. the SNB used the EUR it acquired in step 2 to buy EUR denominated bonds
  4. the SNB promised Federal and Cantonal politicians the future interest “revenue” from the vast bond stockpile.

Evidence of this process can be seen in the figure below demonstating the dramatic expansion of the SNB balance sheet since the “minimum exchange rate policy” was put into effect. At over 83% of GDP, the Swiss National Bank’s EUR bond purchasing program is in a league of its own when compared to other activist central banks around the world. SNB “assets” have
surpassed 520B CHF and keep growing.

Swiss central bank balance sheet vs GDP 2001 2013 physical market

By gorging itself on EUR denominated bonds and bloating its balance sheet the SNB has created a significant foreign exchange risk exposure for itself. The SNB cannot meaningfully reduce its holdings and extricate itself from the currency risk it has created without incurring significant losses selling its inventory of EUR bonds at a rate below the 1.20 level. China, a country that has pegged its currency to the USD for decades, finds itself in a similar predicament. It is unable to sell its massive inventory of USD holdings without putting pressure on its own peg as well. However the Chinese and the Swiss situation differs in one very important manner. China is a net exporter of goods and services to the US. Chinese losses on the import side of the trade balance are more than offset by gains on the export side of the trade balance. This has been one of the key elements of China’s growth strategy since the 1990s. Chinese policy makers systematically undervalue their currency to provide an artificial boost for their exports. Switzerland on the other hand is a chronic net importer of goods and services from the EU and thus does not have the offsetting EU exports in sufficient quantity to compensate for the damage the peg inflicts on its domestic purchasing power.

Swiss trade deficits 1994 2013 physical market

Thus, the SNB “minimum exchange rate” policy impoverishes the domestic Swiss population by increasing the price of all EU imports purchased in Switzerland. This is perhaps the most egregious and certainly least publicized effect of the SNB action. Each time a Swiss resident purchases a good or service in Switzerland made in the EU, he or she is rendered poorer by the actions of his or her own national bank.

The problem of central bank overreach is certainly not isolated to Switzerland. Since the financial crisis 6 years ago, central banks around the world have interfered in and manipulated bond, foreign exchange, and equity markets on an unprecedented scale. These unelected institutions have actively redistributed wealth from one group to another and compete against one another to adjust the purchasing power of their national currency downwards relative to other nations without the knowledge of their populations. For over 3 years the SNB has been operating opaquely behind the scenes substituting another currency for its own, converted its citizen’s savings into EUR, and imposing a stealth tax on European imports without public consent.

A “YES” vote for the gold referendum is a first step towards redressing the imbalance that exists between the SNB and the people of Switzerland. A “YES” vote will begin a process to restore restraint, accountability, and transparency on an institution that took advantage of the removal of its previous gold holding constraint already once before to explode its balance sheet, reinvent itself as a hedge fund, and significantly expand into areas of policy far beyond its original remit. Central banks should be lenders of last resort and systemic regulators. In a direct democracy, decisions regarding taxation, membership in trade / political unions, and the autonomy of the national currency should be determined by popular vote not decreed or circumvented by central bank edict.

 

 
Courtesy: Goldsilverworlds

Currency Wars Reignite As Yuan Tumbles Most In 2 Months

Currency Wars Reignite As Yuan Tumbles Most In 2 Months

Currency Wars Reignite As Yuan Tumbles Most In 2 Months & Chinese Bond Market Freezes

Did China just re-enter the currency wars? The Chinese Yuan dropped 0.29% overnight – its biggest drop since September and 2nd biggest devaluation since March – as the currency tumbles back in line with the PBOC’s fixing for the first time in over 3 months. Despite ‘hopes’, S&P confirms the recent (and reconfirmed) rate cut doesn’t signal renewed government intentions to resort to aggressive stimulus to prop up economy. More troubling is the fact that China’s huge corporate debt market appears to be freezing as over $1.2 billion in bond sales were scrapped or delayed last week suggesting wall of maturing debt will find it increasingly difficult to roll-over and keep the dream alive (especially in light of Haixin’s bankruptcy last week).

CNY dropped notably overnight, now back in line with the PBOC fix for the first time in 3 months…

As Bloomberg reports,

PBOC will probably push USD/CNY fixing higher amid expectations for a weaker yen and euro, as well as the need for looser policy at home, according to Richard Iley, chief economist for Asia at BNP Paribas.

 

“China is losing the currency wars, steadily increasing the risk of another engineered bout of CNY weakness,” Hong Kong-based Iley says in interview today

 

Financial conditions are “uncomfortably tight,” and more easing will be required if real GDP growth is to “have any hope of being propped up close to politically mandated levels next year”

*  *  *

And the fundaraising strains appear to be showing up in the Chinese corporate debt space (as Bloomberg reports)

China’s companies scrapped or delayed at least 7.55 billion yuan ($1.2 billion) of bond sales since Nov. 20 as borrowing costs jumped, flagging fundraising strains even as the central bank eased monetary policy.

 

 

The yield on AAA rated corporate securities due in three years rose 17 basis points last week, the most in a year, to 4.43 percent. The increase comes as investors held more cash ahead of planned new share sales this week, with initial public offerings to lock up at least 1 trillion yuan, according to Australia & New Zealand Banking Group Ltd.

*  *  *

but but but, QE and rate cuts and stuff…

 
Courtesy: Zerohedge

Central Banks: When We Succeed, We Fail

Central Banks: When We Succeed, We Fail

Central Banks: When We Succeed, We Fail

Goosing stocks ever higher will eventually push wealth inequality to the point that it unleashes social instability.

Central banks around the world share a few simple goals:

1. Defeat deflation by sparking inflation–in the cost of goods and services, not wages.

2. Weaken the currency to boost exports and counter beggar thy neighbor devaluations by other exporting nations and trading blocs.

3. Boost the value of stocks to keep pension plans afloat and project a politically powerful message of “growth” and “prosperity.”

What no central bank dares say is what happens should they manage to boost inflation, devalue their currency and continue pushing assets higher: when we succeed, we fail.

Consider the consequences of juicing inflation: every click up in inflation further reduces the purchasing power of wages, which do not keep up with inflation in a world of labor surplus.

When central banks succeed in jacking up inflation, they will fail the households and enterprises whose income is stagnating or declining: Were European Central Bank head Mario Draghi honest, here is what he would say:

Devaluing one’s currency is another way of pushing down the purchasing power of households’ income and savings. Were Bank of Japan head Haruhiko Kuroda honest, here is what he would say:

Goosing stocks ever higher will eventually push wealth inequality to the point that it unleashes social instability. Were Federal Reserve chair Janet Yellen honest, here is what she would say:

Should central banks succeed in jacking up inflation, devaluing the purchasing power of fiat currencies and pushing stocks to the moon, they will have failed their citizenry. Should they succeed in reaching their goals, they will trigger catastrophic instability.

