Gold Bullion and Gold 2 Trade

Long Dollar and Weak Gold

noreply@blogger.com (Unknown) — Mon, 15 Dec 2014 06:59:00 +0000

MANY analysts relate the net long/short position in contracts betting on the US Dollar to be an influence on the gold price, says Julian Phillips at Gold Forecaster.

To a small extent this may be true, but not, in our opinion, to an extent that actually affects the gold price.

A short/long position on Comex for instance can be used in a multitude of major and minor transactions to hedge the original Dollar positions so as to remove the risk of an exchange rate change. This policy has nothing to do with the future exchange rate of the Dollar against any currency or against the move of gold against the Dollar.

A much smaller but considerably more active market is that involving speculators and traders who do view the potential for a change in the exchange rate of the Dollar against any currency. It is this market that influences day-to-day prices, but not in a way that commentators often think. Comex is a financial market where as much as 95% of all contracts are closed out before the contract matures.

Turning to the real net long/short positions in the Dollar, this number includes all those where delivery will not take place as well as those that do. This muddies the water somewhat and reduces this figure to one defining expectations, not necessarily realities.

The section of this market defined as the Commercial positions reflect those positions that are conducted by the more savvy professional investors. As the Dollar turned higher in recent weeks, these investors closed more and more short positions that would have cost them dearly as the Dollar rose against all currencies. The expectations were that the Dollar was set to rise and continue to rise, justifying long positions, not short, in the Dollar.

As you can see in the chart here the Dollar's future according to the Technical picture is for it to rise by another 20% against all currencies. But it must be said that this figure is a 'target' and often not a future reality. Even the Fed has made it clear it does not want to see a stronger Dollar, as this will damage its exports and increase imports, hurting the recovery in the US We believe they are already taking action to hold the Dollar back.

As deflationary expectations have risen worldwide, for the last six months, alongside a rising equity market, we have seen a switch from overseas investments to Dollar assets by the 'carry trade' (borrowing in Dollars to lend in other countries) as they closed their positions. The rising Dollar index has shown this. Gold has been made to fall back to its lows as a result until now.

It's an expression of fear, not of hope when this happens, because of the rising expectation of deflation prompting a turning to 'safe' positions in the most liquid and strong currencies. Treasuries and cash are believed to be the safest of places when market falls are expected.

It may be there will be a major sell-off in Treasuries when interest rates start to rise and bond prices respond by falling. Then cash in Dollars becomes the only currency haven in most investor's minds.

It is a matter of history that US investors/traders/speculators take long positions in the US Dollar and may well either stay out of gold and the Euro, or short them both. This ignores gold's fundamentals which show Asia and the Middle East absorbing around 80% of the world's gold supplies annually and have considerably reduced western market liquidity in gold, a factor that may well leave Asia in control of future pricing.

It is a surprise that this physical dominance of the gold market by Asia has not already translated into Asia's control of the gold price. That time is coming fast as gold liquidity has reduced to critical levels in the developed world. It may be here already.

But until that happens developed world markets will exert this 'strong Dollar, weak gold' positioning. As the Dollar turned up, there was a global rush into US treasuries and into the US Dollar.

Until August, the largest of the largest traders of gold and silver futures continued to report very low net short positions, right near the lowest net short positions they have had in years. The expectations are therefore that the Dollar has peaked and will either consolidate around these levels (with the help of the Fed and Germany) or will fall.

But from August until now short positions in gold doubled until this last week when they were hastily reduced as the gold price leapt from $1141 to $1218 per ounce and after a consolidation from $1200 and the current rise to $1230.

Following this traditional relationship, it is likely that developed world investors will go long of gold as the Dollar retreats. Why has this change happened now?

The dramatic fall in the oil price has also led to a vast quantity of US Dollars not being used now and will return back to the United States. This will have a heavy affect. If the fear persists and deflation becomes the new global reality, then the Dollar as a national currency, faced by an expanding Yuan, loses a great deal of its appeal and gold, the non-national currency, takes on a far greater sheen.

As it is still close to its low, since 2009, it becomes an even more attractive haven. It may be that we are seeing this turn right now.

Tanzania: Gold Biggest Contributor

noreply@blogger.com (Unknown) — Fri, 10 Feb 2012 08:00:00 +0000

FOREIGN EXCHANGE earnings from Gold Mining operations have overtaken those from tourism in Tanzania, according to the latest government data.

Rising Gold Prices have led to the value of gold exports quadrupling over the past six years to $2 billion. There are now however calls for Gold Mining firms to pay more tax to the Tanzanian government.
"Tanzanians look at the Gold Price and think the country should get more out of it," Sebastian Spio-Garbrah, managing director and chief analyst at consultancy DaMina Advisors, tells the Financial Times.

In common with a number of African governments, Tanzania is looking at ways of extracting more money from its Gold Mining industry, with the 2010 Mining Act proposing to raise the tax on gold production royalties from 3% to 4%.

"Almost all African countries are changing their mining laws and making them tighter," says Spio-Garbah.
"It's nothing out of the ordinary."

The Tanzania Mining Report, published last week by Business Monitor International, predicts that Gold Mining in Tanzania could be poised for strong growth.

"Growth of Gold Mining, which has slowed down in recent years would recover and post strong growth in 2013," the report says.

"Much of this growth will be driven by African Barrick Gold, which has four projects in the country [but] poor infrastructure could be a significant obstacle on production growth and may see projects delayed."
BMI's report also says that higher taxes could see Gold Mining firms concentrate their efforts on other parts of Africa.

"Tax rises, combined with lack of adequate infrastructure and the absence of huge mineral deposits compared with many of its neighbours could push investors elsewhere on the continent," the report says.
"We have heard that before, haven't we?" responds Tundu Lussu, and environmental lawyer who has done extensive research on the Gold Mining industry.

"Investors in mining will be taxed like everybody else and if that makes the sector less attractive to them then they’d choose between staying and paying fairly or leave and stop the raping of our non-renewable resources."

Elsewhere in Africa, Congolese delegates at a Gold Mining conference being held in Cape Town this week were abducted and beaten, Bloomberg reports. At least five people were attacked by men protesting Congo's election results.

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Goldbug, 09 Feb '12

Dollar to Collapse

noreply@blogger.com (Unknown) — Fri, 10 Feb 2012 07:47:00 +0000

In the absence of a galvanizing narrative, America is marching towards the abyss...

THE NOTION that the very same economic forces currently plaguing Greece et al are somehow not relevant to America does not hold water. As goes the rest of the world, so goes the US, writes Chris Martenson.

When we back up far enough, it is clear that money and debt are there to reflect and be in service to the production of real things by real people, not the other way around. With too much debt relative to production, it is the debt that will suffer. The same is true of money. Neither are magical substances; they are merely markers for real things. When they get out of balance with reality, they lose value, and sometimes even their entire meaning.

The US is irretrievably down the rabbit hole of deficits and debt, and that, even if there were endless natural resources of increasing quality available at this point, servicing the debt loads and liabilities of the nation will require both austerity and a pretty serious fall in living standards for most people.

Of course, the age of cheap oil is over. And as Jim Puplava says, the oil price is the new Fed funds rate, meaning that it is now the price of oil that sets the pace of economic movement, not interest rates established by the Fed.

However, of all the challenges that catch my eye right now, the one most worrisome is the shredding of our national narrative to the point that it no longer makes any sense whatsoever. I'm a big believer that our actions are guided by the stories we tell ourselves. To progress as a society, having a grand vision that aligns and inspires is essential.

But when words emphasize one set of priorities and actions support another, any narrative falls apart. At a personal level, if someone touts their punctuality but chronically shows up hours late, the narrative that says "this person is reliable" begins to fall apart.

Likewise, if a company boasts about being green but its track record belies them as a major polluter, the "green" narrative fizzles.

And at the national level, if we say we are a nation of laws, but the Justice Department selectively prosecutes only the weak and relatively powerless while leaving the well-connected and moneyed entirely alone, then the narrative that says "we are a nation of blind justice and equal laws" falls apart.

I wish this was just some idle rumination, but I see more and more examples validating the importance of alignment of narrative and behavior. Because when there is a disconnect between words and actions, anxiety and fear take root.

Unfortunately, there is quite a lot to fear and be anxious about in the most recent State of the Union address and GOP response.

The recent State of the Union speech by Obama, and its Republican response, are both remarkable for what they say as well as what they don't say. The summary is this: The status quo will be preserved at all costs.
Here are a few examples of the sorts of disconnects between rhetoric and reality that are absolutely toxic to the morale of all who are paying the slightest bit of attention.

Obama
Let's never forget: Millions of Americans who work hard and play by the rules every day deserve a government and a financial system that do the same. It's time to apply the same rules from top to bottom. No bailouts, no handouts, and no copouts. An America built to last insists on responsibility from everybody.
We've all paid the price for lenders who sold mortgages to people who couldn't afford them, and buyers who knew they couldn't afford them. That's why we need smart regulations to prevent irresponsible behavior.

It's time to apply the same rules from top to bottom? Is Obama aware of what Erik Holder is up to over there in the Justice Department? The robo-signing scandal alone has thousands and thousands of open and shut cases of felony forgery that can and should be applied to as many individuals as were directly involved, from top to bottom in every organization that was engaged in the practice.

Here's the reality. Under Obama, criminal prosecution of financial fraud fell to multi-decade lows during what is and remains one of the most target-rich environments in living memory.

(Source)

Obama
And I will not go back to the days when Wall Street was allowed to play by its own set of rules.
So if you are a big bank or financial institution, you're no longer allowed to make risky bets with your customers' deposits. You're required to write out a "living will" that details exactly how you'll pay the bills if you fail – because the rest of us are not bailing you out ever again.

Has Obama checked with the Federal Reserve to assure they are on board with the new 'no bail out' policy? Because last I checked, they were the ones mainly involved in bailing out the big banks and providing swap lines and free credit to anyone and everyone that needed help, US or foreign.

To be fair, Obama can make no statement or claim about what the Federal Reserve can or can't or will or won't do. It is not under executive nor even legislative control. If, or I should say when, the Federal Reserve bails out the next bank or country or whomever, it's "the rest of us" who will be paying the bill – in the form of eventual inflation.

Obama
[W]orking with our military leaders, I've proposed a new defense strategy that ensures we maintain the finest military in the world, while saving nearly half a trillion Dollars in our budget.

Let's review the proposals for military spending then. The language above is nearly impossible to decode. What is really being said is that proposed defense increases have been scaled back, and that this is what is being called savings.

In 2000, Defense spending was $312 billion Dollars. In 2012, the proposed budget calls for $703 billion, a 125% increase in 12 years.

What the plan he mentions really calls for is spending increases in 5 out of the next 6 years. The lone holdout is 2013, when the plan calls for cutting spending by a whopping $6 billion less than the amount already approved for 2012.

Somehow that all translates into rhetoric that implies cuts of "nearly half a trillion Dollars."
As Lily Tomlin used to say, "As cynical as I am, I find it hard to keep up."

GOP Response
"The routes back to an America of promise, and to a solvent America that can pay its bills and protect its vulnerable, start in the same place. The only way up for those suffering tonight, and the only way out of the dead end of debt into which we have driven, is a private economy that begins to grow and create jobs, real jobs, at a much faster rate than today."

This platitude-laden set of ideas is blissfully blind to the role of energy in the story, the amount of debt in the system, and the fact that both parties have contributed equally over the years to the predicament at hand.
How exactly is it that the private economy is supposed to flourish here, with the Federal government borrowing more than a trillion Dollars a year and oil at $100 per barrel? The simple truth is that the US government needs to begin borrowing at a rate lower than the previous year's economic growth. If GDP grows at 2%, then the total debt pile must not grow by anything more than 2%. That is the only way that the official debts can shrink relative to the economy.

GOP Response
"We will advance our positive suggestions with confidence, because we know that Americans are still a people born to liberty. There is nothing wrong with the state of our Union that the American people, addressed as free-born, mature citizens, cannot set right."

Last I checked, the original vote tally in the Senate on the National Defense Authorization Act, which empowered the armed forces to engage in civilian law enforcement activities and selectively suspended the habeas corpus and due process rights (as guaranteed by the 5th and 6th amendments to the Constitution), passed by a voice vote of 93 to 7 in the Senate.

It's kind of hard to swallow the idea that the GOP stands with Americans as "a people born to liberty" when their members are in perfect lock-step with the Democrats, chipping away at the most basic and cherished freedoms. There's no difference between the parties when both seem intent on limiting individual freedom and increasing the power of the government to reach into and examine our daily lives.

The above examples are not meant to pick on any one person or party or set of ideas, but to illuminate the profound gap that exists between what we are telling ourselves at the national level and the actions we are undertaking.

Again, it is the gap between what we tell ourselves and what we do that creates a sense of unease, anxiety, and oftentimes fear. When we hear words "X" but see actions "Y" over and over again, it is hard not to come to the conclusion that the words are meaningless; empty rhetoric designed with polls and focus groups in mind, but little else.

It is the blind obedience to the status quo that worries me the most, as it raises the likelihood that nothing of any substance will be done until forced by circumstances, at which point, like Greece, we will discover that the remaining menu of options ranges from bad to worse.

In neither Obama's address nor the GOP response do we hear anything about Peak Oil, a stock market that has gone nowhere in ten years, or the fact that with two wars winding down there ought to be massive savings from defense cuts that we can capture. There's lip service to the idea of using more natural gas to begin weaning us off our imported oil dependence, but no commensurate trillion-Dollar program offered to rapidly build out the infrastructure necessary to utilize that gas in a meaningful way.

A more honest set of messages would note that mistakes were made, opportunities squandered, and priorities misplaced. It would note that the US is on an unsustainable course with respect to spending, debts, and liabilities. There would be an explicit admission that having your central bank print trillions in "thin air" money in order to enable runaway deficit spending is a dangerous and foolish thing to entertain.

Most obviously missing is a national narrative that is coherent and comports with the facts. Both parties basically imply that if we elect a few more of their type, do a little of this and then tweak a little of that, then we will get our nation back on track.

There is no call to a shared sacrifice for something greater. There is nothing to rally around except a laundry list of disconnected programs; a little something for everyone. There is no overarching theme under which everything else can be hung, such as a space race, a civil rights movement, or a massive upgrading of our national infrastructure.

A good narrative is one that inspires people and is based in reality but also asks something larger of us that we can share in. What is our vision for this country? Where do we want to be in ten years? How about twenty? How will we get there, and what will be required? What should we stop doing, what should we start doing, and what should we continue doing?

None of these things are on display, and all are badly needed if we are going to make the most of the next twenty years.

Of all the facts that got skimmed over or avoided in the State of the Union extravaganza, the fiscal nightmare in DC was probably the most glaring. Yes, both parties have decided to talk about the deficit, but neither is giving the appropriate context.

For FY 2012, the federal government is projected to run a $1.1 trillion deficit. Let's compare that number to the projected revenues:

(Source)
The $1.1 trillion deficit is 42% of total revenues and 73% of all income taxes. That is, in order to spend what the US currently spends without going further into debt (i.e., to have no deficit), income taxes must immediately increase by 73%(!).

This is the sort of territory that, were the US any other country, would have already landed its debt markets – and likely its currency, too – in very hot water.

Historically, countries that have run deficits 40% greater than revenue for more than two years have experienced profound financial and political crises. The US is now in its fourth year of inhabiting this rare territory.

How can it keep doing this when every other country that has tried has gotten into trouble? Simple. The Federal Reserve has enabled such egregious deficit spending by buying up mind-boggling amounts of government debt. This has both kept rates low and created a lot of additional buying demand for Treasuries.
Exactly how much US debt is the Fed buying? Under Operation Twist, the Fed has bought anywhere from 51% to 91% of all gross issuance of bonds dated six years or longer in maturity.

(Source)
It is quite obvious that the Fed has been a major participant in the bond markets and a major reason why Treasurys are priced so high and offer so low a yield.

It seems that it is well past time to speak directly to the enormous fiscal deficits in a credible way, not merely bemoaning them being too high. And we're also overdue for an adult national conversation that it's unwise and unsustainable for a country to lean on its central bank to print up the difference between receipts and outlays.

There is a clear relationship between high oil prices and recessions, confirming the idea that the price of oil has the same impact on the economy as higher interest rates (perhaps even more so nowadays). Both are a source of friction. With higher interest rates, less lending and less consuming happens. With a higher price of oil, more money gets spent on energy, much of it sent to foreign producers of oil, and thus less money is available for other consumption.

Both higher oil prices and higher interest rates cause people to think a bit more before pulling the trigger on either ordinary spending or a big capital project.

Note that all of the six prior recessions were preceded by a spike in oil prices. In the case of the double-dip 1980s twin recessions, oil remained elevated after the first recession was (allegedly) over. Don't be fooled by the logarithmic nature of the chart below – note that the typical decline in oil prices between the recession-inducing peak (blue lines) and the recovery-enabling trough (green lines) was a substantial 30%-50%:

(Source)
Also note in the most recent data that oil prices happen to be at roughly the same level that triggered the first recession in 2008 (the purple dotted line).

If we needed one simple chart to help us understand why trillions of Dollars of stimulus and handouts are not causing the economy to soar, this is the chart that explains the most. High oil prices and recessions are highly correlated, and it's not too much of a stretch to postulate that economic recoveries and high oil prices are inversely correlated.

Note also that the above chart is not inflation-adjusted. If it were, it would show that there have been exactly zero recoveries when oil prices are near or over $100 per barrel.

For those counting on an economic recovery here to lift all boats and assist the bailout efforts, the burden of history is upon them to explain why this time we should ignore the price of oil.

I say we cannot. Policy planners and citizens alike should be ready for disappointing market and economic activity in response to the usual bag of printing, borrowing and delaying tricks.

The State of the Union speech and GOP response neither accurately portray the true fiscal condition of the US, nor present a compelling narrative that speaks either to the realities of today or a future we might like to head towards.

The US is simply on a fiscally ruinous path, and neither party seems up to the task of laying out the story in a way that is mature, clear, and direct.

No recovery has ever been possible from oil prices this high, nor with debt levels this extreme, and it is quite improbable to think that both conditions could be overcome with anything less than a completely clear-eyed view of the true nature of the predicament faced.

Decades ago, Ludwig Von Mises captured everything discussed here elegantly:

There is no means of avoiding the final collapse of a boom brought about by credit expansion.
The alternative is only whether the crisis should come sooner as a result of a voluntary abandonment of further credit expansion, or later as a final and total catastrophe of the currency system involved.

Our current dire fiscal condition, our leaders' dysfunctional unwillingness to address the flawed behavior that caused it, plus many other recent events both in the US and in Europe, point to the idea that a voluntary abandonment of further credit expansion is just not on the menu.

That leaves us with some final and total catastrophe of the involved currency system(s) as the inevitable outcome.

At this point, time to prepare is your greatest asset. But as we can see from the precarious global economic situation described above, time is running out. Use what remains wisely.
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Chris Martenson, 09 Feb '12

Chris Martenson PhD is an economic researcher and futurist specializing in resource depletion, and creator of the widely-viewed video seminar, The Crash Course. He is also author of the recent book The Crash Course: The Unsustainable Future of Our Economy, Energy & Environment (Wiley & Sons). His regular anlysis and commentary can be read at ChrisMartenson.com

Commodities Volatile while some banks mask write-downs

noreply@blogger.com (Unknown) — Tue, 04 Oct 2011 20:56:00 +0000

The Gold Price fell to $1643 per ounce by Tuesday lunchtime in London – still 1.1% up for the week so far – while stocks and commodities suffered another battering as Greek debt fears once again rattled the markets.

Copper fell 1.9%%, while WTI crude oil lost over 2%, dropping to $76 a barrel.

Fiat Currency of Gold Coins?

The Silver Price dropped to $30.21 – 0.8% up on last Friday's close.

"Gold continues to benefit from the current pessimism regarding the global economy [and] the realisation that the Eurozone debt issue is far from being resolved," says today's note from Standard Bank's commodity analysts.

"We expect physical [gold] demand to be quite decent in the coming days," adds Edel Tully, precious metals strategist at UBS.

"After the recent washout, gold positioning is far from extended, and this is quite a bullish signal for price strength ahead."

Stock markets meantime fell Tuesday for the fifth session running, with the FTSE100 here in London dropping through 5000 – a level it first crossed on the way up in August 1997.

The finance ministers of France and Belgium today pledged to "step in" if necessary and bail out the part-nationalized Dexia banking group.

Dexia received a bailout worth around €6 billion in 2008. Its share price fell to a low of €0.81 Tuesday morning – 44% below where it closed last week – after ratings agency Moody's placed Dexia on review for downgrade, citing "concerns about the group's sizeable reliance on short-term funding and the consequent liquidity gaps".

Last week Fitch, another ratings agency, referred to Dexia's "structural weakness" and warned that the bank faces growing difficulties in getting access to funding.

Several European banks have now "marked to market" the Greek government bonds they own, making writedowns of 50% or more. But others – including French banks BNP Paribas and Societe Generale and the Franco-Belgian Dexia Group – have so far only recorded the 21% loss agreed at a Eurozone summit in July.

"It's no coincidence that the banks with some of the biggest holdings of Greek debt took the smallest writedowns," says Peter Hahn, professor of finance at Cass Business School in London and a former managing director at Citigroup.

"You've got banks, which are supposedly comparable, putting different values on their assets. That destroys the credibility of the banking system, and is one of the reasons why the shares are being hit so badly."

"The market is increasingly worried about the potential of the Greek crisis and the calamity that could be created if there was a messy default," says Jane Foley, senior currency strategist at Rabobank in London.

"We could be in for a shakeout even larger than the Lehman shock," adds Hideki Amikura, Tokyo-based foreign exchange manager at Nomura Trust Bank.

"While last week saw precious metals largely following equities on a downward slope, gold and silver's moderate gains this week are a positive sign that they are returning to favor on haven demand," reckons one bullion dealer here in London.

"Investors will be reassured that last week's rout [of gold] was driven more by a flight to cash to meet margin calls and mitigate losses on equities than by a fundamental shift in perceptions of gold's value."

Luxembourg prime minister Jean-Claude Juncker, who chairs the Eurogroup of single currency finance ministers, confirmed Tuesday morning that he has cancelled a meeting of Eurozone ministers scheduled for October 13 to discuss whether or not Greece should receive the next installment of its bailout funding, worth over €8 billion.

The cancellation follows Greece's announcement on Sunday that it expects to miss its deficit-cutting targets for 2011.

Greek finance minister Evangelos Venizelos said today that the government has enough money to last until mid-November if the next installment is delayed. He has previously said it would run out of money by the middle of October.

Dollar and Sterling Gold Prices remain broadly where they closed on Friday 23 September, while the Euro Gold Price is up 1.7% over the same period. In the so-called commodity currencies, the Gold Price has risen 2% against the Canadian Dollar in that time and 3.4% against the Australian Dollar – recovering most of the losses in that currency incurred towards the end of last month.

Looking to Buy Gold?...
Ben Traynor, 04 Oct '11
Editor of Gold News, the analysis and investment research site from world-leading gold ownership service BullionVault, Ben Traynor was formerly editor of the Fleet Street Letter, the UK's longest-running investment letter. A Cambridge economics graduate, he is a professional writer and editor with a specialist interest in monetary economics.

Trouble Coming Soon

noreply@blogger.com (Unknown) — Tue, 04 Oct 2011 10:38:00 +0000

Ready Access to real bullion is the only defence

WE HAVE OBSERVED world financial markets – including the gold market – for more than 40 years, watching the Gold Price move from $42 per ounce through what we are seeing today, writes Julian Phillips of GoldForecaster.

More importantly we've seen why the Gold Price has moved over these decades and fully understand the monetary history and role of gold. The events of the last three years have interrupted the currency experiment that used paper notes not redeemable either in gold or in anything else except more paper notes.

Right now we're watching the most recent experiment. The Euro, which is only one decade old, suffers the consequences of sub-par financial management, and it's taking Europe to the brink of failure. It's touch-and-go as to whether the Eurozone or the Euro will survive the present crises.

The Eurozone bailout package almost doubled in size to cope with Greece, Ireland and Portugal, to over €400 billion. The markets smiled at first, but then sank back into trepidation as the Italian government had to pay the highest interest ever for funds at a recent auction. When markets keep on being disappointed it signals something far more than just a temporary correction. As markets just dip slightly it's becoming clear that they're in a sort of denial, waiting for something to trigger what we're expecting at any time.

How is this driving gold, which is sitting now around $1,600 after having fallen from a peak of over $1,900? Look at the funds that hold physical gold. They've fallen by less than 2%, which is hardly significant.

Look at the demand from Asia. It's coming in at the lower levels as it has done in past falls; this fall, however, is far more significant. Look back when speculators and banks drove gold from $300 to $390, then farther back to $326 in 2005 – short-term traders can (under the right market conditions) drive prices a long way. In the more recent, 2008 case, Investor Meltdown created conditions where covering margins triggered 'stop loss' protections and the search for liquidity allowed for the precipitous falls.

It was just like a threatened body drawing its limited blood supply to its center, boosting its concentrated central defenses but starving its peripheries, which are now in danger of dying off, endangering the entire body. But gold is at the center and only got a shock.

But was that a change in trend? Have gold and silver market conditions changed, fundamentally?

We're now at the point where solutions and reformation must take place in the monetary world, far faster than governments are capable of and require a degree of consensus that looks unlikely to be achieved. So, what next?

The last couple of weeks have seen nearly all global markets falling, in concert. Yes, they're trying to recover, but this is dependent on some good news coming forward before December. It may be that failure to resolve the Eurozone debt crisis precipitates a far more dramatic set of market events as many important nations' economies confirm deflationary conditions and recessions.

The markets are telling us that bad news is on the way. Far more than just a downturn is being indicated by market behavior. Major structural changes will be forced on the developed world. It's losing wealth to the emerging world and oil producers. The recovery prospects are more than dim. There's far too much debt for the developed world to repay, so more debt will cripple it. Inflation to cheapen money is an alternative (and one the Fed prefers to deflation) but accompanied by a liquidity crisis and banking seizure, will more than likely lead to a degree of inflation that is uncontrollable.

We are on the brink of structures failing, spiraling the financial world into such a bleak scene comparable with the 1930s and the Second World War are valid.

The markets have not yet discounted that picture. And gold and silver prices pulled back solely in the search for liquidity, not because the safe-haven qualities of gold and silver evaporated. With the US Dollar the only standing safe haven in the currency world and one not too far away from its own meltdown, gold and silver have yet to really show their historic qualities. We're very close to a major financial accident that will cause far deeper problems for the developed world.

Many investors have seen the writing on the wall and have seen it since 2008. Now, the writing's more alarming than in 2008. The 2008 scene was when there was more economic strength than there is now. Now, the warnings come on the back of a developed world economy that is failing to grow, failing to resolve debt crisis, and failing to lead its way back to economic health. Disaster doesn't give that much warning. When it comes, a tranquil scene suddenly panics, while irreparable damage is done.

Whether this forecast is correct or not, we can all see that we have to be prudent and take precautionary measures to safeguard our wealth. If we don't, then we'll lose it. We're at the point when we need to be ready for the worst and situate ourselves out of harm's way. If the storm doesn't come, we can always come out of shelter and carry on. But if it does, when we come out of shelter we'll be able to do much more. Are you ready?

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Julian D.W. Phillips, 04 Oct '11
From Bullion Vault

The Death of the Dollar is Nigh

noreply@blogger.com (Unknown) — Sun, 25 Sep 2011 11:23:00 +0000

The Gold Report

If dollar-dumping turns from a trickle into a flood, look out. Exploding prices (aka exorbitant inflation) resulting from the devaluation of the dollar will compound the problems we saw in 2007–2009. Catastrophe will come when everybody realizes that the dollar is an "IOU nothing." That's the downside in the decade(s) ahead, according to Casey Research Chairman Doug Casey. But an optimist at heart, in this exclusive interview with The Gold Report, Doug also identifies some reasons to be hopeful.

The Gold Report: You've been talking about two ticking time bombs. One is the trillions of dollars owned outside the U.S. that investors could dump if they lose confidence. And the other is the trillions of dollars within the U.S. that were created to paper over the crisis that started in 2007. Are these really explosive circumstances that will bring catastrophic results? Or will it just result in a huge, but manageable, hangover?

Doug Casey: Both, but in sequence. One thing that's for sure is that although the epicenter of this crisis will be the U.S., it's going to have truly worldwide effects. The U.S. dollar is the de jure national currency of at least three other countries, and the de facto national currency of about 50 others. The main U.S. export for many years has been paper dollars; in exchange, the nice foreigners send us Mercedes cars, Sony electronics, cocaine, coffee—and about everything you see on Walmart shelves. It has been a one-way street for several decades, a free ride—but the party's over.

Nobody knows the numbers for sure, but foreign central banks, and individuals outside the U.S., own U.S. dollars to the tune of something like $6 or $7 trillion. Especially during the recent crisis, the Fed created trillions more dollars to bail out the big financial institutions. At some point, foreign dollar holders will start dumping them; they are starting to realize this is like a game of Old Maid, with the dollar being the Old Maid card. I don't know what will set it off, but the markets are already very nervous about it. This nervousness is demonstrated in gold having hit $1,900 an ounce, copper at all-time highs, oil at $100 a barrel—the boom in commodity prices.

Some countries are already trying to get out of dollars, but it could become a panic if the selling goes from a trickle to a flood. So, yes, it's a time bomb waiting to go off, or maybe a landmine waiting to be stepped on. If a theatre catches fire and one person runs out, soon everybody rushes toward the door and they all get trampled. It's a very serious situation.

TGR: If panic erupts on the U.S. dollar, would products manufactured in the U.S. become super-cheap or super-expensive?

DC: They would become super-cheap. Everybody says that devaluing the dollar will stimulate U.S. industry because the products will become cheaper and foreigners will buy them. This is a huge canard everybody repeats and nobody thinks about. Yes, it is true for a while, but if devaluation were the key to prosperity, Zimbabwe should be the most prosperous country in the world as it has already collapsed its currency.

A strong currency is essential for a strong economy. Sure, a strong currency can hurt exporters for a while. But, a strong currency encourages manufacturers to invest in technology, and become more efficient. It rewards savings and results in the growth of capital that's critical for prosperity. A strong currency allows businessmen to buy foreign companies and technologies at bargain prices. It results in a high standard of living for the country, and yields social stability as a bonus. The idea that decreasing the value of currency to stimulate exports is a short-lived, stupid and counterproductive solution to the problem. People seem to forget that while the German currency was rising about sixfold from its level of 1971, and the Japanese yen about fourfold, those countries became the world's greatest export economies. It didn't happen despite a strong currency, but in large measure because of it.

TGR: Given that the U.S. is the world's biggest consuming nation, wouldn't fleeing the dollar create a big consumer vacuum in the international community? Doesn't the rest of the world want to keep up the high level of exports to these U.S. consumers?

DC: That's exactly why the U.S. is in such trouble; it's idiotically focused on consumption, while only production can create prosperity. The world doesn't need to stimulate consumption. This is another canard, because everybody has an infinite desire for goods and services. I know for myself, I'd like not just a car, but 10 Ferraris, a couple of Gulfstreams and 10 houses around the world. So, by myself, I have an infinite desire for goods and services. Multiply that by 7 billion other people. The only way to gratify those desires is by producing enough to trade with other people to give you what you want. When so-called "economists" think the problem is that we don't have enough consumption, that shows that the profession itself is bankrupt. It's actually quite embarrassing.

TGR: But other countries currently produce enough of what the U.S. wants. With U.S. dollars, that trade won't look good on their side eventually.

DC: The problem is the U.S. doesn't produce enough in return. The U.S. has been lucky to have a currency that has, so far, been accepted by everybody. But when everybody realizes that the dollar is an "IOU nothing" on the part of a bankrupt government and a society that doesn't really produce anything anymore, it's going to create a worldwide catastrophe. Those $7 trillion held by foreigners are going to become instant hot potatoes.

TGR: Considering what you said a moment ago, that the world doesn't need to stimulate consumption, you must find some irony in the Obama administration's plan to stimulate consumption again in the U.S. as a way to spur some economic growth.

DC: I'm afraid that after being counseled by the fools that surround him, Obama talking about economics is like the blind leading the doubly dismembered. They want to spend $450 billion trying to create new jobs—but these are government jobs, where you have people digging holes during the day and filling them up at night to create the appearance of employment. No government has any idea what the market really wants and needs. There should be zero government involvement in this. The government cannot and should not even try to create jobs. If Obama wants to stimulate the economy, he can decrease the size of the government. I would say a 90% reduction would be a good starting figure.

TGR: But that will create even more unemployment. That's one of the big concerns. States laying off employees could increase unemployment even more.

DC: It is wonderful that states are starting to lay off employees. Once they lose their state jobs, which suck wealth from taxpayers, maybe those people can find real, productive jobs providing goods and services that people actually want and will pay for voluntarily. So I'd argue that getting rid of state employees is essential to a sound recovery plan.

TGR: You warned early on in the 2008–2009 economic crisis that it would really be more of a hurricane. In the last year or so, we've been in the eye of the hurricane and there's more turmoil to come. Will the other side of the storm be worse than the first? And given the recent economic news, do you think we have moved out of that eye?

DC: Yes, I think we are moving out of the eye and going into the other side of the storm. This storm will be much more severe because we haven't solved any of the problems that caused the hurricane in the first place. The fact that governments all over the world have created trillions of currency units has only aggravated those problems. Now, I expect exploding prices to compound the problems that we saw back in 2007, 2008 and 2009. That will devastate the prudent people in society who saved money. They saved it in the form of currency, and wiping out their savings will be catastrophic.

TGR: Will this affect only North America and Europe?

DC: Mostly North America and Europe, but it's going to be very serious in Japan, too. It could be even more disastrous in China. The Chinese real estate market bubble is very inflated, driven by the lending of Chinese banks that won't be able to recover their loans. They will all go bankrupt, taking out the Chinese populace's savings with them. At the same time, those who own real estate will find it worth vastly less than what they paid for it. Those problems will create social disruptions in China, leading to riots, perhaps even revolution, and who-knows-what. The fallout is going to be terrible.

TGR: Many pundits and economists still project growth in China, albeit at a lower rate, and anticipate further expansion of the middle class.

DC: The 21st century will be the Chinese century, but the distortions and misallocations of capital that have occurred over the last 30 years—notwithstanding the truly phenomenal progress the country has made—are serious and have to be washed out. I am a huge bull on China for lots of reasons, but I am bullish for the long run. I think it is going to go through the meat grinder over the next 10 years. I don't know how it will come out; maybe China will break up into five or six different countries. Actually, that would be a good thing. Most of the world's nation-states are artificially constructed and too big to be manageable as political entities.