 

 
Courtesy: Charles Hugh Smith

Gold Sentiment is Changing – Play it Safe

Gold Sentiment is Changing - Play it Safe

Gold Sentiment is Changing – Play it Safe

Florian Siegfried, head of precious metals and mining investments with Zurich-based AgaNola, says there are small signs—fewer equities participating in the recent rally, greater spreads in the high-yield market—that the sentiment toward gold is changing. But we will have to wait to see if a trend forms. In the meantime, Siegfried believes all-paper M&A will gain pace, with a focus on companies that are making money at current gold prices while still trading at multiyear lows. In this interview with The Gold Report, Siegfried suggests playing it safe with some small producers and tiny developers.

The Gold Report: When we talked in the summer, gold had found a floor at around $1,280/ounce ($1,280/oz). Where is the new floor?

Florian Siegfried: With a floor of $1,280/oz in August, the question was will it hold or not. Obviously, it did not. There could be even more downward pressure. The support level could be around $1,070/oz, especially given that the U.S. dollar has more upside. It could take a couple of months before we clear out the weak hands here.

TGR: What’s going to bring upward pressure to gold prices in 2015?

FS: We need to see a change in sentiment in the overall markets. In September, equities were going up and the high-yield market was running wild. That was followed by a mini-panic in both equities and the high-yield market in October. Then we had a springboard rally in the equities, which was really substantial, but the high-yield market stopped reaching new highs.

There is a divergence happening now. Not all equities are participating in the uptrend, and there are rising spreads in the yield market. Things are not as robust as they were, which could also support the gold price at these levels. It doesn’t confirm a trend yet, but gold is basically an investment that you want to have when liquidity is seeking a safe harbor. There are some small signs in the market that the sentiment is changing.

TGR: In late October, U.S. Federal Reserve Chairman Janet Yellen announced the end of quantitative easing (QE). Did the gold price react the way you thought it would? Could it have been worse?

FS: The Fed officially announced the end of QE, but when we look into the Treasury International Capital (TIC) report, there is a large sovereign entity in Belgium that has become the third-largest holder of U.S. Treasury securities after China and Japan. We don’t know who the buyer is, but obviously Russia is dumping Treasury bonds, and with current oil prices the Organization of the Petroleum Exporting Countries (OPEC) has much less capital to recycle into U.S. Treasuries.

It’s puzzling to know how ending QE is going to work. Officially, it worked: the dollar went up and gold tanked. The problem is that the Fed is tapering into economic weakness. As a result, my suspicion is that the zero interest rate policy is going to stay, and we will see yet another round of QE. One of these days gold will react to this central-planning recklessness. So far, the market has perceived the Fed’s move as a rising-dollar scenario, probably a rising interest rate scenario, too, but I don’t see interest rates rising any time soon.

TGR: What’s a realistic trading range for gold in 2015?

FS: In a really bearish scenario gold could hit $970/oz. I would say that’s the floor. We could see some more downward pressure before the end of the year, but it’s difficult to make predictions because basically every market is somehow manipulated and managed. I wouldn’t be surprised to see gold at $1,400–1,500/oz in 2015 but if central banks step in and keep pushing equities higher, as they did this year, then $970/oz is more likely. But when this price-fixing scheme comes to an end, there will be some kind of a reversion to the mean for all asset prices.

TGR: In August, you talked about the continued rotation out of broad market equities into precious metals. Would you suggest that the process has stalled?

FS: We had a severe break in equities in October but the rebound has been impressive. That rebound has pushed money back into equity markets and has taken some air out of precious metals. Gold is down in U.S. dollars, but in most other currencies, it’s up. In Swiss francs, euros and yen, gold is up year-to-date. Should deflationary pressure mount, I think we could see a continued rotation out of the equity and high yield markets into liquidity, namely short-term government bonds and gold. I think this process has not stalled.

TGR: Do you expect mergers and acquisitions (M&A) to be a major theme in the gold space in 2015?

FS: Yes, definitely. We just saw a “stink bid” from New Gold Inc. (NGD:TSX; NGD:NYSE.MKT) for Bayfield Ventures Corp. (BYV:TSX.V), and the merger between Scorpio Mining Corp. (SPM:TSX) and U.S. Gold and Silver Corp. (USA:TSX; USSIF:OTCQX) in an all-paper deal. I think two types of deals will dominate M&A over the next while. First, midtier producers will buy cheaply valued advanced exploration or development companies at roughly a 50% premium in all-share deals. These deals will not be material to the larger companies—they are essentially buying optionality for their project portfolio, which is smart. This is the time to do so.

The other kind of transaction will be mergers among equals, mostly as acts of desperation. How else will these companies get to the critical mass that excites more shareholders? I doubt most of these deals will create value over time because there will be little operational synergies among these companies.

TGR: Are these all-paper deals the blueprint for future deals?

FS: Yes. Every company that has a decent share price can use shares as a currency without spending valuable cash. Every CEO who is prudent will not use cash for M&A at these prices. As for the target companies, those CEOs are executing a takeover bid from a solid producer, so they get something. They would probably prefer quality shares to cash. That way there is a chance to benefit from the upside once the cycle turns.

TGR: What are some likely takeover targets?

FS: At current valuations, Alacer Gold Corp. (ASR:TSX: AQG:ASX) has a depressed multiple. The company is a low-cost producer with solid margins. In Q3/14 the company produced 63,356 oz at all-in costs of $763/oz at its 80%-owned Çöpler mine in Turkey. What could attract the company to any acquirer is the sulfide portion of the mine that has yet to be built. The sulfide project has a preproduction capital expenditure (capex) of $633 million ($633M) but has a 17-year mine life with all-in costs of $810/oz. That is the kind of project companies are looking for—relatively low capital costs leading to a low-cost, long-life operation. On top of that, Alacer has about $350M cash and no debt. An acquirer could use that cash to build the mine.

TGR: Are companies with polymetallic assets more likely to be targets?

FS: Probably not in the current environment because base metals and iron prices are all down. The trend is down and that is likely to continue. If you are positive on base metals, the dance would be different. But selling those kinds of assets in this market is rather tricky.

TGR: Other targets?