TGR: Your outlook on China fits right in with something you've been saying for years—about this being the "Greater Depression," which is also the topic of your upcoming presentation at the sold-out Casey Research/Sprott Inc. "When Money Dies" summit next month in Phoenix. Your opening general session talk is entitled, "The Greater Depression Is Now." We are now four years into it, based on your 2007 start date.

DC: Actually, depending on how long a historical scale you look at, you could say that, for the working class in the U.S. anyway, the depression started in the early 1970s. After inflation, after taxes, their take-home pay hasn't risen in real terms for 40 years. But the definition of a depression that I use is "a period of time during which most people's standard of living drops significantly."

Net savings shows that you're living within your means and putting aside capital for the future. In the U.S., people have been living above their means for many years—that is what debt is all about. Debt means that you are borrowing against future production, which is exactly what the U.S. has been doing.

TGR: So, how long will this Greater Depression last?

DC: It doesn't have to last long at all. It could be quite brief if the U.S. government, which is basically the root cause, retrenches vastly in size and defaults on the national debt, which is essentially an enormous mortgage, an albatross around the neck of the next several generations of Americans. The debt will be defaulted on one way or another, almost certainly through inflation. I simply advocate an honest, overt default; that would serve to punish those who, by lending to the government, have financed its depredations. Distortions and misallocations of capital that have been cranked into the economy for many years need to be liquidated. It could be unpleasant but brief. The government is likely to do just the opposite, however. It will try to prop it up further and make it worse—compounding the problem by expanding the wars. So, it could last a very long time. In that sense, I'm not optimistic at all. I think there is little cause for optimism.

On the other hand, I'm generally optimistic for the future. There are only two causes for optimism. First, smart individuals all over the world continue, as individuals, to produce more than they consume and try to save the difference. That will build capital, which is of critical importance. They should just save by holding paper currency. Second, expanding and compounding technology will increase the standard of living. Remember that there are more scientists and engineers alive today than have lived in all previous history combined. Those two factors countervail the government stupidity around us. Whether they will be overwhelmed and washed away by a tsunami of statism and collectivism, I don't know.

TGR: You say that the U.S. government is the root cause of this problem. Isn't that putting too much blame for a worldwide problem on one nation?

DC: The institution of government itself is the problem, and the problem is metastasizing like a cancer all over the world. But, sad to say, the U.S. is the most serious offender because it is currently both the most powerful and the most aggressive nation-state. It has been greatly abetted by the fact that the U.S. currency has been accepted globally. The U.S. dollar is, in effect, the reserve that backs all the other currencies in the world. That is why the U.S. government has been the most destructive from an economic point of view. Furthermore, military spending—which in the U.S. equals that of all the other militaries in the world combined—is purely destructive. It serves no useful economic purpose at all. The military is no longer "defending" anything—least of all liberty. It's actively creating enemies and provoking conflict. So, yes, I think the U.S. government is actually the most dangerous force roaming the world today.

TGR: Do you see that changing after the next election?

DC: No. I think the chances of Obama being reelected are high, simply because more than half of Americans are big net recipients of state largesse. The U.S. has turned into a larger version of Argentina politically, where the electorate is effectively bribed to vote for the biggest thief. It is likely to turn out much worse than Argentina, however. Unlike the Argentines, the U.S. government is fairly efficient. And, unlike Argentina, the U.S. is rapidly turning into a police state.

Electing a Republican might be even worse, though. With the exception of Ron Paul and Gary Johnson, the potential Republican candidates absolutely make my skin crawl. So, no, there is no help on the horizon. The U.S. government is spending about $1.5 trillion more this year than it takes in, and it is not going to cut that. In fact, foolish spending to bail things out will increase. And, worse than that, the Fed has artificially suppressed interest rates for three years. Interest accounts for roughly 2% of $15 trillion official national debt, or $300 billion per year. As interest rates inevitably rise, that interest amount will grow. At 12%—and I'm afraid they'll have to go even higher than that—it would add another $1.5 trillion just in interest payments.

I absolutely see no way out without a collapse of the U.S. currency and a total reordering of the U.S. economy.

TGR: When Money Dies, the title of your summit, implies some return to a gold standard. How do you see that playing out?

DC: Nothing is certain, but when the dollar disappears—and it's going to reach its intrinsic value soon—what are people going to use as money? Will we gin up another fiat currency like the euro? The euro is likely to fail before the dollar. My suspicion is that people will want to go back to gold. It's not because gold is anything magical, but simply the one of the 92 naturally occurring elements that—for the same reasons that make aluminum good for planes and iron good for steel girders—is most useful as money. In fact, the reason that gold has risen as high as it has is that the central banks of third-world countries—places that don't have large gold reserves, such as China, India, Korea, Russia, even Mexico—have been buying the stuff in size.

TGR: The concept of going to a gold standard seems impossible in the sense that there is only so much gold above ground—6 billion ounces? Maybe $11 trillion worth? But it's only a fraction of the U.S. GDP. Even with gold at $2,000 an ounce, that leaves an immense gap. In that scenario, how do you convert to a gold standard?

DC: In terms of today's dollars, gold should probably be a lot higher than it is. I don't know what the number will be, because a lot of those dollars will disappear in bankruptcies; they will dry up and blow away. It's like a real estate development that was worth $1 billion on somebody's books; when it fails, that's $1 billion destroyed. It's a question of the battle of inflation (with the government creating dollars to prop things up) against deflation (where businesses fail and wipe out dollars). But put it this way: the U.S. Government reports it owns about 265 million ounces. Its liabilities to foreigners alone are at least $6 trillion. If they were to be redeemed for a fixed amount, that would require roughly $22,000/oz. gold. And that doesn't count dollars in the U.S. itself.

I'm a bargain hunter and a bottom fisher, and bought most of my gold at vastly lower prices. But I think gold is going much higher because most people still barely even know that the stuff exists. As inflation picks up, they are going to want to get rid of these dollars—but what other monetary commodity can they turn to? So, gold is going higher. I'm still accumulating gold.

TGR: You said that the storm as we emerge from the eye of the hurricane will be worse than it was on the other side. If they don't own gold, how do investors protect themselves?

DC: It's very hard to be an investor in today's world because an investor is someone who allocates capital in a way to create new wealth. That is not easy in today's highly taxed and regulated economy. It's late in the day, but not too late, to buy gold, silver and other commodities. Productive assets are good to own. Of course, the easiest way to buy most productive assets is through the shares of publicly traded companies, but the stock market is quite overvalued in my opinion, so that's not the best option right now.

In addition to trying to build personal holdings of gold and, to a lesser degree, silver, I think people should learn to be speculators. This is not to be confused with gamblers, who rely on random chances. Speculators position themselves to take advantage of politically caused distortions in the marketplace. In a true free market society, you would see very few speculators because there would be few such distortions. But regulations, taxes and currency inflations are likely to keep markets very volatile. Good speculators will position themselves to take advantage of bubbles, and identify bubbles that have been blown to their maximum and are about to deflate.

Government actions are going to force people to become speculators, whether they like it or not. Most won't like it, and very few will be good at it.

TGR: What bubbles might speculators look to exploit?

DC: I'd say the world's biggest bubble is real estate in China, but real estate bubbles are just starting to deflate elsewhere, too—in Australia and Canada, for example. It's relatively hard to short real estate, of course. Shorting bank stocks is an indirect way to play it. I'd say bonds are the short sale of the century. They're going to be destroyed. Bonds pose a triple threat to capital because:

Interest rates are artificially low, and as interest rates rise—which they must—bonds will fall.
Bonds are denominated in currencies, and most currencies, let's say dollars, are going to lose a lot of value.
The credit risk of most bonds, certainly those issued by governments, is high.

On the long side, mining stocks are very cheap relative to the price of gold right now. I'd say there's an excellent chance of a bubble being ignited in gold mining stocks, especially the small ones; in fact, I'd put my finger on that as likely being the easiest way to make a killing.

TGR: Technology was one of the two areas of optimism you mentioned earlier. Do you see a bubble forming there?

DC: You have a point, but I'm not sure you can talk about technology stocks as a whole; technology is too variegated, too vast a field. Although, I've long been a huge believer in nanotech, which is likely to change the world as we know it. With gold stocks, however, you can jump into a discrete universe, that's likely to become a mania.

TGR: Thank you for the tips, Doug, and as always, for your thoughtful insights.

Doug Casey, chairman of Casey Research LLC, is the international investor personified. He's spent substantial time in over 175 different countries so far in his lifetime, residing in 12 of them. And Doug's the one who literally wrote the book on crisis investing. In fact, he's done it twice. After The International Man: The Complete Guidebook to the World's Last Frontiers in 1976, he came out with Crisis Investing: Opportunities and Profits in the Coming Great Depression in 1979. His sequel to this groundbreaking book, which anticipated the collapse of the savings-and-loan industry and rewarded readers who followed his recommendations with spectacular returns, came in 1993, with Crisis Investing for the Rest of the Nineties. In between, his Strategic Investing: How to Profit from the Coming Inflationary Depression broke records for the largest advance ever paid for a financial book. Doug has appeared on NBC News, CNN and National Public Radio. He's been a guest of David Letterman, Larry King, Merv Griffin, Charlie Rose, Phil Donahue, Regis Philbin and Maury Povich. He's been featured in periodicals such as Time, Forbes, People, US, Barron's and the Washington Post—not to mention countless articles he's written for his own various websites, publications and subscribers.

At the sold-out Casey/Sprott Summit "When Money Dies," more than 20 seasoned investment pros, economists and freethinkers will provide their insights and advice on the coming currency collapse and what you can do to protect your assets. Listen to the timely investment advice and specific stock recommendations of North America's top financial experts from the comfort of your home—in 20+ hours of power-packed audio recordings on CD (or MP3). Pre-order now and save $100 off the regular price.

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ETF's Dangerous Gearing Instruments (WMFD)

noreply@blogger.com (Unknown) — Sun, 18 Sep 2011 18:27:00 +0000

Weapons of Mass [Financial] Destruction WMFD - the 'de-commissioning' of which is affecting the whole banking system.

London, UK - 18th September 2011, 17:35 GMT

The World as Risk?

We have mounted an investigation into the role of Exchange Traded Funds (ETFs) linked to the $2 billion black hole at UBS. We have uncovered a complex entangled world wide web of $1.4 trillion including derivative exposures and counterparty risks.

ETFs: Rising Proliferation, Rising Risk

Extreme Perils of Exchange Traded Funds (ETFs), Derivatives and Unlimited Black Swans (UBS)

Exchange-traded funds are back under the spotlight because of their connection with the alleged $2bn "rogue trader" scandal at UBS's Delta One ETF operation. No one who truly understands the technical makeup of these financial instruments is surprised to see the words ETF and rogue trader in the same sentence! However, purveyors who believe that ETFs are good enough financial "assets" for "widows and orphans" act clueless and some feign total surprise.

Financial Stability Threatened

Regulators around the world have expressed concern that ETFs might be a new source of market instability for nearly a year now.

1. America's Securities and Exchange Commission (SEC) has launched a probe this week into whether ETFs are contributing to market volatility by offering investors a way to quickly lift and reduce their exposure to the financial markets. This, in turn, forces large entries and exits from the underlying securities, or derivatives, that mirror the assets or asset class that the ETFs seek to track.

2. The Bank of England warned in June 2011 that ETFs are potentially dangerous for unsophisticated investors. The rogue trading event that hit Societe Generale in 2008 also originated on a desk that was buying on the market to compile portfolios that underpinned ETFs. The UK's new Financial Policy Committee (FPC) has warned that ETFs are shrouded in "opacity and complexity". It said it was concerned that ETFs "could become a source of risk to the system as the market evolves".

3. The Financial Stability Board (FSB), an international super-regulator based at the Bank for International Settlements in Basel, Switzerland, wrote a prescient paper "Potential financial stability issues arising from recent trends in Exchange Traded Funds (ETFs)" in April 2011. Its central warning was that ETFs are neither cheap nor transparent.

What are ETFs?

ETFs are listed securities that mirror various assets or asset classes, including shares, market sectors, indices, commodities, fixed-interest securities and their sectors.

How big are ETFs?

The ETF market is growing rapidly. It was relatively minor on the financial landscape when the new century began, with investments of just $74.3 billion, all of it in equities. ETFs grew to $797 billion in 2007 when the global financial crisis erupted, and passed $1 trillion in 2010. BlackRock, the US-based asset manager that owns the biggest ETF provider, iShares, estimates that ETF assets totalled $1.4 trillion on 49 global exchanges by June 30, 2011, and forecasts that their total will pass $2 trillion in 2012.

Popularity

The last decade saw an explosion in the popularity of ETFs because of their well known benefits:

1. Relatively low costs;
2. Buying and selling flexibility including the capacity to trade them throughout the day;
3. Tax efficiency including favoured status by tax regimes;
4. Market exposure and diversification; and
5. Implied transparency.

Majority of ETFs are traded by institutional investors and hedge funds. Acceleration in growth of ETFs is linked to their presence on superannuation and other retail investment platforms in the secondary market. It is often incorrectly claimed that ETFs are simple products. Once upon a time, this was true. Now, this argument no longer holds water. Many ETFs are extremely complex and simply beyond the comprehension of individual investors and professionals alike.

Derivatives

Some ETFs do not hold physical assets of the sort they seek to track. They are "synthetic" and hold derivatives. For example, around half of the ETFs in Europe today do not match the index they are designed to track by holding all of its constituent shares. Unlike the plain vanilla "full replication" old ETFs which used to do so, nearly half of the new market is in the form of so-called "swap-based" ETFs which instead use derivative agreements, often with investment banks, to simulate the performance of the underlying assets. When an ETF security is bought, the investment bank or funds management group that is selling the ETF buys corresponding exposure, to pair the ETF's performance with the assets it is tracking. This is sometimes done by purchasing the physical asset -- shares or a share index -- but as the industry has grown it has become increasingly common for ETF vendors to take the exposure by buying derivatives, and to also use derivatives to insure against unwanted extraneous market movements.

Leveraged ETFs

Leveraged ETFs are a special type of ETF that attempt to achieve returns that are more sensitive to market movements than non-leveraged ETFs. They require the use of financial engineering techniques, including the use of equity swaps, derivatives and rebalancing to achieve the desired return. The most common way to construct leveraged ETFs is by trading futures contracts. The rebalancing of leveraged ETFs may have considerable costs when markets are volatile and can lead to substantial losses.

Counterparty Risks

The derivative-based make-up of ETFs gives rise to counterparty risks. As we saw with the UBS incident, some interesting risks arise within the counterparties supplying the basket of derivatives. What happens if such ETF trades cause such a mammoth loss in a counterparty that it does not have sufficient capital to bear the loss and pay out under the derivative contract? Answer: The ETF fails, leading to massive counterparty losses! ETFs based on derivative trades add a second layer of uncertainty to the unavoidable sudden ups and downs of the market and include the counterparty risks that may cause the organisation on the other side of the contract to go bust. This toxic aspect of ETFs is unclear to most investors in ETFs, who treat these complex financial instruments as if they were as safe as equities and bonds.

Conflict of Interest

Unbeknownst to the investor, the provider of the ETF might sometimes be a part of the same organisation as the derivatives desk carrying out the swap. When a financial institution acts in this dual capacity -- given the inadequate disclosure rules -- there is a significant potential for a conflict of interest in which the end investor comes off second best. There is currently no obligation for the basket of assets used as collateral to actually match the assets the ETF purports to be tracking. Hence a bank may choose to hold less liquid assets to back the fund which it could struggle to sell if too many investors want to exit at the same time. Think of all the gold ETFs and then ask yourself: How much physical gold actually underpins the gold ETFs? Answer: Not a lot! As much as half of the trades in gold are now driven by ETFs, while some blame them for speculatively driving up food prices.

Volatility, De-Coupling and High Risk

Extreme volatility makes ETFs behave unpredictably. ETFs do NOT always match the underlying asset or asset class in the way investors expect. Given the daily rebalancing and compounding, an investor can own a leveraged long ETF and end up losing money over a period when the market goes up but during which there are some sharp falls. Equally, an investor can own an inverse ETF -- which provides a short exposure -- during a period when the market goes down but if there are some sharp rallies, the investor ends up losing money. This actually occurred with some inverse ETFs in 2008, for example. ETF investors would not normally expect to be leveraged long and lose money if the market goes up or be leveraged short and lose money when it goes down. Yet, this is entirely possible with ETFs and is not known as an outcome to most investors.

Massive Short and Long Positions: High Frequency Trading (HFTs)

A big unrecognised risk with ETFs is related to the ease with which traders -- hedge funds and High Frequency Traders (HFTs) in particular -- are able to use such funds to short markets or go long. It is technically possible for the number of shares sold short or long in an ETF to exceed the actual number of shares available massively! It has been suggested that the "Flash Crash" of May 2010, in which US shares fell 1,000 points before bouncing back in a matter of minutes, was a consequence of this: around 70 percent of cancelled trades at the time were reported to be for ETFs by High Frequency Traders (HFTs). Given that hedge funds and financial institutions can apparently rely upon creating the units to deliver on their short, some market participants are short 1,000% or 10 times the amount of the ETF available. The danger of allowing short sales which are a multiple of the value of a fund in an area where it may not be possible to close the trades by buying back the stocks are clear. Yet, purveyors of ETFs claim that there is no such risk in shorting ETFs. Do they not understand the product they are offering, and if they can't, what chance has the retail investor got?