FS: Another one is Amara Mining Plc (AMA:LSE). It has a 5 million ounce (5 Moz) resource called Yaoure in Ivory Coast, West Africa. It’s a junior company but with the right ingredients—a solid resource with decent gold grades, a long mine life and low production costs. The projected all-in costs are $624/oz. There are few projects of this kind that can withstand a $1,000 gold price and in this kind of economy Amara is clearly a takeout candidate.

TGR: Amara used to be known as Cluff Gold Plc. What did you make of the recent Yaoure drill results?

FS: The company continues to demonstrate that the project is growing and that the high-grade mineralization has continuity. It will enter the feasibility stage later next year. It’s all about derisking the project. At its current market cap ($70M), Amara cannot raise the $500–600M necessary to build this mine.

TGR: Any others?

FS: We discussed Romarco Minerals Inc. (R:TSX) in the last interview. It received a mine-operating permit, and the debt terms for $200M in project finance are in place. The grade is OK. It’s in South Carolina, which is fine. Do we see a strategic partner buying into Romarco or Romarco being taken out? Both are possibilities. The project is derisked to a level where it should become an M&A target.

TGR: Romarco just got a loan for $200M but it needs another $120M to build the mine. Where is that going to come from?

FS: That is still subject to equity financing, which is probably holding back the stock because there was a negative reaction when it published the permitting news. Everybody knows an equity deal is coming. So, from an acquirer’s standpoint, is it the optimum time to buy? Probably. It’s either that or Romarco goes the route of self-financing. But at $0.50 or $0.60 per share it would be quite dilutive.

TGR: When the permitting news reached the market, casual observers like myself thought the price would bump up but the opposite happened. Please explain that further.

FS: If people want to sell in this market, they sell on good news when there is liquidity in the stock. It’s puzzling for the average investor, but that is how the market is right now. It provides opportunities if you can buy on the dips because you still get a high-quality asset in a safe jurisdiction, trading at $0.55/share.

TGR: Are there other likely takeover targets?

FS: There is another AIM-listed company called Condor Gold Plc (CNR:LSE). It just released a prefeasibility study (PFS) and updated preliminary economic assessment (PEA) for its La India project in Nicaragua. It has 2.33 Moz at 3.9 grams per ton (3.9 g/t), and that includes 1.14 Moz at 3.1 g/t in an open pit, which is very high these days. Management has skin in the game and holds 9% of the company and it is leanly managed.

With the recent financing, the International Financial Corp. (IFC) entered the picture as a strategic partner. That’s a commitment that should help to further reduce political risk. In its PFS, Condor looks at a 0.8 million tons per year (0.8 Mtpa) open-pit mine with an annual production of 79,300 oz gold over seven years considering a front load capex of $110M and all-in sustaining costs of $690/oz. Then in the updated PEA there are two options to build La India. One is to include additional feeder pits for a 1.2 Mtpa plant with a capital requirement of $127M and an annual production of 96,800 oz over a 8-year mine life at similar all-in costs. The other option would include the underground resource, a $170M capex and an annual production of 137,000 oz over a 12-year mine life.

Is it going to be a higher capital cost, higher-production scenario or a lower-capital cost, lower-production scenario? The company wants to be viewed as positively as possible. It is basically saying, “This project has all kinds of optionality, it has strong financing backed by the IFC and it’s close to infrastructure.” Management gives me the impression that this project is for sale, but not at the current share price.

TGR: Is grade a key theme for you in these takeover deals?

FS: Grade is king at the moment. In the end, you want to own quality companies that can make money at current prices or even if we touch $900/oz gold. Because the market has almost no visibility on where gold prices are heading, everything is concentrated on grade because it protects your margins. Should we move into a higher gold price environment, the best leverage is probably with the current marginal producers. They have no room for error, so their valuations remain extremely depressed. Grade is king, at least for the moment.

TGR: What are some producers that could offset a lower gold price with gains from a weak Canadian or Australian dollar versus the greenback?

FS: I would watch Detour Gold Corp. (DGC:TSX) for two reasons. First, probably 80% of its operating and capital expenses are directly linked to the Canadian dollar. So you benefit from a weaker Canadian dollar. Second is leverage to the oil price in the form of lower diesel costs. Oil is down 20% YTD and you can take advantage by investing in big-scale, open-pit, high-tonnage, low-grade operations because those mines are energy and diesel sensitive. You essentially get a “double whammy” with the lower oil prices and the lower Canadian dollar.

TGR: Will takeover rumors resume on that name in 2015?

FS: Detour is still fine-tuning its operations. The company is not cash flow positive at current prices. But it should be in 2015, assuming gold prices stay where they are or move higher and tonnage increases. If that happens and you’re looking for a world-class project in a safe jurisdiction, then Detour should be on the list.

TGR: Any other producers that fit that bill?

FS: Down the food chain is Claude Resources Inc. (CRJ:TSX), a junior trading at about $0.26/share. Its Q3/14 financials were amazing. Its net income of CA$6.9M in Q3/14 was up from CA$3.3M in Q2/14. That’s the function of increasing production, higher head grades and a weak Canadian dollar. All three have helped the company remain very profitable even at these depressed prices.

A third one, with a slightly higher production profile compared to Claude, is Richmont Mines Inc. (RIC:TSX; RIC:NYSE.MKT). As with Claude, it also increased its production guidance for 2014 and in Q3/14 it earned CA$4.6M and was also free cash flow positive. It has CA$39M in cash and very little debt. It has the grade, which is around 6.0 g/t at its Island and Beaufor mines, and most of the costs are in Canadian dollars. It’s a similar situation to Claude’s.

TGR: Are there some development-stage gold projects that haven’t seen share prices respond to positive news?

FS: One that really has been beaten down, and we discussed in our last interview, is Victoria Gold Corp. (VIT:TSX.V). The share price is down to $0.10. Nevertheless, its strategy is the right one. The Eagle project in the Yukon is permitted to mine, but Victoria is not willing to accept any kind of financing from, let’s say, hungry private equity groups at disadvantageous terms. So the company continues to drill and find new zones, like Olive, and it has the cash to do just that. It’s not in a rush to develop Eagle in this market. From a valuation standpoint, Victoria is trading almost at cash. It’s in the Yukon so that’s a safe jurisdiction, too.

TGR: Is Olive enough to bring investors back?

FS: The grade at Olive is almost double that of Eagle. In my opinion, Victoria should define a resource at Olive. Then when Eagle is three to five years into production and the grade in the mine plan drops, Victoria fills that gap with higher-grade ore from Olive. That would increase the internal rate of return (IRR) because the company would likely need limited additional capital to bring Olive on-line. If Victoria demonstrates it can go that route, Olive could bring investors back. Victoria is like an option on gold without an expiry date.

TGR: Does the company have the right management in place for the current wait-it-out strategy?

FS: Yes, I think so. The management and board have experience in building mines. The other question is: Does Victoria have the operating team in place? It doesn’t yet, but it doesn’t need to. If it came to a production decision, which I don’t see any time soon given its share price and the market conditions, it would have to beef up the operational team.

TGR: Any other updates on companies you mentioned in your last interview?

FS: We discussed Asanko Gold Inc. (AKG:TSX; AKG:NYSE.MKT). Since then, it released what it calls the Definitive Project Plan for phase 1 of the Asanko gold mine project in Ghana.

The market did not get really excited about it. Basically, Asanko reconfirmed the mine’s economics, but a base-case price assumption of $1,300/oz gold is too high. If the assumed gold price drops to $1,150/oz, the net present value shrinks by more than 30%. That also means that it has a lot of leverage to the gold price. The market’s reaction to the stock is more a function of the gold price right now.

TGR: Any other companies?

FS: I’m a director of GoldQuest Mining Corp. (GQC:TSX.V). GoldQuest’s Romero project has an Indicated resource of 2.38 Moz gold equivalent in the Dominican Republic, but the company isn’t getting much love from the market. Basically, there are two issues. One is the $333M it will need to build the mine, which is quite high. And that resulted in a relatively low IRR for Romero. We will have to come up with a strategy to improve the PEA numbers. Can we reduce the upfront capital or is there an opportunity to more quickly mine a high-grade portion of the ore in order to increase the IRR? Some optimization work will have to be done.

Romero is a high-grade deposit with all-in sustaining costs, including byproduct credits, of $350/oz, which is very robust. Otherwise, the 100%-owned Tireo is a big district. It’s not cheap to drill and the mineralization appears in clusters. We have money in the bank, and the company will drill test more targets.

TGR: Without naming names, have you signed confidentiality agreements (CAs) with some of the neighboring companies in the Dominican Republic?

FS: Yes, we signed some CAs, but that was done upon the discovery of Romero.

TGR: What are some of the other players in the Dominican Republic?

FS: Barrick Gold Corp. (ABX:TSX; ABX:NYSE) is clearly No. 1. Glencore International Plc (GLEN:LSE)/Xstrata is on the island, too, and then it’s mostly juniors like Precipitate Gold Corp. (PRG:TSX.V) and Unigold Inc. (UGD:TSX.V). Newmont Mining Corp. (NEM:NYSE) and Eurasian Minerals Inc. (EMX:TSX.V; EMXX:NYSE) are close to the Dominican border in Haiti, but it is unclear how the efforts to reform the county’s mining code will eventually turn out.

TGR: Are there other companies that you’re following?

FS: In the silver space First Majestic Silver Corp. (FR:TSX; AG:NYSE; FMV:FSE) is back to its 2008 levels. It should produce 11.5 Moz silver in 2014, but requires a higher silver price to be profitable. If you expect higher silver prices, I think First Majestic offers a good leverage.

Falco Resources Ltd. (FPC:TSX.V) controls the former producing Horne mining camp in Quebec. The company targets a multimillion ounce gold resource and has cash in the bank.Osisko Gold Royalties Ltd. (OR:TSX), which just announced a friendly business combination with project generator Virginia Mines Inc. (VGQ:TSX), holds 12% of Falco Resources.

Dalradian Resources Inc. (DNA:TSX) is developing its high-grade Curraghinalt gold project in Northern Ireland. The project has a robust PEA based on $1,200/oz gold and the company has $37M in the bank.

Then there is a junior named East Africa Metals Inc. (EAM:TSX.V). The market cap is $8M but it has $16M in working capital. The market probably expects that the money will disappear. Exploration is all about value creation through drilling and if East Africa could demonstrate that it will use the cash to drill, then it’s worth having a look at. Its main asset is in Ethiopia in East Africa. Interestingly, Qatar-backed QKR Corp. is said to be close to making a $1 billion bid for miner Nevsun Resources Ltd. (NSU:TSX; NSU:NYSE.MKT), which is operating in Eritrea just north of Ethiopia. Probably this will bring back the whole region to the mining and M&A landscape.

TGR: What words of wisdom do you have for investors in the gold space?

FS: I would still play it safe here. Look for producers that make money at these prices to protect your downside risk—as long as those companies have little chance of issuing new shares. Also, have a look at selective exploration and development stocks that have done well this year. A few stocks are up 20–60% YTD based on progress on fundamentals.

I would be reluctant to buy into any company that is high grading at these prices to survive. If companies mine their best deposit at current gold prices at small margins, those firms are basically giving away their upside when the cycle starts to turn upward. I would rather see those companies shut down and wait for better prices.

TGR: Thank you for your insights, Florian.

 

 
Courtesy: Brian Sylvester of The Gold Report

Ukraine Central Bank Admits Gold Outflow, Calls It “Optimization Of Reserve Structure”

Ukraine Central Bank Admits Gold Outflow, Calls It "Optimization Of Reserve Structure"

Ukraine Central Bank Admits Gold Outflow, Calls It “Optimization Of Reserve Structure”

A week after we reported that the head of the Ukraine central bank admitted in an unofficial, informal interview that Ukraine’s gold is gone, all gone, moments ago the Central Bank revealed that, sure enough, the gold holdings in the civil war-torn country have tumbled, as a result of a decision in September to “increase the share of US dollars in a reserve basket”, or in other words, to sell the gold. Just don’t call it that: in fact, as of today we have a brand new buzzword for gold liquidations: “optimization of international reserves.”

From the central bank:

National Bank of Ukraine has optimized the structure of international reserves. This is due to timing structure of international reserves and the external position of the country. National Bank of Ukraine decided in September 2014 to increase the share of US dollar in a reserve basket, because the structure of the trade balance of the country is 70.3% in US dollars, 15% in euros. 77.7% of gross foreign debt denominated in Ukraine USD in EUR – 11.2% in SDR – 5.8%.

 

Recently, there was a significant volatility in global currency markets associated with the strengthening of the US dollar against other world currencies. Therefore, the National Bank of Ukraine decided to reduce the share of gold in foreign exchange reserves to 8%. To this end, the international markets has sold 0.46 million. Troy ounces of gold in US dollars, respectively proportion of gold in international reserves declined to 7.9%.

 

According to the IMF, the proportion of gold in global reserves at an average of 11.7%, while international reserves of developing countries, the proportion of gold in an average of 4.4%.