Camouflage and Subterfuge: Insider Trading

ETF stripping allows virtually untraceable insider trading. The way this works is that rather than take a position in a security where someone has inside information, The trader buys or sells the ETF and does the opposite on all the stocks that make-up the ETF, except the one for which they have insider knowledge.

Liquidity Out Of Thin Air

The problem of liquidity is an increasing issue with ETFs because of the way in which the funds have branched out into other asset classes such as fixed income and commodities including gold and oil. In these markets, liquidity is typically thinner than in big equity markets such as those measured by global indices like the S&P 500 or the Dow Jones. Liquidity is only ever a problem at times of market stress. Unfortunately, that is precisely the time when it matters, as Mortgage-Backed-Asset (MBA) investors discovered a few years back when the property market turned down and their managers were unable to sell enough properties to pay back redeeming unit holders. Investors were locked in. If the ETF is in an illiquid sector, can one really rely upon creating the units as one may not be able to buy (or sell) the underlying assets in a sector with limited liquidity?

Undisclosed Profitability

Although ETFs are billed as low cost they are also the most profitable asset management product for a number of providers. How can this apparent contradiction exist? The answer is that the charge for managing the ETF is only one part of the cost. There are also hidden cost benefits in the synthetic and derivative trades which the provider undertakes for the ETF.

Mis-selling

There is a rising possibility that ETFs are being mis-sold to the retail market and risks are being incurred in running, constructing, trading and holding them, that are not sufficiently understood. After the UBS incident, this mis-selling of ETFs might become indisputable.

Conclusion

1. Exchange Traded Funds (ETFs) have in a remarkably brief space of time become a trillion-dollar plus trading instrument with critics of ETFs arguing that they represent short-term speculation, that their trading expenses decrease returns to investors, and that most ETFs provide insufficient diversification.

2. The latest UBS black hole is likely to have repercussions, because it has occurred in the ETF sector, a part of the market that is rapidly becoming system-critical. The sudden loss of $2bn at UBS ought to remind investors of the pitfalls of these derivative-based instruments. It is likely that there will be moves to increase oversight of the ETF market in the wake of the UBS scandal. Are regulators going to slam the ETF barn door after the horse has long bolted?

3. Like many financial innovations -- such as the mortgage-related debt obligations that triggered the global financial crisis in August 2007 -- ETFs started out as a good idea. For some investors, in their most transparent form, they remain so. Now, a tangled web of complexity has rapidly developed. What was once a straight-forward means of gaining access to a market has turned into a minefield for investors and one which, as UBS discovered, has the potential to become the next toxic scandal!

4. Some critics claim that ETFs can be, and have been, used to manipulate market prices, including having been used for short selling that has been asserted by some observers to have contributed to the market collapse of 2008 and other severe market corrections.

5. Investors in Exchange Traded Funds (ETFs) ought to review each of the ETFs in which they are invested to reassess the true content and degree of risk embodied in them.

Busted Banks and Financial Scandals

noreply@blogger.com (Unknown) — Sun, 18 Sep 2011 14:14:00 +0000

Are all 'Western Banks' Bust? What is the actual and realistic levels of 'security' that they hold to cover their mortgage books? Are there risk factors that are being hidden, and does the UBS debarcle simply indicate that nothing has really changed?

Metals and Currency Exchanges

Should we simply have let the banks go to the wall for all the toxic debt that the general population is now expected to cover? Can we as voters/businesses consider defaulting to send these 'failing banks [the majority it seems] on their way to allow more efficient financial "institutions" to replace them. And where will Gold and commodities fit in with the World's needs to trade.

Consider this article from George Mangion from today's Malta Times. It raises some serious questions that are simply not being addressed. In practice Banks themselves are the problem. They have evolved into instutions of greed. In practice the basis of banking in both boring and highly marginal.

But the creation of credit and derviatives have turned the Banks into 'monsters', like 'black-holes' who are devouring the middle classes, and their impotent Governments. We need much more than Basel 111. We need radical break-ups, new trading platforms and transparancy. But do not hold your breath! JB


The fabled Higgs-Bouson Particle has more realism than the creation of bank credit

"Banks under fire"
by George M. Mangion from the Malta Times

Article published on 18 September 2011

It does not rain but it pours when financial scandals erupt. Little did we expect that with the introduction of strict banking regulation, including the implementation of new stress tests and Basel 111 rules, another bank would bite the dust? Reference is made here to the shock news that police in London had arrested a “rogue trader” in connection with allegations of unauthorised trading in UBS. At a time when the markets and shares show unprecedented losses, one could hardly believe that this trader at UBS bank caused an estimated $2 million loss. It was immediately reflected in an 8.00 per cent drop in UBS’ share value. Luckily, no client positions have been affected so far, yet the news came as a bolt out of the blue for FINMA, Switzerland’s financial regulator.

Ironically, at a time of such austerity, global banks are under stricter supervision and hence they will struggle to recoup the fat returns they had grown used to, prior to the credit crunch, by trading anything from complex bond derivatives to gold and currencies they made millions. It is obvious that after the balmy pre 2007 days when bank profits flowed so copiously in their Balance Sheets they now face an escalating debt crisis and heightened uncertainty both in Europe and more so in the US where we are seeing banks’ share value dip in market trading.

ZKB trading analyst Claude Zehnder said of the UBS scandal, “They obviously have a problem with risk management.” The Swiss taxpayer had bailed out this top Swiss bank in the 2007/8 banking crisis, following huge losses on toxic assets held by its investment bank. Recently, UBS made 3,500 workers redundant leaving 65,000 staff worldwide. It hoped to save $2.3 billion in wages and salaries and now, paradoxically, it lost them in this last scandal that rocked the UK branch. Furthermore, it was associated with a serious tax evasion dispute with US authorities and was forced to disclose over 300 client names and pay a $780 million fine. In another instant it agreed with the US authorities to reveal data on 4,450 American clients. All this echoes the risks that Swiss banks in post sub-prime crisis are facing. British economist Professor Chris Roebuck said UBS has tightened its compliance and rules, but this latest breach “is a staggering demonstration that all the clever systems that the banks now have still cannot stop a determined individual getting round them if they want to”.

Sadly, this reflects poor corporate governance and lower audit oversight in sensitive sectors such as currency trading where millions are made or lost in a trade. This “casino” style trading is a lucrative edge of each international bank but while it lays the golden egg when things go wrong it conjures visions of ugly days. Just remember when we saw other rogue traders, including the one at Société Générale, rogue trader Jerome Kerviel, who was arrested in 2008 over unauthorised trades that cost the bank €4.9 billion. Following his arrest, a court sentenced him to three years in prison in October 2010. Records show it was one of the largest investor losses in France’s history.

So what is the solution that can plug a bank’s defences against such expensive fraud? Can effective risk management process result in zero risk occurrences? Hardly, as these systems are not watertight and still cost a lot of money to operate. Banks are sometimes unable or unwilling to implement this high level of control. It’s still unclear if management of Société Générale knew about Kerviel’s scam, though he has claimed that it’s impossible his managers didn’t know what was happening, given the level of risk and the amount of cash involved in his trades was perpetrated inside the four walls of the financial institution. Critics argue that it requires inside knowledge of the bank’s security policies and means how to override those policies. Or else the risk mitigation and compliance processes in place were fundamentally flawed. Critics also question how trades of this nature could go unidentified amid the network of risk management in place at a large bank like Société Générale. The bank stated it had no indication that the trader had taken massive fraudulent directional positions in 2007 and 2008 far beyond his limited authority. It is no consolation that France’s regulator fined the bank €4 million in 2008 and issued a formal warning to the bank for “grave deficiencies” in its internal controls that “made possible the development of the fraud and its serious financial consequences”. It looks more like shutting the stable door after the horse has bolted. The Kerviel scandal was a record heist, superseding losses involved in 1995 when Nick Leeson (now a free man) burnt a €900 million hole in Barings Bank plc.

Barings was one of the oldest and most respected British investment banks. After the fraud was discovered in Singapore, it was subsequently sold to Dutch bank ING for £1. Another bank under fire is Ireland’s largest bank, Allied Irish. In 2002 it discovered a rogue US trader John Rusnak who had defrauded its US subsidiary of up to $750 million. His labours netted him a generous salary while his clever manoeuvres landed him with a scheme worth $850,000 in salary plus juicy bonuses from for five years. So have we learnt any lessons from these banking fiascos? Perhaps we did not heed Leeson’s own words when he was interviewed after the Barings fraud was discovered. He was critical of the way banking supervision is entrusted to certain authorities. Perhaps one may say the kettle calling the pot black but when more frauds are discovered it makes you wonder if the gatekeepers are asleep on their watch. The former trader said: “The core, or the key to this fraud problem is that you then have a central bank and a government that don’t really understand the financial markets.” He meekly asserts that in 1995 the government in Singapore did not detect the fraud and he continued to blame the central banks, which omitted to unravel it, saying it was too complex for them.

Banking investment scandals of such magnitude are unheard of in Malta. This is thanks to a closely supervised network operated by trained banking and investment inspectors at the financial watchdog MFSA. Still, one can recall the downfall of the BICAL private bank in the early seventies, which saw the loss of many subsidiaries owned by the family-controlled bank face bankruptcy. Recently, the demise of La Valette multi-manager property fund managed by a subsidiary of Bank of Valletta saw thousands of small investors protesting in court that overzealous banking staff had urged them to invest in risky projects when they alleged that they were ignorant of the potential risks. Luckily for them, sanity prevailed and Bank of Valletta as the custodian agreed without admitting guilt to compensate such investors up to 75 per cent of their investment (provided they renege on their rights at court). This brought a happy ending to a long drawn saga that was hitting local media and was not doing any good to the solid banking reputation enjoyed by the island. Bad news followed with another claim by Finco Treasury Management, a stockbroker firm, in the name of some 40 claimants who were allegedly encouraged by BOV to invest in Lehman Bros perpetuals. It appears that such investors were not informed of the risks involved and they lacked any financial background, and most of them were not experienced investors. The claimants say BOV failed to explain the risks of the perpetual securities; in fact they were described in purchase contracts as “straight bonds”. They were not informed that these perpetuals could be converted to ordinary shares without investors being able to halt the conversion. In their judicial protest, the claimants say they were advised by the bank to place their savings in ‘junior subordinated bonds’ and perpetuals in the Lehman. Unfortunately, this triple A bank went into bankruptcy in 2008 when housing prices crashed in the United States. The worrying news for BOV is that Finco alleges the bank is at fault for not having warned investors of the worsening credit risk of the Lehman Group when the bank itself had suffered massive losses after investing in Lehman securities. On its part, Bank of Valletta has rebutted all claims but stated its intention to meet the claimants to better explain its position.

To conclude, it appears that in times of financial turmoil, the incidence of banking troubles increases exponentially. One hopes that an honourable solution is found for the hapless investors once MFSA as the regulator takes its time to investigate the claims and issues its verdict on the underlying facts that led to their losses. Banks are under fire and they certainly welcome all the protection they can muster from their patron saint in the sky.

The New Dollar?

noreply@blogger.com (Unknown) — Tue, 29 Mar 2011 02:10:00 +0000

$$$ THE USGOVT IS SECRETLY ATTEMPTING TO FLOAT AN IDEA TO RETIRE THE USDOLLAR, PAY OFF CREDITORS WITH TOILET PAPER, RETIRE THE ENTIRE DEBT, DEVALUE OLD ASSETS, START ANEW, AND ISSUE A NEW USDOLLAR. THIS NEW USDOLLAR CONCEPT SEEMS GROTESQUELY FLAWED SINCE IT LETS THE UNITED STATES OFF THE HOOK AS DEFAULTED DEBTOR, AND IT ASSUMES NO CONSEQUENCE FROM THE USTREASURY BOND LIQUIDATION. THE USGOVT AND USECONOMY WOULD DESTROY THE URGENTLY NEEDED CREDIT TO MAINTAIN ITS ONGOING MASSIVE DEFICITS. $$$

In early February, over 150 US State Dept emissaries were called home to WashingtonDC for secret meetings. The news came and went quickly on internet journals. Many thought meetings were convened to discuss the growing Arab world upheaval. Instead, my sources report that the USGovt wanted to canvass opinions and coordinate feedback, if not to simply float a trial balloon on an historically unprecedented idea. The USGovt is trying to end the USDollar, to retire it, and to replace it in a fresh start after forcing a stern devaluation on all US$-based assets in conversion. The Boyz are printing $100 billion per month. So why not print $5 to $6 trillion and pay off all creditors with fresh colored toilet paper? The plan would call for all foreign creditors to be paid off, and all US-based depositors converted, both parties suffering devaluations. They would all be betrayed under the conceived plan, handed a hefty 30% instant devaluation that would accompany the birth to the new Republic Dollar by name, backed 80% by gold and 20% by silver. My guess is that Gold & Silver would be revalued at $7000 and $250, or $5000 and $175, something like that.

The old US$-based USTreasury Bond debt would be paid off with Printing Pre$$ toxic effluent output. The new US Republic Dollar would be backed by precious metals finally, in a return to the Gold Standard. The entire concept does not receive solid confirmation, but rather numerous repetitions from the same secondary source, and reports on support mechanisms working feverishly to enable its enactment. The story does receive an echo from Bob Chapman. The plan is very unclear about the status of old US$-based stock and bond and property assets, but my belief is they would be devaluated in hidden manner, to minimize public objection and to enable acceptance. It is also unclear the status of old US$-based debt obligations like home loans and car loans and business loans, but my belief is they would be converted in like kind. Recall that the world rejected the Amero concept for a omnibus North American currency before, largely because the United States could not dictate terms of contracts across the world, like between Chile and Europe on copper or between China and Brazil on sugar cane or between Canada and China on industrial metals.

My thinking has many parts, best summarized with a caption heading NO WAY IN HELL but summarized in three reasons.

1) The USGovt does not own enough Gold & Silver to back a new currency, even at higher precious metal prices.

2) The USGovt is the debtor nation, and debtors never dictate the terms of liquidation and restructure. The creditors do.

3) The USGovt has huge deficits, and the USEconomy has huge deficits, each not to be funded since creditor nations would halt all new credit to the US after they are handed forced devaluations on the instant payoff and devaluation.

The USGovt and USBankers cannot possibly dictate the terms of a new USDollar since they are bankrupt, since they are guilty of multi-$trillion bond fraud, and since the USGovt and USEconomy are both deeply insolvent with ongoing massive deficits. The defaulting debtor does not dictate terms to the creditors, even if the debtor is dominated by global banker elite. The wild card in such a deal would be nuclear weapons and an eager CIA to deliver terrorist attacks surreptitiously to any creditor nation seeming uncooperative. Instead, somehow, unsure how, the global elite bankers eat some crow, mixed with toxic bread & butter, and are demoted on the global stage of power, secret pacts with China notwithstanding.

With a new US Republic Dollar, the deficits would cripple the United States immediately. The USGovt deficit would force the United States to find and hand over many tons of Gold & Silver every quarter and year, without fail or exception or forgiveness, since no more scheister paper repayment in settlement. The US lacks the base monetary metal from which to continue the outsized and worsening deficits. The USEconomic deficit would force the US into insolvency immediately. The result would be that right away, the US would forfeit massive amounts of Gold & Silver that it does not own to settle trade gaps. Perhaps massive hidden Syndicate Gold supply would come to the table, taken as counter-party from Wall Street shorts that destroyed those shell corporate entities. My position has been stated before, that a new hard currency behind the US financial system would result in rapid insolvency and ruin, since the old systemic insolvency would instantly cripple any new launched monetary initiative. Thus the US never proposes one like the new Republic Dollar. Other foreign nations that would use the new Republic Dollar would generate large surpluses, and therefore make possible grand demands for US forfeited Gold & Silver. A new gold-backed US$ currency would force an immediate Black Hole inside the US system. The new system would promote in fast return exactly the same grotesque imbalances in a grand degradation. The United States could not expect to be given renewed credit after betraying the world's major creditors with the USTreasury Bond devaluations and liquidations, not in this real world.

Lastly, the new Nordic Euro currency would have to be subjugated under the new Republic Dollar. Such a development could only happen under some very scummy power sharing agreement with Russia and China and Germany. Then again, they might make a decision under nuclear threat. Any new Chinese Yuan currency with a hard asset backing would also have to be subordinated under the new Republic Dollar also. Those agreeing to subjugation under continued Anglo banker rule must accept $trillions in losses from USTreasury Bonds, USAgency Mortgage Bonds, even US Corporate Bonds during the devaluation process. The surplus nations, those blessed by huge surpluses, huge reserve savings, robust industry, and absent debts are planning the new Nordic Euro currency, a gold-backed currency. My belief is that as the Nordic Euro comes closer to its anticipated June 2011 launch, enormously important negotiations, hidden battles, important posturing, and desperate ploys will be put forth. The new Republic Dollar seems fanciful and totally impractical, surely such a desperate ploy to be shot down, unless a nuclear threat is delivered.

My best banker source, with solid international experience over 30 years, dismissed the idea as a wet dream by Anglo criminals to gain forgiveness, or rather to dictate forgiveness. This sage generous veteran claims the next phase will unfold very differently, with the foreign group called the Eastern Alliance pulling the rug from under the criminal Americans and British bankers, who operate a syndicate and display an evil streak. They are plainly nazis with nice wrappers. Neocon meant fascist nazi, for those naive in the crowd. The coming arrival of the gold-backed New Nordic Euro is causing a rush to duplicate it. The United States and Great Britain will either maintain a control position within a huge global slavery fascist brutal regime (featuring genocide), or else the US will descend into the Third World with a dead currency which must bid for the good useful currency in order to secure supplies. My belief is that the US$ in current form will be rejected within 18 months, globally, for crude oil and global trade settlement. My belief is that the USEconomy will suffer profound price inflation in the coming two years. My belief is that a new Republic Dollar would fall on its face before launch, but after presentation. A payoff of USTreasury Bonds with soon retired toxic paper with promise of deep devaluation would have immediate consequences of grave proportion, like the US being totally isolated from global commerce. The other name for that place is the Third World, marred by huge price inflation and credit cut off.

◄$$$ UNFOLDING EVENTS REGARDING THE USDOLLAR AND USTREASURY BOND DISPOSITION WILL NOT OCCUR ACCORDING TO ANY USGOVT AND USBANKER PLAN, OR PREFERRED DIRECTION. ANGLO BANKERS ARE NO LONGER IN CONTROL. NO NEW USDOLLAR CAN BE BORN FROM THE CRIMINAL SYNDICATE CRUCIBLE THAT HAS EXPLOITED AND BETRAYED THE AMERICAN CITIZENRY AND GLOBAL INVESTORS. BEHOLD WHAT COMES, A NEW EQUITABLE BARTER SYSTEM THAT REQUIRES ACCOUNTABILITY. $$$

In continuation of the new Republic Dollar theme, and the urgently needed transition to some currency vehicle in a viable fashion, my solid reliable banker source sent this note. He wrote, "It is not going to happen the way any US bankers would choose or direct. It is is unfortunate and regrettable that the USA has begun and is about to commit financial and political suicide. Today's USA power establishment is incompetent, delusional, and outright evil. It is less the criminal foreign policy and all the wars the US prosecutes. It is the treason the US power elites commit in regards to exploiting and betraying its own citizens. They can try whatever they like. They are done, finished. The engrained problem is too big for anyone or any group or any institution to fix. It is not about the price of Gold or Silver. Price is irrelevant. It is about purchasing power of Gold & Silver that has not really changed over the last 60 to 80 years. Take a look at Libya, a similar scenario that you will see unfolding on a larger scale. By comparison, the USA has its own Gadhaffis. We shall have a commodity based money regime and a non-monetary trade system called barter. Back to basics. It is as simple as that. That is what comes in the future. An entire new system has been in the works for almost two years, much planning, much development, an equitable system that has no place for freeloader or deadbeat nations. It will be a very accountable system, a fair system. Nations that do not participate will not have a supply chain. It is that simple."

Willie

Buy Gold, Buy Gold, Buy Gold

noreply@blogger.com (Unknown) — Mon, 31 Jan 2011 17:49:00 +0000

Very, very good advice, apparently, reckons the Mighty Mogambo...

SO CHRIS MAYER was quoted in the 5 Minute Forecast newsletter noting that "If history is any guide, inflation will likely get much worse," writes the Mogambo Guru from Tampa, Florida, in The Daily Reckoning.

Being the kind of guy who goes absolutely insane about inflation in prices, you can imagine the effect this had on me, although with a modest touch of understatement, he does not take things to the logical conclusion, namely that "We're Freaking Doomed (WFD), you morons! And now everyone is going to see what happens after an excessive creation of money has distorted the economy, little by little over the decades, into a grotesque, corrupt, cancerous, incestuous economy feeding on government spending that, in the local, state and federal aggregate, now comprises an outrageous 50% of all spending in The Whole Freaking County (TWFC), and yet the Federal Reserve keeps creating more and more so that the federal government can borrow more and more and thus spend more and more!"

I would suggest, of course, that he would finish up with, "And now I, Chris Mayer, speaking both for myself and the 5-minute Forecast, and everyone on the planet who has not lost his or her freaking mind, the only logical thing to do is to follow the sage advice of The Mighty Mogambo (TMM) to Buy Gold and silver, gold and silver, gold and silver, more and more and more until they are stashed in huge piles all over the house and you are stubbing your toes on them all the damned time, costing you as much in doctor bills as the silver goes up in price, which means (with certain simplifying assumptions yet yielding 3-decimal place precision) you have reached maximum utility!"

This is Very, Very Good (VVG) advice, and provides a good place to finally stop Buying Gold and silver, as taking the next step is the path to insanity, which starts when you find yourself getting peevish about your inability to get a permit to construct a lousy combination precious-metals vault and oil storage facility in your backyard, using land acquired all around my house by buying out the neighbors who thought they were so smart not to buy gold and silver when I told them, "Buy Gold and silver, you morons, when the evil Federal Reserve is creating So Freaking Much Money (SFMM), or one day you will regret it, and I one day I will buy your stupid houses for pennies on the dollar and kick you out, just before bulldozing your homes to rubble and having it hauled away so that every trace of you and your 'no gold or silver for me' stupidity is gone forever! Wiped out! Hahahaha! Morons!"

Well, apparently everyone has heard of my Strident Mogambo Advice (SMA) to Buy Gold, silver and oil equities, and it doesn't even rate a raised eyebrow anymore, as proved when Mr. Mayer went blithely on "Everyone seems to know the US inflationary story of the 1970s. The official inflation rate hit nearly 14% by 1980."

I am stopped from going ballistic about such horrors of inflation only because the rate of inflation is worse in other countries, where, Mr. Mayer goes on, "it was worse. In the UK, inflation topped out at 27%; in Japan, 30%." Yikes!

I used the word "Yikes!" in the sense of "ancient history" since, as far as most people are concerned, 1980 was 31 years ago, which was before most people were born, and which is all a sorry result of the aftermath of 1971, which is 9 years earlier, when the dollar's last tenuous tether to gold was severed by Nixon, allowing dollars to be created "at will" by a whore Federal Reserve, which they were, which is why debt soared and there has been constant inflation in prices and now we are all ruined.

Here is where I forsake the use of, "Yikes!" to use the words, "We're Freaking Doomed!" in the sense of "current events," because if inflation in 1980 was 14%, what is the inflation rate when a reader of Chris Mayer's commented, "He may have cited the Wells Fargo forecast of 4% increase in food prices, but between packaging size reductions and slight price increases, we're currently running between a 10-15% increase on core grocery items."

And it gets worse than that, as the reader goes on, "Add that with the upward trend in energy prices, you're slowly barking up a tree that's 15-20% higher than what we started with a year ago"!!

Perhaps the link between the creation of money and inflation does not impress you, the casual reader who has wandered across the MoGu newsletter by accident, and who wonders if there is something of any significance or interest beneath the dull veneer of my poor writing and weirdly recurring thinly-disguised threats against the Federal Reserve as revenge for creating their so much excess money that it creates inflation in prices which makes life Very, Very Tough (VVT) for the poor.

If so, let me bring you up to speed: 15-20% inflation is enough to destroy you and everything, and everybody, you love, and your best bets are to get a lot of gold and a lot of silver, which is automatically proved, in a metaphysical, mystical way, in that "best bets" are anagrams, and "silver and livers" are anagrams, and if there is one thing you can't live without, it's a liver!

Okay, I admit that I am stretching it with this "silver and livers" thing, but after all the other thousands of reasons to Buy Gold and silver that I have used over the years to convince people to get up off of their fat, stupid butts to go out and buy gold and silver, I am simply out of ideas.

I am desperate for some new reason to buy gold and silver beyond the first 3,000 reasons, although, fortunately, as far as buying them is concerned, easy is easy is easy, and no more need be said of its ease, expect for, perhaps, "Whee! This investing stuff is easy!"

Return to the Gold Standard?

noreply@blogger.com (Unknown) — Thu, 23 Dec 2010 11:54:00 +0000

World Bank President Robert Zoellick reaffirmed his proposal to use gold as a "reference point" to reform the current international monetary system on Wednesday in Paris.

Dollar was pegged at $35 to the Ounce in 1944

"What I suggested is that gold serves as a key reference point to allow people to assess the relations between different currencies," Zoellick told the press here at the end of his meeting with French President Nicolas Sarkozy in the Elysee Palace.

"It's an approach that we can take, others also estimate that we can establish a benchmark against prices of principal commodities," the World Bank president said in response to a journalist's question.

"I didn't propose a gold standard, which is an important distinction because it would directly link currency to gold," said Zoellick, denying reports that he had called for a return to the " gold standard" to modify the present monetary system, which he called "Bretton Woods II."

"The system should also consider employing gold as an international reference point of market expectations about inflation, deflation and future currency values," Zoellick wrote in an article published in Monday's Financial Times.

Some media said Zoellick's proposal to revive gold's role in guiding exchange rates worked as a shock wave to current discussions and disputes over the international monetary system.

The "gold standard" is a system in which the standard economic unit of account is a fixed weight of gold.

Under the Bretton Woods system, which was set up in 1944 in the United States, the U.S. dollar was directly pegged to gold -- 35 dollars equaled per ounce -- while other currencies were pegged to the dollar. The Bretton Woods fixed exchange rate regime broke down in 1971, when the United States unilaterally terminated convertibility of the dollar to gold.

Source: Xinhua

149 Tonnes Gold Reserves - For Mining Co

noreply@blogger.com (Unknown) — Thu, 23 Dec 2010 11:09:00 +0000

Around £4.1 bn of Company Assets!

Gold mining and processing company China Precious Metal Resources Holdings Co., Ltd. (CPM) announces that a sale and purchase agreement was signed on 21 December 2010 in respect of the acquisition of a gold mine in Henan Province, the PRC, for a consideration of 1.18 billion yuan. Upon completion of the acquisition, the Group will have total gold reserves and resources of 149 tonnes.

The mine is located at Zhifang Village of Tantou Zhen of Luanchuan County in Henan Province and has an aggregate area of approximately 8.9940 square kilometers. Completion of the acquisition is conditional upon the Group having obtained a technical report confirming that the total amount of the reserves and the resources of the mine are not less than 25 tonnes.

The consideration of 1.18 billion yuan was determined taking into account the valuation of the target company of approximately 1.401 billion yuan as at 30 November 2010. The consideration will be settled as to HK$500 million by cash utilising the Group's internal resources, and as to HK$680 million by the issue of 328,185,328 consideration shares at an issue price of HK$2.072.

Dr. Dai Xiaobing, Chief Executive Officer and Executive Director of CPM said: "The acquisition is in line with our business development strategy in the gold mining industry. Considering the favourable prospects of the gold mining industry, the board believes that the consideration, which represents a discount of approximately 27.39% to the target company's valuation, is in the interests of the Group and our shareholders."

The issue price of HK$2.072 represents a premium of approximately 17.73% over the closing price of HK$1.76 on the date of the agreement, and a premium of 17.59% over the average closing price of HK$1.762 for the last five consecutive trading days.

Dr. Dai added: "The acquisition enables us to exceed our yearly growth target of reaching 100 tonnes of gold reserves and resources. The strategic locations of our mines in China's three fold belts also help enhance our overall efficiency."

Source: China.org.cn

Why would Anybody want Cash?

noreply@blogger.com (Unknown) — Fri, 03 Dec 2010 18:05:00 +0000

Thanks to

By Bill Bonner
Mumbai, India

O, what a tangled web we weave
When first we practice to deceive!

– Sir Walter Scott, ‘Marmion’

“The trouble with today’s financial system,” we told a Bloomberg reporter, “is that it is based on fraud.”

“At the bottom of it is paper money – itself a kind of deception. It pretends to be real money. And it is real money – in the sense that you can use it to buy things. But it is prone to lie. All the feds have to do is to turn on the printing press and it will tell you that you are a lot richer than you really are.

“This sort of flimflam has been going on ever since the end of WWII. The feds systematically increased the amount of paper money... leading people to think they had more purchasing power than they really had. Today, a dollar is worth only about 3% as much as it was 100 years ago.

“But that’s just the beginning of the scam. They also systematically under-priced credit – in the belief that the key to prosperity is consumer credit and spending, rather than saving and production.

“The system has its architects and its operators – all quacks and mountebanks. They pretend that they can manage the currency and manage the economy. Yet they misunderstand the most basic elements of how a real economy works. Wealth does not come from consuming... it comes from producing.

“The managers claim to be able to manipulate the economy so well that they can actually improve its performance... that is, they say they can make the economy perform better than it would on its own... better than it has naturally for the past two thousand years. By eliminating the cyclical downturns, the feds told us that they would we all be richer... and free from the volatility that plagued us theretofore.

“So they fiddle and fake it... improvising... and making it up as they go along. The raise interest rates... and then they reduce them. They introducing more paper money when it suits them and change banking rules as their theories suggest.

“When anything ‘bad’ happens, defined as something they don’t like, they rush to fix it. But what can they fix it with? A little duct tape of monetary policy. A little fiscal baler twine too.

“Their fixes are not completely random or haphazard. They have a bias – towards more credit, more spending, more cash, and more speculation. If they tighten rates one month, they loosen them for two months. If they run a surplus in the federal accounts one year, they run deficits for the next five.

“Gradually, more and more debt, mistakes, bad judgments and cockamamie speculations build up. And then, the authorities are under pressure... running from one crisis to another... providing credit to one zombie... and bailout to another... and raw meat to a third.

“And then suddenly, the discipline and self-restraints that held them back gives way like a frayed old rope. Then the central banks and Treasury authorities are running free... abandoning themselves to the trickery and fraud inherent in their profession. The European Central Bank says it will provide “unlimited liquidity” to those who need it, in order to fend off a debt crisis in the Old World. In the New World, the Bank of Ben Bernanke is already bailing out big banks in North America as well as those of Europe. And everywhere, the feds are ready to support one another... and bankroll the IMF... with more paper money and more credit...

“...all of them desperate to hold the system together.”

And now they link arms – the Fed, the ECB, the EU and the US... and don’t forget Japan and the BOJ. And off they march – right off a cliff.

Fake Profits and False Markets

noreply@blogger.com (Unknown) — Tue, 10 Aug 2010 10:25:00 +0000

Article courtesy of Nadeem Walayat

The Bank of England kept UK interests on hold at 0.5% last week as it continues its policy of IGNORING HIGH UK inflation that continues to stand above the Bank of England's 3% upper limit for the purpose of the BoE continuing to funnel tax payer cash onto the balance sheet of bailed out bankrupt banks as illustrated by the most recent banking sector profit announcements, most of which are fictitious as in actual fact the banks are not generating any profits because they continue to only partially write down bad debts.

The only reason why bankrupt banks are announcing profits is so as to allow them to pay their chief officers huge bonuses as a reward for succeeding in conning the tax payers by means of threats of financial armageddon as inept regulators with themselves having one hand in the cookie jar watch on as they intend to return to commercial banking themselves so as to have their turn at getting a piece of the tax payer funded bailout pie.

The ways and means by which these fictitious profits are being achieved are many, such as The Bank of England loaning the banks at 0.5% which they then run along and invest at zero risk in longer dated UK government stock at 3.5% and thus make a 3% risk free profit with the tax payers money, meanwhile the ordinary tax payers who have been saving hard all their working lives are seeing the value of their savings being stolen by means of the stealth inflation tax as banks drunk on central bank cash pay a pittance of less than 2% in interest whilst even the official doctored CPI inflation rages at 3.2%, well above the BOE target of 2%. And not to forget the government adding insult to injury by TAXING the pittance of interest received at 20% for basic rate and 40% for higher rate tax payers.

Similarly borrowers are not receiving anywhere near 0.5% for loans and mortgages as most mortgage borrowers will be lucky to see any rate below 4% with many on rates of as high as 6% which is resulting in huge profit margins for the banks that continue to penalise their customers for their own mistakes.

Where savers and borrowers are concerned Britain would be far better off with a nationalised banking sector that exists purely to service the loans and savings market rather than the bankster elite maximising the amount of money that can be stolen from tax payers, savers and borrowers by means of an officially sanctioned artificial banking system.

Comment by Roger Bootle: Budget 2010

noreply@blogger.com (Unknown) — Wed, 24 Mar 2010 21:15:00 +0000

"Government needs first and foremost to look to its own failings. Incompetent and bloated government is one of the most serious factors holding the British economy back".

US Debt Much Worse than Thought

noreply@blogger.com (Unknown) — Wed, 24 Mar 2010 18:15:00 +0000

Re-counting the US budget deficit forecasts, courtesy of the CBO...

RECENTLY the Congressional Budget Office (CBO) published its scoring of President Obama's budget for the next 10 years, writes Bud Conrad, editor of The Casey Report.

It shows a budget deficit of $9.8 trillion. That is just shy of $4 trillion worse than the CBO's baseline budget, a budget that includes only the laws as currently enacted, with no estimates of any new programs lawmakers may add that worsen future projections.

That our budget is out of control is no surprise, but the charts I present here should provide some perspective of just how dangerous this set of budget estimates could turn out to be. The first chart below shows the amount of red ink in each year for the two CBO estimates.

To get a visual interpretation of just how big these budget deficits have become, I plotted the long-term history, then tacked on the CBO evaluation of the president's proposal. Knowing the propensity of governments to spend more than they promise makes one question if the large improvement shown in the dotted line will actually occur.

Even if nothing changes, however, the results look like they could be very damaging for other aspects of our economy.