So Ukraine’s central bank decided to convert its gold into dollars just as the USD has been surging to levels not seen in years? Just who says central bankers are bad traders. Furthermore, while one assumes this is the asset update as of the end of October, we can’t wait to learn just what happened in the first days of November when the Valeria Gontareva interview took place.

And while the fate of the Swiss gold referendum may lie in the hands of the Zurich subsidiary of Diebold, perhaps it is time for Ukraine’s population to ask its “elected” rulers just where Ukraine’s gold has gone, pardon, been “optimized” to.

 
Courtesy: Zerohedge

Significant Drawdown Of UK Silver Inventories On Record Indian Demand

Significant Drawdown Of UK Silver Inventories On Record Indian Demand

Significant Drawdown Of UK Silver Inventories On Record Indian Demand

There was a huge development reported in the silver market last week and how did the precious metal community respond?  They basically ignored it.  Go figure.  So, I will try again to get the word out by presenting it in a different fashion.

Indian silver demand was so strong this year, that it produced a significant drawdown of U.K. silver inventories.  Matter-a-fact, India had to access silver from China and Russia because available supplies from the U.K. were not sufficient.

According to GFMS Silver Interim Report released on Nov 18th:

Meanwhile demand for silver bars and coins has soared in recent weeks as bargain hunting retail investors returned to the silver market after a disappointing first half of the year. Nowhere is this more evident than in India where imports of silver are up by 14% year-on-year for the January to October period and set for an annual record. With imports in the first ten months totalling a massive 169 Moz many vaults in the UK, traditionally the largest supplier to India, have seen significant drawdowns, leading to more supply flowing from China and Russia.

As you can see from GFMS statement, they even included the word “Massive” to describe the demand coming from India.  I emailed Andrew Leyland, GFMS silver analyst and author of the report, to see if he could put some figures behind the declining U.K. silver inventories.  He was nice enough to respond today by stating the following:

The LBMA itself doesn’t hold any silver stocks, but its member companies do. These stocks may be unallocated or allocated (often allocated to ETF holdings) and GFMS survey these stock levels once a year ahead of the silver survey in May.

What we’ve heard so far in 2014 has been anecdotal, that there have been large drawdowns in the UK of unallocated material. This has been backed up by trade data that has seen India increasingly buying from China and Russia while the UK (as the traditional lead supplier to India) has lost market share. While we can’t quantify the drawdown or stock level at this point we thought it worth mentioning the trend. In addition, for the silver survey, we’ll be trying to survey how much material from European bullion stocks is allocated. Silver ETFs holdings have been robust, in comparison to gold, and this could effectively limit available inventory to the silver market moving forward.

Unfortunately, Mr. Leyland could not provide any actual figures, but to state that there have been“LARGE DRAWDOWNS” from U.K. silver inventories is a big issue for the silver market.  As stated, U.K. was India’s “traditional lead supplier” of silver.  Why the big change?  Why did India need to resort to acquiring silver metal from China and Russia if the low paper price signifies a SURPLUS???

Another interesting item Mr. Leyland stated in the response was that this U.K. silver metal was from “unallocated material.”  Furthermore, he commented that “Silver ETF holdings have been robust, which could effectively limit silver inventory to the silver market moving forward.”

Let’s understand what we are seeing here.  Many in the precious metals community do not believe some (or all) of the data put out by official sources such as GFMS, or the CPM Group.  I happen to think there is very good factual data in these reports.  However, that being said…. if an official source such as GFMS comes out to say that U.K. silver inventories have experienced a LARGE DRAWDOWN… I would imagine we can take this to the bank as a very reliable silver market trend-change.

In addition, the silver that India acquired from Russia or China did not come from Government sales as shown in the GFMS chart below:

 World Silver Supply 2014 GFMS

Russia, India and China have been the predominant source of net government silver sales over the past decade.  But, as we can see from this chart, GFMS forecasts no silver supply from official government holdings in 2014.

Which means two things:

1) Russia & China would rather hold onto their official silver holdings, rather than sell it for peanuts

2) India purchasing silver from Russia and China signifies a lack of available inventories from the U.K. — once known as the world’s largest source of wholesale silver supply

I spoke with some people in the industry about this new market development and it may provide more insight as to why we are witnessing near record open interest in the silver market.  Normally, when the price of silver falls, so does the open interest.  Basically, the longs give in and the shorts cover.

So, on the way down… the open interest declines and the opposite is the case when the price increases.  If look at all of this data together, it portends for a very interesting situation going forward.  Why would the amount of open interest contracts remain at near record levels when the price of silver is so low?

Maybe the participants who are trading and dealing in the silver market understand that a drawdown of U.K. silver inventories may mean a REAL ACTUAL TIGHTNESS of wholesale silver (not retail) in the future. 

Yes, we are speculating here as we don’t have the REAL DATA, but I believe this information is giving us a hint that physical silver demand is finally putting a large enough dent in wholesale silver supplies that is now being reported by official sources.

At some point, physical demand will overwhelm the paper markets pushing the value of silver to such levels even the most ardent precious metal investor thought unimaginable.

 
Courtesy: SRSroccoreport

World Platinum Investment Council: “We will help Investors”

World Platinum Investment Council: “We will help Investors"

World Platinum Investment Council: “We will help Investors by providing better data on Platinum”

Paul Wilson recently took up the role of Chief Executive Officer at the newly created World Platinum Investment Council (WPIC). The Council was launched by a group of six platinum producers in South Africa, in order to further develop the global market for platinum investment.

Readers may know that our affiliate Sprott Asset Management LP manages one of the largest above-ground stockpiles of platinum in the world, in the form of the Sprott Platinum and Palladium Trust (NYSE: SPPP). For more information, click here.

What will the World Platinum Investment Council do? Their CEO Paul Wilson was kind enough to call me up and tell me what it’s all about:

“We are launching a new organization called the World Platinum Investment Council – an entity focused on helping investors. Platinum is already a serious investment asset but we don’t think it has been fully considered by many investors as it should have been. Part of the reason has, to date, been a lack of high quality market data and a perception of opacity. The purpose of WPIC is to shine a light on the market, giving investors access to high quality information that will help them make more informed decisions while increasing their understanding of platinum’s investment potential.

The purpose of WPIC is two-fold, to provide much better market data on platinum and, in due course, help facilitate new routes to invest in the metal.

We will provide data on supply and demand, as well as above-ground inventory information, on a quarterly basis – this is a first for the metal. Significantly, we will be presenting a much better analysis of above ground stocks than has been done previously. We are working with SFA Oxford in the UK, who are finalizing the first, independent quarterly analysis, which will be available on December 3rd 2014. Crucially, WPIC is opening up this data to anyone; it’s free and you will be able to sign up to receive it by visiting our website (www.platinuminvestment.com).

Currently, 36 percent of demand comes from automobile usage in catalytic converters. 34 percent comes from jewelry. Another 20 percent is used in industrial applications. Finally, 10 percent comes from investment. Demand has been rising by around 2 percent per year over the last 5 years, principally because of increased usage in jewelry and investment.

How do we get our data? We look at the basis for consumption in each category. We go to people who are working with platinum buyers, and we try to understand how much platinum they are using, how they use it, and how they plan on using it in the future. On the supply side, we will be talking to the miners and trying to get as much information as possible about how much platinum they produce, how much metal there is, and what they’ll be putting out in the future. It’s a detailed research task but one that will be a game changer in terms of market information for investors.

The information that will come out each quarter will be an analysis of supply and demand, and the above-ground stocks of platinum. We will also provide a next year forecast starting from mid-2015. We will then be looking at the investment performance for platinum – how it has appreciated in value over the years and served as an effective store of value. Platinum has appreciated over 20 years at a similar rate to gold and silver, and more quickly than global equities and equities and real-estate in the UK. Over the last 30 years, platinum has appreciated more than gold2, and a lot more than silver (ed. note: taking 1984 average prices to today November 20, platinum has risen from $357 an ounce to $1213, a 240% rise. Gold has gone from $361 to $1,190, a 230% rise. Silver has gone from $8.14 to $16.13, a 98% increase)

I think that platinum has been treated as a niche product by investors in the past. Our improved data and perspective will broaden its appeal and will be of use to existing and new, sophisticated and regular investors.

On the sophisticated investor side of the equation, we’re looking to attract mutual funds, insurance companies, and others of that nature to invest in platinum. I think platinum is an asset that should be considered by high net-worth individuals in North America, Europe, and Asia.

Platinum should also be of interest to retail investors. The products that investors might be interested in are broad – they could be physical bars and coins, or exchange-traded products like the Sprott Physical Platinum & Palladium Trust. In China, for instance, we will look to set up ‘accumulation funds’ so that individuals can contribute an amount per month which would go towards the purchase of physical platinum bars which they could eventually take away and store.

We will also be looking at whether or not worldwide markets have suitable exchange-traded funds set up to help investors purchase exposure to platinum and, often, help hedge against their weak domestic currencies. If in some countries, more sophisticated products are needed for family offices or institutional customers, we will look to work with existing financial institutions to try to fill those gaps.

For all these types of investors, whether retail, institutional, or family office, we think we will provide a benefit with improved information on platinum.

Our group is backed and funded by the six largest platinum miners in South Africa. The idea is that more transparent numbers on world production, usage, and available supply will benefit all investors in platinum.”

As readers may know, platinum supplies have threatened to decline for some time now. Mines are not making enough money to stay open. For Rick Rule, this is the real underlying cause of the violent protests that occurred at platinum mines in the last year. Workers need to get paid a decent salary, but platinum mines aren’t generating enough cash to give them a raise.

Nick Holland, CEO of South African gold mining firm Gold Fields Ltd., echoed the same conclusion, saying that the prospects for higher salaries for the 280,000 mine workers was dim without higher platinum and gold prices.

Because platinum mines are becoming deeper and less economic (our in-house geologist Andy Jackson has explained why), commodity experts have been calling for higher platinum prices this year. They’ve been wrong. Platinum prices have remained low. This raises questions about how much supply is really out there and whether demand can outstrip available inventory. The new Platinum Council’s upcoming report is meant to shed some light on this question. Stay tuned for what we find out.

 
Courtesy: Henry Bonner

Brent Plunge To $60 If OPEC Fails To Cut, “Profit Recession” To Follow

Brent Plunge To $60 If OPEC Fails To Cut, "Profit Recession" To Follow

Brent Plunge To $60 If OPEC Fails To Cut, “Profit Recession” To Follow

While OPEC has been mostly irrelevant in the past 5 years as a result of Saudi Arabia’s recurring cartel-busting moves, which have seen the oil exporter frequently align with the US instead of with its OPEC “peers”, and thanks to central banks flooding the market with liquidity helping crude prices remain high regardless of where actual global spot or future demand was, this Thanksgiving traders will be periodically resurfacing from a Tryptophan coma and refreshing their favorite headline news service for updates from Vienna, where a failure by OPEC to implement a significant output cut could send oil prices could plunging to $60 a barrel according to Reuters citing “market players” say.

By way of background, the key reason OPEC is struggling to remain relevant is because, as the FT reported over the weekend, “US imports of crude oil from Opec nations are at their lowest level in almost 30 years, underlining the impact of the shale revolution on global trade flows. The lower dependence on imports from the cartel, which pumps a third of the world’s crude, comes amid advances in hydraulic fracturing that has propelled domestic US production to about 9m barrels a day – the highest level since the mid-1980s.”

The US “shale miracle” is best seen on the following chart showing the total output of the US compared to perennial crude powerhouse, Saudi Arabia:

It is this shale threat that has become the dominant concern for OPEC, far beyond whatever current US national interest are vis-a-vis Ukraine, and Russia’s sovereign oil revenues, and as reported previously, Brent has to drop below to $75 or lower for US shale player to one by one start going offline.

Unfortunately, it may bee too little too late for the splintered cartel. As Bloomberg reports, “the days when OPEC members could all but guarantee consensus when deciding production levels for oil are long gone, according to a veteran of almost two decades of the group’s meetings.”

The global glut of crude, which has contributed to a 30 percent decline in prices since June 19, has left the Organization of Petroleum Exporting Countries disunited and dependent on non-members to shore up the market, said former Qatari Oil Minister Abdullah Bin Hamad Al Attiyah. The 12-member group is set to meet in Vienna on Nov. 27.

 

“OPEC can’t balance the market alone,” Al Attiyah, who participated in the group’s policy meetings from 1992 to 2011, said in a Nov. 19 phone interview. “This time, Russia, Norway and Mexico must all come to the table. OPEC can make a cut, but what will happen is that non-OPEC supply will continue to grow. Then what will the market do?”

 

“OPEC had been enjoying easy meetings, and decisions were taken without a sweat,” Al Attiyah said. “Now the situation is different.”