One aspect of the CBO projections that is difficult to defend is the expectation that inflation will stay incredibly low. In the next chart, I present the same sort of long-term history, coupled with the projection, for the Consumer Price Index (CPI).

In the next chart, I put together two of the most important measures: the three-month T-bill interest rate and the deficit expressed as a percentage of the gross domestic product (GDP). Both history and projection are shown.

The most important observation is just how disastrous the current deficit is in the historical context, even after rationalizing it by dividing it by the GDP. I overlaid the two series to show that higher deficits in the past tended to occur along with higher interest rates.

As you can see, we now have a significant anomaly, with the budget deficit at its worst in half a century, while interest rates remain near their lows for the period. A closer look at history shows many divergences, to the point that in the short term these two series tend to bounce in opposite directions. That is probably because when the economy shows weakness, the government expands its spending and collects lower taxes, so the deficit becomes worse. Thus, in the short-term cycle of a few years, these two measures often move in opposite directions.

But the situation we face now is much bigger than anything we've seen since the 1950s. The government bailouts and stimulus are at record levels, and the special actions of the Federal Reserve have driven interest rates close to 0%. It is my expectation that both inflation and interest rates will rise dramatically because of these large deficits.

I also think the projected interest rates are much lower than what I expect the deficit would require. As foreigners and others recognize how seriously indebted the US government is becoming, they will expect higher interest rates to compensate for the debasement of the currency.

The budget analysis goes further in calculating the expected growth of the economy, which ranges from 2 to 4% over the years. Those are not large numbers for real GDP, but there is no expectation of another recession during the decade. If the economy didn't grow, tax revenue would be less, and the budget deficit would be worse.

While interest rates are expected to rise as shown in the chart above, the projections expect that they roll over and stop rising at around 5%. That is contrary to my expectations that they will be much higher, and even perhaps closer to 10%, by the end of the decade. If they are, the cost of funding the outstanding government borrowing escalates rapidly because the increased interest has to be added to the debt so that the debt grows even more.

The problem from the onset of this crisis has been the debt, and that continues to be the case. Leaving aside the above two adjustments that could make the budget deficit worse, it's helpful to look at the outcome with the given assumptions and see where it leads. Perhaps the most problematic result is that the debt of the federal government held by the public grows from $7.5 trillion in 2009 to $20 trillion by 2020. Such big numbers are hard to understand, though you can get some sense of things by considering that the government is intending on almost tripling the debt in just 11 years.

The ratio of this outstanding debt to the GDP gives a flavor of how dangerous the situation has become. As Ken Rogoff and Carmen Reinhart have indicated in their new book, when we approach 90% government debt of GDP, we have serious potential for a currency crisis. As you can see, we are well on our way to those levels, even without assuming the two adjustments above.

How will the deficit be funded?

The question arises who will service the rising levels of debt. Clearly the taxpayers are on the hook for all these projections, with more to come. So the question becomes whether the tax base can grow fast enough to provide support for servicing the debt.

The CBO gave us two series for the tax base. One is Domestic Economic Profits, and the other is Wages and Salaries. The basic assumption is that these are the main revenue streams that can be taxed by the government to fund its expenses. I added these two series together and divided by the GDP to determine if the tax base is growing more rapidly than the economy. Unfortunately, but as expected, the orange line in the above graph shows that the tax base only grows about as fast as the economy itself. That's not surprising, but the contrast to the rapid growth in debt will be a serious source of problems, as the only way the debt can be sustained will be through increasing the tax rates, and probably quite dramatically.

The latest set of budget predictions will probably be wrong, and not just because the assumptions are too optimistic, but because there is a relatively high probability that something will go off track to cause a major shift before the 10 years are completed.

Unfortunately we are not preparing ourselves for such problems, and so I would interpret the CBO projections as being far too rosy.

Ready to Buy Gold today...?

Doug Casey, 24 Mar '10

Doug Casey is a world-renowned investor and author, whose bookCrisis Investing was #1 on the New York Times bestseller list for 29 consecutive weeks, a record at the time.
He has been a featured guest on hundreds of radio and TV shows, including David Letterman, Merv Griffin, Charlie Rose, Phil Donahue, Regis Philbin, NBC News, and CNN; and has been the topic of numerous features in periodicals such as Time, Forbes, People and the Washington Post.
His firm, Casey Research, LLC., publishes a variety of newsletters and web sites with a combined weekly audience in excess of 200,000, largely high net worth investors with an interest in resource development and international real estate.

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UK Sub Prime Government and Its Sub Prime Thinking

noreply@blogger.com (Unknown) — Wed, 24 Mar 2010 17:57:00 +0000

The INFLATION Mega-Trend - The world's subprime governments are sending their economies headlong towards bankruptcy by basically continuing to exchange private debt for public debt as a consequence of the dual forces of paying attention to worthless thesis generated by ivory tower academic economists that populate the institutions that rely on revenues from governments to sustain their existence because they would not survive in the market place precisely because they fail to understand economic and financial reality, and as a consequence of politicians being in the back pockets of the bankster elite that wait for the cash handouts when they leave office.

The politicians and governments DO NOT work in the best interests of the people, instead the are systematically screwing the voters / tax payers out of ALL of their life savings and future earning capacity. In Britain we will shortly face a general election where it is either a vote for party tweedle dum or tweedle dee, neither of whom has done or will do anything to bring any of the bankster's to account for their £1 trillion crime against tax payers, instead the Treasury and Bank of England continue to funnel tax payer cash onto the balance sheets of the bankster banks so as they can continue to pay out bonuses on the basis of fictitious profits.

Both Labour and Conservative politicians are in the back pockets of the bankster elite, NEITHER are capitalist OR socialist. Free Market Capitalism would have demanded that the bankrupt banks go bankrupt. Socialism would have demanded that the interests of the workers be put FIRST ahead of the bankrupt institutions instead of giving them hundreds of billions in cash, that money could have ignited an economic boom if every tax payer had been handed £20,000 in cash ! - NEITHER took place, Instead the politicians in the back pockets of bankster's CHOSE to provide unlimited tax payer funds to the bankrupt banks in exchange for future reciprocal cash hand outs that we will witness as the politicians leave office and politicians market themselves at as much as £5,000 a day to the bankster elites.

The consequences of this remains for the balance sheets of the private sector to improve whilst the balance sheets of the public sector to explode. The governments through money printing are set to continue this which is feeding inflationary mega-trend and the stock market BOOM. Eventually the governments risk defaulting into hyper-inflation (many years from now) which is why it is important for people to protect their wealth from the Inflationary Mega-trend. My New FREE 100 page ebook contains 50 pages of how to protect and grow your wealth from strategies including investing in the stocks stealth multi-year bull market and avoiding government bonds and cash as a consequence of negative real interest rates. (Download Now - FREE).

Meanwhile deflationists continue to miss the obvious in that REAL debt is not what is stated in statistics pumped out by the governments such as UK debt being at 60% of GDP. Real debt and liabilities has the UK at 400% of GDP, we are already well along the path towards high inflation, which IS now manifesting itself in the official inflation indices which over the past few months has seen UK CPI break above 3%. The governments will continue to print money to monetize the huge budget deficits because that is publically far easier to do then to allow for the consequences of deflation. I.e. the masses are far more conditioned and susceptible to have their wealth gradually stolen by means of inflation then countenance the pain associated with deflation and nominal economic contraction. This means inflation proof asset classes will continue to rise in price which includes the major stock indices, and 'most' of the individual stocks they comprise.

The strategy is this - To inflate the debt away, to inflate wage purchasing power away, to give the illusion of economic prosperity when people are in actual fact working twice as hard to buy the SAME goods and services. The ONLY defence people have to protect themselves is to diversify out of fiat currencies as illustrated by some 50 pages of the Inflation Mega-Trend Ebook.

For more mega-trend forecasts across the financial market and implications of the unfolding Inflation Mega-Trend download the NEW FREE Inflation Mega-trend Ebook, which includes analysis and precise forecasts for:

Interest Rates
Economy
Inflation
Gold & Silver
Emerging Markets
Stock Markets
Stock Market Sectors and Stocks, including ETF's
Natural Gas
Agricultural Commodities
House Prices
Currencies
Crude Oil

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Economy - The economies are continuing to improve in terms of GDP growth as a consequence of unlimited money printing and stimulus, this will continue throughout 2010 and into 2011, which continues to paint a favourable stocks picture for the current year at least, therefore continues to support the stocks bull market target of 12,500 for this year as a consequence for the need for risk as a consequence of negative real interest rates.

Corporate Earnings - Corporate earnings have FOLLOWED the stock market higher, despite continuous doom orientated commentary of the past 12 months that has repeatedly stated that corporate earnings forecasts implied stocks could NOT rally. The fact is that corporate earnings are surprising to the upside (no surprise to me). There exists a strong case of delusional thought in the processes of many analysts that hold a particular view then go out to seek out reasons to support that view, which is why they miss WHOLE bull markets. Corporate earnings are NOW rising and far from looking for earnings to collapse into a double dip recession, this IS ONLY the beginning.

We heard the mantra based on WRONG corporate earnings expectations that the market cannot support a P/E of over 25, when in fact real forward P/E is much lower because corporate earnings are MUCH higher, not only that but corporate earnings 'should' continue to surprise to the upside for the whole of 2010 therefore reinforcing the fundamentals for a strong bull market.

In terms of stock market trend this implies positive price action into lead up to Q2 earnings season, which therefore implies that the stock market should be heading higher going into May and into the earnings reporting season which suggests a positive trend into at least Mid May and therefore suggestive of a price trading at new bull market highs. So Corporate earnings suggest the stock market will be trading at new bull market highs during May.

Market Psychology - The mainstream financial media and blogosphere continues to pump FEAR into the minds of investors, FEAR of recession, FEAR of sovereign debt default, FEAR of currency collapse, FEAR of credit crisis II, FEAR of the U.S. Following Japan, FEAR, FEAR, FEAR. Any small bit of bad news is MAGNIFIED on an near daily basis. No wonder small investors are running scared, dumping their cash into bonds and cash. However FEAR is a great driver for a stocks stealth bull market, where the FEARLESS have already wracked up profits of 60%+ whilst the FEARFUL majority look on in well FEAR. As I mentioned in the Inflation Meg-trend Ebook, I do not expect this situation to change for MANY YEARS ! So those that are waiting for good news to abandon fear and invest, won't get what they are waiting for many years when the Dow has long since passed its previous all time high, not until we get to the final stages of the bull market when once more investors are wrapped in the cloak of certainty of profits amidst a new paradigm of every rising stock prices.

So market psychology wise, this bull market is still in its infancy which means all corrections are buying opportunities where the greater the deviation from the high the greater the buying opportunity presented. So far this conclusion has borne immense returns for those that deviate from the normal expected behaviour that concludes towards most investors only joining the bull market when it is time to SELL!

Stock Market Trend Against 2010 Forecast and Expectations

The stocks stealth bull market that bottomed in March 2009 confounded widely held expectations by both the bulls and bears of immediate term price action lower to dissipate its overbought state that failed to materialise, instead the stock market last Wednesday broke to a new bull market high by closing at Dow 10,733 with a further advance on Thursday, followed finally by a small down day on Friday to break a 8 day winning streak with the Dow closing at a new weekly high of 10,742.

The Dow high had lagged other stock indices that had made new highs over previous week including the UK FTSE, S&P500 and Nasdaq (though not other European indices despite the weak Euro).

Stocks Stealth Bull Market Trend Forecast For 2010 - The Inflation Mega-Trend Ebook Page 82 (DIRECT Download)

Dow 10,067 - Stocks Multi-year Bull Market that bottomed in March 2009 will trend Sideways during first half of 2010 attempting to break higher. The second half will see a strong rally to above 12,000 targeting 12,500 during late 2010.

My trend expectation has been for the Dow to trend around its 50% axis (10,333) to conclude in a sideways trend between a support and resistance for between 9,500 and 10,730 for the first half of 2010, the trend off of the early Feb low has shown relative strength against this expectation, especially given the break higher. The stock market forecast for 2010 stated that the market would trend within a volatile trading range for the first half of the year and could generate as many as 3 failed attempts to breakout higher, presently despite its strong action off of the Feb lows, this scenario suggests that the stock market should revert back into its trading range in preparation for the breakout higher later in the year.

Stocks Bull Market Anniversary - To make money you go long (invest) in a bull market and go short (SELL) in a bear market. This bull market is now ONE YEAR OLD! Think about that for a moment, ONE YEAR OLD ! The only thing that has changed during the past 12 months is the reinforcement of trend and capital appreciation.

Many investors who have been fooled into MISSING one of the greatest bull markets in history have been driving the market higher these past few weeks to new highs, which suggests the anniversary is carrying increasing momentum behind it which means despite corrections that will undoubtedly happen, however the weight of new buying pressure is so great that we are likely to see the stock markets go much higher and much sooner than anyone expects (even me!).

TIME ANALYSIS - The Jan to Feb 2010 correction was of a similar duration than the June - July 2009 correction, which implies that both corrections were of a similar order in terms of corrective trends that imply we can therefore expect a powerful multi-month rally to transpire over the coming months taking the Dow far beyond the preceding high of 10,730.

ELLIOTT WAVE THEORY - Since the Market Peaked in January, my interpretation of the EWT component of analysis had resolved towards an wide corrective ABC pattern into the target zone of 9,500 to 9,800. We got the Wave A which terminated at 9,835, which left some doubt at the time whether that was the low or not given that it was just out of the target zone, additionally the downtrend was much shorter in time than necessary to unwind the previous swing higher to 10,729. Nevertheless at the low in early February the EWT pattern did continue to conclude towards B wave rally higher in advance of a further C swing lower.

As indicated in the first chart above, this rally continued higher past the previous swing high of 10,438 WITHOUT correcting. The market has trended higher day in day out for 8 straight days into Friday's small decline. The ABC scenario remained in tact right upto the target of 10,625 after which the scenario was further negated on the break above the bull market peak of 10,730.

Current interpretation of EWT is illustrated in the graphs below which conclude towards a relatively minor correction during early to mid April (Wave 4), followed by a powerful wave higher into early to mid May 2010 that targets Dow 12,000, as part of a more powerful trend from the early Feb low. Whilst this will clearly be a Wave 5 peak off of the Feb low, however this does not automatically mean that it will be the larger 5th wave juncture for the whole bull market off of the March 2009 lows - No that would be a far too simple interpretation of EWT, always remember EWT is ONE component that needs to be confirmed by the sum of ALL analysis and if need be needs to bend to the sum of that analysis rather than price be forced to fit EWT. So first things first, we need to get the next two months or so of price action out of the way before I contemplate what happens after mid May.

Bear Market and the 1930's Stock Price Chart Pattern - What happened to the bear market that had supposedly resumed following the January high ? A timely reminder from an earlier article (02 Nov 2009 - Stocks Bull Market Forecast Update Into Year End ) as various changing charts from the the 1930's keeps being brought out on every correction to signal the rally's end, I can imagine 4 years and several thousand points higher from now they will still be presented as FACT as to what is going to happen which NEVER DOES!

Stock Market Crash Again?

Forget swine flu, the pandemic doing the rounds is that of another Crash with the 1930's chart dusted down and presented as near fact of what is to transpire on every correction. However the markets response has so far always been to push to a new high for the move.

What happens to the crash calls ? They again get rolled out again on the NEXT correction! However the damage has been done as short stops are hit and losses accrued, that no broker will refund for the next crash call.

There is one major fundamental flaw in the Repeat of the 1930's thesis and that this is 2010 and NOT the 1930's I could also pick a chart form the past that would closely fit onto recent price action to imply the a stock market will soar higher, but that would be more wishful thinking than an actual attempt at trying to generate an accurate projection of future trend which is exactly what has been taking place for the past 12 months! 1930 does not fit, use 1931, then 1932, then 1933, then 1934 and so on, keep changing the charts each time they are proven to be wrong - That is not analysis.

TREND ANALYSIS - The Dow ABC into early Feb was swift and short, bottoming at 9835, just shy of the target of 9,500 to 9,800. The subsequent uptrend has seen little corrective action against it, which is not surprising given that virtually everyone saw it as not sustainable. The trend of the past 3 weeks has been particularly strong which culminated in an 8 day winning streak with the first down day last Friday that marked a brief pause before resuming to a new bull market peak last Wednesday as mentioned above. As of writing there is NO reversal pattern i.e. lower high and last low break to trigger any form of a sell signal which suggests a continuation higher.

SUPPORT / RESISTANCE - Previous resistance of 10730 now becomes support. With the Dow at 10,888 immediate resistance lies at 11,000, that is likely to contain the momentum behind this rally, which suggests that the Dow may mark a corrective trend to target the 10,730 support level therefore implying a bearish outlook for the Dow during early to mid April. Below 10,730 there exists a wide range of support levels all the way down to 10,500 which implies that any price action lower into this range will be choppy and very volatile. On the upside resistance over 11,000 exists at between 11,900 and 12,000, therefore implying a significant correction could take place from that level.

MOVING AVERAGES - The 200 day moving average contained the Jan- Feb 2010 correction and continues to act as a distant support for the bull market. The shorter 50day moving continues to act as short-term support and as a significant correction measuring move for future corrections, current support stands at 10,400, rising to 10,500 by mid April and therefore providing further support to the zone of between 10,730 to 10,500 which could see intra-day spike lower towards the MA at approx 10,500.

PRICE TARGETS - Upside price targets resolve towards 11,000 and 11,900 to 12,000, then 12,500. Downside price targets resolve towards 10,730 to 10,600 with a possible intra-day spike as low as 10,500.