 

Oil markets are oversupplied by about 2 million barrels a day, and global economic growth is below expectations, he said. “The U.S., which was a major market for OPEC, is no longer welcoming imports. It’s now striving to become an oil exporter. It’s already exporting condensates.”

So if OPEC is unable to reach an agreement, what is the worst case? Back to Reuters, which says that “The market would question the credibility of OPEC and its influence on global oil markets if there was no cut,” said Daniel Bathe, of Lupus alpha Commodity Invest Fund.

That could send Brent down to around $60, Bathe said.

 

“Herding behavior and a shift to net negative speculative positions should accelerate the price plunge,” he added.

 

Fund managers are divided over whether OPEC will reach an agreement on cutting output. Bathe put the likelihood at no more than 50 percent.

 

The oil price has been falling since the summer due to abundant supply — partly from U.S. shale oil — and low demand growth, particularly in Europe and Asia.

 

As a result, some investors believe a small cut — of around 500,000 bpd — would not be enough to calm the markets.

 

If OPEC fails to agree a cut, prices will drop “further and quite quickly”, with U.S. crude possibly sliding to $60, he said. U.S. crude closed at $76.51 on Friday, with Brent just above $80.

It’s not all downside: there is a chance that OPEC will agree on a 1 million barrel or more cut, which would actually send prices higher:

“The market really wants to see that OPEC is still functioning … if there is a small cut, with an accompanying statement of coherence from OPEC that presents  a united front, and talks about seeing demand recovery, and some moderation of supply growth, then Brent could move up to $80-$90.”  “Prices below $80 are putting significant strain on the cartel’s weakest members such as Venezuela,” said Nicolas Robin, a commodities fund manager at Threadneedle. He said a bigger cut — of 1 million bpd or more — was an “outlier scenario”, but such a move would rapidly push prices above $85.

Then again, even thay may be insufficient if the market prices in an ongoing deterioration in global end-demand: “Doug King, chief investment officer of RCMA Capital, sees Brent falling to $70, even with a cut of 1 million bpd.

So in a worst case scenario, where Brent does indeed tumble to $60, what happens? We already know the answer, as it was presented in “If WTI Drops To $60, It Will “Trigger A Broader HY Market Default Cycle”, Says Deutsche“:

… it is not just the shale companies that are starting to look impaired. According to a Deutsche Bank analysis looking at what the “tipping point” for highly levered companies is in “oil price terms”, things start to get really ugly should crude drop another $15 or so per barrell. Its conclusion: “we would expect to see 1/3rd of US energy Bs/CCCs to restructure, which would imply a 15% default rate for overall US HY energy, and a 2.5% contribution to the broad US HY default rate…. A shock of that magnitude could be sufficient to trigger a  broader HY market default cycle, if materialized. “

This explains why the HY space has been far less exuberant in recent weeks, and the correlation between HY and the S&P 500 has completely broken down.

Finally it is not just the junk bond sector that is poised for a rout should there be no meaningful supply cuts later this week: recall that in another note over the weekend, DB said that should crude prices take another leg lower, then the most likely next outcome is a Profit recession, which while left unsaid, will almost certainly assure a full-blown, economic one as well.

So keep an eye on Vienna this Thanksgiving: the black swan may just be coated with an layer of crude oil this year.

 
Courtesy: Zerohedge

Gold And Silver – Is the Golden Rule Broken?

Gold And Silver – Is the Golden Rule Broken?

Gold And Silver – Is the Golden Rule Broken?

He who owns the gold rules.

That has been the clichéd “wisdom” for some time.  However it appears Russia has become the Rodney Dangerfield of the Golden Rule, for it certainly is not getting any respect.  To the contrary, the Golden Rule has become subservient to Military Rule, the last remaining leg upon which the US rests in its ongoing inability to retain  respect internationally. As formidable as US military might is, it is not always effective in execution, and to date,

it has only been [in]effective against those nations that have no military might, Iraq, Libya, Afghanistan.  Syria is still a work in process, but the only reason why Syria has not been destroyed, like the other countries, is because Russia, Putin, stepped in to expose the Obomb-em administration and false flag “insurgent” gassing of citizens.

What continues to be an equal deterrent like military might is the Rothschild-established fiat monetary system that has engulfed and economically eviscerated the Western world. One exception would be Germany, but Merkel has been allowing her central bankers hold sway, via US sanctions against Russia, and harming Germany’s economy and ability to otherwise survive the economic chaos in the rest of the EU.

As the US de facto 51st State, Germany is running at cross-purposes toward its own survival.  It is unlikely that the more pragmatic German sense of maintaining her superior economic sustainability will tolerate much more US abuse, but the time is now for Germany to declare its independence from external forces  that have created that nation’s recent economic slide.

The intrusion of the NSA spying on German politicians and companies, along with all her citizens should have been enough to sever the fiat umbilical cord, but there has been a degree of German complicity in setting up the ability for the NSA to begin with.  Then there was the affront, at least apparent on the surface, by telling Germany her gold could not be repatriated or even inspected, for the next seven years, more likely if ever.  Yet, Germany also backed down from that US insult, too.

For as long as Merkel and the prevailing politicians can keep the fed-up business sector at bay, the US and its cadre of Red Shield central bankers will pursue self-destruction as these controlling forces of evil pursue the attempted destruction/survival of Russia.

It is interesting that elite master puppeteer Henry Kissinger chose to air his views in an article published by Der Spiegel, in Germany, that a new world order is needed, while acknowledging that the handling of Ukraine by the West, blaming Russia and pushing for sanctions has been a mistake.  Why would Kissinger, a devout elitist, choose Der Spiegel, except perhaps as a signal that Germany is important as a link to preserve the efforts at creating the final ends of the NWO, and that nation should not break ranks? For Germany’s own interest, breaking ranks is imperative, and likely a matter of time.

Kissinger, stating the West mishandled the Ukrainian fiasco in the US bungling efforts to economically weaken Russia and isolate her from the rest of Europe, along with Alan Greenspan’s earlier announcement that gold was a buy are not random events.  Something is going on when two old guard elite messengers are sending some kind of message, maybe that the “dollar” is on its way out and there has to be more careful reconfiguration as to how the NWO is going to accomplish its insidious objective of ending all national sovereignty in favor of an uber-governmental rule by a handful of people.

Said Kissinger, “Russia is an important part of the new world order.”  The only way in which Russia can be important is to keep it isolated from any further relationship with Europe, as has been the intent of the elitists since the early 1800’s.  At that time, it was the duty of Britain to keep Russia engaged in the Anglo-Afghan Wars, parts I and II. Once the UK went belly up, the US took over in the 1940’s and 1950’s with Operation Gladio, part III, doing whatever was/is necessary to prevent Russia from engaging with Europe as a supplier of its vast natural resources, thus minimizing the role of the US and Western central banker control.