MACD - The MACD confirmed that the last correction was in line with that which transpired during June / July 2009. Whilst the current rally has been strong, however because of the amount of time taken to rise, it has not pushed the MACD into a particularly overbought state. Neither does any negative divergence exist. However on the expectation of a narrowing in momentum for this years stocks bull run, I do expect a more compact MACD pattern which implies stocks could correct BEFORE they reach an overbought extreme, which implies a correction towards the lower end of the MACD range (indicated) could be imminent.

VOLUME - Volume has remained WEAK throughout the rally, which has been one of the main reasons why so much commentary has been bearish during the past 12months. However it is perfectly inline with that of a stealth bull market and also implies that this rally is STILL NOT being bought into. So all of the talk of hyper bullishness investor sentiment since, well summer 2009 basically remains rubbish as there is no sign of such sentiment in the volume, which remains heavier on the declines than the rallies and thus suggestive of SELLING rather than buying into the rally.

SEASONAL TREND - There is a strong seasonal tendency for stocks to rally into Summer then correct in October followed by a sharp rally into December. The seasonal trend is increasingly matching actual chart trend and the unfolding forecast for the next 2 months for a rally into Mid May 2010.

PRESIDENT CYCLE YEAR 2- The impact of the 2nd year of the presidential cycle on the stock market is for a weak trend into September, and a rally in the fourth quarter into the end of the year for a small average gain for the year. This is increasingly becoming contrary to the unfolding trend which implies greater price volatility.

SWING SELL SIGNAL - The nearest swing sell signal is at 10,500. With the Dow at 10,888 the market retains plenty of room to breath, in fact I would not be surprised if the market retraced towards the sell signal before continuing higher.

Stock Market Conclusion

The sum of existing analysis upto the end of January had concluded in the Dow targeting a trend during 2010 to above 12,000, targeting 12,500 by late 2010, to be preceded by a volatile sideways trend during the first half of the year.

As we approach the end of Q1 the trend is showing relative strength against this forecast, the key manifestation of this is that the stock market did NOT retest the February low as I was expecting to take place i.e. to generate a double bottom pattern. This coupled with current analysis (above) suggests we are going to get what cycle analysts would know as 'left translation' in the projected trend, which implies we get the rally to 12,000 far earlier i.e. during Q2, rather than Q3 to Q4. Which on face value also suggests a weaker trend later in the year, but more on that in May.

Dow (DJIA) March to May Stock Market Trend Forecast Conclusion - Therefore my specific conclusion is for a continuation of the uptrend into early to mid May, achieving the 12,000 target during this time period, also allowing for a correction during April as illustrated by the below graph.

Risks to the Forecast

That the market reverts back to the January forecast expectations and delays the trend to above 12,000 until later in the year, at this point I would put a probability of this happening at about 20%.

The next in depth analysis is scheduled to follow during early May 2010 as the current analysis expires. The key question I will answer at that time is whether the stock market under goes a major correction, far greater than that of Jan to Feb or continues trending higher beyond the 12,500 target for 2010. My focus is now primarily on mapping out a trend for UK house prices over the next few years that will conclude in an FREE ebook, to receive this in your email in box, ensure you are subscribed to my always free newsletter.

Hedge Your Portfolio

Stock market and commodity investing is high risk which does require mechanisms to be in place to hedge against being wrong. Just as those that have remained bearish on the stock market this past year have probably long since given up any bear market profits by repeatedly betting against the bull market, the worst thing an investor can do is to give up all of their bull market profits during a bear market. In this regard investors need mechanisms that are able to liquidate / distribute portfolios to cash in the early stages of new bear markets and this mechanism is stop loss orders. The most basic rule is that for a 20% retracement from the last bull run high on an individual stock. The better rule is to identify a preceding significant support level that cannot be breached for ones opinion on the stock to be correct.

A more advanced form of hedging that requires greater experience is to utilise stock index futures and options to partially hedge your portfolio against any decline. The operative word here is that one is hedging, i.e. the returns are to partially offset the loss on the portfolio that is paid for by the portfolio. I.e. dividend income in part finances put options etc.

Labours Last Giveaway Election Budget Tomorrow

Tomorrow (24th March) is the Labours last budget. The labour government over the past 12 months has bent over backwards in an attempt to ignite an debt fuelled election boom, I just cannot conceive that they will now at this late stage see sense and implement a commonsense budget, so I expect a final throw of the dice, to spend more money that the country does not have and leave the tories with an even bigger debt headache than the 12% annual budget deficit and £1 trillion of public debt that they already face. So expect spending surprises / election bribes tomorrow aimed at Labours traditional voter pool that will likely result in much volatility for sterling.

The axe is hanging over the public sector of which some £65 billion or 10% will be cut which includes the NHS black hole spending department that as we saw with the lengthy report on the REAL performance of one of Britians top ranked hospitals, The Mid Staffordshire NHS Foundation Trust that NHS statistics are fiction against the facts of actual patient experience.

Telegraph - 19th March 2010

Up to 1,200 patients are thought to have died unnecessarily at the trust between 2005 and 2008.

A damning report on the deaths found chronic staff shortages, receptionists in casualty departments assessing the urgency of cases and nurses switching off equipment that did not know how to use.

Both trusts are “Foundation Trusts” a status supposedly awarded to only the best in the NHS.

I don't mean to be a damp squib to those americans reading this and in an euphoric mood following Obama's healthcare bill being passed by Congress, but the last thing you need is your own version of NHS hell, that routinely kills patients masked by fictitious official data that disintegrates in the face scrutiny under public inquiries and that politicians are too scared to seriously reform due to the army of workers / voters that ride the NHS gravy train. The sooner the NHS is privatised the better the prospects for the health of ordinary Britains.

Your Dow stock index trading and bull market investing analyst.

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By Nadeem Walayat

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Nadeem Walayat has over 20 years experience of trading derivatives, portfolio management and analysing the financial markets, including one of few who both anticipated and Beat the 1987 Crash. Nadeem's forward looking analysis specialises on UK inflation,economy, interest rates and the housing market and he is the author of the NEW Inflation Mega-Trend ebook that can be downloaded for Free. Nadeem is the Editor of The Market Oracle, a FREE Daily Financial Markets Analysis & Forecasting online publication. We present in-depth analysis from over 500 experienced analysts on a range of views of the probable direction of the financial markets. Thus enabling our readers to arrive at an informed opinion on future market direction. LINK`http`www.marketoracle.co.uk/`margin-top: 0px; margin-right: 0px; margin-bottom: 0px; margin-left: 0px; padding-top: 0px; padding-right: 0px; padding-bottom: 0px; padding-left: 0px; background-image: initial; background-repeat: initial; background-attachment: initial; -webkit-background-clip: initial; -webkit-background-origin: initial; background-color: transparent; text-decoration: underline; cursor: pointer; color: rgb(0, 0, 204); background-position: initial initial; `LINK

Disclaimer: The above is a matter of opinion provided for general information purposes only and is not intended as investment advice. Information and analysis above are derived from sources and utilising methods believed to be reliable, but we cannot accept responsibility for any trading losses you may incur as a result of this analysis.Individuals should consult with their personal financial advisors before engaging in any trading activities.

Petro-dollars Under Threat

noreply@blogger.com (Unknown) — Sat, 04 Apr 2009 11:12:00 +0000

The coming financial storm no one is talking about

BY MANRAAJ SINGH

Dear Reader,

There’s a major trend that could have a devastating impact on the US dollar.

What’s shocking is that I haven’t come across a single other financial analyst who has fully grasped the implications of it.

This is crazy, given that it will affect anyone who owns dollar-denominated investments, whether it’s gold, international shares or commodities. In fact, even if you aren’t directly invested in them, there is very good chance your pension fund is.

That’s how big this is.

The thing is, though, you can turn this trend to your advantage, as we’ll see in a moment.

I’m talking about the planned creation of a single common currency in the Gulf States. A new monetary union just like the eurozone, but for oil rich countries.

That might not sound like a big deal. After all, who really cares what a bunch of Arab countries are doing with their currencies?

But this is going to have a colossal impact on the world economy. Let me explain…

Last Friday, I explained why the dollar’s long-term value is under threat as the US economy falters. But now let me show you the threat to the dollar that the rest of the world still hasn’t picked-up on…

The great petrodollar merry-go-round is about to break down

You see, right now the dollar receives a huge amount of support from being the standard currency for international trade. The international oil trade is a big part of that. Oil is priced in dollars on the international market. It is bought and sold in dollars.
What that basically means is that countries that want to buy oil need to have dollars. Countries that sell it are left holding dollars. That fuels global demand for the American currency. It props up its value…

Right now, the only major producer that sells in a different currency is Iran. They take their payments in euros and Japanese yen. But it is the Gulf Arab states like Saudi, Kuwait and the UAE that are at the heart of the global oil trade.

But now think of a situation where global oil production is increasingly concentrated in the hands of the Gulf Arab countries. And, as I explained in a recent special report, that is what is going to happen as non-OPEC production collapses.

Now consider what the impact on the dollar is going to be when those countries say they don’t want to be paid in dollars anymore. Once they’ve got a common currency you can bet they are going to price their oil in it. They will want to be paid in Dirhams or Dinars or whatever else it is that they eventually name it.

That is going to short circuit global demand for the dollar. Because oil importing countries won’t need to buy dollars to pay for their oil anymore. The Gulf countries won’t be left holding huge reserves of dollars which they then have to recycle into the US…

Right now the oil-exporting countries are the second-biggest holders of US government debt after China. That’s because they get paid for their oil in US dollars. A lot of that money then gets reinvested in US dollar-denominated assets. But if they aren’t being paid in dollars anymore, they won’t have to recycle them by investing in US government bonds. International demand for the dollar is going to plunge. And the value of the dollar is going to plunge with it.

Two years to D-Day?

The Gulf Co-operation Council (GCC) states have been talking about this for a long time. And they signed the first concrete agreements to implement it last September. Since then they have been moving ahead with their plans. By the end of this year, they should have a monetary council in place. This will be a precursor to the Gulf central bank. And it will decide on the name and value of the currency.

They had planned to have their new currency in place by 2010. I doubt they will manage it that quickly though. The way I see it, the impact of the financial crisis will force them to push it back by about a year.

But there is absolutely no doubt about it – the Gulf common currency is now on its way. And when it happens it is going to kick the legs out from under the dollar.

As I said though, there are ways that you could profit from this. An obvious trade is to go short on the dollar. There are listed funds that allow you to do that. And again, not all dollar-denominated assets will lose out. Whilst the value of US shares, for example, is going to be eroded, the value of certain dollar-denominated commodities like oil and gold rises as the dollar weakens.

Kind regards,

Manraaj Singh
For The Right Side

Editor’s recommendation: Manraaj Singh is Chief Investment Strategist at Profit Hunter. As he explains, when the dollar falls, oil goes up. Click here to receive his latest smart way to play the “oil rebound”.

When will gold break through $1,000 an ounce?

noreply@blogger.com (Unknown) — Wed, 28 Jan 2009 14:49:00 +0000

When will gold break through $1,000 an ounce?

The difference between gold and other precious metal

Thanks to Dominic Frisby, in London

Today, I wanted to look at precious metals in general. Not just gold, but silver, platinum, palladium and even some of the lesser known platinum group metals, such as rhodium and indium.

We are living through one of the greatest financial crises in history – possibly the greatest. The contraction in credit has forced selling in everything.

Many were under the illusion that precious metals would be safe in such a scenario. But they haven’t been. Let’s look at why...

Gold is maintaining its purchasing power, unlike money

The key thing to remember is that this is a financial crisis – a crisis of money. Of all the precious metals, gold is the only purely monetary metal. Yes, it has some industrial use, but a negligible amount. Gold’s use in jewellery has derived from its monetary function, which is to store wealth.

Money has two functions: one is to be a medium of exchange, the other to store wealth. Gold has long since been useless as the former (although technically sovereigns are still legal tender) but as the latter it has acted soundly. Yes, it fell against the yen last year, but so did everything. Yes, it was volatile against the dollar, but in the grand scheme of things, gold is maintaining its purchasing power, while money, be it the yen, the dollar or the euro is falling.

Some currencies have been weaker than the dollar. One ounce of gold now costs 110,000 Icelandic Krona for example, up from around 40,000 in 2007. To be honest, I’m surprised it isn’t higher. (Thanks to Nick Laird at www.sharelynx.com for the charts.)

Britain has similar, though currently less extreme, problems to Iceland. This has been reflected in the price of the pound against gold.

So gold, although volatile, has performed well.

Silver is more vulnerable than gold

Silver, too, is a monetary metal. As many of you will know, the words ‘silver’ and ‘money’ are interchangeable in some ninety or more languages: ‘argent’ in French, for example; ‘plata’ in Spanish. ‘Pound sterling’ once meant a pound of sterling silver. But, historically, silver’s role as money was less as a store of wealth and more as a day-to-day medium of exchange. That role has now expired.

Many silver bugs will point to silver’s numerous and ever-increasing industrial uses. But the demand for these uses has decreased as the crisis has unfolded. The outlook for business is grim, and the market has reflected this in the price of silver. In other words, silver’s industrial use, the very thing that made it desirable, suddenly made it undesirable.

In short, silver outperforms gold during an inflationary boom, but underperforms during a deflationary bust. This is reflected in the gold-silver ratio, which spiked dramatically in the Autumn.

Many were calling for that ratio to fall below 20. It will one day. The historical ratio is 15 – there is 15 times as much silver in the earth’s crust as gold. But we are a long way from that. We may see 100 first.

But those who bought silver with pounds will not be as disappointed as dollar buyers. It’s not too far off recent highs:

The story isn't great for platinum or palladium either

I’m afraid it is the same story for platinum and palladium as with silver. Only a year or so ago, many - myself included – looked at South Africa’s political problems and its energy crisis and asked where in the world platinum was going to come from. Indeed we are still asking ourselves that.

But the market doesn’t care. Though precious, platinum is still an industrial metal. The car industry is, for now, doomed and the market has no time for platinum, despite its rarity.

It was the same story for palladium, which fell from $600 to about $175 per ounce, and for rhodium it was even worse. The rhodium chart was amazing. It seemed to do nothing else but go up. For years this was the case – then crash.

Yes, silver and platinum group metals have a use in jewellery, but jewellery sales are down, despite its use as a store of wealth. Even gold jewellery sales are down. All the demand for gold is safe-haven investment demand.

By November of course, the industrial precious metals had become way too cheap. The market recognized this and platinum and silver have since rallied. And I suspect they will continue to rally along with all commodities for the next month or three.

But the greater demand is for money, so over the longer term – the next three years or so - we can expect the demand for the monetary metal gold to be greater than the demand for the industrial.

When will gold break through $1,000 an ounce?

However, those short-term traders who play gold in dollars should perhaps exercise some caution here. It has had a good run since November and could easily bounce back off the trendline below. In fact, the ideal technical scenario is to gently pull back and then cruise through at the next attempt.

Those who read a lot of my stuff will know my theory – and it is no more than that – that gold makes 6 to 9 month up-moves, followed by periods of consolidation lasting about 18 months. I suspect we are in one such period. I do not see a break out to new highs above $1,000 in the very near future, but we'll be there by this time next year.

So I am holding onto every ounce of gold and every quality share that I own. Gold’s uber move could strike at any time and I don’t want to miss it when it comes. Like the stock market crash of last autumn, it has been years in the making, it will be swift in the unfolding and you have to be positioned.

If you’re not in it, you will not win it.

Turning to the wider markets...

The FTSE 100 fell another 0.4% yesterday, closing at 4,194. Mining stocks and utilities were among the bigger fallers: Xstrata lost 4.9%, Anglo American 1.3% and Antofagasta 0.8%. Severn Trent Water was down 3.5%, and Scottish & Southern Energy lost 0.7%.

In Europe, the Paris CAC 40 lost just one point to end at 2,954; the German Xetra Dax, meanwhile, was down three points at 4,323.

In the US, financial stocks led the Dow Jones Industrial Average up 0.7% to 8,174. Bank of America climbed 8.3%, while Citigroup added 6.6%. The broader S&P 500 index closed up 1.1% at 845, and the Nasdaq Composite finished 1% higher at 1,504.

Overnight in Japan, the Nikkei 225 rose 0.6% to 8,106, sustained by hopes of a US 'bad bank' rescue plan. The broader Topix index, however, fell 0.1% to 804.

Brent spot was trading at $43.63 early today, and in New York, crude oil was at $42.39. Spot gold was trading at $898 an ounce, silver was at $12.13, and platinum was at $948.

In the forex markets this morning, sterling was trading against the US dollar at 1.4283 and against the euro at 1.0743. The dollar was trading at 0.7526 against the euro and 89.08 against the Japanese yen.

And there was mixed news for Britain's economy today. In a rare ray of sunshine, satellite TV operator BskyB announced it will create 1,000 jobs in its customer service and equipment installation teams, as it expects strong demand for its high definition services. Sales were up 5.8% in the six months to December 2008. But there was bad news for the commercial property market, as a report issued by Moody's concluded prices in the UK could fall by as much as 25% this year.

The Gold Bull Run

noreply@blogger.com (Unknown) — Wed, 07 Jan 2009 11:57:00 +0000

What was the best-performing asset of 2008?
Thanks to Dominic Frisby of Money Week

The Japanese yen. The many funds that had borrowed money in yen to buy assets in other currencies, now sold those assets and bought back yen to pay down debt. This was the unwinding of the Great Yen Carry Trade.