Russia has the gold [along with China], the US and EU do not.  Why is the Golden Rule not being applied?  The timing is not quite right for Russia, for Putin must coordinate with China and the other BRICS nations so as not to disrupt the building economic ties that are bringing the US to its fiat knees.  Also, and maybe most importantly of all, the elites are not yet positioned to wield control and power over Russia as the NWO shifts its base from West to East, a transition that has probably been planned for several decades in advance.

While many have been assuming that the shift in gold, and its attendant power, from West to East, mostly China  and Russia, spells the end for the elites and their Western central bank dominated fiat Ponzi scheme, that may not be the case.  The elites are the most powerful controlling forces on the planet, and to think that the Red Shield demons have not been planning for that inevitability is pure folly.

Both Russia and China are on record for saying that the IMF should play a key role in the world’s monetary system.  Why would both countries pay tribute to the IMF, a lower part of the BIS, when these institutionalized monetary systems of theft and world-enslavement via debt, are the backbone of the Rothschild elite’s world domination?  Why has the concerted effort to suppress gold and silver been so unopposed by China and Russia when either country to “stick it” to the West and collapse the “dollar” and Western central banks in a day?

Is it the newly emerging powerful East, flush with control of the world’s physical supply of gold, versus the rapidly declining West, choking on maintaining a paper derivative house of cards that could collapse with just the right amount of minimal effort from the East?

As the Rothschild forces switch from West to East, the “Game” must be preserved at all costs, and that includes the gaming of the rest of the non-elite world.  Nothing is ever as it seems when dealing with the elites, masters at deception and mass-mind control through its own total control of governments and all media.

What will be the impact for gold and silver?

Maybe not the upside explosion so many are expecting.  Control is the strongest suit of the elites, and they will not let gold and silver explode to unheard of levels if such an event is not in their best interest.   It may also well be that China and Russia are assisting the IMF because it is not in their best interest to see gold and silver “reset” dramatically higher.  All the world is a stage.

Where there could be a huge increase in the “value” of gold and silver is in the United States when the fiat “dollar” self-destructs from the unsustainable creation of “dollars” the rest of the world will no long accept.  That can only lead to the de”value”-ation of  the “dollar,” and where it takes  1,200 fiat Federal Reserve Notes [FRNs], called “dollars” even though they are not, to buy an ounce of gold, and 17 FRNs to buy an ounce of silver,  with the destruction of the US fiat monetary system, those of us living in the US will discover that it could take thousands of fiat FRNs to buy the same one ounce of gold, and hundreds
of the same fiat to buy an ounce of silver.

The relative price “value” of silver and gold may not change as much for those in the East, but the imagined $5,000 or $10,000 ounce for gold and $150 or $300 ounce for silver, in the West, may not be the anticipated  dream come true and instant wealth, but instead a nightmare as the fiat trillions have no value for the East factions and Weimar-like value for those in the West, and for sure the US.

The Golden Rule may not be broken, but it may just be in the process of necessary change for it to reassert itself.  For  US citizens, do not get caught without holding any. For as manipulated are the stock markets by the Fed, as can be seen in the charts, the same holds true for gold and silver.  The charts do not show any change in the forces being applied, and all anyone can do is read them as they are.

Silver may play a pivotal role in the next rally phase for PMs.  If nothing else, the ratio of gold to silver says it will eventually come in from its present 73+:1.  The ratio could go still higher:  80:1, 90:1, who knows, as a bottoming process unfolds before reversing lower.

Considered as the poor man’s gold, some suggest the elites want to “crush” silver and exhaust the patience and/or willingness for people to hold silver.  Then, once that game plan has been executed, thrust the price of silver substantially higher and closer in value to gold, thereby making it too expensive for the average person to buy.  Whether this is idle conjecture or not makes little difference.  What does matter is that both silver and gold remain the best alternative to the FRN fiat, or any others, will come undone, at some point, whenever that may be.

For as encouraging as the recent PM rally may seem, it is still just a rally within a clearly defined down trend.  When price declines, the ranges are greater than when price rallies, and that is the character of a market that is struggling to go higher.  Unlike gold, silver has not even come close to regaining a close back into the broken downside of 18.

The smaller range of last week reflects the struggle for buyers to extend the rally higher. However, the close was at the high-end of the range, and it is a better show, relatively, for buyers over sellers.  The upper range close gives a higher probability of an extended rally into next week.  How much higher is not known.  It could be just a little or a lot higher, but there is no apparent change in trend.

SI W 22 Nov 14

Applying a little bit of common sense can give anyone an idea of the market’s ability or lack of ability to sustain a rally.  You can see the swing low from early October, when it acted as brief support.  Once that support was broken at the end of October, it became potential future resistance.  The current rally has stalled just under that level.

Judging from the weak reaction after the strong rally two Friday’s ago, the current pause may be buyers absorbing all the offers from the sellers prior to moving higher.  The highest volume effort has been on rally days.  We point out a contrary read on the chart comment. Which way will it go?  There is no need to “guess” or “predict,” in advance.  It is a future event, and no one knows how the future will unfold.  Better to watch how the market activity develops, and at some point, an opportunity will present itself.

S/D = Supply overcoming Demand in a stronger than normal manner.  The opposite is true for D/S, when Demand [Buyers], overwhelms Supply [Sellers].

SI D 22 Nov 14

The prospects for a bottoming process continues, without necessarily saying a bottom has been established.   Will the low from 3 weeks ago hold and establish a bottom?  The only way to ever know that for certain is from future developing market activity that confirms a bottom is in place.  What would that be?  A series of higher swing highs followed by higher swing lows.  It takes time and patience for a bottom to be confirmed.  Just ask those who thought the market reached a bottom over the past few years.

The race to be first to “know” is an ego-driven one that is typically costly and a fool’s game.

GC W 22 Nov 14

The current rally from  November is creating a swing high.  What must follow is the next reaction lower has to stay above the November low.  There have been several swing highs in this chart, but you can readily see that there has been no successful higher swing low.

The swing lows from June, August, and October have all failed to hold.  There is no evidence yet that the November low will hold.  It may, but its realization as a low can only be confirmed by future activity.

For trading purposes, there is no reason to be long.  For buying and holding physical gold and silver, there are too many reasons not to be long.  Plan accordingly.

GC D 22 Nov 14

 
Courtesy: Edgetraderplus

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