Hard to believe though it is with all the huge volatility, the next best performer was gold, up about 6% on the year against the dollar, and a lot more against everything else from stocks to real estate.

Gold was down some 15% against the yen. But those who bought their gold with British pounds will be delighted. After a hedge-fund beating 30% gain in 2007, we saw a stupendous 44% rise in 2008. Gold broke out above £600 to all-time highs.

However, it was an extremely volatile year and many of those attempting to trade gold with margin, in other words on borrowed money, will have been wiped out. It’s why I am forever saying that you should buy the physical metal itself...

The outlook for sterling is grim - gold is your insurance

Even silver, which had a pretty woeful year by all accounts and was down some 24% against the US dollar, made 13% against the pound. (That most frustrating of metals continues to frustrate). As we all know the outlook for sterling is grim. I do not rule out a full-scale currency collapse. But, for now, it appears to be making some kind of a bottom against the US dollar.

If you look at how gold has traded vs sterling since Gordon Brown sold our gold, you will notice a distinct staircase pattern. It shoots up, then consolidates at the higher level, then shoots up.

Based on this repeating pattern, since we have just had a sharp shot up – and this could continue for a short while longer - a period of consolidation is now likely, before the inevitable march to £1,000 an ounce and beyond. But I would not sell a flake of your physical gold yet. It is your insurance - if sterling implodes, you’ll need it.

When measured in gold, this is already the worst house price crash in history

I don’t know if this sell-off in sterling has been orchestrated, but it suits the government. The economic downfall doesn’t look nearly so bad measured in weakened sterling as it does in, say, dollars. House prices are down some 15-20% from the highs, depending whose figures you use, measured in sterling. But measured in gold, this is already the worst crash in history, as the chart below shows.

What’s more this crash still has a lot further to go.

In this chart, having risen by the most, London prices look set to fall by the most:

(My thanks to mathematician Tom Fischer of Heriot-Watt University for these superb charts, which he kindly offers free of charge. You can see more of his work here.)

There are many people out there, myself included, who sold property and bought gold. They were considered cranks and crackpots by their nearest and dearest. Those nearest and dearest are now revising their opinions. The long-term trade of property to gold and back to property when certain targets are reached (100 ounces of gold for the average UK home, maybe?) is still very much alive and well.

Gold is on track to be a top performer this year

In late November I wrote that I felt gold stocks were set to be the best performing asset class over the next two years (to read this article, click here: 2009: gold stocks will be among the top performers). We are already on track with the HUI (the index of major gold producers) up about 50% since then. Now that tax-selling is done in North America – it ended at Christmas – some significant buying has come into gold stocks of all kinds, from explorers to majors, and we are seeing some impressive action everywhere. Hold your positions.

Over Christmas, I had a long conversation with my step-father about gold. He’s South African, so perhaps has a greater familiarity with gold than many of us Brits. In the 1970s, you weren’t allowed to take your money out of South Africa. (Who knows what currency controls are headed our way as governments – Brown’s in particular –move to tighten international banking regulation).

The rand was falling fast and nationals saw their purchasing power collapse. Many of those who fled, he told me, got their wealth out of the country by carrying out Krugerrands. His parents were Jewish and fled Poland in the 1930s. They too transported their wealth through a similar means. And yet he doesn’t like gold, because, he says, it doesn’t pay any interest. I reminded him how much interest you get on dollars and on yen. From tomorrow, as the Bank of England cuts interest rates further, it looks like you’ll get a similar amount on pounds. Paper currency paying as much interest as gold, who’d’ve thought it?

The gold bull market of the 1970s ended when Volcker raised interest rates to 20%. 20% interest rates are a long, long way off this time around – and so is the end of gold’s great bull market.

The police, and the state, are out of control

noreply@blogger.com (Unknown) — Wed, 03 Dec 2008 14:22:00 +0000

By Philip Stephens of the FT
Published: December 1 2008 19:21

The police are out of control. So is the government. We can only conjecture as to what possessed the senior officers who raided the homes and parliamentary office of Damian Green, the Conservative immigration spokesman. Yet their disdain for political process spoke eloquently to the authoritarian culture of our times.

In this respect, regardless of whether ministers played a direct role in Mr Green’s arrest, the blame rests squarely with the government. The police must be held to account for their heavy-handed intimidation, but ministers nurtured the climate in which such madness flourishes.

The absurdities of the incident are self-evident. A score of officers from the Metropolitan police’s “special operations directorate” barged into Mr Green’s London and constituency homes, hauled him off to the cells and stripped his office of computers and files. The alleged offence? To have put into the public domain leaked information that embarrassed Jacqui Smith, the home secretary.

There is not a hint here of any breach of national security. Mr Green exposed the incompetence that has long described the conduct of affairs at the home office. The official alleged to have leaked the information has already been arrested.

It is all but impossible to imagine a jury convicting Mr Green. Disseminating leaked information has been embedded in the custom of politics since time immemorial. Rightly so, given the stiflingly secretive British state. When he was in opposition, Gordon Brown used to boast of his skilful exploitation of such material. Can we expect the “special operations directorate” to be hammering next on the door of Number 10 to seize Mr Brown’s BlackBerry?

Mr Green was arrested under a part of the common law that proscribes “misconduct in a public office”. The police say (off the record, of course) that the MP was not a passive recipient of documents, but conspired with the official. They hint they have evidence enough to charge Mr Green.

We shall see. The purpose of this 18th-century law is to deal with corrupt public officials including, dare one say it, police officers. To deploy it in this fashion against elected members of parliament is to show, at very best, blithe ignorance of the democratic process. MPs are not above the law, but the police have no place in politics.

We have been here before. During the final year of Tony Blair’s premiership, a team of officers conducted a long, expensive and fruitless inquiry into allegations that the then prime minister had sold peerages in return for party donations. Once again the staged drama – dawn raids and off-the-record smearing of those under investigation – was in inverse proportion to the possibility of any prosecution.

Needless to say, no one was ever brought before a court. But it seems the police are still ready to trample over the line that separates legitimate investigation from the, albeit sometimes grubby, practice of politics.

You could say, though, that Mr Blair should not have been surprised. If the police think they can discard due process, they have been taking their cue from the government.

For more than a decade, first Mr Blair, and latterly Mr Brown, have rolled forward the boundaries of the state at the expense of civil liberties. The consistent opposition of the Liberal Democrats and, latterly, even of the Conservatives to this insouciant disregard for ancient freedoms has been brushed aside as the hand-wringing of feeble liberals.

Some measures have been explicable and justifiable in the face of the threat from violent Islamist extremists. The first duty of any government is to guard the security of its citizens. I have more sympathy than many with the view that the intelligence agencies and the police must be given sufficient means to thwart the terrorists.

But the powers of the state have advanced well beyond that. The present government sees no distinction between the rule of law and whatever piece of legislation it can force through parliament.

In the criminal justice system, the fragile balance between the rights of police, prosecutors and accused has been overturned. The presumption of innocence is scorned. Successive home secretaries, including Ms Smith, have mouthed the mantra that the police are always right.

Ministers have likewise greatly extended the state’s surveillance of law-abiding citizens. The pretence that it is all about al-Qaeda has been exploded by widespread use of anti-terrorism laws by local authorities and other public bodies. Parents suspected of “gaming” school admission systems have become the victims of elaborate surveillance operations by local councils. Almost anyone and everyone in public authority can now call up private telephone and e-mail records. We must suppose they will have equal access to the government’s Orwellian National Identity Register.

Little wonder the police seem to think they can abuse their power. The senior ranks of the Metropolitan police are overdue a serious clear-out. No one should be in any doubt, though, that the real culprit is the government.

More columns at www.ft.com/philipstephens
philip.stephens@ft.com

Western Banking Sells Out?

noreply@blogger.com (Unknown) — Mon, 24 Nov 2008 14:00:00 +0000

Barclays faces vote on £7bn stake sale

By Jane Croft and Kate Burgess of the FT

Published: November 23 2008 23:59 | Last updated: November 23 2008 23:59

Investors will today confront Barclays executives at a potentially stormy meeting called to approve a controversial £7bn capital raising that will result in Middle Eastern investors controlling about a third of the bank.

Barclays is holding an extraordinary meeting in London at which it hopes to gain approval to raise capital from the Qatar Investment Authority and Sheikh Mansour Bin Zayed Al Nahyan, a member of Abu Dhabi’s royal family.

However, the encounter promises to be one of the most contentious votes of the year because existing investors are furious that the bank did not observe pre-emption rights to allow them to participate in the capital raising and offered preferential terms to the two Gulf investors.

In addition, Barclays has faced mounting criticism that it is paying more for its capital infusion than if it had accepted help from the UK government to raise the money. The government, which is helping recapitalise banks including RBS and Lloyds TSB, has insisted that its involvement comes with strings attached such as limits on executive pay and bonuses.

Full article at the FT

Shopping Beats Working?

noreply@blogger.com (Unknown) — Mon, 24 Nov 2008 13:46:00 +0000

In case you hadn’t noticed, Chancellor Alistair Darling’s giving a bit of a speech this afternoon.

He’ll be laying out the Government’s plans for saving the economy from an even worse recession than it’s already facing.

It’s quite a clever way to sell it. Regardless of how bad things get in the future, you can always say: “Well, it would have been even worse had it not been for the quick-thinking actions of the dynamic Brown Government.” That’ll be the spin anyway.

But can the pre-Budget Report really make much difference to our economic plight? Of course it can. It can make things a lot worse…

This government encourages shopping and discourages working

The main thrust of the pre-Budget Report seems likely to be a 2.5 percentage point cut in VAT, which will fall to 15%. There’s plenty of other stuff being mulled over by the papers, and no doubt a few nasty surprises as well. But we’ll find out what he’s really got in store for us in a few hours, so no point running through all the eventualities here.

Let’s just focus on this VAT cut. I’m not going to complain about tax cuts. Lord knows, we’ve seen too few of them in the past decade. But it’s interesting to have a look at the thought process behind what’s being done here.

VAT is a tax on consumption. As taxes go, it’s not the worst one. It treats everyone equally and fairly - you pay according to the quantity of resources you consume. You could even describe it as a green tax.

Income tax, on the other hand, is a tax on production. The harder you work, the more you earn. The more you earn, the more the state takes out of your pay packet. And oddly enough, this effect is felt most strongly among the least-well off in British society. Because of the way the ridiculous tax credits system works, certain workers face a marginal tax rate of 70% once they earn above a certain amount. In other words, there’s a point at which they only end up getting an extra 30p for every £1-worth of work they do. For an apparently dour Presbyterian, Mr Brown sure doesn’t believe in encouraging the work ethic.

So effectively, the Government heavily favours consumers over producers. And the pre-Budget Report makes this very clear. Because it’s tomorrow’s producers who will pay for today’s consumer boost. According to The Daily Telegraph this morning, Labour plans to introduce a 45% tax rate on those earning above £150,000 after the next election.

Yet Britain’s big problem is that we’ve been doing too much consuming and not enough producing. How does encouraging more consumption, and discouraging production, help us get any further forward? The answer is simple enough. It doesn’t.

A recession is nature’s way of telling you that your economy is heading down the wrong path. A depression is nature’s way of saying the same thing – only a lot louder.

Britain needs a new set of economic props

As a nation, we’ve become too dependent on three things, all of which have been fuelled by the credit bubble. First there’s the financial sector. The finance sector is meant to allocate capital efficiently. It gets money from the people who have it, to the people who need it, with a minimum of fuss. That’s the nature of the value that it adds to the economy. But it’s not performed that role anywhere near as efficiently as we’d like to pretend. Were all those new-build buy-to-let properties an efficient use of capital? No, I don’t think so either.

The financial system’s ability to allocate capital efficiently has been badly undermined by central banks making it much harder to gauge risk clearly – more on that in the future. In any case, the end of the credit bubble also spells the end for the consumption bubble.

People used easy money and grossly inflated house prices to boost their consumption of everything from household furniture to shoes to computer games. That in turn meant more jobs in the services sector. But now that economic prop is being kicked away too.

The third prop has been rampant government spending. Fuelled by cheap borrowing and extremely healthy tax revenues, the government has splashed our money all over the public sector. But it’s not been spent on useful jobs, but on increasing the range of administrative and management roles in health, policing and education.

What will replace finance as our 'specialism'?

What can we do about all this? We need to consider what will replace the financial sector as our ‘specialism’. If we want to maintain a developed world standard of living, we need to contribute something to the global economy that can sustainably generate high-paying jobs. That means we need to have well-educated, skilled employees. But given the Government’s propensity to view any institution that promotes academic excellence with suspicion and hostility, the chances of turning around our education system any time soon is a major challenge.

And right now, this is a debate for another day, argues the “something must be done!” brigade. So will the VAT cut be effective? Well, it’ll make goods in the shops cheaper. But then, so will deflation. Shops are already slashing prices ahead of what they fear will be a miserable Christmas. And consumers are – rightly - already in ‘cut-back’ mode. It’ll take a lot more than a couple of percentage points off prices to make them blow their budgets this year.

So Mr Darling will have to have a lot more in his box of tricks if he wants to make a dent in this recession. We’ll find out soon enough – and give you the reaction on the MoneyWeek website later this afternoon.

Big Thank you to John Stepek

Lower Interst Rates and Recession - Time for Gold

noreply@blogger.com (Unknown) — Fri, 14 Nov 2008 14:52:00 +0000

In its quarterly Inflation Report, the Bank forecast that national income could shrink by one to two percentage points over the next few quarters and growth would probably be flat by the end of next year. Consumer price inflation, which at its last reading registered an annualised rate of 5.2 per cent, will fall to its target rate of 2 per cent by the middle of 2009.

In remarks at a press briefing Mervyn King, Bank of England governor, said interest rates could fall much lower than their current 3 per cent and declined to rule out cutting rates to zero.

“We are certainly prepared to cut Bank rates again if that proves necessary,” Mr King said.

The Enemy of the State - You and Me!

noreply@blogger.com (Unknown) — Fri, 14 Nov 2008 14:40:00 +0000

Great article in Money Week

Governments love capitalism. As long as asset prices are rising, that is.

When prices are rising, governments will do anything to keep them up there. You want free money? We’ll keep interest rates low. You want light-touch regulation? We’ll give you off-balance sheet finance.

The deal between banks and governments in the past decade or so has been simple. “You lot keep the voters happy and feeling rich,” says the government. “And we’ll give you a nice cosy, risk-free world to play in.” Of course, capitalism without risk, is not capitalism at all. What we’ve had is sugar-daddy socialism, with the financial industry frolicking freely, safe in the knowledge that there’s always a bail-out around the corner.

But you can’t buck the market forever. And even though there have been plenty of bail-outs, prices just keep on falling. Yet governments don’t seem to learn…

Chaos in emerging markets

Yesterday I pointed out how Hank Paulson’s U-turn on the Tarp highlighted the dangers of government interference in the markets (to read about this click here: The pound has nowhere to go but down) . But you can get a much clearer idea of how the state can make a bad situation worse by looking at the havoc in emerging markets.

Like Western investors, investors in emerging markets came to believe that asset prices could only ever go up. And so when they fall, they start looking around for someone to blame.

That’s why Kuwait’s stock market (which has fallen by more than 40% since late June) was shut down yesterday. According to The Telegraph, an investor had filed a claim “over the heavy losses he had suffered on the exchange.” So the court stopped it from trading until Monday, finding that “the bourse management failed to take any measures to boost a flagging market.”

I imagine that the management didn’t realise that this was part of their remit, any more than the owner of a fruit and veg stall’s pitch would expect to have to keep the price of apples high.

The dangers of too much government intervention

But the plight of Russia probably demonstrates best the dangers of too much government intervention. The Russian Micex market has been the worst performing in the second half of this year so far, reports The Telegraph. Stocks have fallen by 75% since May.

A key problem for Russia is that it is massively dependent on oil. Its 2009 budget only balances if oil is trading at an average $95 a barrel. I can’t see that happening. So its markets, and the rouble, have come under pressure with falling oil prices. And of course, as an emerging market, it has taken a hit as investors pull their money out and repatriate it to the “safe haven” of the US.

But the state’s attempts to prevent the crisis with brute force, have only made things worse. The central bank has already had to spend $120bn of its reserves on defending the rouble, which analysts reckon is now 30% over-valued. This is just a waste of money. When a country, particularly a politically risky country like Russia, starts defending its currency, it’s a sure sign to the market that said currency is over-valued. No central bank in the world has enough reserves to defend against a forex market set on helping a currency to find its “real” worth.

Let's hope our governments learn to accept falling prices

The state is also making the stock market plunge worse than it has to be. They keep shutting the market because it keeps falling so hard. But a big part of the reason that it keeps falling so hard is because every time they open it, investors think “Quick! Let’s sell before they shut it again!”

If you limit the trading that can be done, you increase the liquidity risk. Anyone who is scared they might need cash at short notice, isn’t going to be happy to hold stocks that can only be easily traded as and when the government says it’s OK to do so.

All these measures rattle investor confidence further, and make it even harder to price genuine risk. At some point, most assets of any real value at all will reach a price at which fundamentals suggest they are worth buying. But if you have to worry about the government’s random reactions to such falls as well, it becomes impossible to make any kind of judgement based on these fundamentals.

So we’d better get used to falling prices – and let’s hope our governments learn to accept them as well.